President Obama and Secretary Chu need to learn urgently about the deadly sin of the smart grid that state regulators are making, that is leading to a huge Greek Tragedy. Politics as usual will keep “… generating a legacy bubble that will explode with a stimulation package that will not transform the power industry at all.”
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The Deadly Sin of State Regulators
on the Smart Grid
By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity
EWPC Systems’ Architect
First posted in the GMH Blog, on July 5, 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.
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The huge Greek Tragedy in the making with the smart grid development is a typical case that has “an unprecedented number of interdependent risks,” such as The Egg Basket deadly sin of the flaw of averages, as Sam Savage, Stefan Scholtes, and Daniel Zweidler explain in their article Probability Management, as reprinted by the IEEE Engineering Management Review, Vol. 37, No.2, Second Quarter 2009. The authors write:
Consider putting 10 eggs all in the same basket, versus one by one in separate baskets. If there is 10-percent change of dropping any particular basket, then either strategy results in an average of nine unbroken eggs. However, the first strategy has a 10-percent chance of losing all the eggs, while with the second there is one chance in 10 billion of losing all the eggs.
That is the huge kind of interdependent risks that state regulators are taking on the smart grid projects under the IOUs Architecture Framework (IOUs-AF) with all the eggs on the basket. As the reengineering revolution show that 75 percent of projects were not successful, the Greek Tragedy in the making has spoken. The situation gets even worst at jurisdictions where the artificial profit decoupling incremental extension of the IOUs-AF is also being considered.
Under the EWPC Architecture Framework (EWPC-AF), retail markets business model competition (not all the eggs in one basket), there is such a low expected probability of failure, which enables the development of business model innovations that better understand and satisfy customers’ needs. Under the EWPC-AF, natural decoupling is set by natural selection of competitive market survival, as customers are able to choose.
Now I have more on the IOUs-AF architecture flaw, courtesy of Mr. James Carson, as he returns to comment and as I keep paying close attention to what he writes. In response to the EWPC article COMPETE Coalition to Stop a Huge Greek Tragedy in the Making, where after it is clearly shown to him that IOUs are indeed entrenched, Mr. Carson responded not about the Greek Tragedy, nor the COMPETE Coalition, which is where he stopped, and try to rationalize by saying:
Frankly, I stopped because you weren't paying any attention to my posts. I should have stopped long ago when you posted the details of the EWPC transformation were unimportant.
As readers can confirm once again, I pay lots of attention to the comments I receive. But as it happens, Mr. Carson is a master at selecting what he wants out of the context. As can be seen under the EWPC article Just as Pogo, IOUs Found the Enemy, this was the context he selected:
EWPC centers its attention in the essential systemic elements of the transformation. This is what I wrote on another EWPC article, which also explains the flaw of wholesale deregulation: We should forget the details, and focus just on the essence.
He then he picked just the last sentence out his own chose context. But, to explain the flaw of deregulation, as a systems architect I only needed to look at the essence as follows:
The IOUs-AF architecture flaw, introduced as early as the enactment of the 1992 Energy Policy Act (a common and very costly architecting error introduced by the IOUs lobby to extend the obsolete IOUs-AF), was based on inactive external demand, which in turns allow the assumption of inactive distribution, for IOUs to keep what they considered to be their “native loads.” It is that flaw, which enabled the development of a great legacy of open transmission access and organized wholesale markets, which have produced a huge unnecessary and costly amount of details and unnecessary investments that are bound to be worth nothing in the future.
In fact, under the EWPC-AF, demand is active and so is distribution. It is with the development of the resources of the demand side, that demand becomes elastic and gets integrated to power system planning, operation, and control, enabling a least costs development of the integrated transmission and distribution grid. That is why under the EWPC-AF, retail and wholesale markets mutually reinforce each other to enable a virtuous circle of value creation that will let regulators get back to their original job of doing almost nothing.
Smart Grid would be OK for somewhere in the future.
Why do not think about cheaper and efficient regulation by local/customer energy storage. For example mechanical, electrical or magnetic with God willing.
We have good examples from force coming Storage Week, La Jolla, CA.
You write that "Smart Grid would be OK for somewhere in the future." The problem is that a lot of work is being done right now for DOE to use stimulus money to finance it starting next year.
The EWPC-AF considers local storage as one of the six disruptive technologies that need to be tightly integrated to produce a virtuous circle similar to the one the power industry had before the 70s, in which the now obsolete business model of winning rate cases to the regulator was great, as year after year, rates were reduced, and when customer and regulators were very happy had almost nothing to do.
If the organizers of Storage Week, La Jolla, CA., would like a presentation about the EWPC-AF, please have them contact me at javs@ieee.org .
Even this article evidences severe ignorance on your part about the US power markets, a point I have hammered many times. What do you think that Chu and/or Obama can do about states' recalcitrance? Nothing whatsoever. Everybody knows that, except you.
Believe or not, there are important details that need to be understood by President Obama and Secretary Chu in order for them to develop priorities to distribute a stimulus fund that reduces the risks that States regulators can take to help avoid the deadly sin. As Most of the value creation of the Smart Grid will be in the development of the resources of the demand side, to follow Jeanne Liedka's advice, value creation is found in the marketplace and not by analysis that is used to make huge bets.
I repeat from the next to last EWPC article that "The 'massive' Greek Tragedy change effort (not a real transformation that is here to stay) will fail as a result of the fatal 1992 architecture flaw of the IOUs-AF. The IOUs-AF has been extended it way beyond its useful life (trying to fix the flaw, with capacity markets, NERC mandatory requirements, etc.), with organized wholesale markets based on said architecture flaw that is generating a legacy bubble that will explode with a stimulation package that will not transform the power industry at all. If the COMPETE Coalition does not act fast to shift its course, its members will need to pay the early obsolescence rates of the Greek Tragedy that will make many of their firms uncompetitive."
For those reasons, the market discussion details should concentrate on business model based on regulated or competitive Enterprise Solutions, independent of the existence or not of retail competition by First Generation Retailers (1GRs). For customers that have no access to 1GRs, profit and sales decoupling has been enacted or planned to be enacted at some jurisdictions increases the risks even more.
The deadly sin that leads to the Greek Tragedy is centered on Utilities' Enterprise Solutions (UES), which are still based on the obsolete business model of winning rate case to the regulator. The UES gives an unfair advantage to incumbent entrenched IOUs which that will be able to add to the rate base failed IOUs Smart Grid UES investments.
Under EWPC-AF, there is business model competition based on their Retailers' Enterprise Solutions (RES), which will not add to the rate base of the wires only Smart Grid Transportation utility. As total RES risks are infinitesimal, the marketplace will enable business model innovations that will make State regulators jobs very simple, as it used to be before 1970.
Thank you very much Jesse for sending me this timely article.
I suggest that instead of being a great opportunity to keep incrementally extending the Investor Owned Utilities (IOUs) Architecture Framework (IUOs-AF) with in home displays, this is the right time to start the Retailers' Enterprise Solutions business model competition that replaces the obsolete monopolistic business model of IOUs winning rate cases to the regulator. I suggest that DOE should aim the stimulus fund to the States that are able to adopt the Electricity Without Price Control (EWPC) Architecture Framework, as described in the EWPC Blog ( www dot energyblogs dot com/ewpc ).
The synchronicity with which Control4 and the EWPC Article "The Deadly Sin of State Regulators on the Smart Grid" have emerged, should be the basis to say so long IOUs-AF.
Best regards,
José Antonio
Very interesting comment made by Jesse: "I agree with your comment on the long-term trend to distributed resources (DR, generation and storage)." The long term trend is one of the key requirements missing under the Smart Grid incremental extension of the IOUs-AFI, which is being restricted to demand integrated to power system operations and control, but not to power system planning, which requires a shift from the IOUs-AF to the EWPC-AF.
Under EWPC, DR and Generation and Storage are disruptive technologies that need to be tightly integrated with other disruptive technologies, such as Energy Efficiency, which is also very important for the long term, to be able to enable maximum social welfare. The Second Generation Retailers (2GRs) of the EWPC-AF will be responsible for the coordination of the development of the resources of the demand side to help power system expansion long term system adequacy requirements. That is in addition to the short term system security that is already being addressed.
I picture market segments for competitive 2GRs which include competitive HEMS as one of the disruptive technologies. I disagree, however, that IOUs should "pay" for HEMS that will be added to the rate base that may become wasted by the Greek Tragedy of early obsolescence. I believe that business model competition in the open market will do a much better job of enabling business model innovations.
Dr. Vanderhorst-Silverio, I am trying to follow your logic when you say "The Second Generation Retailers (2GRs) of the EWPC-AF will be responsible for the coordination of the development of the resources of the demand side to help power system expansion long term system adequacy requirements."
The chain of modifiers is pretty long and it is difficult to get a handle on what your trying to convey. So the 2GRs are responsible for:
1. coordinating
2. coordinating what? - the development of the demand-side resources
here is where I start to loose you -
with an objective of:
3. helping ... something - don't really get your "something".
Is it helping (a) the elicitation, formation, and codification of system requirements to assure adequacy of operation, or (b) long-term system planning, or both?
Thank you very much Bruce for a good question.
I am using a comment made by Toby Considine, who wrote on March 2008 this (I extracted part of it) about the EWPC Article Missing From Gridwise:
Quote Begins. Many on the GridWise side start out with a control orientation, a continuation of the load limiting approaches most recently in the news in California's short-lived thermostat proposals. As they work the problem, and become more aware of the complexity and diversity of the problem, they inevitably migrate more toward an agent-based approach. (Someone, I think it was Apperson Johnson, once said, "an agent is an object that can say no!").
Eventually these agents have to be able to negotiate around the issues of scarcity and value; and of the desires of their owners. Such complex negotiations cannot be handled at the control level, but only at the economic level. This will push things toward the EWPC model. My view of the GWAC is that they are trying accelerate that realization and that transition. Quote Ends.
Christine highlighted the complex negotiations that cannot be done at the control level. 2GRs will be enabling the complex coordination negotiations at the economic level, because customers' investments on disruptive technologies are interdependent. Power system expansion planning will the take into account not only supply, but also demand. I forgot to mention that under the IOUs-AF, demand is still considered an externality, but no so under the EWPC-AF.
Hi Barry,
About integration under the IOUs-Af and the EWPC-AF to respond to Christine's point above: Unlike the IOUs-AF, the EWPC-AF will provide tight integration one stop retail shopping to promote business model competition to open the power industry to innovation in retail markets. The EWPC-AF will price integrated whole offering with the traditional electric service plus a combination of energy efficiency (EE), demand response (DR), distributed energy (DE) and other innovative services (IS) options that best meet the customers needs and improve the customer experience.
As can be seen under the must read Martin Rosenberg's post Holy Cow - Have You Checked Out D O E ??? (please hit the link http://www.energyblogs.com/rosenberg/index.cfm/200... ), by writing "Jose: What exactly do you propose that Obama and Chu do?," James Carson has now changed his opinion (see above) that said: "...What do you think that Chu and/or Obama can do about states' recalcitrance? Nothing whatsoever. Everybody knows that, except you." With all due respect, thank you very much James!
As Chris Dreibelbis, the Communications and Economic Policy Director at the Reform Institute, a nonpartisan public policy organization working to strengthen the foundations of our democracy and build a resilient society, has written an also must read post "Gr8 Expectations (please hit the link http://www.energyblogs.com/ReformingAmericanEnergy... )," in which he concludes that "Leaders need to make viable plans and start engaging the public."
Writing about the critical expectations, Mr. Dreibelbis said that "Achieving these goals will require significant change in the global energy regime, which in turn will necessitate people the world over to change their energy consumption habits. Getting people to make the requisite sacrifices will not be easy." It is very clear that the obsolete IOUs-AF is completely unfit for a viable plan that engages the public. That is another reason to say So Long IOUs-AF.
Under the EWPC-AF, the leading institution that will engage the public to change the culture is the Second Generation Retailer (2GR, please hit the following link http://grupomillenium.blogspot.com/2007/07/second-... ), which "... will price integrated whole offering" described under the post So Long IOUs-AF Part IV above. To achieve such critical expectations, it is required that 2GRs operate independently from, and compete with, central station generators in the wholesale markets.
That is what President Obama and Secretary Chu should be working with the States and other global leaders to be able to meet the critical expectations.