sábado, noviembre 04, 2006

Avoiding the Boom and Bust Cycle in Electricity Trading

I have posted the following comment under the EnergyPulse article Avoiding the Boom and Bust Cycle in Energy Trading, posted on 10/31/06, By John Sheely , Trading Manager, Sheely Capital Management

I understand that it is impossible to avoid altogether the boom and bust cycle in energy trading. What is needed is to mitigate the amplitude of the cycles. As electricity growth is greater than total energy growth, there is a need for power sector structures that will help decrease said amplitude. If large scale transportation becomes a reality, the mitigation opportunities for electricity will further increase.

Vertical integration is not such a mitigation structure, because fuel clauses simply transfer volatility to the utility, which in turn is transferred to the customers after a time delay. The time delay depends on the regulation procedures, where customers cannot do anything about to avoid – a systemic time delay – except paying sooner or later whatever it costs. Some countries use taxes to cover part of the increases, but I think that is or soon will become irresponsible with todays and tomorrow technology and possibilities of innovations. The result is no mitigation whatsoever.

Neither is a mitigation structure centered on transmission access and generation competition, while distribution remains a retail monopoly –kept alive and protected as native load on the 2005 Energy Bill - under inefficient price controls (none or very little demand response to increase short run price elasticity). The problem experience so far is that spot prices amplify fuel volatility. That is one of the reasons of the failure of deregulation. The explanation is that as power systems get close to capacity limits in time and space, system risk of failure increase at the same time spot prices increases. The result is amplification instead of mitigation together with opportunities to game the system, as the Enron case showed. From this standpoint, Enron was just a casualty in the making.

What is needed is a structure where fuel volatility is transformed into spot prices with much less volatility. That was what the late M.I.T. professor Fred C. Schweppe worked very hard to envision during the 80s, and that resulted in the book "Spot Pricing of Electricity." The idea being that with a reduction of the systemic time delay, customers with the aid of new interface technology will be able to become responsive and mitigate random short run volatility. That is what now is called demand response, still an immature but highly promising technology.

Professor Schweppe explained how to adapt the vertical integrated utility to demand response, without deregulation. However, he explained that it would be easy to deregulate once the electricity marketplace was operating under the utility. The problem with deregulation was that his suggestion was bypassed. A quote from the EnergyPulse paper “An Alternative Business Case for Demand Response,” repeats his suggestion:

Most wholesale deregulation efforts have been a failure. Professor Schweppe had a different idea. He and his colleagues wrote in the book "Spot Pricing of Electricity": "We believe the deregulation which considers only the supply side of the supply-demand equation is dangerous and could have very negative results." It has taken a long time and a lot of value destruction to understand the above insight. The doors to innovative solutions in the power industry will be wide open when these concepts are finally understood.

I have been working on an extension of Professor Schweppe's work and have come to the conclusion recently that there are a great opportunities to develop the resources of the demand side. That is what I have call Electricity Without Price Controls in the blog of Grupo Millennium Hispaniola. At the center of the structure is a transmission and distribution natural monopoly, which is also the agent that controls physical electricity systemic risk, in the short and long run. That is a new paradigm of the power industry leading to its end state for the foreseeable future.

Electricity trading works on a new value chain which is wholesale, retail, customer, as explained in the article already mentioned. This is a more modest kind of deregulation than the earlier, which is not exclusive for the benefit of large industry, but for the benefit of the small guy. An inclusive, innovative, 21st century electricity industry will be the result. This is what the market at the Bottom of the Pyramid is waiting for. For further information please take a look at comments posted earlier on EnergyPulse that I have compiled 12 Selected 2006 Posts on Electricity Without Price Controls.

12 Selected 2006 Posts on Electricity Without Price Controls

1. A Blueprint for the Development of the Resources on the Demand Side
19 Oct 2006 by José Antonio Vanderhorst Silverio, PhD
This what I have been writing about Electricity Without Price Controls, whereby the development of the market at the Bottom of the Pyramid can be developed. A Blueprint for the Development of the Resources on the Demand Side can be ...

2. A Challenge to the Best and Brightest
6 Oct 2006 by José Antonio Vanderhorst Silverio, PhD
Electricity Without Price Controls will lift the inherent protection of the price control system and introduce competition and innovations to the power industry. I told them of the work I have been developing, and many of them became ...

3. On the End-State of the Power Industry Part 3
3 Oct 2006 by José Antonio Vanderhorst Silverio, PhD
Under Electricity Without Price Controls (EWPC) reform Sean's argument "Decades of confused utility regulation have given us the worst of both worlds - bad decisions by regulators who (no matter how intelligent) can never be expected to ...

4. On the End-State of the Power Industry Part 2
2 Oct 2006 by José Antonio Vanderhorst Silverio, PhD
I think that Electricity Without Price Controls (EWPC) is the correct regulatory and market structure, that it seems to me – correct me if I am wrong - you are shying away from them because they are offering such uncomfortable ...

5. Synthesis of Electricity Without Price Controls
2 Oct 2006 by José Antonio Vanderhorst Silverio, PhD
Electric power deregulation that separates transmission and distribution - the FERC way - is flawed, because that separation is not done at a modular interface. The interface isn't modular when most needed - when real time reserves are ...

6. On the End-State of the Power Industry
29 Sep 2006 by José Antonio Vanderhorst Silverio, PhD
That is a tall order, which gives me the opportunity to present once again an alternative new system which I term Electricity Without Price Control. It has been known for quite some time that the business of utilities is winning rate ...
7. Water Without Price Controls
21 Jun 2006 by José Antonio Vanderhorst Silverio, PhD
Water without price controls is a paradigm to complement electricity without price controls. The value added by retailers which have economies of scope may lead to a turn around of the two services, whereby the development of the bottom ...

8. Please Blame the Deregulation and Regulation Fiascos Parte 39
25 May 2006 by José Antonio Vanderhorst Silverio, PhD
That is the case of Hogan's mental model, which makes Electricity without price controls a better market possibility. For example, customers with supply security requirement away from the average should be able to choose the offering ...

9. Please Blame the Deregulation and Regulation Fiascos Parte 26
10 May 2006 by José Antonio Vanderhorst Silverio, PhD
What I have been doing is working on the architecture of electricity without price controls to the customer and recognizing the need of retail market development should be an integral part of transforming the electric power sector into ...

10. Clientes Controlando Costos Electricidad - Clients Controlling ...
23 Mar 2006 by José Antonio Vanderhorst Silverio, PhD
The suggestion of the GMH is to concentrate the attention in the Electricity Without Price Control, that differentiates supply security and introduces retail marketing competition. The result in simple words is that clients will be able ...

11. An Unorthodox Solution to Blackouts
28 Feb 2006 by José Antonio Vanderhorst Silverio, PhD
On Thursday 2 March, at 7pm at the Academy of Sciences, Dr. Jose Antonio Vanderhorst-Silverio PhD, Academy of Sciences member and a graduate of Cornell University, will give a speech on "Electricity Without Price Controls: key element ...

12. Utilities vs Retail-Marketers on the Purchase of Communication ...
3 Jan 2006 by José Antonio Vanderhorst Silverio, PhD
Such a vision will lead eventually to retail marketing of electricity, without price controls, as transaction costs become negligible. There will be no utility, but several competitive retail marketers, making it simpler “how to apply ...