lunes, diciembre 17, 2007

Making Electricity a Commodity

To make electricity a commodity, a proper market architecture and design has emerged in the last two years, as the electricity without price controls (EWPC) paradigm. The structural flaws in the current incremental extensions of the vertical integration paradigm will not go away by implementing NERC mandatory requirements, as it prevents the necessary coordination leading to maximum social welfare.

Making Electricity a Commodity

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. This article is an unedited, an uncorrected, draft material of The EWPC Textbook. Please write to to contact the author for any kind of engagement.

Electricity is not a regular commodity like gasoline, unless it meets the requirement to properly managed systemic risk of system failure. To explain how to make electricity a commodity, I will try to convey the information which might be non-trivial on the EWPC articles Demand Integration is NOT the Province of Politics, To BE or NOT to BE Smart Metering and Market Research Doesn’t Work Yet for Demand Integration, and their respective hyperlinks, in another way.

As far as I know, only the original vertical integration and the EWPC paradigms are designed to satisfy such requirement. As you can see in the GMH article NERC Compliance and Power Sector Structure, NERC mandatory requirements are just a set of costly afterthoughts, which “will no fix the structural flaws remaining.”

Missing in the afterthoughts is that systemic risk of system failure requirement under vertical integration aimed to provide maximum social welfare by developing the power system infrastructure under least costs expansion plans. Under EWPC the transportation infrastructure is to be developed under similar least costs to enable maximum welfare in the open market. Coordination is brought about by EWPC market architecture and design paradigm. When customers take their decisions independently the results can be way off the social welfare optimal as lack of coordination will lead to a lot of value destruction.

As the work of FERC is correctly showing, demand response (and thus energy efficiency) investment and service plan procedures information is required beforehand to determine the price of electricity when demand gets integrated into power system planning, operation and control. EWPC dual markets design provide how customers will interact in supplying the needed information while selecting 2GRs’ service plans, which under competition will become business model innovations.

The transition from vertical integration to EWPC should proceed in a reasonable time frame in which supply side risk management gets reduced by increasing demand side risk management of system failure, as the customers’ education process continues.

The alternative is to go back to vertical integration to keep receiving a monthly bill and using costly generating reserves to manage systemic risk of system failure, which in turn lead to very costly electricity.