The Pitfalls of and Opportunities in Electric Power Deregulation is an article written by Harry Valentine, Commentator/Energy Researcher, which opens up the deregulation box. The following comment is written from the EWPC architecture framework (EWPC-AF) perspective.
The Obsolete Generation Economies of Scale Argument
By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity
EWPC Systems’ Architect
First posted in the GMH Blog, on June 8th, 2009.
Copyright © 2009 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.
Wishful thinking of an old world that doesn’t care about environmental risks abounds. However, energy poverty is a highly likely scenario of clean energy to be expected in North America. Even in China and India, people need to be prepared for such a culture changing scenario.
Whether considering or not the above statement, Harry’s emerging scenario will be only possible under the EWPC-AF, as explained in the article Innovation Needs to Belong to the Small. To ease the large value destruction in the making, the government needs to make a revolutionary move in the power industry to enable business model innovations to develop the resources of the demand side in order to increase significantly the efficiency of the power industry.
What Harry should be telling readers is that large generating stations are being protected from competition from disruptive technologies, by successive incremental extensions of the investor owned utilities (IOUs) architecture framework (IOUs-AF). In that process, a huge and highly complex legacy stock is now blowing a bubble with taxpayers’ funds, which will explode as the smart grid “innovations” regulated bets, including those that actually make it through, fail at early obsolescence, as it historically happened with 75% of all projects during the reengineering revolution. That is the Greek Tragedy that is explained in the discussion to the article Competitive Markets for COMPETE Coalition Potential Losers.
Two years ago I wrote the GMH post Lowest Cost Electricity Generation is Just Intuitive, but I will add more. Missing from the generation economy of scale thinking is the fact that most of the value being added in the power industry has been found close to customer premises, as explained in the EWPC article Just as Pogo, IOUs Found the Enemy. As the IOUs-AF developed resources of the supply side saturated long ago, they left the resources of the demand side highly undeveloped. The new economies of scale and scope are to be found in the development of the resources of the demand side and its integration to power system planning, operation and controls. See also the EWPC article Demand Integration is NOT the Province of Politics.
On 6.9.09 Joseph Rosenthal wrote the following comment:
Gee, those silly Chinese are going to be sorry for building all those coal plants lately. I guess they should have been encouraging their peasants to make a 20-year investment in some shiny DG units for their 600 square foot homes.
Ethically, we should calculate how much GHGs exports are still accumulated so far in the atmosphere. Do you know what that figure is? I bet that the Chinese have added only a small percentage of the total, which mostly belongs to the U.S. Maybe something like that is what is in store for the end of the year.
I guess that there is nothing than a good example for the peasants, who would like to have 6000 square foot homes to be comfortable with some shiny DG units on their roofs to export what they don't need to the grid for the factories to use. Maybe the Chinese government will own the homes and the production of the shiny disruptive technology.
Um, we're not shutting down our coal plants. A small number may retire. When push comes to shove, we are not going to double or triple the electricity costs of those in the U.S. who have cheap, coal-based power. Not going to happen. I have about 25 years remaining in my career, and for better or for worse, central station power will be the primary means of getting reasonably priced, reliable power to all sorts of customers for those 25 years. The hope is that we don't overpay through silly market schemes and treat power like cheeseburgers.
And that's just how it is.
"Um, we're not shutting down our coal plants." How can you be so sure. That is a perfect example of the certainty of wishful thinking.
As a planner under uncertainty, I have indirectly admitted that I can not be certain what the future will bring. That is why I wrote "Whether considering or not the above [environmental] statement, Harry's emerging scenario will be only possible under the EWPC-AF."
However, the EWPC-AF is a predetermine element of all plausible scenarios that is also able to satisfy not shutting coal plants down. In addition, there is at least another plausible scenario in which a large number of the coal plants will be shut down sooner than 25 years. In those situations, the EWPC-AF works just as well, but the barriers set by the IOUs-AF, which unnecessarily protects the coal plants while slowing progress, means that it is not a predetermined element.
Whether you want it or not, electricity produced with coal power plants may involve subsidies not accepted in the global market, as border tax is also a likely action to discipline markets.
Joseph,
Ontario's provincial government has MANDATED that all of Ontario's coal plants must close down permanently by 2015 or so. Luckily coal is not the majority of central generation in Ontario as just over half is from nuclear and some is from hydro. Natural gas and renewables (wind and solar) are small but emerging sources in Ontario that are growing. And once the coal plants shutter, the lost capacity is expected largely to be taken up by growing conservation and efficiency programs, and of course more renewable energy sources.
Now you may think this is ludicrous since coal is one of the lowest cost sources, but the carbon and other nasty emissions from coal plants has been cited by the government as costing too much in added health care costs and climate change. So the higher energy costs once they close is a price the public will be forced to pay, and it will be gradually eased onto our energy bills through the use of Time-Of-Use energy billing rates.
Initially the TOU rate structure will be almost revenue neutral, but over time they will surely widen the gap between on-peak and off-peak rates to extract more overall revenues, and anyone in the consuming public that doesn't like it will be told to mitigate their higher energy bills by practicing more load shifting to off-peak hours.
What makes you believe the same won't gradually be foisted onto the American public over time?
some seem to be confusing (perhaps intentionally) economy of scale, which originally lead to utility regulation, with economy of scope which may drive costs (down) for many of the smaller technologies. Large central stations, including nukes, will continue to dominate. There are also "smaller" nukes that benefit more from economy of scoe than scale.
"There is nothing more powerful than an idea whose time has come... Victor Hugo" You are partially right, but as I will explain next I am not confusing them.
According to wikipedia "Economies of scope are conceptually similar to economies of scale. Whereas economies of scale primarily refer to efficiencies associated with supply-side changes, such as increasing or decreasing the scale of production, of a single product type, economies of scope refer to efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products."
Thomas, I don't have to confuse them. As you can see in the article EWPC as a Timely Basic Innovation (http://www.energyblogs.com/ewpc/index.cfm/2009/2/2... ), the EWPC-AF may "... involve not just a single new technology but a collection of new inventions, practices, distribution networks, businesses and business models, and shifts in personal and organizational thinking." So it should not be any surprise that EWPC involves economies of scope with water and gas for Second Generation Retailers (2GRs). But most importantly, 2GRs business model innovations are mainly information systems projects that get economies of scale on the Federal and Global markets.
Right on, Joseph Rosenthal, but don't throw a fit if your contribution is misunderstood. I put it this way: people with finite life spans are not going to accept the playing down of things like nuclear and coal, REGARDLESS OF WHAT THEY MAY THINK OR SAY OR FOR THAT MATTER DO OVER THE SHORT RUN. That's the bottom line, regardless of how we get there. The main point that I have tried to make in this forum is that voters are being tricked by ignorant politicians into believing that wind and solar and the like can replace what Thomas Tanton calls "large central stations". I like that expression, because I don't have to say...well, you know.
And let me repeat, the wishes of that comparatively small group of voters and colleagues who are hooked on renewables should be respected. But insofar as my personal standard of living is concerned, energy-wise it would be best served in this country (Sweden) by the appearance of two new large nuclear plants.
I'd love to explain that some day in this forum, but as in certain other forums of one description or another, there is no market for that particular truth. As a Canadian billionaire said not too long ago, we are living in the most dishonest period in human history, which means that things like truth and logic have about the same intellectual value as a video clip..
If large central coal plants had no carbon or other nasty emissions, and if large central nuclear plants didn't cost so much money up-front to build, I'm sure politicians would take a much different approach than they are doing in Canada and the US. This is the message I have been trying to give in this forum, and whether we like it or not, and whether you agreeor not that our politicians are being "dishonest" as professor Banks strongly suggests, we must live with whatever politicians force us to do. The political involvement by our governments in regulating the power industry and changing it to suit their plans for the future is never going to disappear.
So I suggest all readers must face that we're going to pay considerably more for electrical energy over time, and I suggest you either start saving your pennies or start learning to practice much more conservation and efficiency upgrades. That is of course if you want to maintain any semblance of your current standard of living.
Fair enough, Bob. To clarify, my strong expectation is that the general public, and most politicians, are (1) underestimating the cost and overestimating the reliability of renewables, (2) treating efficiency as entirely a resource when it will likely be only partly a resource and partly a subsidy scheme from ordinary folks to the influential, (3) underestimating how important central station power is for keeping costs down and how much power we really get from coal and nuclear.
In Canada, the cards may play out that coal goes away. But in America we have something called the Senate, with two representatives from every coal-using state (there are probably thirty States and sixty such senators) as well as the electoral college. So, my strong expectation is that once people see the electricity cost impacts of "going green," we will reverse course in the U.S. You say that "all readers must face that we're going to pay considerably more." You may be right that that would be best. But it won't happen here, in my estimation. Not for long, anyway. If cap-and-trade doubles the electriicty price in say, Indiana, a key victory State for Obama, or in Ohio (same), it will be reversed. You may be sad about that and I may shrug my shoulders, but that's the likelihood, in my view.
Meanwhile, China will enjoy the lower-priced coal resulting from whatever coal demand reduction is achieved in the U.S. or Canada. So we may get higher electricity prices and a reduced standard of living without much reduction in global emissions. That would be policy that sounds good, not good, sound policy.
Fred wrote the following: "Bob, you and I had some disagreement earlier on something, and now you have decided to interfere in something that you don't know anything at all about, so I am going to take the gloves off... It isn't economics that you should be thinking about here - assuming that you are capable of doing any thinking on this topic - but history. The history of electric generation and transmission shows a movement from local to regional generation. The explanation is economies of scale: the large plants feature ECONOMIES OF SCALE. Nobody in their right mind is capable of denying that."
While I do not regard that Fred is interfering in my responses to Joseph and Thomas, I do think it is improper to tell anyone that they "don't know anything at all about," because it may come back to hunt us. I repeat that I do not know what the future will hold. However, the world has been undergoing a discontinuous historical transformation from cheap energy, expensive information, and the environment as an externality, that used to made, for example, what Thomas Tanton calls "large central stations" feasible, to a new world order which clearly reverses to expensive energy and cheap information, and which seem to be making a plausible scenario that denies large plants economies of scale.
The truth is that the economies of scale of the U.S. grid had more to do with the whole power systems interconnections (coordination savings that have been known since the 1920s) than that of the generating units themselves. However, that is a story already told almost two years ago (and posted above) in response to the same Joseph Rosenthal in Lowest Cost Electricity Generation is Just Intuitive (to read it, please hit the link http://grupomillenium.blogspot.com/2007/09/lowest-... ).
In fact, the emerging order has already given us a shift from the central computer to the micro computer and from the central telephone system (not to the microphone, which we had) to the cellular phone. Even more, both technologies have already converged into for example, the Apple iPhone, the Palm Tre, etc., which transfer real choice to the demand side. No end in sight yet as Moore's law has displayed its potential effects.
For the power industry, at least one disruptive technology is now increasing its potential according to that law, as explained in the highly read recent article Solar Makes Sense Now (see what Len Gould responded on 6.4.09 to Fred about nanotechnology progress by hitting the link http://www.energypulse.net/centers/article/article... ). Dick Maclay even rephrased it as "Solar Will Make Sense and Obsolete the Utility Mind Set Real Soon Now." Whether it actually makes sense now, there is no doubt that it is a highly likely scenario.
I may conclude that Joseph's contribution is not misunderstood at all. It is just plain wishful thinking, which may result if the specific business as usual scenario remains. Just as it happens in the ICT's industries, as mentioned above, there is an emerging plausible scenario where the micro grid is where most of the value creation is generated instead of the macro grid. As the Internet shows, the macro grid does not disappear, but the demand side micro energy is where value migrates. As seen above I am not inventing that scenario. The key problem seems to be the temporary barrier of the IOUs-AF, which as I said will keep generating huge value destruction. A shift is needed to the EWPC-AF basic innovation because it is a predetermined element of all plausible scenarios.
The Bob and Fred show continues.
The reality can be boiled down to a few hard facts.
1. Renewable energy will always be more expensive than nuclear power. Even with some miracle solar cell, you still have the storage problem.
2. Nuclear Power will always be more expensive than coal. Prior to this global warming business, utilities were RUNNING, not walking away from nuclear. It just wasn't worth it for them.
3. Global Warming and the concerns about CO2 emissions are probably real.
Given the reality (or at least political reality) of number 3, it would seem the best course would be to try to steer the politicians to nuclear power, if possible. The only debate as I see it between Bob and Fred is that Bob thinks this is unlikely, and Fred thinks it is essential. As far as I can tell, both might be right.
I think Bob may be failing to acknowledge how much of a cost disparity there may be between renewables and nuclear. True, these costs may be ameliorated by conservation and a smart grid, but these would benefit nuclear power as well.
I think Fred might not notice his own inconsistency in railing about "ignorant politicians" supporting renewables at the expense of nuclear, whereas nuclear power requires political help as well, as it is NOT being well-supported by the private sector. Perhaps this is the problem of "ignorant capitalists".
And Joe, the solution to China burning coal is trade sanctions. Since CO2 emissions are a global issue, it is suicide for a country to adopt such policies without expecting the same from its trading neighbors.
That's a great point Jim, but I don't know if trade sanctions will be as robust as necessary (I would doubt it--they would have to be huge), nor do I know what consequences China may like to impose in exchange for trade sanctions. Finally, there are other markets available for Chinese products (other than U.S., Western Europe, that is), though I admit those markets would be best.
And, as a brief response to Jose, I don't "wish" for coal to continue. We in Connecticut are merely on the receiving end of the coal emissions. I do wish for reliable, relatively inexpensive power that doesn't unduly harm the environment, which may actually end up causing the use of natural gas for baseload (we are already starting to do that). Absent energy storage advances, I don't put in my trust in renewables or efficiency to accomplish our goals. I think efficiency is overestimated as a potential "resource." Also, average folks without much air conditioning don't have much to conserve. Wealthy people in big homes that write to politicians, on the other hand, do enjoy when the rest of us pay to make their central air more efficient.
Jim,
I fully realize and agree that renewables are today considerably more costly than nuclear or coal. However my other main point in the "Bob and Fred show" has been that there are huge efforts going on in industry and in research institutions to reduce that cost gap. And it's not crooks or vested interests or environmentalists driving all of it, it is pure and simple capitalism by smart business people who smell massive opportunities to compete with conventional power system companies.
Storage for solar and wind are a crucial factor of course, and granted a breakthrough in battery storage would also benefit nuclear too. Just today I read the Obama administration is pumping new money in the range of billions into the US domestic battery industry for R&D. The US government also realizes a breakthrough is needed. And more money for R&D drastically increases the chances we'll get one someday, I know because I work in R&D in another industry, and money for R&D is the lifeblood for successfully engineering AND commercializing new discoveries or new design techniques for products.
Let's say hypothetically a breakthrough occurs for battery storage and as a result the cost of renewables came down to something at least comparable to today's large central generators. Not necessarily equal but at least comparable. What do you think politicians will choose - spend money gradually on incremental deployment of large numbers of micro-generators, or spend huge sums of money up front on large central nuclear plants (and cope with their waste problems), or spend money on many new large coal plants up front and deal with their emissions and the carbon taxes or cap&trade schemes soon to unfold.
The breakthroughs in any R&D venture are never guaranteed by any means, no matter how much money is thrown at it. But it's no different than playing lotteries - if you don't spend money on tickets you are guaranteed never to win. It's easy for Fred or anyone else to ridicule those who are working towards making renewables practical on a large scale - until it happens someday. And seeing renewables grow as they have in recent years, the chances they become widespread on every rooftop and every street corner grows, figuratively speaking.
2 billion dollars of stimulus funding from the US government for battery technology R&D and manufacturing is described in the Wall Street Journal story April 13, 2009 titled "Better Batteries: General Electric, A123 and the Power Grid", found at
http://blogs.wsj.com/environmentalcapital/2009/04/...
It is also summarized in the Electronics Design News article June 8, 2009 titled "Stimulus package's $2B investment in domestic US battery manufacturing" by technical editor Margery Conner, found at
http://www.edn.com/blog/1470000147/post/120045412....
I'm publishing a letter in EnergyBiz in which I say that the nuclear industry is in disequilibrium. Thirty years ago they were building nuclear plants in 4-5 years and aiming for 3 years, now they are talking about building them in 8 years and aiming for 5 years. I prefer aiming for 3 years, which is going to be possible when they build reactors in plants, or for that matter the way that they constructed small warships in WW2.
"Ignorant politicians", Jim. How did George W. get into this? Actually I was thinking about the kind of Swedish politicians who make George look like Einstein..
Since it seems very difficult, no to say impossible, to get on the same page, I must say that I respect your opinions. So, I will give you my humble take on all this so far, even if I make myself vulnerable to gossip.
To me the issue is clearly not the Bob and Fred show, but the need of an Architecture Framework that opens the power industry to innovations. I tried to show that the IOUs-AF obstruction to progress might cost the American taxpayers billions of dollars in addition to maybe losing the hard earned leadership that the U.S. had in the past. I also tried to show that the obsolete generation economy of scale argument has not been an issue either since a long time ago.
To open the power industry, and face the real issue, I suggest adopting the basic innovation EWPC-AF that is a predetermined element under two or three highly plausible scenarios. By the way, I don't discount a scenario having base load generation for years to come, but they should need to compete without the help of externalities to avoid shifting their any excess risky costs, which they may have, to the customers. As in the ICTs industries, value creation migration to the customer also seems to be a predetermined element that will be exploited by 2GRs in the development of the resources of the demand side to enable their business model innovations.
Although I may be wrong, I feel that that the essential issue have been sufficiently discussed. Thank you very much for input and for as usual being a great sounding board.
Regards,
José Antonio
Bob,
A breakthrough in battery or some other electrical storage would indeed change the world. But it is very unlikely to occur. And even if it did, would not address seasonable differences in renewable energy generation (such as solar).
If we assume a battery pack is sold for $300 per kw-hr and lasts for 1000 cycles, how much would that add to the cost of the electricity stored? It would add 30 cents per kw-hr! Yikes! This is a real problem. Batteries or any other kind of electro-chemical storage are unlikely to be able to store electricity economically (for broad usage) anytime soon. Please note the economics of batteries for vehicles are much different as they are competing with gasoline (about 40 cents per kw-hr usable at today's prices) and not line electricity.
Jim,
What if a new battery came that was good for 5000 or 10000 cycles for the same $300 per kw-hr. Now that 30 cents per hw-hr becomes only 6 cents or 3 cents added to line electricity. Perhaps tolerable. Some battery people are working on improving charging life cycles an order of magnitude better than current Li-Ion.
Maybe we won't get any breakthrough, but we had better hope we do because we're going to need it for electric vehicles if not the power grid.
Bob,
As I said earlier, the economics of vehicle energy storage are quite different than grid storage. (Which is a big reason why V2G is probably nonsense except in specialized cases.)
Also, any battery breakthrough which would make renewables more attractive would also make nuclear more attractive as well, though perhaps in a more muted sense, as nuclear is already reliable, non-seasonal, relatively inexpensive, etc.
FWIW, I don't really "like" nuclear either, but my reasons are a bit foggy and not a little paranoid. I think, in theory, renewables COULD displace both coal and nuclear, but it would be a tough road indeed involving both huge infrastructure changes and greatly reduced energy use by people. I think if we actually went down that path a bit, my "fog" about nuclear power would clear up and I would feel better about it.
Sorry JIm, but it sounds to me like you are agreeing with certain people who mistakenly believe that renewables can be substituted for nuclear.
I'm becoming more radical than ever on that point, or maybe fanatic is the right word. The more I study this thing the more I become convinced that there is no reason why it is impossible to put a reactor in operation in 3 years - from ground break to grid power, to quote Len. Of course, reactors will have to be constructed the same way that they construct Boeings, or ships in WW2, but so what. This will be possible when there are sufficient orders.
I respect very much your radical or fanatical believe that "that renewables can not be substituted for nuclear." Think hard that we don't know what the future will bring us. So that believe should play out as a predetermine element in the two or three plausible scenarios. I have two questions for you.
1) What if one of the scenarios includes that politics say NO on the usual grounds.
2) So try to fully test your believe, Do you agree that this could be done under the EWPC-AF to enable a leveled playing field? That is, to open the power industry to innovation in renewables? The EWPC-AF is meant to enable a competitive and fully functional retail and wholesale markets for private parties that invest to try to share ALL of their risks in the open market to compete with renewables. No subsidies allowed for nuclear as a mature industry.
Truth is, 3 or so years ago I was far more concerned about the future of electrical generation than I am now. What's changed that is "tight gas". It appears from here that so much gas resource is available to N America at such low prices over the next few decades that I have a hard time envisioning any dramatic shifts in direction for N American ganeration development. The same appears to hold for Mid-East and Russia. So I forsee two divergent energy directions for areas included above vs. areas not included. Definitely adds interest.
However, Nat Gas GHGs emissions are lower as a resource of the demand side. That means that the EWPC-AF basic innovation is even more valuable in those areas.
Prof. Banks. Of no relevance to the above discussion. I am interested in your reaction to a quote from an article in the current Scientific American July 2009 pp 78, in an article titled "The Science of Bubbles and Busts". The author Gary Stix quotes Andrew Lo, professor of finance at MIT, as saying "Economists suffer from a deep psychological disorder I call 'physics envy'. We wish that 99% of of economics behaviour could be captured by three simple laws of nature. In fact, economists have 99 laws that capture 3% of behaviour. Economics is a uniquly human endeavour and, as such, should be understood in the broader context of competition, mutation and natural selection -- in other words, evolution."
I thought it both humerous and relevant to the present economic crisis in the light of neo-conservative economics.
Also ref my post above, perhaps I was over-confident of tight gas resources. US presently consumes 23 tcf / yr. At that rate, 600 tcf resporces of tight gas will only last less than 25 years. Assuming all other resources might add 1/2 again as much, that's still less than 40 yrs. Not exactly comfortable. We should be switching away from it now, but I know too much about how markets work to hope for that.
Len, I saw that item in Scientific American and immediately tuned out. I dont pay any attention to the good Prof Lo, because his approach to financial economics is exactly the opposite of mine. You may be familiar with the absolutely brilliant book 'A Random Walk Down Wall Street', well Lo and somebody wrote a book or paper called 'A non-random walk down Wall Street', or some street. I mention this in my finance book, and my conclusion is that the man simply doesn't know what he is talking about. He thinks/thought that he can put together some econometric equations that will tell the chumps what shares to buy. Well, Bernie Madoff had some ideas along that line too, he said.
My advice Jose is to stay away from the - timely or untimely - genius of Dr Lo. And by the way, when I talk about not being able to substitute various things for nuclear I am strictly thinking about Sweden, where both the government and voters seem to have lost it.
Fred
I like to understand what's in your mind to see if I agree with you about the EWPC-AF relationship to systems dynamics, which is not mentioned in your post.
I don not see the logic of your argument about Dr. Lo, the follower, not the leader, of Systems Dynamics. You are writing about Dr. Lo econometrics performance instead of his performance on systems dynamics.
Is that logic supporting that M.I.T. should fire Prof. Lo for incompetent while using Systems Dynamics or what?
I see that the Swedish scenario is at the moment not plausible.