jueves, abril 10, 2008

The Electricity Revolution

Warren Causey is reporting a technological revolution in the power industry, which is ahead of legislative and regulatory uncertainty and is heading for a very costly dead-end. Utilities in the US and Europe are trying to extend their obsolete business model of winning rate case to the regulators. Customers and society should not have to pay for such large value destruction, by adopting the EWPC market architecture and design paradigm that removes the uncertainty.

The Electricity Revolution

By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity

First posted in the GMH Blog, on April 10th, 2008.

Copyright © 2008 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 javs@ieee.org to contact the author for any kind of engagement.

Warren Causey’s Reinventing the U.S. Utility Blog is a great source of the power industry insider information. In his very illuminating recent article We're on the cusp of another tech revolution, Warren writes that “These new systems, one of which is in pilots at six U.S. utilities will enable the next step, utilities interacting directly with customers—rather than through a third-party—to reduce consumption.”

These new systems are very close to what Fred C. Schweppe and his team at M.I.T. proposed TWENTY YEARS AGO, as the Spot Price Regulated Energy Marketplace (SPBEM), in their 1988 book “Spot Pricing of Electricity.” Schweppe knew that such a step was not to be the end-state of the power industry, so legislative and regulatory uncertainty will remain in place after those systems, while extending unnecessarily the obsolete business model of winning rate cases to the regulator.

EWPC is an extension, and a natural evolution, of the SPBEM that emerged as the end-state of the power industry for the Third Industrial Revolution that we are already experimenting. As part of the greater effort of demand integration to power system planning, operations and control, EWPC takes care of the retail marketing barriers of the present regulation that were not considered by Schweppe and that moved me to write the EWPC article Utilities and Regulators’ Value Destruction, whose summary reads as follows:

As one of the problems, excessive marketing costs are identified by Marty Agius, under today’s regulations, which make utilities and regulators unable to add customer value as will be done under EWPC. Added to his arguments is the large value creation waiting to happen with the emergence of business model innovations, to be develop by retail marketers (2GRs) to integrate demand to power system planning, operation and control, since market research doesn’t work yet.

What the above means is that the incremental development of the power industry, already overdue for a large reengineering project, is going directly into a very costly dead-end (not for the utilities vested interests, but) for the customers and society in general. Comparing the US to those of Europe, Warren adds that “U.K. utilities and retailers are competitive and apparently being successful at it. The large retailers have hundreds of thousands, even millions, of customers in some cases.”

So it seems that the U.K. is getting closer to EWPC, but there are important differences, as can be seen in the article EWPC is NOT the UK Model summary that states that “In EWPC there are 8 possible End-State (UK was developed on 4), only one of which is the generic market model paradigm: retail competition with active demand (UK had no active demand) and ultraquality transportation (UK has separate transmission and distribution and no ultraquality identified). That is the essence." Europe, however, is not the UK. It seems that some of the utilities like the US model better. A hint on the differences can be found in the EWPC article Utilities vs. Neelie Kroes.

In his article, Warren adds: “The technological complexities involved in all of this are immense,” as market complexities of the power industry are still undefined everywhere “… because regulators and legislators haven’t yet told utilities what they plan to impose.” The EWPC market architecture and design paradigm has been developed to reduce both market and technology complexity, where complexity can be reduced.

EWPC emerged at the beginning of 2007, by separating market vs. market competition from company vs. company competition. The result is that the utility remaining will be a transportation only utility that will have a responsibility to transport compact that will be financed by tolls. To get demand (that used to be exogenous) integrated to power system planning, operation and control, a new breed of Retailers’ Enterprise Solutions will compete for market share.

EWPC market architecture and design adoption will solve the main legislative and regulatory uncertainty issue. I have no doubt whatsoever, that after understanding EWPC, regulators and legislators will tell utilities that they plan to impose it. Just like the telegraph companies, utilities as we know them “… won’t survive what the world is about to throw at them.”