miércoles, febrero 24, 2016

The Old Response to Jack Casazza

An EWPC Post

It seems to me that the above comments help understand what has happen to the electricity business. I will use Jack Casazza’s comments and EPRI’s Framework to try to add elements to the discussion and maybe suggest some insight to a produce new mental model which is closer to today’s reality and opportunities. However, please correct me if I am wrong in my understanding:

1. I recall the question “How much reliability can you afford?” posed by the Editor of Electrical World in April 1978, as incremental costs stop declining.

2. Economist entered the picture and found that engineers in the power industry were designing and operating electric systems using excessive reserves, without understanding the risk management of systems failures.

3. The world was stating to make a transition from an industrial society to an information society, which we are now experimenting.

4. The power industry did not seek deregulation in the 1980s as Fred C. Schweppe et al, “Spot Pricing of Electricity” became available to the general public.

5. It was expected that transaction costs would decrease as the information society would come to be the dominant paradigm.

6. Spot Pricing of Electricity explained how to develop a market of electricity where end customers with interfaces that enlarged the meters would be able to respond to prices, even without Electricity Without Price Controls (my replacement for true deregulation). I completely agree with Thomas Tanton that there is no evidence of deregulation anywhere.

7. Today it is clear that Spot Pricing of Electricity is centered on a new paradigm of at the wholesale and retail level, which by “Unleashing Technology” for price demand responsiveness would lead to “Empowering Customers,” and in turn result in “Stabilizing Markets” and “Protecting the Environment.” Demand responsiveness is a complementary risk management innovation to mitigate system failures, which replacing otherwise excessive investments and operating reserves in generation, transmission and distribution.

8. As Mark and others comment that the industry did not seek deregulation, a large threat was in the making for the power industry. That was when as Bruce points out that lobbyist and senior executives came “to the rescue” of the old paradigm. As the new paradigm would mean stranded costs, the result was a double gain by neutralizing the new paradigm.

9. Jack’s comments have merit insofar as the inexistence of price demand responsiveness in the industry

a. No. 1 is historically correct.

b. No. 2 addresses “a severe decline in the coordination needed...” However, such coordination was integral in the Spot Pricing of Electricity, but which avoids the incomplete and faulty deregulation that resulted.

c. No. 3 is correct in the old paradigm, but with demand responsiveness to excessive quoted prices of generation would lead to non-dispatch of such generators.

d. No. 4 reflects the old minimum cost for integrated resource planning, which I suggest should be replaced with an infrastructure that adds maximum value, by using demand responsiveness and energy efficiency to develop an efficient rationing system to satisfy “Providing for the Public Good.”

e. No. 5 is debatable. The power industry could be restructured to satisfy all 5 EPRI’s main conclusions. One such restructuring is Electricity Without Price Controls, which I commented on Prof. Banks article.

f. No. 6 states correctly that the greatest harm has been the loss of cooperation and coordination, as expanded by Rich Marrano comment. While Jack’s comment is certainly a way out it may be distorted on contracts and designs based of perceptions by powerful interest. Recently I came to the conclusion that a big mistake has been allowed in the restructuring processes by introducing a political decision process. Now, I understand that a power system must be architected with the imperative of ultraquality to preserve the reliability that results in maximum value to society.

g. As for Jack’s conclusion, I think it is clear from the above comments that we may aim to have both an excellent power system and an excellent complete and functional market without any price controls. While under E-WPC prices also move both ways, all customers can be approached with the idea of receiving maximum relative value added in the long run. For instance, in the case of retail customers, every retail marketer will produce several plans, one of which offers the customer the better value. Retail competition gives customers the opportunity to select the plan which they perceive to be the one with the most value in the market from all retailers. If every customer can select the plan with the highest value, then providing for the public good is satisfied in the long run.

José Antonio Vanderhorst-Silverio, PhD

Interdependent Consultant on Electricity

Dominican Republic

Reference and context: What a surprise: Prices move both ways, by Mark Gabriel, President, Positive Energy Directions.