Making Electricity Ubiquitous, Ubiquitous But Not Necessarily Cheap

I attended the 37th International Association for Energy Economics International Conference 2014 June 15-18 in New York City.  During the Wednesday “Dual Plenary Session: Utility Business Model” Michel Derdevet, Secretaire General, Electricite Reseau Distribution France, the French distribution utility, raised the issue of getting electricity to the billion people in the world who don’t have access to electricity.

During the audience discussion period, I raised the concept of a different business model, unregulated micro-grids owned by non-utilities.  I mentioned that a friend thought this concept could be applied to the nearly ubiquitous cell phone tower.  Cell phone towers require a power supply.  My friend thought that the provider of a cell phone tower should be granted a 10-year license to provide power on an unregulated basis.

My thought was that owner of the cell phone tower should be allowed to provide electricity and compete against anyone else that wanted to provide electricity.  Competition can better drive down prices than can regulation.  Regulation in terms of getting electricity to be ubiquitous would just stifle innovation.

Over the years, newspapers and newsmagazines have had pictures of the electric grid in some countries that look like a spider’s web on LSD.  Local entrepreneur’s buy their own diesel generators and provide “backup” electricity to their neighbors over wires strung in parallel or across the wires of the local utility.  The electricity is “backup” electricity in that it is used only when the local utility doesn’t have enough central station power to provide electricity to the entire national grid.  The utility then blacks out some neighborhoods.

The neighbors buy only a small amount of “backup” electricity from entrepreneur because the “backup” electricity is so expensive, being produced by diesel generators, which are less efficient and use a premium fuel.  The “backup” electricity is used for lights and a fan at night, perhaps for a refrigerator, not for those devices that might otherwise by electricity guzzlers.[1]  When the utility once again has enough power, competition drives the price down, putting the high cost entrepreneur out of business.

These micro-grids, whether run by the owner of the cell phone tower or by a neighborhood entrepreneur, can make electricity ubiquitous, even if the electricity is not cheap.  After all, Michel Derdevet said to me after his panel was done that some people were pushing for ubiquitous power supplies so they could make money selling electricity, not just for an eleemosynary purpose.  Thus, the power might not be cheap.

During the plenary session, Jigar Shah, Founder, SunEdison, LLC, claimed that California, with the highest electricity rates in the U.S., does not have the highest energy bills, because California residential consumers use less electricity. [2]  This is consistent with my comment about the lower usage of “backup” electricity relative to central station power.  However, elasticity may not be the only explanation for the lower consumption in California.  There is also the issue of climate and rate design.

Standard rate design practices also result in higher prices for customers with smaller consumption levels. The standard residential rate design has a monthly customer charge (say $10/month) and a commodity charge (say $0.09/KWH).  These rate levels nominally reflect the way that a utility will incur costs, a fixed cost per customer and then a cost that varies with the amount of energy the customer consumes.  A customer using 100 KWH per month would have a monthly bill of $19 and an average cost of $0.19/KWH.  A customer using 1000 KWH per month would have a monthly bill of $100 and an average cost of $0.10/KWH.  Thus, an area of the country with lower electricity consumption can be expected to have higher average cost and lower overall bills.

The micro-grid could be operated by the above mentioned owner of the cell phone tower or an entrepreneur.  I like to think of innovators who decide to install their own electric systems and then share with their neighbors, which is a form of the first type of owner.  The generation is put into place for a purpose other than selling electricity but if the sales are lucrative enough, the owner may decide to upsize his generating capacity until the owner looks like a utility.

A friend built such a system during the 1980s while in the Peace Corps in Africa.  He had an engineering degree from MIT.  So he took the concepts learned dabbling in the MIT labs in Cambridge, Massachusetts and applied the concepts in the field in Africa.  Later my friend worked for a Westinghouse subsidiary building power supplies for remote micro-wave towers (the same concept as a cell phone tower) and remote schools.  His company used mostly renewable energy, such as solar and wind, because diesel was so expensive in the remote areas he electrified.  Diesel was used to top off the associated batteries when there had been insufficient renewable energy supplies for extended periods of time.  It was during this period of his life that I met this fellow MIT alumnus.

Yes, we can make electricity ubiquitous.  But it will take competition to make it cheap, or at least not quite so expensive.



[1] As an aside, the consumption reduction during periods when “backup” electricity is being used demonstrates the concept of the elasticity of consumption.  When prices go up, consumption goes down.

[2] Looking at Table 6 of the EIA’s utility data for 2012, the average price to residential consumers in California was $0.153/KWH, or 8th most expensive.  The average consumption for residential consumers in California was 6,876 KWH/year, or the 3rd lowest after Hawaii and Alaska.  The average bill for residential consumers in California was $1,053/year, or the 10th lowest in the U.S.

Disruptions, Energy Markets and “Joseph and the Amazing Technicolor DreamCoat”

On 2014 April 22 as this year’s president of the National Capital Area Chapter (NCAC) of the U.S. Association for Energy Economics (USAEE), I will preside over NCAC’s 18th Energy Policy Conference, which this year has the title “Disruptive Technologies Shock All Energy Sectors.”[1]  These disruptive technologies will require additional infrastructures, such as pipelines, wires, refineries, and generators.  And, since we operate a free market economy in the United States, we will need dynamic markets to handle the effects of these disruptive technologies as we see a change in the way energy flows in North America.

Wind pockets in the Great Plains and West Texas need high capacity lines to transport the energy across space to areas where the need for electricity is greater.  We need ways to pay for those transmission lines.  In response to the intermittency associated with wind, we will need fast response generators and ways to pay those generators to operate only a small fraction of the year.

Some fast response generators will be storage devices.  A high price for storage devices providing electricity for a small fraction of the year will be meaningless unless there are low prices during the portion of the year that the storage devices are being recharged.  This will move electricity across time, using cheap electricity during periods of fat to provide electricity during later periods of lean.

Oil production areas in North Dakota and Montana need pipelines and rail cars to move oil across space to market.  For years, the availability of low cost oil pipelines has reduced the price differential across the U.S.  The lack of sufficient pipeline capacity has depressed the well head price of oil in the Bakken fields, reflecting the higher cost of rail transportation to refineries.  New oil pipelines will reduce this price differential.

The natural gas system has many storage fields.  I mentioned earlier electricity’s growing need for storage.  And petroleum and its refined products also need storage.  During January 2014, there was not enough propane in storage in the Midwest and prices soared.  The shortage could have been handled by more refined products pipeline capacity, but additional storage would also have been an option, perhaps a cheaper option.

Though the conference is about technological disruptions, the shortage of propane in January can be thought of as a weather disruption.  Some people say that we are experiencing climate change.  My first experience with a claim of climate change was in 1990, when Edith Corliss, a physicist with the National Institute of Standards and Technology, a bureau of the U.S. Department of Commerce, told me was that the weather at that time more variable than weather had been since the time of Christ.  Our summers were alternately either (A) hotter and dryer or (B) cooler and wetter.  Or to put it mathematically, we were seeing a greater statistical variance and standard deviation in the measured temperature and the measured rainfall.  The el Niños were getting more intense, as were the la Niñas.  We were not having more of one and fewer of the other, just seeing more intensity in each.

I am reminded of the stage musical  “Joseph And The Amazing Technicolor Dreamcoat.”  The DreamCoat refers to a vision by the pharaoh that Joseph interpreted as a climate disruption.  There were to be seven years of fat followed by seven years of famine.  Joseph then created a physical system and a market to handle this insider knowledge.  He stored grain during the years of fat and used the grain sparingly through the end of the years of famine.  In commercial parlance he bought low and sold high.  In legal parlance, he traded on insider information and made a killing.

We need new infrastructure to handle the growing disruptions created by technological changes.  But we also need dynamic markets and new market mechanisms in our free market economy.  At least that is my Technicolor dream.

[1] See the conference notice at WWW.NCAC-USAEE.org

A Romp Through Restructuring

Today I presided over the monthly lunch of the National Capital Area Chapter (NCAC) of the U.S. Association for Energy Economics, with Craig Glazer, Vice President-Federal Government Policy, PJM Interconnection.  Besides announcing future events and talking about the successful NCAC field trip of October 4-5[1], I got to ask questions and comment as the luncheon moderator and President of NCAC.  I include some of those questions and comments below, along with several that where beyond what I felt like imposing on the luncheon attendees.

I liked that Craig mentioned that code words were often used in the industry, though not the ones I sometimes point out.  But when one questioner commented about the growth in distributed generation (DG), I pointed out that I look at DG as a code word for non-utility generation.  Nominally DG should be any generation on the distribution grid, but is generally used to restrict the ownership options.

Craig identified “Rates significantly above the national average” as one of the issues that drove the restructuring movement.  Unlike the children of Lake Woebegone where children are all above average, retail rates can’t be above the national average everywhere.  Thus, there are some parts of the country where restructuring was not an issue and the utilities have not been restructured.

Craig used the term “Half Slave/Half Free” to address the case of Virginia, where the State Corporation Commission still regulates retail rates but the generation and transmission systems participate in the competitive PJM market.  I noted that the result of restructuring was that the market value of electricity in my home location of Eastern Kentucky went from very low prices to moderately low prices, at least according to one of Craig’s slides.  But Craig had already made me feel better about this by telling of his trips to Kentucky to persuade the regulators to let their utilities join PJM.  He told them that one result the Kentucky electric companies joining PJM would be higher utilization of Kentucky’s cheap power plants.

These power plants joining PJM could sell the very low cost generation (the pre-restructuring picture) at moderately low prices (the post-restructuring picture), with the differential being used to reduce the prices for Kentucky residents.  As I pointed out, this is an example of Craig’s term “Half Slave/Half Free” where he pushed the concept.  I also pointed out that a substantial portion of the country has not restructured, which was my initial thought when he mentioned the term.  So we went back to the issue that not all parts of the country would benefit from restructuring.

Craig stated that restructuring changed the risk allocation formula.  He made the point that there was no Enron rate case.  In other situations where utility investments were cratering, there were rate cases, but not with Enron in the restructured world.  Further, there was effectively not even a hiccup in the PJM bulk power market on the day that Enron collapsed, even though Enron had been a major player in the PJM bulk power market.

Craig says that capacity prices are too low.  I see capacity as being a multi-year issue, requiring a multi-year solution.  Pre-restructuring, the utilities handled the variations in the need for capacity, and the value of capacity, through long term rates.  They built what they thought was needed and didn’t worry that the bulk power market went up and down, the utilities kept on trucking as vertically integrated entities.  Indeed, one of the problems that caused the California debacle of 2000/2001 was that the entire market was forced to pay the spot price of electricity.  The Texas market seems to be greatly hedged in that when the bulk power market price went up by a factor of 10, on average, for the entire month of August 2011, the retail price hardly budged.

Craig made an excellent point in regard to the question of who decides what in the electric industry, providing a list of governmental entities.  I notice that he did not mention the U.S. Department of Energy (of course he was a substitute speaker who replaced Melanie Kenderdine, assistant to the Secretary of the U.S. Department of Energy, because Melanie thought she would not be allowed to speak because of the shutdown of the federal government that ended about 24 hours before the lunch.)  He also listed state legislatures but not Congress.  But then the other decision makers are the owners of the facilities.

A continuing issue that I have with regulation is tangential to Craig’s “Half Slave/Half Free” term.  His PJM operates in parallel with several other entities.  I have frequently pointed to the Lake Erie donut[2] , with is the path around Lake Erie that allows electricity to flow from Chicago to New York City along two major paths, north or south of Lake Erie.  I have said that when there is unscheduled loop flow, e.g., more going north of Lake Erie than has been scheduled, that there should be payment for that unscheduled flow.[3]  The same issue applies to PJM versus TVA, which have lines in parallel.  Sometimes one system is paid for the contract path but some of the electricity actually flows on the other system.  And just south of TVA is the Southern Company, providing a fourth east/west path for loop flows.  I say that a mechanism to pay for loop flows may be one of the ways to get around the transmission cost allocation and siting issues mentioned by Craig.

I note that I did not raise all of these issues during the lunch Question and Answer period, I spoke enough as it was.  Craig is certainly welcomed to comment on this blog, as are others.



[1] See “NCAC-USAEE Overnight Field Trip of 2013 October 4-5,” 2013 Oct 07, http://www.livelyutility.com/blog/?p=233

[2] See my “Wide Open Load Following,” Presentation on Loop Flow to NERC Control Area Criteria Task Force, Albuquerque, New Mexico, 2000 February 14/15, on my web site, under publications under other publications.

[3] See my blog entry “Socializing The Grid: The Reincarnation of Vampire Wheeling,” 2011 Mar 17,  http://www.livelyutility.com/blog/?p=83

NCAC-USAEE Overnight Field Trip of 2013 October 4-5

Friday and Saturday I went on a overnight bus trip with NCAC-USAEE to visit energy facilities in Western Pennsylvania and Maryland.  The trip included a visit to the Conemaugh coal fired generating plant near Johnstown, PA, the EDF Renewable Energy Chestnut Flats wind farm near Altoona, PA, and a family owned open pit coal mine near Frostburg, MD.  It was wonderful to visit these different technologies, seeing how they work, and getting some quality time with other people interested in the topic of energy economics.

The National Capital Area Chapter (NCAC)of the US Association for Energy Economics (USAEE) is one of the largest chapters of USAEE.  USAEE is in turn one of the largest members of the International Association for Energy Economics (IAEE).  I started attending NCAC meetings in January 2001, was on the NCAC council for 2003-4, treasurer 2005-2011, secretary 2011-2012, vice president 2012-2013, and am now president for 2013-2014.  As president I receive great support from the other council members.  This trip was the result of that support.

Jim McDonnell of Avalon Energy Services has been an NCAC member for about 5 years.  Late this summer he called to tell of a visit he had made to an open pit coal mine in Western Maryland, suggesting it might be a good place for an NCAC field trip.  Rodica Donaldson, NCAC secretary, of EDF Renewable Energy had mentioned during the July NCAC council meeting the possibility of a field trip to a wind farm.  I introduced Jim and Rodica and the next thing I knew they had plans to combine those two field trips with a field trip to a coal fired power plant and we were off for an overnighter.

During the bus ride Friday morning to Conemaugh, the 20 people on the tour introduced ourselves.  We included two current officers of NCAC, two past presidents of NCAC, and a vice president of IAEE, who currently lives and works in the DC area.  Sarah McKinley, an NCAC past president, of the Federal Energy Regulatory Commission was one of the last people to introduce herself.  She told of the open meetings at FERC that facilitated discussions, including the meeting of the Asian Pacific Electricity Regulators (APER) forum 2012 August 1-2.  She told the group that I had attended the APER conference as a member of the public.  Sarah and I talked the rest of the ride to Conemaugh.

My memory of the APER forum included having lunch with two members of India’s Central Electricity Regulatory Commission (CERC), including its chairman.  During the two days prior to the conference, on July 30-31, the Indian electric grid had suffered two huge blackouts, which were highly publicized.  Sarah remembered the two CERC commissioners being interviewed by the press about the blackouts.  My view of the blackout was that India had an overly constrained market mechanism for unscheduled flows of electricity.  A less constrained market would have provided larger incentives for actions that might have prevented the blackout.  I had even written a blog entry on that issue.[1]

In 1998, I became a pen pal through IEEE’s PowerGlobe with Bhanu Bhushan, the principal architect of the Availability Based Tariff (ABT) which in 2002 began to govern wholesale transactions in India.  Bhanu and I visited over dinner in both 1999 and 2001 when he came to Washington, D.C.  He gave me his papers supporting the ABT concept including its provision for pricing Unscheduled Interchange (UI).  A pricing vector sets the UI price every 15 minutes based on the average frequency variation experienced during that 15 minute period.  The UI pricing concept was quite similar to my Wide Open Load Following (WOLF) concept, in that WOLF also sets a price for unscheduled flows of electricity based on concurrent frequency variation.  Just as he shared his private papers on UI pricing, I gave Bhanu some papers I had published on WOLF.  As suggested by the full name of Wide Open Load Following and by the WOLF acronym, the UI pricing mechanism is very constrained relative to the prices that WOLF can produce.

In 2003 January, after UI pricing became active, Bhanu introduced me to InPowerG, an Internet e-mail group of electric power engineering professionals, generally from Indian industry and academia. The group is currently administered by the Power Electronics and Power System group, Electrical Engineering Department, IIT-Bombay and has more than 500 subscribers.  Bhanu’s introduction of me to InPowerG was in regard to an extended discussion of UI pricing, with some people strongly opposed to the concept.  I ended up adding comments providing theoretical support of UI pricing.[2] Though I fault UI pricing as being overly constrained, especially in comparison to my WOLF, I note that the US has no mechanism for pricing the unscheduled flows that brought down the US grid in 2003.[3]

Conemaugh is an 1800 MW power plant near Johnstown, PA, with two 900 MW units.  Conemaugh’s low cost has generally resulted in it being operate 24×7 at full load.  The expanded PJM market place has changed sufficiently to provide incentives for Conemaugh to cycle down at night.  Its operators have made major modifications to allow each unit to have a minimum load of about 380 MW.  I was impressed that the ball mills used to crush limestone for the scrubbers are generally operated off-peak.  The plant has sufficient storage for crushed limestone that the operators shut down this major parasitic load during the day, moving the parasitic load to the night.

One of our tour members subsequently ascribed the need for cycling to the growth of wind during the night.  I question attributing the need for cycling solely to wind since PJM has also experienced a huge shift in load patterns, with many fewer major loads, such as steel mills, that used to operate 24×7.  For instance, the river passing Conemaugh used to be reddish orange from the run-off at Johnstown Steel a few miles upstream.  Now the steel mill is gone.  I imagine that the shift in load shape could be having as big of an effect as the growth in wind.  Accordingly, I say that the jury is still out on the cause of the need for increased cycling of coal fired power plants.  I prefer to think that the cause of increased cycling is the increased transparency of the diurnal price of electricity, independent of the cause of that diurnal aspect of prices.

Another tour participant commented on the very large investment being made at Conemaugh to handle new environmental concerns, both NOX’s and mercury.  His analysis was that the investment is in excess of the original cost of the plant, at least according to his estimates.

EDF Renewable Energy’s Chestnut Flats wind farm is near Altoona, PA.  Seeing the wind mills operate up close, I could image Don Quixote tilting at wind mills in the 1605/1615 classic or the attack of the Martian machines in H.G. Wells “War of the Worlds” radio broadcast of 1938.  I have a blog entry combining Don Quixote and Robin Hood in regard to a proposal last year to mandate Maryland customers paying for off shore wind, which is an expansion of my “Letter to the Editor” published by The Washington Post.[4]

The output of Chestnut Flats is sold to Delmarva Power at a flat energy price.  There is no seasonality nor diurnal incentives, just that maintenance could not be planned during the summer.  After all, the summer is the high price period for PJM.  The SCADA system is operated in Spain, home to the company that provided much of the equipment and has the contract to provide operations and maintenance.  The Spanish company normally has three workers on site.  EDF Renewable Energy’s field manager at Chestnut Flats does have access to the SCADA information.  The SCADA system includes the ability to feather the blades after 6 seconds of continuous excessive wind speeds.

Our bus parked in the wind shadow of one of the wind mills.  Most of the time that we stood there I did not notice the noise created by the wind mills.  But when I thought about it, I could pick out a sound that I realized was the action of the blades.  The local township has zoned Chestnut Flats as residential, though the closest house is about 1200 feet from a tower.  A result of the residential zoning is that rain runoff ponds must be encircled by fences to protect children from drowning hazards.  But with the nearest house being 1200 feet from one of the towers and the land being fenced and at the top of a ridge, the zoning requirements seem excessive.  EDF Renewable Energy’s field manager very much accepted the regulations, providing very matter of fact responses to our questions, much like the old Dragnet line, “Just the facts, Ma’am, just the facts.”

The field manager had no impression that the wind was stronger during the night versus during the day.  His experience was that there was no significant difference.   Again, “just the facts” as he saw the facts and his personal observation of the movement of the wind mills.

On Friday morning we visited a family owned open pit coal mine near Frostburg, MD.  The owner described buying about 180 acres for his home so he could be away from everyone and then deciding to dig up coal from the abandoned drift mine about 100 feet under his property.  The entrance to the drift mine was about one mile away from the pit into which we walked.  Thus, the old underground miners eventually had to walk a mile into a hill side to get to the coal.  Initially the underground miners would have chipped at the coal at the hill side and then went deeper into the hill side to get to the remaining coal.  At the greatest extent, the walk was about a mile into the hill, at least for the underground mine.  Now, the mine was a pit 100 feet deep.

The owner had preserved, perhaps only temporarily, an area that included two wooden rails that had been used about 200 years ago to move coal cars into and out of the mine.  In the early 1800’s, miners would pull wagons into the mine, at an upward slope, through the coal seam to the face at which they were working.  The loaded wagons could almost drift down the rails to the exit.  Thus, empty coal cars were pulled up hill into the mine and loaded coal cars were pulled down hill out of the mine.  Jim McDonnell had given another explanation for working at an upward slope.  Water could not run upslope to fill the mine and did not need to be pumped out.  Both explanations work for me.

One of the mine workers seemed to express surprise that our group from Washington was “pro” coal, making the comment to Andy Knox, the other NCAC past president on the field trip, who works on energy projects for the Navy.  I didn’t hear Andy’s response but the worker’s comment led me to think that I am not “pro” coal, since that would imply that I am “anti” some other source of electricity.  Rather, I am “pro” keeping the lights on at the lowest reasonable cost to consumers.  As an engineer, I have learned that diversity of supply is generally good.  Having all wind, all nuclear, all gas, or all coal would make the electric system subject to great stress during political or environmental upheavals, such as has occurred in regard to nuclear, wind, coal, and gas.  Thus, I personally am “pro” diversity.  If NCAC is “pro” anything, NCAC is “pro” an open discussion of the issues.

The trip back to Washington, DC, on Saturday from Frostburg included a stop at Sideling Hill, where I-68 goes through a manmade notch in a ridge.  Jim McDonnell is a geologist and had provided material on synclines (which look like a bowl) and anticlines (which look like an inverted bowl) that resulted in the folding of the earth’s crusts millions of years ago.  Sideling Hill is at a sharp syncline, showing dozens of strata in the manmade notch.  The upward slope of the strata in the syncline suddenly stopping on both sides of Sideling Hill, which is only obvious because of the manmade notch, is quite impressive.  That Sideling Hill is at such a sharp syncline shows the impressive results of erosion, in that the notch is several hundred feet about the base of the mountain.  The implication is that huge amounts of the upper portion of the syncline bowl had been washed away.  What was left, as revealed in the manmade notch, was a narrow bottomed bowl that had layers of different types of rocks stacked in its center.

For me, an important part of the field trip was the interaction with the other participants.  Some of that is described above in regard to my discussion with Sarah McKinley and hearing the questions asked by various parties, including the mine worker’s comment.  Andy Knox also talked about his personal experience of becoming a net zero energy household.  He has installed enough solar cells that he often has a surplus and exports electricity to the grid.  He believes he has enough solar power to offset not only the energy he takes when solar production is low but also to compensate for the gas he burns in his range.  Recently, the gross generation from the solar cells has become enough that he was able to sell a REC, or a Renewable Energy Credit, for the 1 MWH he has generated to date.  I believe that Andy has an impressive story to tell.

Pictures from the field trip are being posted to the NCAC web site.[5]  Jim McDonnell has already submitted his photos and I saw many other people with cameras.  We expect to have an article published in the next issue of USAEE’s Dialogue.  I hope that some of the other participants on field trip will add comments to this blog or that I can include their comments in the Dialoguearticle.  There is enthusiasm for another field trip, which NCAC had already been planning for the spring in the Philadelphia direction.  One participant expressed interest in a field trip dealing with the use of electricity, such as at a steel mill or an aluminum plant, which the Philadelphia trip would do only partially.  Another participant said he had contacts in the steel and aluminum industry and might be able to arrange such a trip.  Maybe more later.



[1] Economic Failures Contribute to Indian Grid Blackouts, Posted on 2012 Aug 06 by Mark Lively, http://www.livelyutility.com/blog/?m=201208

 

[2] ABT – Availability Based Tariff, http://abt-india.blogspot.com/2007/10/windpower-discussion-on-inpowerg.html

[3] Power Crisis: Revenue Accounting Needed, http://www.energycentral.com/utilitybusiness/businesscorporate/articles/521/Power-Crisis-Revenue-Accounting-Needed

[4] Wind Boondoggles, Posted on 2012 Feb 28 by Mark Lively, http://www.livelyutility.com/blog/?m=201202

[5] NCAC-USAEE.org