James said, "My intention is not to convince Professor Banks… is to challenge his assertions with which I disagree. Thousands of people read these forums, and I think it is a bad idea for them to get the impression that… Banks reflects the prevailing consensus. Frankly, I expected a more spirited clash. He merely makes pronouncements with little support and fails to respond to my rejoinders."
As I will show, readers can reverse Banks and Carson’s names without any loss of generality. That shows that Jim opinion does not reflect the prevailing consensus either.” Bad ideas “must be killed, the sooner the better.”
After working for 30 years at FPC and at FERC, Jack Duckworth – a professional engineer, not a politician - predicted the 14th August Blackout in the very illuminating article The Fatal Flaw in Electric Power Deregulation. Mr. Duckworth said that “[D]eregulation can work, but it will not work unless those overseeing the deregulation initiative recognize the inherent flaw and install a mechanism that will fill the gap by guaranteeing the availability of electric power without guaranteeing the price.”
As a mechanism, he said: “When I saw in 2001 that the market was failing to ensure adequate generating reserve margins, I proposed in my book, Power to the People, that the government put national rules in place that would require any power generating company to maintain a set reserve generating capacity margin as a condition of doing business. Such a mandatory reserve margin would ensure that there could never be a disastrous shortage of supply that could blackout an entire electric power supply region. It would also ensure a level field for all competing generating companies.”
This is what Jim, the practical analyst, advised to all readers of EnergyPulse on Feb 18, 2003:
Sorry, I did not find this article at all illuminating.
The principal objection appears to be that reliability is not considered in the market price of power, and cannot be. This is true, as far as it goes. However, there are several market mechanisms that have been developed that specifically address this.
First, capacity. It is not perfect, but it does work after a fashion. More work must be done to improve this mechanism.
Seond, spinning reserve markets are already functioning in PJM and, I believe, ERCOT. So far, so good on these efforts. The notion that electricity is somehow 'different' from other commodities must be killed, the sooner the better. One could make the similar points about wheat and natural gas. Indeed, the histories of both of those commodities are replete with similar concerns.
Power as a commodity is distinguished by two 'interesting' features, both of which contribute to its incredible volatility. First, with a few exceptions, power cannot be stored. However, now that we have functioning markets, we can measure the value of storage. I have already worked on one project that required an estimate of the value of storage.
Second, the elasticity of the demand curve at any particular moment for power is essentially zero. That is, a marginal change in price produces no change whatsoever in demand. Even a large change in price produces no change in demand. That is why the marketplace is working so hard on 'demand side' management programs. Again, the market is responding, albeit slowly.
James Carson JBCarson@RisQuant.com
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Mr. Duckworth's objection has been met, and was met when he made it. The market mechanisms in place in the LMP (most de-regulated) regions in the US already do, and already did, guarantee delivery of power regardless of price. As for his point regarding mandatory reserve margins, that hasn't changed in principle in decades. It remains 15%. The details are evolving of course as the markets evolve. Mr. Duckworth's point about ensuring adequate reserve margins is belied by the fact that most of the United States is drowning in excess capacity at this time, primarily as a consequence of de-regulation.
James Carson, JBCarson@RisQuant.com
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