martes, septiembre 11, 2007

A Paradigm Shift to EWPC

Thanks Len once again for asking to answer your questions. In my answer to Edward it is evident that any solution that does not pass the tough test of Todd is because it is not modeled with essential requirements, but a proposed implementation, like the SMD. I am responding not because of the good intentions of Jeff, but to get back to good terms with you and all the other brilliant commentators, as Fred called us.

Len Gould on 8.31.07. My problem with EWPC are myriad eg. it's precisely identical to every existing failed attempt at de-regulation in N. America. And it's promoter flatly refuses to answer any difficult questions about it. Questions which I have posed before, such as:

1) How can it manage to implement effective demand response and avoid the huge "free rider" problem?

This question is a key element of the EWPC paradigm shift, but belongs to the second phase of competition: company vs. company competition. It will be answered by 2GRs business model innovations. Any customer trying to be free rider will find how effective competition is. The huge free rider problem is under monopoly.

2) How can it GUARANTEE no shortages?

Although with a very small probability, in any power system there will be always shortages. EWPC is about rational rationing in those very costly moments when required. Vertically integrated systems were designed for a 24 hour loss of load probability in 10 years. The system planner and engineer is the responsible for short run and long run systemic physical risk management as explained in my article An Alternative Business Case for Demand Response and refined in the post Letter to Dr. Alfred E. Kahn which helped you say “José you are closed!” The integration of demand into power system planning, operation and control, will increase demand elasticity, reducing shortages relative to vertical integration on any given event.

3) How can a fragmented bunch of small-cap "Retailers" finance items such as new-build nuclear?

Ja, ja, ja…nuclear! All you need is a robust, complete and fully functional retail and wholesale markets. Second generation retailers are not small-cap retailers. Today’s utilities should be restructured by separating the commercial regulated retailers from the physical distribution which should be integrated with transmission to become transport. Under EWPC a lot of mergers and acquisitions activity and competitive, as well as business model innovations will lead to worldwide competition after a transition. See also item 5.

4) What specific benefits do the "Retailers" provide to customers?

This has been answered at length in earlier posts. Edward A Read Jr. understands it very well.

5) Why would generation choose to sell to middle-men if they can sell directly to the customers at no additional transaction costs?

Sorry. Generators will need to have a retail department to handle non-trivial retail management. Economies of scale should be the result of activities under my response on item 3.

6) What mechanism under EWPC would be used to deter gaming by artificially with-holding generation?

Anyone withholding committed generation under a day-ahead security constraint unit (generating and load under EWPC) commitment is liable to pay large sums under the balancing market.

7) Are wholesale market transitions private or public information? Retail contracts?

This will be the result of the detailed design of the prudential regulations, which I suggest should be negotiated at the WTO. The main reason is that small and poor customers in developing countries are being taken for a ride. The information that should be transparent should emerge.

8) How could any mechanism to defeat gaming be set up if market transactions are private?

Already answered on item 7.

9) How does EWPC deal with "spinning reserve" and "standby" costs?

Under EWPC a whole system approach, instead of an incremental approach will be performed. Research needs to be performed to distribute systems costs.

10) What specific provisions are made to enable / encourage small Distributed Generation / residential CHP, when that ideal future trend goes directly counter to the interests of the "Retailers" and large incumbent generation?

This is a good of a paradigm shift at work. Under EWPC, retailers’ incentives are aligned with those of the customer. If they weren’t the customer would elect to choose a retailer that would satisfy his need for higher value added. The last sentence on the top of the GMH blog reads “Let’s enable electricity with the maximum value added to the customer.” However, under vertical integration, native load incentives are perverse and go counter customer interest.

11) Why would "retailers" bother to encourage conservation when that simply reduces their gross sales?

That is a problem of perverse incentives under monopoly service, which cannot be solved by piece meal interventions, such as how is conservation added to current rates. Utilities solutions are answered with their obsolete business model winning rate cases to the regulator. This answer complements that in item 10.

The World Needs to Implement EWPC ASAP

Dear Edward, Len, Jim, Jeff, Ken and other writers, such as Fred, Don, Joseph, Malcolm, and Todd, which have from time to time made recent comments under these fine articles about EWPC. Thank you all for the help to make EWPC better understood, even if you don´t understand it yet.

In his elementary textbook on energy economics, Professor Ferdinand Banks calls all of us (ken is added by myself) as brilliant commentators. I recognize also that all of you are intelligent people, which are probably experts in more than one field of knowledge.

What has emerged as EWPC is the work of many years, which I would say started in 1980, when I learned how to plan an interconnected power systems, under experienced and generous (free of charge) power planning professionals from Puerto Rico. They had gone to Schenectady after a huge mistake of purchasing two oversized generators for their mostly thermal power system. The result of the mistake is that they have been operating those two generators at half load since then to satisfy the reliability criteria.

Officials and regulators of the Puerto Rico Power Electric Authority (PREPA) authorized the investment by thinking intuitively that by purchasing two large base load generators, electricity cost would come down. However, reliability results were that when one of those generators tripped, the whole system collapsed and everybody lost because of the large interruption costs. That occurred several times in the 70s. Leaning at GE ffor the was truly a paradigm shift. The essence of the message is the need for expert professionals to plan the electric system under the architecting imperative of ultraquality, just as nuclear power stations are architected and designed. That is part of a logically true and non-trivial doctrine key for EWPC.

Over the weekend, while researching to satisfy Edward A. Read Jr. request (see EWPC is a True and Non-Trivial Doctrine), I came to the conclusion that I may have been trying to explain a non-trial doctrine to intelligent people. For example, central to the non-trivial subject of power system planning is the intuitive concept of "Lowest cost electricity generation" - that Puertorican had bought - which I though to be a good statement to get many readers on the same page, but apparently didn’t make it. So, in the post Lowest Cost Electricity Generation is Just Intuitive, I have included a small lecture to explain the concept, the reaction by Don Giegler who said “Seems like a pretty close-minded lecture, Jose....” and my logical response to his reaction.

The conclusion applies to Len too. Although he is very intelligent, there is not guarantee that he will understand the paradigm shift of the EWPC doctrine, not matter how well it is explained to him (see what Paul Samuelson said on EWPC is a True and Non-Trivial Doctrine). So I have answered, not 7, but 11, of his 8.31.07 questions about EWPC as you will see below in the next two posts.

By the way, “a good tax,” is the one that elected government should decide, in line with a finite environmental capacity world. If we act with a business as usual (irresponsible) response, we may get to what Jim wrote about Jared Diamond’s “Collapse.” However, his suggestion at the end about finding it difficult not to keep burning coal it will only increase the probability of collapsing. One way to go about such difficult scenario is to implement a reduction of the consumption of energy per capita – while keeping as much as possible the energy service – by developing EWPC ASAP.

Industries in Ohio want to go back to vertical integration, which is a zero sum game. For industry to get lower rates, other customers will get higher rates. No so under EWPC, where price and service differentiation will let every customer find the best service plan, which better fits its requirements, as long as prudential regulations are well design and implemented.

Lowest Cost Electricity Generation is Just Intuitive

Jose Antonio Vanderhorst-Silverio wrote on 9.3.07

To all readers Part III

"Lowest cost electricity generation" is a good statement to get many readers on the same page. It is also good for Joseph, because his "reality check" that I quoted above is mistaken and it also stresses even more that he might not be representing ordinary folks well. I repeat, Joseph Rosenthal said before: "It is better to just do one big thing, in my view, like build a nuclear plant, and then do your best to regulate the cost using traditional rate principles. If you try to do 10 good small things, you'll wind up doing 90 bad small things for campaign contributors. That's the reality check."

The idea of a system with just one big thing is very, very costly, because the parts are unreliable and the load is variable. That is why peaking units are required and they are the marginal units.

Lowest cost electricity generation does not make any sense to a system engineer, nor to the end customers that pay for it. As an old system planner, I will tell facts and the origin of the idea.

Under vertical integration, systems engineers made long run least cost expansion plans and as a result came up with a generation mix adapted to the forecasted long term demand. Such optimization was to minimize the costs of investments, operation, maintenance and outages to produce reliable electricity.

To produce reliable electricity is a property of the whole system not of the parts. To have 24 hours of loss of load probability - as many systems were designed - generation reserves of 20 or 25 percent resulted for many systems.

I read that PJM had recently more than 30 percent reserves. That is one of the main reasons that demand response is not attractive, because it makes obsolete a lot of generating units.

That is also why retail customers get rates which are way above the cost of base load generation. They have a lot of coal units, but ask what is the retail rate residential customers are paying for.

Hydro and nuclear seems a good mix. However, with a very uncertain future demand and with a lot of climate changes working out, I would not bet on it and have some gas installed. Or better yet, I would develop the resources of the demand side to integrate it as active demand, or said in other words develop an effective rationing system or still in another way change demand from inelastic to elastic.

Sorry for the class. But I fell it was needed for some of the people posting their ideas without sufficient understanding of electric power system planning.

Don Giegler reply to the above post on 9.3.07

Seems like a pretty close-minded lecture, Jose....

Jose Antonio Vanderhorst-Silverio responded to Don Giegler on 9.4.07

Don and anybody else that might perceive my Part III post as closed-minded.

It seems, but the post is not closed/minded. It is just that a power system is a very complex system that cannot be planned and designed by debate, among stakeholders groups. The system should be design by a system planner leading to ultraquality transportation.

Some highly respected professionals in the IEEE said that an electric power system is the most complex machine ever built. One of the greatest mistakes done in deregulation was the lack of leadership that the engineering community had at the outset of deregulation. Any one that needs more details please read EWPC: People Coordinating and Cooperating with Electrons Part

The conclusion is that since market architecture and design, like EWPC, was not considered in the decade old debate, a lot of value destruction has resulted. With EWPC the deregulation debate should be over. Ohio's re-regulation process is great opportunity for the whole world, because the utilities already recovered deregulation costs. European Union authorities might also be very interested in looking deeply into the issue, as the July 1st deadline is over.