This is an invitation to readers to comment about the application of two social economists’ insights about the IOUs and EWPC paradigms.
Will Anyone Pay for the SmartGrid?
By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity
First posted in the GMH Blog, on January 1st, 2009.
Copyright © 2008 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. This article is an unedited, an uncorrected, draft material of The EWPC Textbook. Please write to javs@ieee.org to contact the author for any kind of engagement.
On May 17, 2007, Martin LaMonica reported on the Clean Energy Venture Summit, with the article “Will anyone pay for the 'smart' power grid?” Its introduction says:
Like the Internet today, the electricity network needs to be able to connect billions of devices and still operate reliably. Because of growing environmental concerns, the grid needs to become far more flexible than it is today, accommodating distributed power generation from renewable sources and use several energy-efficiency techniques.
But while many people can agree on the vision of tomorrow's utility grid, few are willing to pay for it, according to experts who spoke at the Clean Energy Venture Summit on Tuesday.
A number of technologies need to be put in place to make the power grid smarter, notably more automation within the network and tools to give end users better information. But utilities are "grossly risk-averse and grossly hesitant to adopt new technology", said energy industry consultant Alison Silverstein.
"The utilities all want someone else to make the mistakes and take the risk (of adopting new technologies) for five or 10 years," Silverstein said. "And regulators are not willing to get out of their way and let them take those risks. It will require a transformation."
The question who pays? is necessary, but not sufficient to enable the needed transformation identified by Alison Silverstein. According to Eberhardt Rechtin and Mark Maeir, in their book "The Art of System Architecting," to go forward "[S]ocial economist bring two special insights to sociotechnical systems." They are: 1) "the four who's:" who benefits? who pays? who provides? and, as appropiate, who loses? and 2) In any resource-limited situation, the true value of a given service or product is determined by what one is willing to give up to obtain it.
From the article, it is very clear that with a few exceptions, the Investor Owned Utilities (IOUs) paradigm is unable to respond well to the social economists' insights. Utilities want to benefit and to provide, but they don’t want to pay, nor lose. They want someone else to pay and take the risks, while they retain their obsolete price control business model that is set as an average service that don't let customers get the true value of electricity that the smart grid will provide.
The true value of electric service will come from business model innovations of a restructured power industry. As can be seen in www.energyblogs.com, more than 130 articles have been written on the emergent electricity without price control (EWPC) to the end-customer paradigm. To provide a market/regulation balance, the emergent EWPC whole involves a transportation (transmission and distribution) only utility, under a regulatory compact with a responsibility to transport electricity, as the IOUs get divided into regulated transportation and the open market value chain of generation and retail.
I invite readers to comment about the social economists’ insights about the IOUs and EWPC paradigms.
Intelligent Buildings need to refelct this interoperability , especially as we make distributed genration and demand response part of the equation to meeet the load duration curves. See the convergence to Bright buildings proposed by CABA at www.caba.org.
James Carson, RisQuant Energy
JBCarson@RisQuant.com
I browsed the highly rich source on CABA. With the "Bright" Green Building (BGB) paradigm paper, commercial and multi-residential buildings have available a business proposition that is "intelligent, green, and profitable." The proposition has the utility bill as an input, which they will indirectly affect as the IOU price control business model will respond later on with price and/or service distortions. I suggest that BGB's profitability will depend on the risk of the utility bill/service, where a void needs to be taken care of.
To take care of said void, this is part of what I think is emerging. Under EWPC, the IOU gets divided into a risk-averse state level regulated SmartGrid (SG) transportation only utility and non-risk averse competitive retailers (and generators) operating in the federal liberated and democratic market (not deregulated) under a prudential regulations.
The retailers are competitive Second Generation Retailers - 2GRs (please hit the link http://grupomillenium.blogspot.com/2007/07/second-... ) that will be selected by BGB owners to strike a long term deal to integrate demand to power system planning, operation and control. BGB owners will benefit and pay, 2GRs will provide. The government will approve tolls for the SG that will provide reliable transport service for BGBs, to be paid by 2GRs that benefit. IOUs might be losers, as they get split, since their 100 year old obsolete business model is not longer effective.
Risk-averse IOUs owners should become SGs owners. Non-risk averse IOUs should aim to become 2GRs owners after EWPC restructuring at the federal level (eventually at the global level), but they will no longer be able to become SGs owners. Generators will be winners or losers, as they face competition at the federal level, without IOUs price controls. Although the government loses its political power at setting retail rates, it gains even more by increase economic activity and the reduction of environmental impact.
As can be inferred from above, EWPC re-regulation will also superseed wholesale deregulation. A lot of the highly complex regulations will get simplified.
The problem, however, comes from the lesson that Dee Hock, CEO Emeritus VISA International, gave us: "Simple, clear purpose and principles give rise to complex and intelligent behavior. Complex rules and regulations give rise to simple and stupid behavior." For more, please see the complete EWPC article "Financing and Developing Uncertain Generation" in the link http://www.energyblogs.com/ewpc/index.cfm/2007/11/...
Price controls business models are getting increased attention in the U.S. There is an urgent need to shift to federal business model innovations, eliminating once and for all regulators' bets. The EWPC market architecture and design will bring.
The article says "It is important to recognize that the 'incredible bets on Intelligent Utility Enterprise and Smart Grid investments,' correspond to the combined utility rate case. Under EWPC, the Smart Grid investments will remain on price control regulation with the ordinary approach [2].
I should add that the Intelligent Utility Enterprise is what should be open to federal competition. That is not what is being done and that is where Second Generation Retailers (please hit the link http://grupomillenium.blogspot.com/2007/07/second-... ) should compete to develop business model innovations.
End of answer.
In other words, the U.S, is now unevenly behind, with a very complex incremental set of market architecture and design.
I have no idea what a 'federal business model innovation' is, nor do I much care. What Mr. Vanderhorst-Silverio does not seem to understand is that there are dual regulatory regimes in the United States and Canada. To oversimplify the situation, retail distribution is regulated by the states and provinces while wholesale markets are federally regulated. Certain regulatory functions, reliability standards in particular, are handled by the industry itself through NERC and its subdivisions.
I have already mentioned that wholesale markets have been (pretty much) fully and successfully de-regulated. Moreover, many US states, and two Canadian provinces, already have well developed retail power markets. By 'retail' I include commercial and industrial (C&I), not just residential and small commercial. Progress has been uneven and halting, to be sure. Nevertheless, over the past ten years, the movement has been inexorably towards freer markets in power.
<< Under EWPC, the Smart Grid investments will remain on price control regulation with the ordinary approach [2]. >>
Doesn't that pretty much negate one of the principal benefits of markets? To wit, the keystone benefit of a free market pricing mechanism is to apply monetary values and market discipline to decision making processes. Shouldn't we make 'Smart Grid' investment decisions based on economic fundamentals rather than bureaucratic fiat?
<< In other words, the U.S, is now unevenly behind, with a very complex incremental set of market architecture and design. >>
Well... granted multiple US and Canadian market architectures are complex and de-regulation progress geographically uneven. Such is the nature of a nation as diverse as the US and Canada. However, behind whom or what?
It is apparent to me that Mr. Vanderhorst-Silverio is speaking out of ignorance of how the North American power markets actually operate. And, yes, I have already read much of his material about EWPC.
The concept of a smart grid (SG) under EWPC as a transportation only utility evolved from the idea << I believe that the End-State of the power industry needs to keep the wires monopolies completely separate from the competitive generation and retail businesses. >>
He quoted that earlier idea at the end of 2006, when he agreed to a generative dialogue and responded with this contradiction: "That has been accomplished already in the US. The wires monopolies are regionally managed by several ISOs that are operationally independent of the generators. The buy side operates independently of the sell side too. Retail power is still heavily regulated by the individual states in a crazy quilt patchwork." So, it is very clear that the "wires monopolies completely separate from the competitive generation and retail businesses" negates that it has been accomplished already in the US. I stress "completely separate" to enable a SG transportation (transmission and physical distribution) only utility.
As can be seen in a post above, I wrote that "Risk-averse IOUs owners should become SGs owners. Non-risk averse IOUs should aim to become 2GRs owners after EWPC restructuring at the federal level (eventually at the global level), but they will no longer be able to become SGs owners. Generators will be winners or losers, as they face competition at the federal level, without IOUs price controls. Although the government loses its political power at setting retail rates, it gains even more by increase economic activity and the reduction of environmental impact."
I am glad that he mistakenly wrote that I do "not seem to understand... that there are dual regulatory regimes in the United States and Canada. To oversimplify the situation, retail distribution is regulated by the states and provinces while wholesale markets are federally regulated," as he apparently has not read the EWPC article A Warning to the US Congress and the European Commission (please hit the link http://www.energyblogs.com/ewpc/index.cfm/2007/9/2... ), which was centered on the "the federal and state jurisdictional separation."
The article was written in response to this: "In the post European Confusion and Tail Chasing, Marty Rosenberg reports that 'This week comes work that the European Union wants to break open the energy markets. Again. I thought it was supposed to have happened July 1... The initiative is perplexing, particularly considering the fact that the major governments of Europe cannot keep their hands off the energy business.'"
All I am suggesting to Dr. Steven Chu is to actually break open the energy markets. The rest of the article which applies also to Canada goes as follows:
Just like in the US, the European Union wants to break open the electricity market with a faulty market architecture and design that keeps "native load" intact.
We ought to Mr. Giegler hero, Sam Insull, the ingenuity of the creation of the deadlock that the US is facing with the federal and state jurisdictional separation that lead to The Anti-System Utility (please hit the link http://grupomillenium.blogspot.com/2007/09/anti-sy... ). This is an excellent example of system thinking in action, as the 1st and [the[ 7th Law of the Fifth Discipline apply: "Today's problems come from yesterday's "solutions" and "Cause and effect are not closely related in time and space." FERC and its pair in the EU will play its role with a transformation to EWPC, allowing the development of federal wide competition in the US and Europe by 2GRs initially, with worldwide competition later on.
EWPC applies the 8th Law of the Fifth Discipline: "Small changes can produce big results – but the areas of highest leverage are often the less obvious. Two example of high leverage are the change in structure from VIU to EWPC, and the introduction of competitive retailers.
EWPC takes into account the possibility of a transition, in accordance with the 6th Law of the Fifth Discipline: "Faster is slower."
As state regulated retailers, aka "the enterprise" by Warren Causey, are transformed into federal competitive retailers, the negative political influence will be strongly mitigated. The open market activities in the value chain will change the need of financial capital to production capital, as predictability is reinserted into the industry.
The most important element to enable the open market and the key to predictability is a transportation grid with ultraquality. The motto "reliability first, economy second" is what should drive the industry from now on. As the deadlock is eliminated, new investments, innovations, and jobs with a lot of future, will be created. Financing base load power plants will be easy, under a predictable environment.
US Congress and the European Commission need to digest EWPC very fast. The political distortions in the power industry at the state level in the USA and at the country level in Europe can be strongly mitigated by performing a paradigm shift to EWPC.
Why do you think that Dr. Chu has any such power? The energy markets in the United States are regulated by FERC, not the Energy Department. FERC, while administratively functioning inside DOE, Chu has no power to direct FERC to do anything. Again, you really need to learn the ropes.
With Obama administration operating as a system, which according to Deming is "a network of interdependent components that work together to try to accomplish the aim of the system," the DOE and FERC are just component of the administration. Deming also adds that "The secret is cooperation between components toward the aim of the organization. We can not afford the destructive effect of competition."
Obama's job is according to Deming "... to direct the efforts off all components toward the aim of the system... Everyone must understand the danger and loss to the whole organization from a team that seeks to become selfish, independent, profit centre."
It is evident that part of the aim of the new system related to energy and the environment has been given to Dr. Chu. So with that understanding, I repeat that "All I am suggesting to Dr. Steven Chu is to actually break open the energy markets." He will certainly need the leadership of President Obama and the cooperation of FERC and the US Congress to do it.
As "The answer to the question of what to do first is for the global power industry to get out of the wrong jungle to produce a EWPC based EPAct as soon as possible. That is the kind of leadership needed to face the inevitable fundamental changes required to significantly reduce today's legislative and regulatory uncertainty," as explained under the EWPC article "Leadership Answers What to do First (please hit the link http://www.energyblogs.com/ewpc/index.cfm/2008/4/1... )," Dr. Chu should waste no time to open the markets to enable the EWPC based Energy Policy Act as soon as possible.
The Obama Administration has no statutory authority currently to accomplish what you suggest. Congress has already invested that into FERC and FERC is not subject to Administration oversight. The legislation to mandate competitive power markets was passed in 1992. FERC has implemented that legislative mandate through a series of Orders (888, 889, 890, 2000 and the SMD White Paper). Market evolution is moving forward more slowly than FERC would prefer, but it is already well underway.