A guest post by a writer with more than 30 years in energy and the environment with government, private industry, and the nation's leading think tanks. He currently works for the federal government and will be blogging in anonymity until he leaves public service.
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One of the more serious structural flaws in energy policy has been the fact that utilities can make money by selling electricity, but not by saving it.
As a result, a lot of power plants are built even though energy efficiency measures, on-site generation, and demand response could displace the need for the power they generate, at a far lower cost.
For years, the Holy Grail of utility policy has been to decouple utility profits from electricity sales, freeing them to make money off of efficiency and other low-cost means of providing capacity. Selling negawatts, as well as megawatts, in short.
As with most innovative energy policies, California led the way, decoupling utility profits from power sales in 1982 and ramping the policy up in 2007. Decoupling has been a big reason California has held its per capita electricity consumption flat for 3 decades while the rest of the country's per capita use has increased by 50 percent.
In New England, they're implementing what may be the next generation in decoupling.
Faced with capacity shortfalls, and a fraying consensus among the states in its service area, the New England Independent System Operator negotiated a new approach to meeting demand: the Forward Capacity Market.
FCMs just might become decoupling on steroids. Here's how it works in New England.
ISO NE develops forecasts for needed demand three years in advance and then conducts auctions annually to purchase sufficient power to meet those needs. Nothing too spectacular so far.
But here's where it gets interesting. The auctions are relatively wide open, and the entity that can provide the lowest cost capacity -- whether through negawatts, megawatts, on-site generation, or demand response -- is awarded the right to supply that capacity.
Whereas traditional decoupling strategies allow utilities to invest in and profit from efficiency-based capacity by assuring them a return that is equivalent to sales of MWs, FCMs require that power be allocated to the lowest cost bidder, and it opens the bidding to capacity providers other than utilities.
The centerpiece of the FCM is the descending clock auction. Essentially, a series of rounds are held where qualified applicants bid to provide the needed power. At the end of each round, the auctioneer announces the excess supply bid in the prior round, the start of round price; and the end of round price. As a result, bidders adjust their prices or drop out. The clearing price is determined when the excess supply being bid into the auction is zero.
Nothing is simple in transmission and distribution, but ISO New England has clear rules for qualifying both new and existing resources. New demand response applicants have to use a monitoring and verification (M&V) protocol to quantify reductions (based on the IPMVP), they must provide financial assurance, and they must be located within a specified capacity zone.
The first auction began on Feb. 4 of this year and finished up on Feb. 6. The results were intriguing. Existing supply faired the best, but of the 1,813MW of new resources, 1,188MW were demand-side projects.
Although the FCM will increase prices in some capacity zones during the transition phase, it is expected to substantially lower consumer costs in the long term.
It's not clear how much efficiency FCMs will tap into, but the approach will put demand-side strategies on an even footing with traditional supply and generation, and that could cut a lot of carbon at a low -- or no -- cost, particularly once carbon is priced under a cap-and-trade program. And if allowances were auctioned under the cap-and-trade program, as Obama has proposed, efficiency and on-site generation would garner an even bigger share of New England's energy needs.
This post was created for ClimateProgress.org, a project of the Center for American Progress Action Fund.
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Comments View as Flat
Sean Casten Posted 12:26 am
14 Aug 2008
FCM is great but has nothing to do with decoupling
It's better.
Utilities in New England - which is largely restructured, and therefore are primarily distribution rather than generation utilities - still earn their revenue based on how many kWh they sell, and have incentives to block efficiency that are no more benign than they were pre-FCM. (Indeed, Boston's NSTAR and Maine's Bangor Hydro remain some of the worst utilities in the country in my experience when it comes to blocking efficiency.)
What FCM does instead is let an unregulated actor to provide grid services without having to first get a permission slip from their badly-incentivized utility. Pre-FCM, not only could I not get paid for the service I provided to the grid from load reduction, but the act of connecting to the grid required extensive negotiation with the utility on everything from interconnection to rate treatment, with every positive step I could take for society creating pain to the utility shareholders and fought accordingly. Post-FCM, I can cut the utility out of the conversation. I install some device to lower consumption at the load (be it efficiency, cogen, load curtailment, or anything else), I install the appropriate meter and hire the appropriate independent M&V firm to sanctify my project and then I go direct to the ISO to sell my services. In other words, it separates the responsibility for grid-management from the utility profit incentives, recognizing that the monopoly utility does not have an exclusive franchise on the provision of a low-cost, reliable system.
The reason this is better than decoupling is because decoupling doesn't question the utility's omniscience - it simply changes the way they get paid for it. FCM, by contrast provides an economic signal for lots of independent actors to take lots of independent bets and get rewarded based on their ability to support the grid. In other words, it replaces a monopoly with a market, at least in terms of capacity.
All good.
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amazingdrx Posted 12:40 am
14 Aug 2008
Incredible!
So the leading state economy in america, "California has held its per capita electricity consumption flat for 3 decades while the rest of the country's per capita use has increased by 50 percent."
There's a headline.
So we are talking a 1/3 cut in electric power consumption across the nation using this arcane, impossible to understand policy change?
How did the people who got this through California's government explain it to legislators? Can this be done with the federal government?
We will need some kind of translation to try and get this to our congress and senate. Any translators from tech..neeze to english out there?
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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GreenMom Posted 12:57 am
14 Aug 2008
Lots of ways to translate, but...
Amazing -- there's lots of ways to try to sell this -- we can tout the free market, good old American ingenuity, helping "small" business (like Sean) compete, and so forth.
But the politics in Washington are much more difficult to overcome than in many states, because of the legislative hurdles and lobbyists run amuck, and Republican intransigence.
Sean -- this is why I've argued, in another thread, that it's counter-productive for federal legislation to pre-empt state efforts, whether it's in creating carbon markets or any other arena. I just don't see the federal gov't being able to lead fast enough, and so many states are out front with renewable portfolio standards, not to mention California decoupling and the New England FCM.
Even in an Obama administration, there won't be 60 Dems in the Senate, and the Democratic leadership seems unwilling to let the Republicans filibuster and look stupid. So we're going to get legislation that will be too heavily compromised in favor of the big utilites, whether it's by allocating them too many carbon credits, or not setting the cap high enough. Mark my words...
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Jon Rynn Posted 1:00 am
14 Aug 2008
Lemme give it a try...
...basically, any ol' company can saddle up to the utility and say, "I wanna put in these here megawatts!", and if some electricity priest says "you are blessed", you can do it -- or, at least, you can try to sell it. Previously, the grumpy ol' utility could say, "I don't like the looks of ye, get lost!", and then you'd have to talk to the judge.
In addition, you can sell, not just megawatts, but negawatts. How's that Sean?
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Sean Casten Posted 1:16 am
14 Aug 2008
Greenmom
I agree, although maybe not for precisely the same reasons. Electric regulation is predominately a state-level activity. There are things that the feds can do on wholesale dereg, but the majority of the opportunies for enhanced efficiency are "at the load" (e.g., end-use efficiency, use of opportunity fuels, cogen, etc.) rather than by squeezing a little more juice or fuel switching at big, inefficient central plants. Thus, these activities are all shaped primarily by state regulations.
The interesting thing about the ISOs in this context is that - with the exception of NY-ISO and ERCOT in Texas - they all span multiple states. This makes for some rather interesting legal experiments with a level of jurisdiction that is bigger than a state, but smaller than the feds. (Take that, constitution!) Legal brains sharper than mine can comment on that, but it is interesting - and in many ways, analogous to RGGI and WCI on the climate side - in the sense that we have states realizing that their actions need to be coordinated and doing that coordination in spite of the lack of a federal coordinator.
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Craig Allen Posted 1:24 am
14 Aug 2008
Negative clock auction???
Err, could you explain the negative clock auction a little more clearly please.
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amazingdrx Posted 1:26 am
14 Aug 2008
Sounds good Jon!
Now how would utility regulation need to change to acomplish that? Are there groups already pushing for the needed reform legislation?
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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Sean Casten Posted 1:34 am
14 Aug 2008
Jon
Sort of.
FCM doesn't break the utility paradigm, nor does it present the majority of the revenue incentive for a given project. (For example, the one project I have done that participates in FCM - a 500 kW wood-fueled cogen unit at a furniture plant in northern VT - still realizes the vast majority of it's revenue by displacing retail kWh purchases. The $/kW FCM revenue is additive, but small by comparison.) What FCM does do though is start to put some cracks in the utility-centric model for a specific part of the grid services.
A brief digression is in order.
We think of power as being kilowatt-hour denominated, since that is what most of us pay for. Inefficient appliances use more. Conservation uses less. All of which is on the energy star label at Sears and which we can multiply by our retail rate to figure out financial impact.
However, from a grid-management perspective, kilowatt-hours are just one of many, many variables that have to be measured and adjusted in real time.
This is partial list - but the point is that a grid manager must do all those things to keep the lights on. However, while the utility gets paid for all those services, the only economic signal that an electricity customer has historically had is their $/kWh rate. Ergo, the customer hasn't had any incentive to affect those other variables, even when the solutions they have available are so much more cost-effective than those available at the utility level.
FCM addresses one of those things: namely, the provision of "capacity", or peak system kW. In the standard utility model, peak kW is met by utilities building stuff and keeping it on-line. Generators, wires, etc. Indeed, our whole US grid has about a 20% surplus "reserve margin" built in just so that the system can accomodate sudden swings in demand. The elegance of FCM is that it recognizes that such capacity services can just as equally be provided by the individual at the load who shuts of their lights (or installs on-site generation, or some other measure) as it can by the utility - but that in historic regulatory models, they won't do so because they have no financial incentive. With FCM they not only have the incentive, but their actions will be preferentially used so long as it is cheaper than the utility alternative - since both the customer and the utility participate in the same market. Which is exactly what's happened - as Joe notes - because the preponderance of the load has come from load sited investments. In a declining bid auction, that is because those investments are cheaper. Which we all know of course, but comes as something of a revelation to a top-down utility regulator.
Now onto all those other grid services...
Make sense?
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georgebizpro Posted 1:52 am
14 Aug 2008
Demand response
Demand response certainly seems to be the way to go.
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Jon Rynn Posted 1:54 am
14 Aug 2008
I think so...
...you know, I was searching wikipedia for a good article on electricity rates and pricing, and there's nothing. Do you have a link or two that explains this stuff to a beginner? If it's not there, don't worry about it.
I keep bringing this up, but there's something called a "community choice aggregation" which is another way to break the utility's monopoly, it's basically the city buying mega and negawatts from a provider, with the utility providing the wires and billing. SF is doing this, and a lot of other bay area communities are looking into it, and some states.
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Sean Casten Posted 2:23 am
14 Aug 2008
But Jon, if this stuff was easy to understand...
...my expertise wouldn't be worth as much. : )
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Jon Rynn Posted 2:39 am
14 Aug 2008
LOL, Sean
but if you could explain at least parts of it so that the "normal" person could understand, you could eventually be a talking head...and that's something to strive for.
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Erik Hoffner Posted 2:52 am
14 Aug 2008
Mass
Yes, community choice aggregation is an option in Mass, I believe, and it is indeed a good move.
The grid in the NE definitely needs help - negawatts particulalry but also some new renewable supply side sources...we were a hair's breadth from a brownout last summer on a normal hot day due to a couple plants being offline.
In addition in Mass, we now have a rule coming down that will allow municipalities to own their own electricity source, which deregulation in MA had disallowed previously. Odds are that any new project will be small/city scale and renewable.
Erik
The Orion Grassroots Network: supporting grassroots groups working for conservation, justice, & more
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John former Marine Posted 3:01 am
14 Aug 2008
Let's de-grid instead...
If we get individual tax credits so that individuals and small groups can invest in solar, wind, and methane generators, we can break up the grid. When you're producing your own energy, there's much more of an incentive to be efficient and live within your energy means.
Il faut cultiver notre jardin.
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KenG Posted 3:42 am
14 Aug 2008
Electricity is Cheap
It's very hard to produce an incentive to conserve without a lot of artificial manipulation of the system because the actual cost of generating electricity is very low. In a completely rational system (ignoring political and environmental reasons to minimize generation) an electric bill could be divided into three components (neglecting taxes) - the cost of infrastructure to distribute power, the administrative cost to maintain customer accounts, and the cost to generate the power used. The first two would be constant and independent of amount of power used. The cost of the actual electricity would then be less than half of what we now see as a retail price.
I think it's important to remember this when we talk about the relative value of individually owned renewables, negawatts, etc. These hidden infrastructure costs have to still be paid (unless we get completely off the grid) even as consumption decreases. The same principle will apply to higher mpg cars and electric cars - someone still has to pay for the road maintenance.
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Sean Casten Posted 4:20 am
14 Aug 2008
KenG
You're mostly right, but for the assumption that all costs must be paid for. In a market-oriented system, people who invest in the wrong capital don't get guaranteed return. In our electric system they do.
In the jargon of the trade, short-run marginal costs (essentially, fuel) are low while long-run marginal costs (fuel + capital amortization) are high.
So while your point is true, it doesn't tautologically follow that all investments are wise and deserve guaranteed capital recovery. Proper market signals can give an incentive for intelligent capital allocation without guaranteed recovery, which leads to a pricing that is closer to the long-run than short-run marginal cost basis. (Indeed, this is how current retail rates are currently set.)
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stopgreenpath Posted 5:02 am
14 Aug 2008
but infrastructure cost isn't fixed...
i've enjoyed the discussion, what i can follow (!) but i want to remind people that thousands and thousands and thousands of miles of NEW, GHG-emitting, unneeded transmission lines are being planned for billions and billions of dollars as we speak - that is NOT a "fixed" cost in KenG's model, although it is one we could easily avoid by emphasizing point of use renewables and conservation.
my questions are, especially in a place like CA:
- why on earth are utilities in charge of the "conservation" programs for end-users, which have resulted in virtually NO conservation? sorry to disillusion you, but nearly all the conservation has been achieved in pre-Schwarzenegger eras of forcing efficiency improvements in goods and services delivered in CA. wouldn't the state or a non-profit be less of a fox guarding the henhouse, regardless of "decoupling," which accounts for all point of use renewables and all conservation as a "loss" on utility books???
- similar question - why are utilities in charge of the point of use renewables programs, even after they have proven to be actively obstructing installations? do you really think that Sempra is "decoupled" to the point where it isn't forcing through gas "peaker plants" at an unprecedented rate, while obstructing rooftop PV through administrative processes? Utilities, in my mind, need to be "decoupled" from ALL demand-side processes, except as load balancers/grid maintenance/purchasers of our renewable generation at rates set by government.
- wouldn't feed in tariffs be a more direct and effective way to accomplish massive grid decongestion, renewable power generation at PEAK hours, and conservation, while engaging PEOPLE directly in the renewable energy paradigm, rather than just as consumers? this human engagement - with a simple reward/punishment matrix, especially when coupled with smart metering, has proven, time and again, to greatly increase conservation and renewable generation, without killing a single acre of intact ecosystem.
not addressing every state, just CA, as it gets held up as a "model," yet i see Germany, Spain, Japan and even Greece and Switzerland to be FAR more progressive. why would we need an intermediary consolidator to accomplish the first major tiers of our goals, if we could do it directly?thanks for insights!
the greenest energy is that which you needn't ever produce.
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KenG Posted 5:29 am
14 Aug 2008
Infrastructure
Certainly the infrastructure isn't static but it will always exist in some form and have to be paid for. We hope it gets developed in an efficient manner but that's probably a whole separate discussion.
I've seen the opinion that renewables decrease the need for major grid investment but I think the opposite is true. Major solar and wind installations tend to be removed from load centers and, because of intermittancy, require large capacity transmission lines that will be underutilized.
Slightly off topic but I am uneasy with the regressive economic nature of conservation and renewables. Since I bought a hybrid car, I'm spending less on gas and paying significantly less in road tax. Some poor guy who can barely afford a 10 year old car is now picking up the slack for me. If someone in Malibu invests $50,000 for a solar PV system, is he offloading the electrical infrastructure costs on someone living in an apartment making 20,000/year? I don't think this issue goes away quickly.
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Sean Casten Posted 6:22 am
14 Aug 2008
SGP
Good questions. Feed-in tariffs are problematic for other reasons, but with respect to foxes & henhouses, you're spot-on. Years ago, utilities fought against end-use efficiency just as hard as they fight against on-site power today. (Some vestiges of this still remain: check your utility's website and see if they provide a discount for "all-electric service", whereby they give you a cheaper power rate if you commit to ripping out all your gas fired heaters and replacing them with electric ones. Which are way less efficient and more expensive, but pay the utility more money.)
The reason utilities don't fight against efficiency anymore - and indeed, now champion it - is because we passed rules under which a small premium is charged on utility bills per kWh sold (typically labelled as "system benefits" or some such thing), which is to be collected and put into a fund administered by the utility for end use efficiency. Lightbulbs, etc. There is a political logic to this of the if-you-can't-beat-em-join-em variety, and their impact isn't insigificant - something one the order of $3.5 billion worth of investments were made last year from those funds. The utilities may still not like the lower kWh sales, but they at least get some greenwashing PR, and their mandated anyway. That may not be so bad - but as you note, it's far from the only model.
California has taken this a bit farther than most and had the utilities run lots of the renewable & self-gen programs as well which - in other states - are more commonly run by neutral third parties. The logic is basically the same, and it is all founded on the same presupposition I was responding to in KenG's post - namely, that the returns on utility capital are sacrosanct.
They need not be, of course. But politically, it has historically proven easier to get (small) things done if you assume they are. Getting big things done (like addressing the $30 billion in annual utility fuel purchases, which makes the $3.5 billion on efficiency seem rather paltry) will require that we ask more substantive questions about the underlying regulatory model.
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Sean Casten Posted 6:30 am
14 Aug 2008
KenG
You're right with respect to infrastructure needs and payment for same. The question I was posing is simply (a) whether it needs to be paid off with profit, per the standard utility model and (b) why we don't contemplate a model where bad investments get bad returns, like we do in every other industry. There is a tendency in the utility industry to believe that if an investment was made, it must be perfect. (Where else do we talk about things like "capacity needs", that implicitly assume that all the existing capacity is perfect, and we just need to build more of that? It's analogous to looking at a root cellar full of potatoes and concluding you don't have to go grocery shopping, since all your caloric needs are sitting in front of you.)
Re: renewables, you need to parse between centralized and decentralized sources. Centralized (e.g., remote, far from load) generation, do need significant infrastructure to connect them to load. Decentralized (e.g., close-to-load) generation do not, for fairly obvious geographic reasons. This is not a function of renewability per se, but simply generator location. Some generation technologies like CHP and opportunity-fueled generation are innately decentralized because their fuel and/or thermal load is located close to the power load and not easily moved. Some generation technologies like coal and nuke are innately centralized because no one wants one in their back yard. For many renewables (solar, wind, hydro, geothermal) there is no natural reason for them to be located at the load, but no natural reason for them not to be either - e.g., you build a wind turbine where it's windy. So for them, the infrastructure issue all depends.
Personally, I wouldn't worry too much about the regressivity bit. After all, by that logic, you should buy a really big TV to support local sales tax coffers, no? It seems to me that long-term growth for all sectors is dependent upon minimizing fossil fuel use per unit of prosperity, however measured. You're a good man in that hybrid, and people like you, dammit!
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stopgreenpath Posted 9:48 am
15 Aug 2008
but that's just a tax hike...
masquerading as a "fee" on our utility bill, which then funds the "damned with faint praise" conservation programs which serve utility PR departments, but do not serve the planet or the ratepayers, sean. you seem to be quoting from the press releases, instead of looking hard at what caused lower per-capita consumption in CA - which was MORE regulation (sorry) on products that were sold here, forcing them into becoming more efficient. handing out a few thousand CFLS which end up on eBay or poisoning our water supplies, does not a "successful" conservation program make.
in my opinion, decoupling has done very, very little to remove the conflicts of interest inherent between conservation/point of use generation and Big Energy, and those programs should be run by our government with the same exact funds the utilities are currently administering.
i have a lot of trouble living in a democracy which throws up it's hands and says "if we can't beat em" to Big Energy. there are more of us than there are of them, and our government is hired to work FOR US - Big Energy are just willing to push and bribe till they get their way. we all just sit around wishing someone else would deal with it...
i am still curious about how an intermediary which buys rights to deliver capacity is a better idea than an aggressive consumer-driven demand-side management program like FITs, conservation and smart metering. shouldn't that be done first, then we see whatever is left over and manage that as Phase 2?
the greenest energy is that which you needn't ever produce.
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amazingdrx Posted 3:27 pm
15 Aug 2008
Degrid?
Yeah I like that for us radicals John. But I think this is more practical for mass consumption.
Take advantage of the variable rate plan to cut utility bills.
It would involve using utility power only at off peak times at half the normal rate. Then avoiding the marked up power rates on the variable plan (up to 7 times the offpeak rate), with battery backup for low power equipment like phone, computer, tv, low power lights and so forth.
The batteries, charger, inverter, and timer would paty off in lower power bills in a couple of years at most. All high power uses would be taken care of in offpeak at night.
The next natural step would be solar or wind to charge the batteries. But in the first stage one would charge them at the offpeak, half price rate.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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