Jose Antonio Vanderhorst-Silverio | Jun 6, 2010
Taxpayers and ratepayers representatives are being tricked to let state regulators approve rate increases to utilities related to an Automated Metering Infrastructure (AMI) investment, based on the "ethics" of a simplistic Dynamic Pricing scheme. For lack of an updated restructuring mandate to be led by state governments, under the fact that customers’ needs will evolve in ways that cannot be determined by anyone, state governments (via state regulators) are taking huge risks by letting utilities invest risk free into AMIs that will very likely result in early obsolescence and thus cost a fortune for taxpayers and ratepayers.
|I am not so sure selling power in California (or any number of other regions as well) is a “market” based exercise. Rather, shortages are created by government regulations that stymie building power plants while all manner of additional costs are piled on, as driven by politically correct causes. Having created the mess, the government then attempts to artificially contrive a “market” economy through all manner of heavy handed manipulations. Part of this exercise is “time-of-day” rationalizations which utilities are all too willing to embrace because they can , with little effort, readily increase profits and not worry about competition (they are, after all, state sanctioned monopolies).|
Let the free market loose, with the vast army of bureaucrats given their walking papers. Further, no subsidies for industry; if you are unable to compete, to the scrap heap you go. That includes the current subsidy darlings feeding at the government slop trough: renewable energy
Technology will increase efficiency and simultaneously reduce production costs, thereby aiding consumers (trying to save money) and power producers (attempting to increase profits) alike. Ancient, inflexible base-loaded units will go the way of the dinosaur.
... and I do not favor "dynamic pricing" because it is a government creation that aids and abets monopolies.
|Micheal: Sure, but listen to you howl if someone suggests that all your little darlings should pay the full cost of their use of the commons.|
Government regulations, fights over siting and expensive mandates apply to all industries, not just power. I'm not a fan of regulation but events in the Gulf of Mexico right now clearly demonstrate what happens when government bureaucrats turn a blind eye and businesses are allowed to self-regulate. Efficiency and cost are important factors, but so are public health and safety. If you like seafood, it's just become both scarce and very expensive.
Whether we like it or not, we're already subject to dynamic pricing. There are toll roads in California and elsewhere that charge in proportion to traffic flow on those roads (or more specifically, in those lanes). Airline seats are priced the same way. Lazy customers won't like it. Smart, savvy consumers who love a deal will thrive on it. So long as the lazy folks are not forced to change their ways, and I don't think they necessarily should be, what's the problem?
Utilities are not necessarily supporting dynamic pricing and it is not necessarily in their interest. Instead, it's policy people inside and outside of government that are advocating this idea. I am actively trying to get it implemented in California for a couple of reasons. First, because it will provide the right incentives for customers to spread demand out over the day and avoid at least some of the weather-driven demand spikes. Second, because it will place customer-owned technology on a level playing field with utility investments. Third, because it is the only rational, palatable and technically feasible way to finally link energy-intensive end-uses with electric production. However my position, which I have repeated several times in my replies and repeat here again, is that dynamic pricing needs to be voluntary, and customers need a flat price choice, though I also think customers on flat prices should pay a bit more.
|OK, its not shift differential. What makes a power plant cost more to run at 5:00 PM than at 5:00 AM that can be explained to customers and consumer advocates?|
|<< What makes a power plant cost more to run at 5:00 PM than at 5:00 AM that can be explained to customers and consumer advocates? >>|
Dispatch of generators is done in merit order. Load is lower at 5am than at 5pm, so the generator on the margin at 5pm is higher cost than at 5am.
|And the costs are higher at 5pm because that generator may only get dispatched a very few hours per year, whereas the marginal unit at 5am has probably been dispatched 8000 hrs in the past year. The key goal is to do whatever it takes to get the low-hour fossil-fueled peakers off the grid, replaced with continuous-run baseload units and large slices of available renewables. Dynamic pricing is the only rational means of doing that.|
|Jose Antonio Vanderhorst-Silverio|
Just like Jack, I think this should certainly be a topic of intense interest among all industry stakeholders, but in a different direction. Similar to Michael, I see this discussion as a way to extend the useful life of the Investor Owned Utilities Architecture Framework with another incremental extension.
This time the extension is the AMI infrastructure, with the obsolete business model of winning rate cases to the regulator through a supply side orientation. About a year ago, I suggested a shift to a true demand orientation, in the EWPC article Forget Demand Side Management (DSM); Think Demand Side Innovation (DSI). The article's summary says: "To make the emergent power industry smarter, there is a need to restructure the power industry to enable Second Generation Retailers integrate the required demand side innovations to power system planning, operation and control."
Under that alternative (integral not incremental) orientation, I hope you might be interested in the EWPC article Power Industry State of the Art that Emerged from The Network Grid (TNG) Conference, whose summary says:
Architecting evidence on the urgent need to simplify the power industry is based on the serious flaws of an ineffective and highly complex system-of-systems interoperability approach that keeps in place anticompetitive “Walled Gardens.” Unless there are smart markets with efficient and effective pricing, together with real customer choice, customers will not be able to be empowered with innovative technologies to be smart. Retailers will participate in retail and wholesale markets, developing business models to help balanced the resources of the supply side and the demand side as much as it is viable, feasible, and desirable. Competitors do not need to wait for a homogeneous infrastructure to be in place. As the demand side risk management tool, demand response is here to stay. The killer application on the residential retail market will emerge as a one stop integrated service.Regards,
|The big hidden problem with EWPC and many other suggestions above is the "free rider". It kills things.|
|Jose Antonio Vanderhorst-Silverio|
|Hi to all of you. Thank you Len,|
The free riding that Len mentions is only necessary during a transition period. As Nat Tradeway explained, the design of the default service is the key to a successful retail market. I added that in the design free riders are contained within the peers with default service. That is exactly what is happening today as some customers are subsidized by other. For details, look for False Fact #2 in the post IMEUC's False Facts.
The transition period is one of the key instruments of theElectricity Without Price Controls (EWPC) Architecture Framework (EWPC-AF) to give Second Generation Retailersthe opportunity to develop their business models as part of an architecture competition described in the EWPC-AF link as follows:
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.
The whole above refers to the integrated power industry. The real problem with the AMI infrastructure incremental extension, “with the obsolete business model of winning rate cases to the regulator through a supply side orientation,” is exactly related to the need of the transition period, which is intended to avoid. See for example the EWPC article Is the Smart Grid that is Being Pushed a Costly Mistake? Its summary says:
The main argument is that, by inaction, each State Government should be responsible to their constituencies for a very costly mistake that is being made by letting the smart grid process continue without giving State Regulators the proper mandate.
Regards to all,
|Thank you for your comments on my questions. I am somewhat familiar with merit order dispatch. The paper seemed to be focused on persuading consumers and consumer advocates of advantages of various forms of dynamic pricing. I was looking for convincing arguments for this to take place. There will be consumer questions and concern about paying the cost of a diesel generator (dispatched a few hours per year) for power from a nuclear plant (operating 8000 hours in the past year). As noted, dynamic pricing wil remove some from the grid. However it will be those customers unable to pay who are removed, not any particvular generator or class of generators.|
|It's become clear to me from some of the comments that explaining how this might work to consumers will be challenging. In response to Mr. Williams' note above.|
Dynamic pricing is meant to move demand around more than it's intended to take demand off the grid. To the extent dynamic pricing takes demand off the grid, it should, if properly implemented, a) avoid the need for new generating capacity that tends to be expensive, and b) encourage adoption of demand management, distributed generation and distributed storage technologies that are less expensive than new, grid scale supply.
Under a two-part dynamic tariff, which I believe should be one of the three options available to consumers (real-time pricing and flat pricing are the others), customers could fix a large portion of their electricity costs by purchasing what they think they will use ahead of time, thereby protecting some or perhaps all of their consumption from high prices on hot days. Moreover, customers who may be exposed to very high prices on very hot days will face much lower prices than they otherwise might when overall demand is moderate or low. A low income customer might be able to cool their home at night when prices are very low in order to avoid using any electricity for air conditioning during the day and save money in the process. Is this scenario a certainty? No, it's not because it depends on many variables. Today, however, customers don't even have the option of find out whether they might be better off.
|Jose Antonio Vanderhorst-Silverio|
That was an excellent post. You helped Jack tell the truth when he wrote "Is this scenario a certainty? No, it's not because it depends on many variables."
That scenario and many others that can be written will be uncertain, because of the very simplistic assumptions used by Dr. Faruqui to extend the excessively complex Investor Owned Utilities Architecture Framework (IOUs-AF) with yet another incremental extension to keep in place anticompetitive “Walled Gardens,” as mentioned in my first post.
Instead of the huge state regulators’ bet with the AMI incremental extension of the IOUs-AF, that it is very likely to fail in early obsolescence, there is a simple (not simplistic) well proven alternative for vulnerable customers: means testing. Once you change to the holistic EWPC-AF, that “is a basic innovation that greatly simplifies today’s exceeding complex power industry,” peaking units will not be needed at all, because capacity markets will not be needed either after the transition period.
|Jeff Williams << it will be those customers unable to pay who are removed, not any particvular generator or class of generators. >>|
Jeff: If customers elect to reduce load because of price, the most expensive generator will be taken down or offline. So, your comment is simply mistaken.
|For those who may be interested, Toronto Hydro has now transitioned most of its over 1 million customers to Time-Of-Use billing since the beginning of this year. As the months go by, Toronto Hydro will have amassed large volumes of residential and industrial consumption pattern data, and this data when compared with historical demand curves should gradually reveal how much demand curve flattening TOU billing is achieving on Toronto's grid.|
The important point here is the large volume of customers in Toronto (a localized grid) will provide very statically significant results, virtually independent of biases from customer's social class or income levels since the data group will include all types of customers.
By next year all 5 million+ customers across Ontario are slated to be on TOU.
The current regulated TOU fixed billing rates in Ontario are set at 5.3cents/kwhr off-peak, 8.0cents mid-peak, and 9.9cents on-peak. I’m sure some here will claim Ontario’s on-to-off-peak ratio is not really high enough to foster substantial load shifting and demand curve flattening, but some is bound to happen with some customers. Toronto Hydro's data should be quite informative on how much is happening, so I suggest anyone interested give them a call and ask for the data.
|A further note, Ontario's and most other smart meter initiatives can technically accommodate dynamic pricing that more closely resembles wholesale real-time pricing. Ontario's smart meters are logging TOU consumption data, and most smart meters are designed to log it with time resolutions as fine as 15-minute intervals. Ontario's billing calculations however are being done separately from the smart meter systems, presently only on hourly interval data. To migrate from TOU billing to dynamic pricing would simply require Ontario to change the billing calculation software to finer 15 minute interval data, using prices associated with each interval, and of course devise some means of communicating dynamic prices to all customers given they will vary every 15 minutes and from day to day.|
|Jose Antonio Vanderhorst-Silverio|
Don’t get distracted; the real issue is the very costly extension of the IOUs-AF, not Dynamic Pricing. Customers’ needs will evolve in ways that cannot be determined by state regulators. The emphasis should be centered in the EWPC article State Governments Need to Unleash the Benefits of the Next Big Thing, whose summary says: “As the utility business model has outlived by many years its useful economic life, state legislatures need to produce as soon as possible emergent regulations that enable the Next Big Thing - business model innovations - under a market-based approach.”
Having identified the main weakness of the century year old business model, Dynamic Pricing has several interpretations. Bill Hogan has commented on Faruqui's paper. In what follows, I repeat some of the oversimplifications the paper has.
In that light, as if state regulators knew what the future holds, "Dynamic pricing is the only rational means of doing that" qualifies as one of the oversimplifications. Jeff comment is not 100% mistaken, because customers may be asked to respond when it isn't necessary at all and because they ignore transaction costs of the AMI for vulnerable customers that may become losers at the outset. Also, customers that may just fail to hedge are at risk.
Those oversimplifications in how real power markets operate render some comments faults. In fact, they may still leave free-riders in the system. For example, random outages of nearby base load generating units may increase nodal prices sharply at any time. Also for that simple reason, well known by the utilities that have already terminated them out, fixed TOU just doesn't work. Very early obsolescence is expected if the AMI is unable to work as promised later on.
As the AMI infrastructure (it is not a standard thing), for which state governments (not state regulators, as the follow the law) are making huge bets, may soon become obsolete, as it happen with AMR. Instead, the best alternative available for the future is the Silicon Valley Model (successfully created in California) to shift from supplier oriented Demand Side Management to demand oriented Demand Side Innovations, as I suggested in my first and second posts.
|Reading all the posts above has me worried. I think my electricity is about to become unaffordable. So I have decided to put electricity pricing under my direct control by buying a generator and making my own. The kind people from the grid installed a new meter that I did not request then ask (force) me to pay for it on my electricity bill. This is so that I can do my laundry in the middle of the night to save money. l will run it off natural gas and use the waste heat for my hot water. It may not be economic for now but it soon will be. With natural gas in plentiful supply for about 100 years due to the gas shales I think it will be a good investment. I will disconnect from the grid once the installation is done then you folks can dynamically price anything you want 'til the cows come home and I won't worry at all.|
|Jerry, I liked your response above. Many people on this site have indeed completely lost sight of the fact that with the massive coal bed methane and gas shale finds the price of natural gas will be quite stable for a very long time. I recall just a few short years ago we were talking about building dozens of LNG plants to get gas from Algieria. Now no longer required But rather than use gas to make electricity from gas turbines which is not very efficient, I think the market is in small scale in-home production as noted above. The gas companies, with the right technology could take the electricity industry to the cleaners. The waste heat from the process can be used for hot water heating making the process near 100% efficient overall. I think I am right in saying that the UK gas companies have been marketing a machine that does this already. Not sure how much success they have had yet. They already have the infrastructure all they needed was a large scale gas supply which they now have.|
Your small generator example illustrates a problem with electricity pricing that continues to bedevil regulators. Let's say a new, efficient, central station plant plus transmission will deliver electricity to my home at a cost of ten cents per kWh. Let's say the gas engine in your example can deliver it for 9 cents. If my local utility charges me 8 cents, I'm going to continue to buy from the grid rather than installing the gas engine.
The same goes for solar. Utilities can install it for about the same cost as a residence once you factor in land acquisition, permitting and transmission. It never makes economic sense for customers to install the stuff. Energy efficiency and demand response suffer from the same problem.
In a perfect world, I'd say let's build enough capacity so everyone can use as much electricity as they want when they want it. In that same perfect world, no one would care about emissions, no one would mind having transmission lines cut through their gardens, everyone would welcome power plants nearby, and no one would complain about the cost of providing this bounty. There would be no need to ration the use of electricity in any way.
Since this perfect world doesn't exist and hasn't for nearly four decades, the trick is to impose some sort of rationing scheme that is sensible, effective, publicly acceptable,and doesn't preclude alternatives like the one you described.
Your feelings about the new smart meters imposed on us in Ontario are common amongst a large portion of consumers. I sympathize with you. In fact the claim that you can save some money on your electricity bill by load shifting to off-peak hours is really a publicity tactic to get more consumer to accept it, when in reality the purpose behind the new meters and Time-Of-Use pricing is to attempt to flatten demand curves and reduce the level of peaking generation.
Another unsaid purpose for TOU billing is to make it much more difficult for average consumers to understand their bills, and therefore make it easier to hike rates and collect more revenue. Then when anyone complains about higher bills, they can be told the answer is simple; use more of your electricity during off-peak hours and it won't be so painful on the pocketbook.
Anyways you are absolutely right, our electricity bills are going to rise substantially over the next few years especially too when you consider all the solar and wind farms that are slated to pop up around Ontario, and we ratepayers are going to have to pay for it, somehow
|"The gas companies, with the right technology could take the electricity industry to the cleaners. " -- Some truth emerges. Can only happen with a real-time rate system though.|
|Jose Antonio Vanderhorst-Silverio|
People like you should not worry with the EWPC-AF, because customers will be free to reject new meters during a transition period, in which they will be able to know what works and what doesn’t. Most AMI’s bets are bound to fail, because they are designed with consumers in mind, not with real evolving citizen’s needs like yours. As utilities don’t lose with those failures, rate payers, taxpayers, and I hope state governors, are bound to be the losers.
The natural gas reserves are plentiful for about 100 years, due to the gas shales. However, their supply also depends on plentiful water, which the scarcest survival resources in the future. We don’t know for sure, whether investing in a gas generator will be economic in the future.
Under EWPC-AF, you will able to have to have a better economic generation proposition off a natural gas investment, as you will be able to increase its plant factor and the bottom line of your personal investment by selling the output you don’t need at market prices at the right time to a Second Generation Retailers. That personal idea gets readily multiplied to support the economic and social development of a vibrant retail market of electricity, which needs to be well coordinated to work to generate huge savings.
To oppose the idea of a vibrant market, Jack goes to his supply side average rates thinking approach, which is in total contradiction with the value creation opportunities in variable pricing in time and space. In what is his imperfect world, he also forgets the oversimplification related to the costs or value destruction of random failures on transmission and especially distribution facilities to citizens. That is specific case of the benefits from coordination savings when we change to EWPC-AF.