Reference: Playing with Fire – Part II
Andy had said: “This is the first of a four part series of articles on the natural gas and electricity price and supply risks facing the U.S. economy.”
The topic is: natural gas and electricity price and supply risks.
Electric power market architecture and design is right at the center of the topic. Two generic electricity systems models have been implemented: Model 1: old vertical integration controlled market and Model 2: faulty deregulation, based on open transmission access and “native” loads.
As an emergent system is Model 3: electricity without price controls. Since Model 1 and Model 2 have barriers on the development of the resources of the demand side that are being addressed on a piecemeal basis. Model 3 is based on an integral development of the resources of the demand side.
As gas prices rise, in Model 1 gas price volatility are transferred to the electricity price volatility; in Model 2 gas prices volatility are amplified into higher volatility to the electricity prices; and in Model 3 gas price volatility is mitigated into less volatile electricity prices.
Physical supply side risk management of Model 1 was not fully transfer to Model 2, making it unstable under shocks conditions. Model 3 has both supply side and demand side physical risk management. Demand price elasticity development barriers under Model 1 and 2 are fully eliminated under Model 3.
Model 2 incredible volatility is a flaw that goes against electricity as a commodity. The flaw is the lack of ultraquality. McKinsey has an article on electricity as a special commodity.
The key suggestion to develop a generative dialogue is thus right on the topic. The decade old debate around Model 1 and Model 2 is no longer necessary.
By developing two or three plausible scenarios, one of which is the “continuity” scenario, my opinion is that Model 3 will result as a predetermine element – fits on any of the scenarios. Model 1 will only be on the “continuity scenario”. On the “playing with fire” scenario Model 2 won’t cut it, while Model 3 is the best to face the severity of the crisis. Piecemeal changes to Model 2 towards Model 3 will make it very inefficient.
The adoption of a comprehensive national energy strategy should be based on a generative dialogue, including strategic conversations around the scenarios and system dynamic runs that include all the mental models of the interested parties. Major changes to the existing U.S. energy infrastructure, with the wrong market architecture and design is nothing more than playing with fire. Andy’s contribution is a welcome input to such strategy.
For some more details read the following recent posts:
EWPC: People Coordinating and Cooperating with Electrons Part 4
EWPC: People Coordinating and Cooperating with Electrons Part 3
EWPC: People Coordinating and Cooperating with Electrons Part 2
EWPC: People Coordinating and Cooperating with Electrons
© 2007. José Antonio Vanderhorst-Silverio, Ph.D.