No Need for Regulated Price Caps - II

Customers’ price caps are the key to the infrequent rational rationing of service. During a transition to EWPC that ends with every customer defining its own price cap, it is important to understand that most of the customers need to make load commitments well in advance of real time operation. They will do that by participating in hour ahead, day ahead, week ahead, and futures markets. Any system with a larger than optimal balancing, real-time market, is bound to become an unreliable market.

No Need for Regulated Price Caps - II

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. Please write to javs@ieee.org to contact the author for any kind of engagement.

In response to the content of my article No Need for Regulated Price Caps - I, Mr. Len Gould wrote:

Jose Antonio: "customers themselves have negociated individually their prices caps with Second Generation Retailers." - I can see no way to assure reliability fairly without a large percentage of running reserve except if all customers participate continuously in a real-time price market. If only a few participate, e.g. through only one or two of several copmpeting retailers in a distribution region, they wind up subsidizing all the competing retailer's customers as "free-riders". Why on earth do you expect ANY retailer to go that route when they can never recover the costs because the rewards are distributed equally to all customers, including their competitors customers? So the key question is, once you have applied real-time market price metering to all customers, as necessary, what use are retailers?

Below is my response:

Dear Mr. Gould,

Thank you for your question about retailers, which is a repeat of many earlier interventions which I responded almost two years ago in the first intervention which came as a result of the Letter to Dr. Alfred E. Kahn (hit link please):

Len Gould on 12.21.05 wrote:

Jose: You're close, just not going quite far enough. You need to eliminate your "Retail marketers" by implementing intelligent software within the customer's meters which takes over the simple task of selecting either a lowest-cost supplier from among all available in a central electronic "marketplace", or alternatively choose to not purchase, and shut down some of the customer's less critical loads if the price exceeds customer-set limits.

Jose Antonio Vanderhorst-Silverio on 12.21.05 responded:

Thank you very much Len for the “lead” and a sharp comment.

Being conservative, I agree with you if there were only the short run market problem. However, there is also a long run problem for which retailers need to coordinate in the wholesale market. This is where I understand boom bust (long run risk management) power system behavior should be managed from the demand side by retail (and wholesale) marketers. Marketing service offerings need to be designed based on what will be coming up in the future.

In addition, while most price response marketplaces have been designed with real-time, day ahead, and hour ahead markets, I strongly believe there is an important week ahead market mainly (some industries would classify also) for the low end residential market, where retailers need to participate on the wholesale market to complete week-ahead unit commitments.

However, I don’t dismiss "just not going far enough," because I am over 60 years old now, having work through design, operation, planning, management, and research of vertically integrated and (faulty) deregulated power systems, which don’t let me see very well outside of the box. For those simple reasons, Len, maybe I [am] missing something really important, so please advice!

Regards,

José Antonio

The advice on how to tackle the large non-real time non balancing market segment never came.

Now think of two extremes: perfect vertical integration and perfect EWPC. In the first case, reliability requires an excessive reserve in both generation and transportation. In the second case, all customers will have their own price caps, but there will be a penetration (sufficiently small) that will result optimal in the real-time balancing market. There are other markets identified, such as day ahead, week ahead (very important when a low probability rationing is foreseen to know ahead customers price caps), and future markets, which will allow demand integration development, which is a lot of work for 2GRs.

In practice, however, there is need for a transition from today’s situation to EWPC. As there will be no incumbent retailers, 2GRs will need to carry the default service customers during the time limited transition period.

Nat Treadway, wrote in the article The Dawn of Electricity Competition: Efficient Prices and Efficient Choices that, “The design of default service (also called basic or standard service or provider of last resort) was identified as the most significant determinant of the success of retail electricity choice. A poorly designed default service undermines competition. If default service is designed to satisfy all residential consumers’ needs, or if it bundles and spreads risks among all consumers, or if it is priced below market, then it is unlikely that new retail electricity providers will enter the market. With few choices, consumers are left with only the poorly designed default service, and with limited benefit.”

During such a transition, 2GRs will have both types of customers (as there is no incumbent retailer), with increasing development of the resources of the demand side, as the default service will have essentially all the “free riders” being subsidized by peers. Hence, a systemic incentive to non-free riders will result, as they get the pressure for efficient prices and efficient choices. So, if only one or two retailers are truly competitive (2GRs), they will end up with the whole market.