There is more to markets than meter electronics. It is important to understand the need for retailers as the bridge between the retail and wholesale markets.
A Little Silicon is Necessary but NOT Sufficient
By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity
Copyright © 2007 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. Please write to javs@ieee.org to contact the author for any kind of engagement.
It is important to signal that Prof. Banks properly mentioned retailers as a required institution when he wrote: “… it should never be forgotten that while initially deregulation was crafted to prohibit large California utilities (i.e. ‘distributors’ or ‘retailers’) from signing long term contracts when they begin to encounter very high prices, they were not allowed to pass them to e.g. households and small businesses. Why was that? It was because consumer (retail) prices could have escalated by as much as 200%, and as Governor Gray Davis made clear, the California economy might have been shocked into recession.”
That is only true, where lacking a proper institutional market architecture and design. As can be seen in A Futures Market under EWPC, it is no longer necessary to have regulated monopoly retailers to sign long term contracts with generators.
In that basis, I respectfully disagree with Mr. Gould in that “the intelligent application of a little silicon intelligence we can do better by providing a genuine free market for every customer,” while a necessary technological aspect is identified, it is totally insufficient in the institutional sense. A genuine free market in which all customers participate in the wholesale market as he proposes is an unnecessary administrative burden that also leads to an unreliable E1R2 market (please see IMEUC: Unreliable Service and Price Spikes).
To understand how to participate in the wholesale market, in the article “Understanding Demand: the Missing Link in Efficient Electricity Markets,” Marija Ilic et al write: “the ability to expose customers to real-time pricing provides the needed incentives to create demand elasticity. LSEs [competitive retailers] through better understanding of load profiles, customer’s demand elasticities and willingness to reduce or shift load in exchange for compensation, can more effectively bid demand into the wholesale electricity markets and reduce overall market price…”
Except for the balancing real-time market, market price results from generation and load bid commitments made ex-ante under the restrictions of R1E2. Under the R1E2 EWPC markets (in plural), every end customer can participate in the genuinely open retail markets and select the service plan (markets mix) contract that best meet their needs for low cost and/or high value. Such markets are the real-time balancing market, the hour, day and week ahead markets, as well as any other forward market that retailers can provide with their business design innovations. Some customers will also require physical delivery of their futures contract.
In fact, under EWPC all end-customers can participate fully in the market. Some of them will be able to participate in the wholesale markets as they do already in many jurisdictions. Most of them will participate in a genuine retail market, being able to choose, when prepared to do so, a pure and risky balancing real-time market that contradicts Governor Davis statements. However, it is not practical, nor economic, to impose that all end-customers should participate in the wholesale market, as there are very costly procedures to follow.
The retailer approach is a mistake.
To understand better what is going on read http://www.energyblogs.com//ewpc/index.cfm/2007/9/...
Under competition, the retailer that is not efficient simply loses in the corresponding market segment. Saying that "the retailers who do spend the money to actually accomplish this goal will in fact be subsidizing their competitors, therefore I douby that any of them would do so and still survive..." as explained in http://www.energyblogs.com/ewpc/index.cfm/2007/10/... where it says:
In practice, however, there is need for a transition from today's situation to EWPC. As there will be no incumbent retailers, 2GRs will need to carry the default service customers during the time limited transition period.
Nat Treadway, wrote in the article The Dawn of Electricity Competition: Efficient Prices and Efficient Choices that; "The design of default service (also called basic or standard service or provider of last resort) was identified as the most significant determinant of the success of retail electricity choice. A poorly designed default service undermines competition. If default service is designed to satisfy all residential consumers' needs, or if it bundles and spreads risks among all consumers, or if it is priced below market, then it is unlikely that new retail electricity providers will enter the market. With few choices, consumers are left with only the poorly designed default service, and with limited benefit."
During such a transition, 2GRs will have both types of customers (as there is no incumbent retailer), with increasing development of the resources of the demand side, as the default service will have essentially all the "free riders" being subsidized by peers. Hence, a systemic incentive to non-free riders will result, as they get the pressure for efficient prices and efficient choices. So, if only one or two retailers are truly competitive (2GRs), they will end up with the whole market.
"the retailers who do spend the money to actually accomplish this goal will in fact be subsidizing their competitors, therefore I doubt that any of them would do so and still survive."
The retailer approach is a mistake.
The retailers will do more than demand response to integrate demand, as explained in the "The Sixth Disruptive Technology" (please hit the link http://www.energyblogs.com//ewpc/index.cfm/2007/9/...). As explained above the issue of subsidies during the transition was taken care of in Nat Treadway's article.
The retailers that expend the money but don't innovate will lose. As competition develops, those that don't expend the money to innovate will lose even faster. Hence, only those that invest and develop business models innovations will be the winners in their market segments. As simple as that!
Regards,
Mr. X