FEATURE ARTICLE
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
Solutions from the Demand Side
One reason that markets within the electric-power industry can be so volatile is that they are, for the most part, one-sided. The real-time electricity prices that I have quoted above are not being passed on to the end users. Therefore the end users have little incentive to modify their electricity usage. During the June 1998 Midwestern price spike, the customers of the affected utilities paid the same rates as they did the week before, when the spot market prices were more than a hundred times lower. The utilities made urgent pleas to their customers to conserve, and many did, but not because they saw the high prices. If customers had known about them—and especially if they had been forced to pay them—it is likely that the load and hence the spot market prices would have been substantially less.
Currently a small portion of the load is, at least indirectly, price-sensitive. For a long time utilities have provided some of their industrial customers with lower rates, provided the customers agree to allow the utility to turn off their electricity at specified times of year for an agreed-upon duration. These are known as interruptible rates. Interruptible rates have worked well, but only for customers that either have alternative sources of electricity, such as their own backup generators, or that can completely turn off equipment that uses lots of electricity. More direct control of load has been accomplished through demand-side management programs. These reduce the peak demand for electricity, either by promoting conservation or by enabling the utility to turn off certain residential loads, such as water heaters or air conditioners. All of these programs have been beneficial in reducing the peak loads but have not involved direct price feedback to customers.
As customer choice emerges, real-time pricing for end users will probably be one of the options load aggregators use to compete for customers. For the load aggregators, real-time pricing will lessen their risks in obtaining electricity on the spot market. For customers with more flexible electricity requirements, real-time pricing should result in lower overall electricity bills, because most of the time these customers will be able to obtain electricity at lower spot-market prices.
Of course, if there are price spikes, customers seeing real-time prices will have to be able to adjust their electric demand. This may require some changes in life-style. Although nobody wants to have to check the price meter to determine whether or not electric rates are low enough to watch a favorite TV program or to microwave a bag of popcorn, not all kilowatt-hours have such high value. Perceived value per kilowatt-hour varies tremendously. For example, operating a portable computer for a day might take on the order of 1 kilowatt-hour. Even during a price spike of $7,500 per megawatt-hour, I might be willing to pay the $7.50 it costs to run my computer for the day or the pennies it would take to keep the VCR clock from resetting. But the air-conditioner thermostat would certainly get turned up a few degrees, the wash might not get done, and dinner would probably not involve a roast turkey. With new technologies, many of these demand changes could be set up to take place automatically. Real-time pricing might also spur the development of better solutions for short-term (several hours) energy storage.
Consumer choice is already driving many changes in the industry. For instance, a growing number of utilities offer a "green" energy supply package. Previously, renewable sources such as wind and geothermal energy were not as economical as the more traditional fossil fuel and nuclear sources. Even if they were so inclined, regulated utilities could not justify passing on the higher costs to all their customers. But with deregulation, customers who are willing to pay a premium for green power are now able to do so.
For example, customers of Madison Gas and Electric (MGE), headquartered in Madison, Wisconsin, can elect to purchase some or all of their electricity from MGE's new wind farm. MGE customers wishing to support wind power pay an extra 3.33 cents per kilowatt-hour, an increase of about 40 percent over their regular rates. (Of course, once wind-generated power is injected into the grid it is no different from any other power.) So many customers have signed up that new customers wanting wind energy now have to be placed on a waiting list. Throughout the country, at least 60 utilities offer or plan to offer green power options.
Over the long term, new generation methods will certainly mitigate the exercise of market power. The combination of new combined-cycle, gas turbine technology and the deregulation of natural gas prices have significantly reduced the economies of scale in power generation. Now, cost-competitive generators can be built in a fraction of the time it used to take to build the large coal or nuclear generators, and their smaller size allows much greater flexibility in siting. The result has been an explosion of applications for new generation. For example, PJM, with an installed capacity of about 56,000 megawatts, has seen new generation applications for over 30,000 megawatts. Although a significant portion of this generation will never be built, the portion that is built is sure to have an impact.
Finally, in an ironic twist, the electric industry may be moving back to where it began in the 1880s, with small generators supplying a handful of customers. Two promising technologies for "distributed generation," in which the generator is located at or near the load, are microturbines and fuel cells. A microturbine is a small natural-gas fueled combustion turbine with an integrated high-speed generator. Microturbines may not be small enough for residential use, but they could certainly meet the needs of commercial establishments. Fuel cells are similar to batteries, in that electricity is created via a chemical process. However, unlike a battery, the fuel cell includes a fuel input and therefore does not run down. Fuel cells for home use are already available, and they are under active development as a low-emission energy source for cars. If the economies are right, the family car may even be used to light up your house! With real-time pricing, it is not hard to imagine a microprocessor that switches on the car for electricity any time the price from the grid gets too high.
Like it or not, the days of the vertically regulated electric utility will soon be gone for good. Will the deregulated future hold lower rates? Certainly for some, but not necessarily for all. Moreover, as our phones begin to ring and our mailboxes begin to fill with solicitations for electric service, it will quickly become apparent that uncomplicated electric rates are also gone for good. With the freedom to choose comes the obligation to choose. So choose wisely!
Bibliography
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