The Electric Transmission Grid and Economics

Tuesday, 2013 October 8, I went to the MIT Club of Washington Seminar Series dinner with Anjan Bose of Washington State University talking about Intelligent Control of the Grid.  Anjan began with giving two reasons for the transmission grid but then seemed to ignore the predicate in explaining what the government has been doing in regard to the grid.

The first slide identified two reasons for the electric transmission system.  The first was to move electricity from low cost areas (such as hydro-electric dams) to higher cost areas.  This is an obvious reference to economics.  The second was to improve reliability.  Anjan did not get into the discussion of how that is an economics issue, but it is.  Reliability is greatly improved by increasing the number of shafts connected to the grid.  We can produce the same amount of electricity with five 100 MW generator or one 500 MW generator.  The five units provide greater reliability but also higher costs.  The higher costs are associated  with various economies of scale, including higher installed cost per MW, less efficient conversion of the fuel into electricity, and the need for five sets of round the clock staffs.  A transmission system allows dozens of 500 MW units to be connected at geographically dispersed locations, achieving the reliability of many shafts and the lower cost of larger generators.

But, the presentation had little to do with the economics of the power grid, and the investigations into those economics.  I noticed that much of the discussion during the question and answer period did talk about the cost of operating the grid, so people were indeed interested in money.

Anjan said that the financial people used different models than did the engineers who operate the system.  I have long said that we need to price the flows of electricity in accord with the physics of the system, by pricing the unscheduled flows.  The engineers and operators may plan to operate the system in a prescribed way, but the flows of electricity follow the laws of physics, not necessarily the same was the way some people have planned.

Anjan said that deregulation[1] has caused a dramatic decline in new transmission lines, especially between regions such as into and out of Florida.  My feeling is that new transmission lines would be added more willingly if the owners of the new transmission lines would be paid for the flows that occur on the transmission lines.  For instance, twenty years ago a new high voltage transmission line in New Mexico began to carry much of the energy that had been flowing over the lower voltage transmission lines of another group of utilities.  The group of utilities called the service being provided “vampire wheeling” and refused to make any payment to the owner of the new transmission line.  The new line provided value in the reduced electrical line losses and perhaps allowed a greater movement of low cost power in New Mexico, but that value was not allowed to be monetized and charged.

I note that a pricing mechanism for the unscheduled flows of electricity would have provided a different mechanism to handle the 2011 blackout in Southern California, which began with a switching operating in Arizona.  Engineers swarmed to the area to find data to assess the root causes but were initially blocked by San Diego Gas & Electric’s attorneys who feared that any data could be used by FERC to levy fines pursuant to the 2005 electricity act.  I remember a discussion at the IEEE Energy Policy Committee on that proposed aspect of the bill.  The IEEE EPC voted to suggest creating mandatory reliability standards.  I was the sole dissenting vote, arguing that the better way was to set prices for the unscheduled flows of electricity.  Thus, SDG&E and the Arizona utilities would have been punished by the market instead of risking a FERC imposed fine.

[1] I prefer to use the more accurate term restructuring, since the entire industry is still regulated, even though generation is often subject to “light handed regulation” by FERC, which approves concepts instead of specific prices.

2012 Washington, DC, Area Storm Electricity Outage Duration

The Washington, DC, area was hit by two storms in 2012, each of which cause widespread electrical outages.  A derecho hit the evening of June 29.  Hurricane Sandy hit four months later on the evening of October 29.  I sent surveys to people on the mailing list of the National Capital Area Chapter of the U.S. Association for Energy Economics (NCAC-USAEE) for both storms asking for a reply about the number of hours they were without power.  (I experienced nine hours for the derecho and two hours for Hurrican Sandy.)  My “Derecho Outage Survey” was included in USAEE Dialogue, Volume 20, Number 3 – 2012.  Here I report on the outages related to Hurricane Sandy and compare the results to the outages related to the Derecho.

Table 1 replicates the form of Table 1 from my “Derecho Outage Survey.”  There were 93 survey responses, which I have summarized for five of the electric utilities in the Washington, DC, area.  I report the number of customers who reported an outage to me and the duration of those outages in hours.  I also include the number of customers who reported that their outage time was zero.  Many of these zeroes may have actually been an outage of a few seconds to a few minutes.  None of PEPCo’s customers in Washington, DC, reported an outage.   I note that 22 PEPCo’s customers in Washington, DC, did participate in the survey, though each reporting 0 hours of outage.

Figure 1 presents a cumulative distribution function for the outages, including separate plots for BG&E; PEPCo-Montgomery County; and VEPCo; as well as a plot for the combination of all of the outage data.  Each plot has a convex shape, showing a rapid increase in the number of customers who have been returned to service, with a gradual degradation of the response rate as time accumulates.

The phenomenon of a convex cumulative distribution function is often referred to as “low hanging fruit” or “the most bang for the buck,” reflecting the incentives and policies that utilities have to concentrate on returning the most customers to service as quickly as possible.  Thus, problems that can be resolved quickly for large numbers of customers are the first problems to be attacked.  The result is the rapid early increase in the number of customers who are returned to service.  Problems that affect individual customers are the last to be resolved, resulting in the plots turning horizontal as the outage duration time increases.

Figure 2 presents the cumulative distribution function for the outages of BG&E, comparing the outages for Hurricane Sandy with the outages for the derecho.  The plot for the four outages associated with the derecho does not have the convex shape described above.  But with only four outages reported, the distribution of reported outages has a greater chance of not being representative of the distribution of actual outages.

Figure 3 presents the cumulative distribution function for the outages of PEPCo in Montgomery County, comparing the outages for Hurricane Sandy with the outages for the derecho.  PEPCo took some 72 hours to restore half of the customers who had outages associated with the derecho compared to only 3 hours to achieve the same restoration level for outages associated with Hurricane Sandy.

Figure 4 presents the cumulative distribution function for the outages of VEPCo, comparing the outages for Hurricane Sandy with the outages for the derecho.  VEPCo took 40 hours to restore half of the customers who had outages associated with the derecho compared to only 12 hours to achieve the same restoration level for outages associated with Hurricane Sandy.

Figure 5 presents the cumulative distribution function for all the outages reported in the two surveys, comparing the outages for Hurricane Sandy with the outages for the derecho.  The utilities in the DC area took 55 hours to restore half of the customers who had outages associated with the derecho compared to only 9 hours to achieve the same restoration level for outages associated with Hurricane Sandy.

The DC area electric utilities were severely castigated by government officials for the length of time that restoration efforts took after the derecho.  Few comments were made about the restoration time in regard to outages in the DC area for Hurricane Sandy.  Some of the differential in the length of the outages associated with the derecho versus Hurricane Sandy relate to physical phenomenon.  Some relate to planning by the utilities.

The derecho occurred four months before Hurricane Sandy.  The derecho is likely to have toppled many of the trees that Hurricane Sandy would otherwise have toppled.  The utilities in the DC area also initiated a substantial tree trimming program after the derecho, further reducing the number of trees that would otherwise have been grist for Hurricane Sandy in causing outages. The derecho may also have had stronger winds.  Together, these items are reflected in the large increase between the two surveys in the number of responses that showed no outages.

At least one utility in the DC area, PEPCo, pre-positioned contractors before Hurricane Sandy, as I wrote while sending out the survey.

When my wife and I drove to church Sunday morning, I was impressed with the dozen or more bucket trucks sitting in the parking lot of the Gaithersburg Holiday Inn, thinking I should call the television stations as a potential story for them to film. I didn’t, but I was no longer impressed by yesterday’s sight when I saw Channel 4’s story today about noon from Gaithersburg, just across the street from the Holiday Inn. The Montgomery Country Fairgrounds seemed to have over a hundred bucket trucks, making the Holiday Inn parking lot scene look insignificant.

These pre-positioned contractors would likely have reduced the duration of the outages, just as the relative timing of the two storms, the tree trimming programs, and the relative strengths of the two storms likely contributed to the reduced fraction of customers who reported any outages and the increased fraction of customers who reported no outages at all.

Pre-positioning contractors comes with a cost.  The contractors I saw at the Holiday Inn were in the DC area two days before Hurricane Sandy hit.  Some of that time might have been non-productive.  Some of the time might have been used for additional tree trimming and other normal on-going work that utilities do on a routine basis.  Even the contractors shown on TV seem to have been pre-positioned a day ahead of time.  In contrast, the derecho was not anticipated and contractors generally travelled during the first day after the derecho hit instead of one or two days before Hurricane Sandy hit.


Socializing the Grid

A friend sent me a message overnight that asked me, since my friend says I have an understanding of utility issues, to identify the misstatements in a 2009 January 15 article “Browner: Redder than Obama Knows” by Steven Milloy.,2933,480025,00.html   My response is below.  Now, as I am posting this to my blog, I realize that the article is over two years old.  When I began writing my response, I had focused on the January 15 and thought that I was only 11 days behind the time instead of two years.  Oh, well.  The interest in the article is current even if the article isn’t.

Before I talk about the Fox article, “Browner: Redder than Obama Knows”, let me talk a little about the socializing of the electric system, an issue I have been trying to correct for over twenty years.

Electric systems improve reliability by increasing the number of generators connected to the grid.  More generators with enough capacity and we are more likely to have enough electricity for everyone.  Electric generators have great economies of scale.  Larger units mean less steel and concrete per KW or KWH.  Perhaps more importantly, fewer power plant employees.  Manning an operating room 24×7 for a 2,000 MW plant takes not many more people than for a 300 MW plant.

So, eighty years ago electric systems were in a quandary.  To maintain high reliability, electric systems needed more units.  To keep costs low and improve profit margins relative to a fixed price, electric systems needed larger units.  So the trade off was between more, therefore smaller, units versus larger, therefore fewer, units.  The solution was to interconnect with one’s competitors which increased the number of units connected to the grid and allowed utilities to build larger, less costly, units.  In the summer of 1969 and from 1971 to 1976 I worked for American Electric Power (AEP).  In perhaps ten years times, AEP went from building 280 MW generators, to 800 MW, to 1300 MW, being able to achieve those economies of scale by having more interconnections with its neighbors than almost any other utility in the US.

Those interconnections created a form of socialism.  The utilities did not figure out how to charge each other for the increased reliability provided by the interconnection.  Reliability came to be considered to be a public good, not to be charged for.  Reliability regions created rules for their interconnected utilities, such as having a 20% reserve margin for each utility or having spinning reserves equal to the size of the largest unit.  If we assume only the 20% reserves, then a very small utility could build one large unit to enjoy the economies of scale and rely on the large number of interconnected units for reliability.  If an industrial facility builds and operates a cogeneration plant (whose per KWH fuel costs because of the steam usage is half of the per KWH cost of a conventional plant), then the industrial facility will not want to have a spinning reserve requirement that reduces the generation by on the cheapest unit on the system.

Over twenty years ago I wrote “Tie Riding Freeloaders–The True Impediment to Transmission Access,” Public Utilities Fortnightly, 1989 December 21 arguing for a de-socialization of the electric system, both of the generation component discussed above and of the transmission component.  I say that we need a system to pay for unscheduled flows of electricity on very small time increments.  That way the small utility with the single large unit would pay the current value of electricity whenever the unit went down.  If the unit always failed during the summer peak, then the prices would be very high.  If the utility did sloppy maintenance and the unit was out more than the average for the rest of the grid, then the utility would be making frequent payments.  The reliability regions were not able to devise a reserve rule to penalize the sloppy maintenance practices or the bad timing issues.  I say that pricing the unscheduled flows achieves the appropriate grid discipline, or at least better grid discipline.  India put into place such a pricing mechanism and improved its grid discipline.

The physical interconnection created a form of socialism of the generating system.  Real time pricing of the imbalances would remove some of that socialism.

For the transmission system, socialism comes in the form of loop flow.  Engineers often use the short hand of saying electricity flows through the path of least resistance.  But, when there are several paths of relatively low resistance, the electricity divides among those paths such that the marginal line losses on each path are the same.  Thus, two parallel identical lines will split the load equally between them.  Attach something to one of the lines and the load will split in some slightly different way, but not all going to the one line with the least resistance despite the short hand.

Higher voltage lines have lower resistance than do lower voltage lines.  Higher voltage lines are more expensive per mile of wire but less expensive per KW-mile, with much lower line losses.  Consider this another example of economies of scale.

Consider a small utility that has a low voltage transmission line connecting its customers over a long corridor.  Consider a large utility serving roughly the same corridor that builds a high voltage transmission line parallel to the other line.  If the lines are connected to each other at each end, total line losses are reduced when some of the power from the small utility travels on the wires of the large utility.  If there is a scheduled transaction for the flow, the small utility will pay a wheeling fee to the large utility.  Generally there is no scheduled transaction and the small utility gets a free ride, a form of socialism.  Some describe the claim by the large utility for a wheeling fee to be “vampire wheeling.”  My article says that the network needs to price this unscheduled flow by differentiating the price geographically in addition to the temporal differentiation discussed above.

In regard to the Fox article, the aiding and abetting has taken the form of support for carbon taxes that would impact utilities differently.  A utility with a large nuclear fleet would see its competitors costs go up.  That would competitively advantage the nuclear fleet owner and in restructured markets, such as those operated by ISOs, the price of energy from the nuclear fleet would go up by the carbon tax without the cost of the nuclear fleet going up.

In regard to decoupling, some utilities will weatherize my home, with little or no charge to me.  That will lower the amount of electricity that I consume for HVAC.  The utility will treat the cost it incurred to weatherize my home as a legitimate rate case expense.  This raises the price that everyone, including me, pays.  If the utility has 100 customers, then I end up paying in higher rates less than 1% of the cost that the utility incurred to pay for weatherizing my home.  With a thousand customers, I pay less than 0.1%.  But I will pay for weatherize other peoples’ homes.  Except, that my new, green and economy minded, wife and I already spent a fortune on new double paned windows and other weatherizing features.  So my costs will not get socialized but I would pay the cost incurred by the utility for weatherizing others.

The Fox article presents three ways for decoupling, different ways for the utility commission to treat the weatherization costs as a legitimate rate case expense.  Or the government could use stimulus money for the same purpose, a different form of socialization.

My comments above don’t actually identify and explain misstatements, just explain some of the statements.