Power Markets In The Electricity Journal

The venerable Electricity Journal has published the overview paper from the Power Markets Project, Aligning Markets with Clean Energy Policy.  It is now available in the December issue.

This is my second time in the EJ.  The first time was in 1998, for my research for the Energy Center of Wisconsin on green power marketing.

If you are not a subscriber to EJ you can also read it on the Power Markets website.

You can also listen to and watch the "audio slide" presentation that I did for the Electricity Journal website.  Just click below. It is a shorter version of the talk I gave at the NARUC conference.

The new shape of the world: Net Demand

I had the honor of speaking at the annual conference of the National Association of Regulatory Utility Commissioners (NARUC).  I spoke on a panel about "lessons learned from Germany."

It was a lively and informative conversation, with input from Lola Infante of EEI, Julia Hamm of SEPA, and Jurgen Weiss of Brattle Group.

While many lessons could be learned from Germany's energy transition, I focused on one particular lesson -- the concept of net demand.

Traditionally, the job of grid operators is to follow demand and make sure a set of dispatchable power plants are deployed to meet it.  Demand was not controllable, so supply must adjust to meet it.

But wind and solar power are changing that job (as is demand response*).

Wind and solar are not controllable by generators, at least in the sense that they can't be turned on or up as needed.**

So grid operators now look at the concept of "net demand," where wind and solar are subtracted from the overall "gross" demand.  What is left over is what they now operate for, deploying dispatchable plants to meet the residual load.

This issue is acute now in Germany, where renewables have accounted for about 70 percent of load at times.  It is getting to be an issue in California, which has seen days with over 30 percent wind and solar.  CAISO has begun reporting net demand in real time.

The net demand curve can be a dramatically different shape than the gross demand curve, with big implications for daily operations, long term planning, and the money flows in a power market.

To hear the audio of my talk along with the slide deck, click on the image below.  Enjoy, and feel free to pass it along or send me comments.

*  Demand response allows grid operators to control power demand, by reducing it, shifting it to other times, or even increasing it.  Here is more info.

** They can in fact be turned down, and grid operators are now using them to provide down-ramping services.  Kind of like demand response for generators.

Arguing about Germany

Thanks to my recent experience in studying the Energiewende and visiting Germany, I've been invited to speak on a panel of the National Association of Regulatory Utility Commissioners (NARUC), on November 16 in San Francisco.

The theme:  Germany's Transition to Renewables:  Gutsy or Foolhardy?

As NARUC describes it -- "Some news reports paint an optimistic picture of Germany's efforts to de-fossilize and de-nuclearize its electricity production. Yet industry reports show there are issues, both financial and electrical, to be addressed. We'll ask four experts to react to a particularly upbeat news cast regarding Germany's transition to renewables and help us understand the positive and not-so-positive aspects of that country's energy policies."

I'll be joined on the panel by three transAtlantic experts --

• Julia Hamm - Director, Solar Electric Power Assn (SEPA), who recently led a delegation of US energy industry people to Germany.

• Dr. Lola Infante - Dir.of Generation Fuels and Market Analysis, Edison Electric Institute.  EEI recently commissioned a paper on lessons learned from Germany.

• Jurgen Weiss - Principal, The Brattle Group, who recently wrote a paper for the US Solar Energy Industries Association (SEIA) also on lessons learned.

After a roundtable discussion, we each get to present a lesson.  Mine will be on the concept of "net demand" and the need to plan for flexibility in a future power system with much more wind and solar power.

I'll post it here afterwards, so come back again.

Going Globalist

My article on "Texas and Germany: Energy Twins?" has been picked up by The Globalist, a world affairs news site.  You can read it here.

The benefit is that it is much shorter than the version in POWER Magazine, and with fewer pesky graphics.  Enjoy.

Tracking the Energiewende

The good wonks at Agora Energiewende, the think tank in Berlin devoted to the German energy transition, have introduced new tools to track the German energy system.

The new "Agorameter" tracks electricity production hourly by fuel source, wholesale prices, and imports and exports.  It is currently all in German, but easy enough to understand once you remember a few key words and colors.

For starters, Kraftwerk is not only an awesome band from the 1970s, it also means "power plant."  Strom is electricity, and Strompreis is the price of electricity.  Stromerzeugung and stromverbrauch means power production and consumption.

For renewables:  Wind and solar are the same in English, biomasse is what I like to call biopower, and laufwasser is hydropower.

The conventional fuels are gas, nuclear (kernenergie) and two types of coal, both aptly named:  lignite they call braunkohle; sub-bituminous, or black coal, is called steinkohle, which I like to pronounce "stink-hole."

Pumped storage hydro is pumpspeicher und speicherwasser.

The graphic embedded here shows power production for the last couple of days, with conventional Kraftwerk in gray, wind in blue, solar in yellow, and biomass and hydro running flat on the bottom in green and blue.

Click on it to go to the Agora website for more detailed information on prices and exports.

Then everybody dance with Kraftwerk!

Wanted: Crystal Balls

Power grid operators need to plan for the future,  but how do they know what to plan for?  They make forecasts of the future, incorporating expected supply and demand, economic growth, weather trends, and demographic changes.

No one has a crystal ball, but clearly planners could do better.

The Project for a Sustainable FERC recently commissioned a report from the Brattle Group that finds PJM consistently overestimates future demand because they underestimate the effectiveness of energy efficiency programs.  By 2022, they estimate PJM will buy an extra 27,245 gigawatt-hours, equal to a 3000 MW power plant running full out for a year.

So PJM ends up with more capacity than they need.  Not a problem, right?  It's a good conservative engineering approach, reliability is maintained, and nobody's lights go out.

But this comes at a significant cost, say $1.3 billion over three years.  Not to mention building unnecessary infrastructure and propping up old coal plants that should retire.

Grid planners in Texas have likewise been criticized for predicting too much power demand.  In their twice-annual Capacity, Demand and Reserves (CDR) Report, ERCOT forecasts expected reserves for the next five years.

From the Texas Coalition for Affordable Power.

They have consistently overshot in their predictions of peak demand and underestimated the amount of new supply.

The Texas Industrial Energy Consumers group warned against putting too much faith in the forecasts.

"The CDR report systematically over projects reserve margin shortfalls that never materialize," they wrote in a filing in 2013. "The market does not believe these predictions and [the] Commission should not take drastic action in response to these reports.”

The debate about capacity markets has inevitably raised the question -- how much capacity do we need to buy?

Brattle Group, in an earlier report for the Texas PUC, tried to estimate the "economically optimal" margin for ERCOT. While engineers have traditionally used a rule of thumb of "one outage in ten years" -- in other words, where demand exceeds supply once in ten years and a blackout occurs -- Brattle questioned why that was the rule.

They balanced the cost savings that come from building fewer power plants against the price suppression effects of having a lot of supply, and found the magic number to be 10.2%.

"This risk-neutral, economically optimal reserve margin is substantially below the 14.1% reserve margin needed to meet the traditional 1-in-10 target," they wrote.

Nevertheless, the annual savings that could be gained by dropping the margin 4% was an "only modest" $100 million, on an annual power bill of about $35 billion.

A few hundred million here, a few hundred million there -- pretty soon you're talking real money. And real enough to nearly double the annual energy efficiency programs of Texas utilities, which would increase reserve margins, clear the air, and save money for consumers.

From "Estimating the Economically Optimal Reserve Margin in ERCOT"

Power Markets in POWER Magazine

One of the articles written for the Power Markets Project, "Texas & Germany: Energy Twins?," was picked up by POWER, the magazine that provides "business and technology for the global generation industry."

Geographically and politically, Texas and Germany are on opposite sides of the world, but both believe strongly in competitive energy markets, and both have largely deregulated their power industries. Now both are reconsidering their market designs.

You can read it on their website.

It was also the précis for the UT Energy Institute symposium of the same name.  More on that symposium later.

UT Energy Institute Symposium: Germany and Texas: Energy Twins?

Germany and Texas, so different in so many ways, have some surprising similarities when it comes to their electricity systems. These similarities and differences will be explored at a symposium called "Germany and Texas:  Energy Twins?" at the AT&T Executive Education and Conference Center on the University of Texas at Austin campus on September 2.

Policy makers in both Texas and Germany believe strongly in competitive markets and have largely deregulated their power industries.  Both regions have a large and growing amount of renewable energy, especially wind and solar, and are likely to see much more in the future – in Germany, driven by strong policies; in Texas, driven by abundant natural resources.

And in both places, the focus on competition has led to “energy-only” wholesale markets, where generators compete to sell their juice on daily and hourly markets.  Unlike other states and countries, they do not get long-term payments to be ready to provide power as needed, called a “capacity” payment.

These factors (and others) have led to very low wholesale prices in both Germany and Texas. Low prices are driving incumbent utilities toward bankruptcy, and shuttering power plants.

In Texas the result was a contentious debate about capacity markets.  While some argued that prices were too low, and would result in power shortages in coming years, others maintained it was just market forces at work. In the end, the state utility commission decided the market was “healthy” and made only minor fixes.

In Germany, the debate is just heating up.  The ongoing growth of wind and solar is pushing conventional technologies out of the market, yet those power plants are needed for when the wind doesn’t blow and the sun doesn’t shine.

To inform the debate, a delegation of German energy officials and experts is touring the United States to study market design issues, visiting Texas, the PJM Interconnection, and Washington, DC, in the first week of September. To welcome them, and give a full airing of the issues and their specific challenges, the University of Texas Energy Institute is convening a public symposium, with support from the Heinrich Böll Foundation, the Cynthia and George Mitchell Foundation, and CleanTX.

Oliver Krischer, a member of the German parliament, and a presenter at the symposium, said, “Germany has very strong energy and climate goals, including getting to 80 percent renewable energy by 2050.  As wind and solar become more mature and cost effective technologies, we are entering a new phase in our energy transition, known as the Energiewende.  The future will hinge on having an efficient, competitive, and cost effective market design that will make the transition as smooth as possible.”

University of Texas professor Michael Webber, Deputy Director of the UT Energy Institute and Co-Director of the ATI Clean Energy Incubator, will also present at the symposium. “These fundamental issues of market design are universal and will have a profound impact on the growth of renewables,” he said.  “Texas and Germany have a lot to learn from each other.”

The symposium will also feature: 

• Dr. Felix Matthes:  Research Coordinator for Energy & Climate Policy, Öko-Institut (Institute for Applied Ecology), Berlin
• Dr. Christoph Maurer:  Managing Director, Consentec GmbH, Aachen
• Walter Reid:  The Wind Coalition, Austin
• Phillip Oldham:  Partner, Thompson & Knight, Austin
• John Fainter:  Association of Electric Companies of Texas, Austin

Event website:  https://germanpower.splashthat.com
Time and location:
September 2, 2014
2:00—5:00 PM

AT&T Executive Education And Conference Center, Room 203
1900 University Aveue
Austin, Texas  78705

Contact:  Bentham Paulos, 510-912-3001, ben@paulosanalysis.com

A Market for Policy

This week I've been studying up on the PJM Interconnect, the world's largest organized power market, serving 61 million consumers in 13 eastern US states.

PJM is also notable for featuring a capacity market, and for fostering more demand response than any other market.

A capacity market pays generators and demand response suppliers to provide capacity -- that is, the ability to meet demand at all times.  In other markets, like Texas and Germany, power providers are paid only for the energy they sell, the megawatt-hours, and not for the ability to produce those megawatt-hours when needed.

Demand response is an old idea that is getting supercharged in the microchip era -- grid operators controlling some power demand and turning it down when needed.  Utilities have been doing this for decades with air conditioners, water heaters, and large factories.  When supplies were tight or very expensive, they would call (on the phone) the factory manager and ask them to throttle back.  Or they would send out radio signals to hundreds of air conditioners, cycling them off to cut demand.

Now, with wireless connectivity and smart controls in all kinds of devices, companies can control demand with increasing sophistication, and pass the savings on to customers.  What used to be "curtailment" is now "demand response."

But both capacity markets and demand response are still evolving in PJM.

This week I reported for Greentech Media that PJM is starting a process to tighten up what it means to be a capacity provider.  In the "polar vortex" of last January, 20 percent of the power plants in PJM were missing in action.  A number of them were gas-fired plants who were saving a few bucks by not having firm access to fuel.  As furnaces cranked up, some power plants were at the back of the pipeline, so to speak, and couldn't run.

Coal and nuclear advocates spun this to say that only traditional, big thermal power plants were "reliable."  But reliability is really the sum of all the parts, not the feature of a single power plant.  Nuclear plants are reliable until, suddenly, they aren't.  PJM has yet to come out with their reforms, but they are likely to be practical and mundane, like so much RTO policy.

Which brings me to the other reform PJM got approved recently, in the way demand response works.  PJM was unhappy that demand response resources couldn’t be activated unless they called an emergency and gave two hours notice.  They got approval in May to change the rules by creating a new category of “pre-emergency” DR resources.  These DR entities (with few exceptions) now must respond within 30 minutes, can have a minimum run time of one hour instead of two, and have revised price caps.  In other words, demand response can be more flexible and certain now.

It's certain that these will not be the last changes in policy at PJM.  Markets need to evolve to account for changing technologies, trends, and actions by market participants.  It's good that PJM has the capacity and the responsiveness to do so.

Welcome to the Power Markets Project

Renewable energy is becoming competitive in a growing number of markets, and becoming a major contributor to power supplies.  Pro-renewable policies to date have been successful at jump-starting the industry, giving it the maturity to succeed.

Now that it is succeeding, more fundamental policy reforms are needed.

Power market policies designed for conventional generation are emerging as a major stumbling block to the rapid growth of wind and solar power, and to their long-term dominance.  

By "power markets" I refer to how the money flows, rather than the important technical issues about integrating variable generation (how the power flows).  Because wind and solar have low operating (marginal) costs, and because their output is driven by the weather, their power is delivered whenever it is available, regardless (mostly) of market conditions.  

In sufficiently large amounts, this can have a major impact on electricity market prices.  Thanks to the "merit order effect," where low operating cost generators are dispatched first, market-clearing prices are driven down, sometimes to zero or even negative levels.  This draws revenues away from conventional generators who must pay for their fuel in order to run.  

Over time, this is exactly what we want to happen, for renewable energy to out-compete conventional, polluting sources like coal and gas.  There is a whole suite of smart-grid technologies on the supply and demand side that can help integrate wind and solar, including dispatchable renewables, demand response, and storage.  But for now, we still need dispatchable generation to maintain reliability.  

Managing that transition to a system dominated by wind and solar, with complementary roles played by all the other technologies and tactics, hinges on designing the dollar flows in a power market.

The Power Markets project is intended to compare electricity markets in the US and in Germany, to exchange experience and best practices between grid leaders in both countries.

While Germany is unquestionably deploying more renewable energy than other nations, it has not resolved all possible problems in the transition. Being in the vanguard creates an even greater need for expertise and ideas than being a follower.

The Project will first summarize the existing literature on electricity market issues in both countries, and survey experts about possible solutions.  It will then bring a delegation of German policy-makers and grid experts to the United States to learn about approaches.  Lastly, it will publicize the "findings" of the research and the tour, to further understanding about the issues.