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Reengineering the Electric Grid

Deregulation places new demands on one of the world's largest engineered structures—and presents new opportunities for educated consumers

Thomas Overbye

Most people give little thought to the source of the power that comes out of an electrical outlet. And why should they? The American electric power system was designed as the ultimate in plug-and-play convenience, seemingly as dependable as the sun rising in the morning. For years, the regulated monopoly structure of the industry meant that consumers had no choice but to buy their power from the local utility. With no chance to shop around, most people had no incentive to learn how power is made, traded, moved from region to region and delivered on demand.

Figure 1. As sunset silhouetted theClick to Enlarge Image

But the process of deregulating this industry, moving quickly in some U.S. states and slowly in others, is beginning to change how we view electricity. Consumers, electric utilities and power generators find themselves in an unfamiliar competitive world, a situation that may lead to lower prices or, paradoxically, to new kinds of market imbalances that could drive prices higher. The reliability of America's electric grid, which has to date been unequaled anywhere in the world, is increasingly at risk. Highly interconnected to assure a power supply and predictable prices even when major components fail or demand soars, the electric network is governed by the laws of physics as much as economics. No part of the grid is sheltered from changes or failures in other parts. Therefore even states where consumers have no choice of a power supplier are affected by deregulation and the new issues of reliability and market fluctuations that it raises.

Excepting a few islands and some small isolated systems, the entire electrical grid in North America is really just one big circuit. The humble wall outlet is actually a gateway to one of the largest and most complex objects ever built. The grid encompasses billions of individual components, tens of millions of miles of wire and thousands of individual generators.

This high degree of interconnection has two primary benefits. The first is reliability: With thousands of generators interconnected through tens of thousands of transmission lines, the loss of even the largest generator or line has but a minuscule impact on the reliable operation of the system. When one device fails, others are able to make up for the loss. The second benefit is economic, providing the key to the development of power markets. Although the system was not built explicitly for bulk power transmission—the movement of large power loads from one region to another—utilities can buy and sell electrical energy to one another, taking advantage of differentials in the cost of electric service.

However, this connectivity also has a detrimental side effect: The power system can fail, and when it does it fails in complex and dramatic ways. Failures in one location can propagate through the network at almost the speed of light. Large-scale blackouts can quickly affect tens of millions, with losses reaching billions of dollars. Although the Northeast Blackout of 1965, in which more than 30 million people lost electrical service, was certainly a watershed event, the recent widespread outages of the Western Interconnect in 1994 and 1996, and the Eastern in 1999, prove that such failures are not just a part of the past. A key challenge to restructuring is how to set up an open electricity market on a huge electric circuit—while simultaneously keeping the lights on. This challenge was highlighted by U.S. Secretary of Energy Bill Richardson in March as he released a report by a Power Outage Study Team formed by his department. Under conditions of increasing demand, the grid's reliability, Richardson said, "is, at times, faltering, mainly because policy makers haven't kept pace with rapid changes in the electric utility industry."

This is a challenge with new dimensions. Other industries have been deregulated in the United States—trucking, oil, gas, airlines and telephone service, to name a few. As I shall explain below, the electric-power market differs from all of these. The product must always be manufactured exactly when needed, producers continually matching a demand that fluctuates significantly with conditions such as weather. The transmission system's load and its capacity to handle the load are in constant flux, and congestion at any point affects all other parts of the system. As deregulation progresses from state to state, its apparent impact on consumers will vary widely. But behind the scenes, power-systems engineers have their work cut out for them.

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