lunes, noviembre 04, 2013

A complete and fully functional electricity restructuring proposal

"You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete."  --Buckminster Fuller

© 2013. José Antonio Vanderhorst-Silverio, Ph.D.
Consulting engineer on electric sector systems architecting.
Creator of the Value Added Electricity Architecture Framework.

Summary

Adequate electricity system restructuring is a key subsystem component of the adequate global society system restructuring needed to enter the Golden Age of the first technological revolution of what this author conjecture is a systemic civilization. From a heuristic system architecting perspective that Golden Age will be the result of the design of the value creation generated by the highly complex socio economic system that none of the subsystems by themselves is able to provide. Such value is the result of the relationships among global society subsystems.

In the paper Rethinking Electricity Restructuring, Van Doren and Taylor said in 2004 that “the poor track record of restructuring stems from systemic problems inherent in the reforms themselves. We recommend total abandonment of restructuring and a more thoroughgoing embrace of markets than contemplated in current restructuring initiatives.”

What Van Doren and Taylor failed to recognize was that systemic problems are the “wicked” problems that were identified by professors Rittel and Webber as far back as 1973. In addition, as early as 1989, professor Paquet provided two characteristics that make the traditional policy research methods inadequate to address “wicked” problems, while stating a simple rule for the selection of a framework that is satisfied, for example, by the generative restructuring proposal of the Value Added Electricity Architecture Framework.

Introduction

The post Will society reach the golden age or waste the opportunity of the ICT revolution? with some editing now says that:
The author has been looking closely for quite some time to technological revolutions that redefine the society’s system in an effort to consider the system environment of what emerged as the Value Added Electricity Architecture Framework. As far as he knows, the most important research work on technological revolutions started at the Center for Business Research of the UK. They documented four technological revolutions of the industrial civilization which followed Kondratiev's long wave model and identified the 5th as the information and communications technological (ICT) revolution. Such revolutions were driven not by just one technology but by a cluster of technologies that mutually reinforced each other over a period of 50 or 60 years when they run out of steam and were replaced by a revolution that led to a better societal system.

Professor Carlota Pérez one of those researchers, followed up the above research and wrote the book “TECHNOLOGICAL REVOLUTIONS AND FINANCIAL CAPITAL: The Dynamics of Bubbles and Golden Ages.” To get a better feeling on Carlota's work, please take a look, for example, at one of hers most recent presentations, where she quotes the late professor Chris Freeman who was also among the original researchers.

This author now understands that the first 4 revolutions defined the industrial civilization which corresponds to Alvin Toffler’s 2nd Wave. Recently professor Pérez responded to a comment that the 5th revolution might be the first revolution of the next civilization, which fits very well with Alvin Toffler's 3rd Wave.

Influenced by both Toffler and Pérez, elsewhere this author wrote that “Right now 2nd Wave status quo civilization and 3rd Wave emerging civilization are in a big fight that was anticipated by Toffler back in 1980. We are able to see that fight as a global economic depression, with 2nd Wave institutions, like the IMF, the World Bank, doing the job for which they were designed, which is to protect the 2nd wave.”

Professor Pérez’s conclusion on that presentation says:
Another important lesson that Chris Freeman taught us is that:

Beyond the interdisciplinary understanding of the economy

OUR ACADEMIC WORK HAS FULL MEANING WHEN IT ENGAGES IN THE BETTERMENT OF SOCIETY

Will we reach the golden age or waste this opportunity?

WE SHALL ALL BE RESPONSIBLE FOR THE OUTCOME
Finally, please take a look at a 4 min video of Professor Perez to see what’s still missing to move to the Golden Age of the 3rd Wave civilization
In this article, while it concentrates on the systemic electricity problem, professor Pérez’s work is interpreted as addressing the global society systemic problem through a wider framework, which lets the author conjecture that we might be about to enter the 1st Golden Age of the systemic civilization. I understand that some of those systemic problems will go beyond that first technological revolution, to continue to address, for example, the systemic environmental crisis. Such systemic problems might require much more than the ICT revolution, as professor Pérez already hinted in her presentation, at what will be the following technological revolution as the Age of Biotech, Nanotech, Bioelectronics and New Materials?

That conjecture is based on a magisterial conference (see presentación ) that the author gave in Spanish at the Academy of Science of the Dominican Republic in which he introduced the 3rd Wave civilization scenario with a new philosophic ground that replaces the Descartes’ 2nd Wave scenario. As we moved from the agricultural civilization to the industrial civilization, Descartes’ 2nd Wave scenario replaced Aristotle’s 1st Wave scenario. Now it is Descartes’ scenario that is replaced by the great American Philosopher Charles Sanders Peirce’s scenario.

The author expects that other subsystems of global society, like education, health, government, which are also currently under systemic problems, will be able to benefit from the heuristic systems architecting approach. It is that 3rd Wave systemic civilization approach that makes the 2nd Wave non systemic civilization modeling obsolete.

Electricity restructuring

In the Executive Summary of Cato Institute’s Policy Analysis No. 530, Rethinking Electricity Restructuring, of November 30, 2004, Peter Van Doren and Jerry Taylor wrote emphatically that:
Electric utility restructuring was initiated in the 1990s to remedy the problem of relatively high electricity costs in the Northeast and California. While politicians hoped that reform would allow low-cost electricity to flow to high cost states and that competition would reduce prices, economists wanted reform to eliminate regulatory incentives to overbuild generating capacity and spur the introduction of real-time prices for electricity.

Unfortunately, high-cost states have seen little price relief, and competition has had a negligible impact on prices. Meanwhile, the California crisis of 2000–2001 has led many states to adopt policies that would once again encourage excess capacity. Finally, real-time pricing, although the subject of experiments, has yet to emerge.

Most arresting, however, is the fact that restructuring contributed to the severity of the 2000–2001 California electricity crisis and (some scholars also argue) the August 2003 blackout in the Northeast, without delivering many efficiency gains.

The poor track record of restructuring stems from systemic problems inherent in the reforms themselves. We recommend total abandonment of restructuring and a more thoroughgoing embrace of markets than contemplated in current restructuring initiatives. But we recognize that such reforms are politically difficult to achieve. A second-best alternative would be for those states that have already embraced restructuring to return to an updated version of the old, vertically integrated, regulated status quo. It’s likely that such an arrangement would not be that different from the arrangements that would have developed under laissez faire.
Even though it is easy to “recognize that such reforms are politically difficult to achieve,” the “return to an updated version of the old, vertically integrated, regulated status quo,” has made the situation a lot worse by failing to understand that we have been against a “wicked” problem for such a long time. As will be shown in the remainder of this article “a more thoroughgoing embrace of markets than contemplated in current restructuring initiatives” has emerged to replace “the second-best alternative” suggested by Van Doren and Taylor by following Buckminster Fuller’s as a new model is available that makes the existing model obsolete.

To begin, we can recognize that the systemic problems of those reforms were originally named as “wicked” problems in the 1973 article "Dilemmas in a General Theory of Planning” by HORST W. J. RITTEL Professor of the Science of Design and MELVIN M. WEBBER Professor of City Planning, of the University of California, Berkeley. The abstract of that article says:
The search for scientific bases for confronting problems of social policy is bound to fail, because of the nature of these problems. They are “Wicked” problems, whereas science has developed to deal with "tame" problems. Policy problems cannot be definitively described. Moreover, in a pluralistic society there is nothing like the undisputable public good; there is no objective definition of equity; policies that respond to social problems cannot be meaningfully correct or false; and it makes no sense to talk about "optimal solutions" to social probIems unless severe qualifications are imposed first. Even worse, there are no "solutions" in the sense of definitive and objective answers.
In spite of those strong second conclusions, the electric power industries of many countries are still following the inadequate conclusions of the World Bank Discussion Paper No.19, Besant-Jones, John E. (2006) "Reforming Power Markets in Developing Countries: What Have We Learned?", which by applying Ritter and Webber conclusions it is easy to see that there was no much to be learned to start with.

Instead, and making matters a lot worse, the World Bank published at the beginning of this year (March 2013) the study Revisiting Policy Options on the Market Structure in the Power Sector, which uses a cause and effect event reactive (econometric) justification that “… specifically examines whether power system size and country per capita income can be reliable indicators of initial conditions for guiding policy on power market structure.”

To further reject the econometric approach used in said World Bank guiding policy study, we repeat below a well elaborated summary of LEARNING ORGANIZATIONS, taken from Peter Senge’s work on The Fifth Discipline. Giving special emphasis on systemic structure generative explanations, that summary prepared by Kai Larsen, Claire McInerney, Corinne Nyquist, Aldo Santos and Donna Silsbee on this link says that:
According to Senge, fragmentation has forced people to focus on snapshots to distinguish patterns of behavior in order to explain past phenomena or to predict future behavior. This is essentially the treatment used in statistical analysis and econometrics, when trying to decipher patterns of relationship and behavior. However, this is not how the world really works: events do not dictate behavior; instead, they are the product of behavior. What really causes behavior are the interactions between the elements of the system. In diagrammatic form:
systems (patterns of relationships) ---> patterns of behavior ---> events (snapshots)
It is commonly recognized that the power of statistical models is limited to explaining past behavior, or to predict future trends (as long as there is no significant change in the pattern of behavior observed in the past). These models have little to say about changes made in a system until new data can be collected and a new model is constructed. Thus, basing problem-solving upon past events is, at best, a reactive effort.

On the other hand, systems’ modeling is fundamentally different. Once the behavior of a system is understood to be a function of the structure and of the relationships between the elements of the system, the system can be artificially modified and, through simulation, we can observe whether the changes made result in the desired behaviors. Therefore, systems thinking, coupled with modeling, constitutes a generative --rather than adaptive-- learning instrument.

Thus, according to Senge:
Generative learning cannot be sustained in an organization if people's thinking is dominated by short-term events. If we focus on events, the best we can ever do is predict an event before it happens so that we can react optimally. But we cannot learn to create. (1990, p. 22) [emphasis added]
To complement the idea that “the system can be artificially modified,” in The Fifth Discipline Senge states that: “… since structure in human systems include the ‘operating policies’ of the decision makers in the system, redesigning our own decision making redesigns the system structure.”

The author recently found the 1989 paper "A Social Learning Framework for a Wicked Problem: The Case of Energy,” by Gilles Paquet. The first part of the abstract says that “Wicked problems in policy research have two characteristics: (1) the goals are unknown or very ambiguous and (2) the means-ends relationships are highly uncertain and poorly understood. This paper suggests that energy policy poses a wicked problem and that traditional methods of policy research are therefore inadequate when they are applied in this domain.”  In addition, to help make the old model obsolete, that paper says:
The rule for selection of a framework is simple: the one chosen should have the heuristic and learning power. This is the least objectionable way to choose normatively in the policy field, yet is not a criterion that prevails in most academic discussions on energy. Economists have hijacked the energy problem. If energy is an ordinary commodity, one may count on the market, so the argument is that to allocate it as efficiently as possible and there is no need for energy policy. To the extent, however, that energy is not an ordinary commodity, that it has external and asymmetric effects on the rest of the socioeconomy of such a magnitude that it has to be regulated for socioeconomic reasons, then frameworks other than strict allocative efficiency schemes have to be used.
Electricity restructuring proposal

First Paquet’s paper recognizes the energy is a wicked problem and that learning is critical to address it. Second, from the above discussions it is clear that certain traditional economists will no longer be able to keep hijacking the field with non generative explanations.

Third, in order to address the external and asymmetric effects on the rest of the socioeconomy, the scope goes beyond the traditional power industry limits to the socio-technical system architecture of the whole, as part of global society. Within that larger scope we will look at the Value Added Electricity Architecture Framework, formerly Electricity Without Price Controls Architecture Framework (EWPC-AF), proposal that emerged at the end of 2009 that has both heuristic and learning power.

Fourth, at the end we will see what it takes to redefine the traditional organized market given its lack of social desirability. To remedy the situation, not less market, but “a more thoroughgoing embrace of markets than contemplated in current restructuring initiatives,” as Van Doren and Taylor suggest, result in a complete and fully functional market institution in the post Great electric service.

Taken from the EWPC Blog, next is the text of The Electricity Without Price Controls Architecture Framework:
Summary: A new approach to power energy policy design, based on system’s architecting heuristics, has led to an emerging simplified synthesis of the power industry regulatory policy. Instead of undergoing business as usual regulatory proceedings, the approach to the Electricity Without Price Controls Architecture Framework is poised to replace the Investor Owned Utilities Architecture Framework and its incremental extensions that have evolved by analytic patchwork as a extremely complex system.

The Electricity Without Price Controls (EWPC) Architecture Framework (EWPC-AF) is a basic innovation that greatly simplifies today’s exceeding complex power industry. The EWPC-AF emerged to replace the century old Investor Owned Utilities (IOUs) Architecture Framework (IOUs-AF) and its incremental extensions, such as Open Transmission Access, Capacity Markets, NERC Mandatory Requirements, and now the regulated architecture Smart Grid.

By having demand as an externality, IOUs-AF industry growth is traditionally measured up to the consumer meter. As the grid is not longer able to meet the performance requirements of an increasingly share of demand, industry growth needs to take it into account those contributions.

Growth measures should reflect the new reality of the EWPC-AF. By integrating demand to the power system, large investment in, for example, demand side energy efficiency or distributed generation, or both, the EWPC-AF will help reap important value added coordination savings within the larger industry envelop.

The EWPC-AF is a two tiered architecture that greatly simplifies regulations. The first level is an intermediate architecture aimed for an energy policy act, which separates the whole emergent complex system into two less complex systems. Those systems are highly cohesive with lightly coupled interfaces among them:

1) A primary regulated  power (integrated transmission and distribution) transportation service system (RPTSS) compact with a responsibility to transport  electricity of commercial quality (EoCQ) of a given area; and

2) A complementary open market business system (OMBS) on the value chain generation, retail, pro-sumer (consumer that may produce).

To enable the purpose of maximum social welfare of the whole, the expansion of the RPTSS is to be done at least costs to transport electricity within the OMBS. The expansion of the OMBS value chain also includes customers’ electricity investments, operating, and maintenance and outage costs.

An important part of the value creation of the EWPC-AF in the OMBS comes from changing the managing by averages in retail markets to managing by “discovering new sources of profitability in a network economy… when the events are interconnected and interdependent (Hax and Wilde, the delta project)” through the development of Business Model Innovations by Second Generation Retailers (2GRs).

The second level architecture is reserved for proprietary architectures for open systems under the leadership of 2GRs. Most value creation will be the result of an architecture competition centered on the Silicon Valley Model, which will lead to the final architecture of the EWPC Smart Grid, which is just one of the disruptive components of the whole.
Contrasting the EWPC-AF with Van Doren and Taylor policy analysis, it is easy to see how it avoids altogether the original restructuring mistake by going back to vertical integration in order to introduce an approach from a clean slate that meets what “economists wanted” in order “to eliminate regulatory incentives to overbuild generating capacity and spur the introduction of real-time prices for electricity.” What “politicians hoped that reform would allow low-cost electricity to flow to high cost states and that competition would reduce prices” is what actually has made electricity restructuring a systemic problem through inadequate guiding policy.

Taken from another EWPC Blog post the text of above mentioned Great electric service is repeated next:
Great electric service will be the result of the development of business model innovations in the retail market, for example, on the internet infrastructure. This blog post repeats a comment posted under the article Energy: The smart-grid solution, by Massoud Amin, published online in Nature on 10 July 2013, in which Dr. Amin “…outlines how the United States should make its electricity infrastructure self-healing to avoid massive power failures.”

In the well-researched book “Good to Great: why some companies make the leap… and others don’t” by Jim Collins, HarperCollins 2001, there are three overlapping circles whose intersection defined as the Hedgehog Concept result the required simplicity that guarantees sustainability. Similar work like “Change by design: how design thinking transforms organizations and inspires innovation,” HarperCollins 2009, by Tim Brown leads to the same result with different wording: overlapping innovation criteria is at the intersection of 1) (technological) feasibility, 2) (economic) viability, and 3) (social) desirability. The smart-grid solution meets the first and second criterions but not the third as a result of two scoping flaws in its underlying architecting act done in 2002 and 2003. The flaws are in industry organizational change scope and in the customer scope.

It is the lack of the social “what you are deeply passionate about” on the Hedgehog Concept that makes the smart-grid industry organizational scope unsustainable, making a non-positive sum game that goes into a start-stop changes in direction mediocre (Good) “Doom Loop”, probably like the one being proposed for making “its electricity infrastructure self-healing to avoid massive power failures.” Examples of changes in direction in the United States of America started with EPAct 92 wholesale markets, open transmission access, the California Crisis, Capacity Markets, NERC mandatory requirements.

Back in 1978, the late MIT professor Fred C. Schweppe, wrote that there was actually not need to avoid massive power failures. He introduced the concept of a societal definition of a blackout to contrast it to the technical definition that is being used in the United States, China and other countries said to be following suit with smart-grid projects. Once that is understood, the public will respond by having supplemental energy sources.

To manage supplemental energy resources, customer scope needs to take into account, for example, the internet infrastructure in the development of electric retail (not wholesale) markets. To develop product and services that people love in that internet infrastructure, after returning to Apple, Steve Jobs said that "You've got to start with the customer experience and work back to the technology, not the other way around." From Jobs standpoint, that smart-grid solution is being been done the other way around.

At present, there are at least two “smart-market and smart-grid” alternatives to the smart-grid solution: the one announced in January 2012 by Germany’s Federal Network Agency Bundesnetzagentur and the unprecedented December 2009 Electricity Without Price Controls Architecture Framework, which defines a minimalist (only two systems-of-systems), top level system architecture that I posted on the EWPC Blog and which meets the three above mentioned criterion, making a positive sum game that goes into Great non-stop “Flywheel Effect” in one direction. To guarantee the positive sum game, a business model (architecture) competition that starts with the customer experience will be set up in the smart-market.
Finally, as “the system can be artificially modified and, through simulation, we can observe whether the changes made result in the desired behaviors,” the first level architecture of the EWPC-AF is even more powerful than that as it transfers to the second level an architecture competition in which desired behaviors will emerge. This will be done by following Steve Jobs quote "You've got to start with the customer experience and work back to the technology, not the other way around."