domingo, septiembre 23, 2007

IMEUC: Unreliable Service and Price Spikes

In response to the suggestion by Mr. Jeff Presley about simulations, it is shown that there is not a need to look further, as a simulator already exists, and its information’s confirm the EWPC is the winner of the first phase of competition with the VIUs, as IMEUC doesn’t even qualify.

IMEUC: Unreliable Service and Price Spikes

By José Antonio Vanderhorst-Silverio, Ph.D.

Systemic Consultant: Electricity

Copyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to to contact the author for any kind of engagement.

In an attempt to compare IMEUC with EWPC as the wining market architecture and design, Mr. Len Gould started yesterday (September 22nd, 2007), the Energy Market Simulator Design – Software Design Blog. Its second post is entitled Opening discussion.

Mr. Gould states that “The reason for this initiative is that it is my response to a prod by Jeff Presley.” In what follows it is shown that there is not a need to look further, as a simulator already exists, and its information’s confirm the EWPC is the winner of the first phase of competition with the VIUs, as IMEUC doesn’t even qualify.

Using systems dynamics, Dr. Jason Black’s, Ph.D. theses at MIT, already simulated a shift from the Vertically Integrated Utilities paradigm to an incremental paradigm that apparently integrates Demand Response. Dr. Black’s simulations did not consider the most important criterion of electric power utility service, which was suggested by the late Professor Fred C. Schweppe, also of MIT. That criterion, "considers the engineering requirements for controlling, operating and planning an electric power system," being the key distinctive element of the Electricity Without Price Controls (EWPC) paradigm; In layman's terms, the criterion can be expressed as "reliability first, economy second (R1E2)."

By the way, the R1 part is the key to develop the optimal transportation system, which results from the minimization of the sum of all the costs of investments (included those of supply and demand), costs of operation, costs of maintenance and costs of outages, so in a sense “reliability first” is about developing the best economic transmission system for the expected supply and demand of society.

Because of the lack of the R1E2 criterion, the thesis leads the untrained observer to the false general conclusion of “pernicious effect from… increase price volatility due to reductions in generation capacity reserve margins.” The R1E2 criterion prevent the possibility of price spikes occurring under EWPC, but which will occur under IMEUC, making it just another faulty deregulation experiment candidate.

The model system includes three alternatives: IMEUC distributed end-user level (so now we have IMEUCs paradigm available), a Disco incumbent retailer and an alternative First Generation Retailers (1GRs), whereas, EWPC is centered on Second Generation Retailers (2GRs). 1GRs have low competitive capacity as they operate under the VIUs paradigm in which the incumbent Disco retailer can foreclose competition. Incumbents are afraid of 1GRs cherry picking their customers.

Under EWPC, there is no Disco retailer, nor cherry picking, as 2GRs compete with each other. 2GRs have incentives to innovate – by developing business model innovations - to maximize value, minimize costs, or both, for individual customers, and, as a group, have the potential to maximize social welfare, something IMEUC cannot do. They optimize by obtaining as close as possible the required information of the (changing perceptions) preferences and conditions of all customers. While getting that information, they satisfy as close as possible the R1E2 criterion, something that is prohibitive and excessively complex to do by the system operator.

Systems operators all over the country are already operating with especial demand response retailers. In Geoffrey Moore’s Technology-Adoption Life Cycle model, Demand Response has already crossed the Chasm to the Bowling Alley in a few jurisdictions, as Pragmatics “Stick with the herd!” Many others are in the Early Market as “visionary companies get ahead of the herd!”

In the mean time, many Conservative VIUs, under the lack of leadership of IOUs and regulators want to “Stick with what’s proven!” By starting the new blog, Mr. Gould is trying to get into the Techies “Just try it!” stage, but it not possible, as they are trying to avoid the retailers, one of whose essential role is to fulfill the R1E2 criterion.

At the same time, there are other secondary economic requirements, the E2 part of R1E2 that should be mentioned. 2GRs compete and use the increasingly detailed information to reduce free riding. A IMEUCs benefit, such as being better at curving free riding, is insufficient to be the wining market, as the system operator or market manager will need to perform the required and unavoidable essential retail function to maximize social benefits. In addition, IMEUC would need to receive a large subsidy under a mandate to get implement it.