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. http://www.foxnews.com/story/0,2933,480025,00.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.