Jose Antonio Vanderhorst-Silverio | Dec 31, 2009
Potential COMPETE Coalition losers need to be aware of the need for a revolutionary regulatory change to enable highly competitive power markets. As the Digital Era advances, the difference value capture among winners and loser among them will widen.
Competitive Markets for
COMPETE Coalition Potential Losers
By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity EWPC Systems’ Architect First posted in the GMH Blog, on May 6th, 2009. Copyright © 2009 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 tojavs@ieee.org to contact the author for any kind of engagement. |
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Denying the need to help Electric Power Research Institute (EPRI) professionals to get liberated of the obsolete Investor Owned Utilities (IOUs) Regulatory Framework mindset, as described in the EWPC article Can EPRI Professionals Get Out of the IOUs Box to Join the EWPC Necessary Revolution?, Mr. James Carson wrote:
What are you talking about? EPRI has LONGGGGG been in the forefront wrt market solutions for the power sector. Here is a link to their latest program review for Power Markets and Risk.
http://mydocs.epri.com/docs/Portfolio/PDF/2008_P00...
While I may quibble with their approach, and compete with them on price forecasting, they do great work.
http://mydocs.epri.com/docs/Portfolio/PDF/2008_P00...
While I may quibble with their approach, and compete with them on price forecasting, they do great work.
I give him thanks for yet another interesting inquiry that shows the need for a move to jump out of the box to reinforce the green tech revolution. EPRI Professionals and he may have the highest professional level of accomplishments, but those accomplishments, by being still within the IOUs box, will destroy immense economic value if they proceed as planned.
I looked at the EPRI' s pdf that he suggested and I can tell that their work and his work are still inside the IOUs Regulatory Framework, with demand integration as an afterthought. As I read the Power Markets and Risk pdf, I distilled the insight that both energy efficiency and demand response are demand side management (DSM) components coming from the outside as incremental extension of the IOUs Regulatory Framework.
As they are actually external, retail markets have to depend solely on the restricted competitive possibilities of wholesale markets enabled by DSMs. I think that the COMPETE Coalition members that are losing with those market still not aware of the need to jump out to the EWPC Regulatory Framework.
Trying again to explain to potential losing COMPETE Coalition members, as 2GRs develop business model innovations, that effectively integrate a mix of ongoing demand side innovations (DSIs) to power system planning, operation, and control, competitive retail and wholesale markets mutually reinforce each other to produce a much more competitive service than organized wholesale markets. The difference between the two approaches is the large value destruction due to lack of innovation is explained in the EWPC post Smart Grid: Can the U.S Waste Billions in Taxpayer Dollars?
So I repeat, “I am inviting careful and serious inquiry to try to find out how to help Electric Power Research Institute (EPRI) professionals to get liberated of the obsolete Investor Owned Utilities (IOUs) Regulatory Framework mindset. U.S.
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Comments
You can 'distill' whatever you like, but that doesn't make you right. EPRI (and myself) address the needs of wholesale buyers and sellers. Neither takes a direct interest in serving the retail market because that is not the market segment we have chosen to address. You are basically castigating EPRI for failing to serve a market that they have not chosen to address.
While I probably agree that demand response is infantile, I disagree wrt energy efficiency. I know for a fact that there are dozens of companies out there that actively help power consumers take advantage of DSM and energy efficiency opportunities. For the most part, their efforts are directed at the commercial and industrial segments of retail power, but there is a growing interest in the residential segment.
EPRI's Framework for the Future called for complete and fully functional electric power markets. Organized wholesale markets are neither complete nor functional.
In order to be effective in the Green Tech Revolution, which will happen, not only in the wholesale market, but mostly on the retail market, will require a corresponding regulatory revolution as I have shown. Such emerging revolution will create most of the value by innovations in the (highly undeveloped) resources of the demand side to enable customers face high energy costs. Thus there is a need for a revolutionary change to the EWPC Regulatory Framework. Once again, "...(DSM) components coming from the outside as incremental extension of the IOUs Regulatory Framework," will lead to a huge value destruction.
2GRs are needed to enable the large coordination savings, which are unavailable by independent efforts on energy efficiency. COMPETE Coalition potential losers need to become aware of the need to have only one company to interface with to lower their investment and operating costs.
I disagree. While I prefer a competitive retail regime, history has amply demonstrated that organized wholesale markets are both complete and highly functional.
<< Green Tech Revolution, which will happen, not only in the wholesale market, but mostly on the retail market, will require a corresponding regulatory revolution as I have shown. >>
This 'green tech revolution' will NOT happen in a freely functioning competitive market. I do not believe that consumers will willingly pay for it, at least not enough to effect any 'revolutions'. This green tech revolution will require government mandates and/or subsidies to flourish, with the intention of grossly distorting the free market. Why? Cost. Do you think we would be building windmills if they were not heavily subsidized or mandated? Of course not.
Nevertheless, issuing mandates and subsidies does NOT require a freely functioning retail market. My state, Minnesota, has a well functioning wholesale market with old-fashioned no-competition distribution. We have some of the most aggressive and 'successful' green mandates in the US. 7-8% of our power is already 'renewable'. Same with Iowa and the Dakotas.
Finally, once again, I feel compelled to point out that what you propose is naive. The decision about retail competition belongs to the STATES. Without federal legislation, it is going to remain there, and I see utterly no interest in forcing that decision to the federal level. NONE. The same applies in Canada, too. There, the decision on distribution policy is strictly provincial.
James Carson, JBCarson@RisQuant.com http://www.RisQuant.com
Unlike a political revolution where people expectations usually do not get fulfilled, what we are experimenting is a revolution similar to the renaissance and the industrial revolution that transform societies as a whole. The revolution is ongoing to shift the center of attraction of the power industry from the IOUs Regulatory Framework to the EWPC Regulatory Framework.
The means to a clean energy power industry where innovation will flourish are being set by the Obama administration, but I have to accept that it may be further delayed through politics and lobbying. The inertia of the first center of attraction is very large and overextending its useful life through more delays will be very costly to taxpayers and to all potential losers of the COMPETE Coalition,
The Obama administration should be fully aware that the regulatory shift is not possible through incremental reform.
You can, of course, define 'complete and fully functional market' to preclude non-competitive retail. Nevertheless, there is no such 'illusion'. Customers benefit in competitive wholesale markets in several ways. First, utilities are induced to dispatch from the lowest cost regional source, not just from within their own resources. The same applies to reserve resources. Second, nodal markets illuminate the marginal cost of transmission constraints. Third, the true value of innovations on the generation side may now be valued. Need I go on? These values flow to consumers regardless of whether they are in a competitive retail area or non-competitive.
Nevertheless, I prefer a competitive retail regime for many reasons. I would agree that DSM would be better implemented in a competitive environment. But, is is necessary? Of course not. I have had DSM (Xcel has the option to shut off my air conditioning on hot days) right here in my home for over ten years, WITHOUT retail competition.
<< The Obama administration should be fully aware that the regulatory shift is not possible through incremental reform. >>
So.... you believe that the OBAMA Administration is going to implement competitive markets??? I mean... come on....
The OBAMA Administration is not going to implement markets that have predatory pricing with price spikes and high congestion costs as the result of organized wholesale markets that are incomplete and not fully functional or with expensive solutions like capacity markets. Just as predatory lending in financial markets are now posed to become fair lending, so will fair pricing be the result of complete and fully functional markets as explained with another insight of the difference between DSM and DSI to also support the conclusion "Potential COMPETE Coalition losers need to be aware of the need for a revolutionary regulatory change to enable highly competitive power markets. As the Digital Era advances, the difference value capture among winners and loser among them will widen."
DSMs are developed piecemeal and independently of the customer's complete business case resulting is excessive value destruction. The best mix of DSIs is considered holistically and interdependently by 2GRs in their competitive business models. Ongoing integration of the customer's complete business case is done by 2GRs to help reduce costs and/or increase value for every customer, which "done right, will drive innovation for decades to come." The quote come from Business Week's May 7th article Hammering Out Smart Grid Standards, by Katie Fehrenbacher.
This is what @gmh_upsa was doing in Twitter: Posting another insight of the difference between DSM and DSI http://twurl.nl/kgszp0 #EWPC
1> WHAT 'predatory' pricing?
2> Price spikes are an inevitable consequence of high load wrt resources available.
3> Congestion happens because of insufficient transmission. No other reason.
4> Some regions have capacity markets, a few do not. The implementation of those markets and standards differs widely. Moreover, capacity is a STATE decision.
<< ... the need for a revolutionary regulatory change to enable highly competitive power markets. >>
We ALREADY have highly competitive power markets, so, why do we need revolutionary change to enable them?
Once demand elasticity is fully developed a lot of excess in transmission and distribution will be made available for some time. As environmental costs are internalized in the industry organized wholesale markets pricing without effective elasticity will become a lot more unfair.
Price spikes and congestion are avoidable when the policy Economy First, Performance Second, of the IOUs Regulatory Framework, is changed to the policy Performance First, Economy Second of the EWPC Regulatory Framework as demand elasticity leads to fair pricing. I know that COMPETE Coalition potential losers are now getting the message
This is what @gmh_upsa was doing in Twitter: Posting renaissance fair electric pricing urgently required http://twurl.nl/kgszp0 #EWPC
Why is the lack of load elasticity with respect to price somehow "unfair"? Frankly, it is the LOAD side that has been resisting the move towards retail markets. Why do you continually rail against utilities? One of the principal tasks of the Compete Coalition, in fact, is to educate power consumers as to their best interests. You are sadly ignorant of US (and Canadian) politics if you think this is ever going to be mandated from on high by Congress, the DOE or FERC.
<< Price spikes and congestion are avoidable when the policy Economy First, Performance Second, of the IOUs Regulatory Framework, is changed to the policy Performance First, Economy Second of the EWPC Regulatory Framework as demand elasticity leads to fair pricing. >>
Price spikes have nothing to do with 'economy first, performance second'. Congestion occurs when the optimal solution to the power flow problem is impeded by line loading constraints, usually thermal. The main impediment to solving these problems is local resistance to new power transmission. Price spikes also occur during periods of high demand when the most expensive generators are pressed into service.
<< I know that COMPETE Coalition potential losers are now getting the message. >>
There is nothing in EWPC that guarantees demand curve elasticity any more than any of the existing regimes do.
First of all, in those areas and market segments where DSM/DSI (or whatever) has been most fully implemented (despite your assertions, it HAS been implemented) there is virtually no empirical evidence that it has been effective in creating price elasticity. There is some anecodotal evidence. AESO (Alberta) may finally be showing some negative slope to its demand curve in its realtime market, but not even that is certain yet.
An effective DSM regime that creates demand elasticity requires at least hourly retail pricing as a necessary (but not sufficient) condition. That way, consumers can, if they so choose, respond to timely price signals. However, the resistance to this innovation comes primarily from the CONSUMER side, not the utilities. Moreover, hourly pricing in no way requires retail price competition. I can easily envision a regime where the state PUC mandates that the retail price be determined strictly by competitive wholesale markets.
I agree that under the IOUs Regulatory Framework and its incremental extensions there are no evidence. Evidence will result when 2GRs are enabled to operate and the word will spread, as customers are able to demand competitive electric markets.
Price spikes and congestion are usually based on potential overloading of the power system. With demand elasticity under a performance first policy applied at operations planning, neither price spikes, nor congestion will result with a frequency beyond some standard values.
Power systems should have enough reserves in the supply side and the demand side (elasticity) for real time operation in the Normal State, to apply the Economy Second policy. If the system shifts to the Alert, Emergency, In Extremis or Restorative states, the system needs to be back as soon as possible to Normal State operation. Price spikes and congestion are generally the result of Economic First, Performance Second, while the power is operated under risks in the Alert State for longer time than the advisable standards.
DSM and DSI can not be compared, as explained in a post above. DSI help customers, while DSM utilities.
As I have pointed out many times, we already have real wholesale competition. In fact, I have posted evidence, REAL evidence, on my own blog that those wholesale markets are already fairly efficient.
Where is the empirical evidence that developing demand elasticity is either an inevitable consequence of fully developed retail markets or that developing demand elasticity will have a material effect on prices? So far, the evidence is mixed at best. Contrary to your earlier postings, there already are several retail markets that have been highly competitive for a number of years. So, why haven't you combed through the data to establish an empirical case, a REAL case?
<< I agree that under the IOUs Regulatory Framework and its incremental extensions there are no evidence. >>
I regret being insulting, here, but you are simply speaking out of ignorance.
<< Price spikes and congestion are usually based on potential overloading of the power system. >>
Yeah.... Isn't that what I already said?
<< With demand elasticity under a performance first policy applied at operations planning, neither price spikes, nor congestion will result with a frequency beyond some standard values. >>
Where is the evidence? There are many regions of the US and Canada that have had commercial and industrial time of use pricing for years. Has price spiking been reduced? No. Price spiking has been reduced mainly where there is surplus generation capacity, NOT where retail markets have been allowed to evolve.
Clarification: I agree that under the IOUs Framework "... there is virtually no empirical evidence that it has been effective in creating price elasticity" Under EWPC evidence is found one customer at a time to produce REAL evidence.
Asking for evidence in bulk is a key IOUs instrument the leads to the Greek Tragedy. I repeat once again what is posted in the article Let's Avoid Many Expensive Fiascos (Please hit the link http://www.energyblogs.com/ewpc/index.cfm/2008/8/26/Lets-Avoid-Many-Expensive-Fiascos ):
"Going against the flow, IOUs are in the process of extending the useful life of the price control business model under the watch of regulators making "big bets with questionable data," as can be seen in the video "WSJ: How Growth Succeed (lost the link)" by JEANNE M. LIEDTKA, that explain that they "will end up with expensive fiascos," that will be added to the rate base.
Being "obsess with bigger is better" and needing to "cite evidence" by getting involved in analysis, regulators are pushing what Leidtka calls the Greek Tragedy. This has been dealt in another light in the EWPC article "Utilities and Regulators' Value Destruction (Please hit the link http://www.energyblogs.com/ewpc/index.cfm/2008/4/9/Utilities-and-Regulators-Value-Destruction )," whose summary says: "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."
EWPC restructuring enables competition among Second Generation Retailers to find better value for customers in the market where as Leidtka explains "all the real learning happens" with "customer feedback" while avoiding the Greek Tragedy.
I have read your EWPC materials, and I see nothing remotely resembling 'proof'. I have, however, examined power markets myself in considerable detail, and find scant evidence that competition, whether wholesale or retail, reduces spikes, congestion or prices. Theoretically, it should.
<< Asking for evidence in bulk is a key IOUs instrument the leads to the Greek Tragedy. >>
So, you want us to institute a $Trillion reformation based on ... what?
Don't get me wrong. There are few stronger advocates for power markets in the US than myself. Nevertheless, I understand that power market reform is going to be incremental, if it happens at all. That reform will require extensive evidence at every juncture to justify it. I am glad that there are states that are willing to move forward and experiment so as to develop that record.
Markets are about business model competition on complete and fully functional markets available through a revolution that is already emerging. That is what COMPETE Coalition potential losers are quickly becoming aware of through our interchanges. They should thank you and me.
DOE ceiling on smart grids grants is a proof that open standards is the way to go for the revolution. DOE should NOT increase that ceiling, unless they want to generate a Big Greek Tragedy by throwing away (good money after bad) a huge amount of taxpayers dollards.