Reef Industries

Decades of Disconnect

Proper pricing is important

By Gerald Sheble

For any company’s survival, the proper pricing of electric energy has to include future expenses. Using marginal pricing ignores future expenses and constant expenses. Pricing without including all expenses is offering “tidbits today to offset the megatons of tomorrow’s profits.”

Enter the Third Parties/Following Proper Price Signals

Transactive energy (TE) is another step in reregulation. The source for the regulatory and financial viewpoints expressed here are from a January 2016  Advanced Energy Economy (AEE) webinar, “What Does it (Really) Take to Modernize the Grid?” [the webinar presented overviews on regulatory and financial perspectives, and participants were Lisa Frantzis, AEE moderator; Audrey Zibelman, New York State Public Service Commission (NYPSC); James Tong, Spruce Finance; and Michael Ferguson, Standard & Poor’s], the articles within this issue, and previous “In My View” columns. The aim of TE, prototyped in New York, is to satisfy grid neutrality tenets: consumer empowerment, the commons, risk rewards, transparency, and open access. The lure of the Internet of Things has extended to all appliances, and transportation, distributed storage, and distributed generation (DG) is similarly explosive. The inclusion of demand response (DR) and DG are not news.

The headline should be “NYPSC moves from monopoly to third party for new project funding.” The intent is to use price signals better, react to customer demands for environmentally sustainable resources, and less risky solutions when compared to coal (subject to pollution) and nuclear power (subject to long-term storage). The NYPSC desires a response to climate change, to reach 50% renewable energy by 2030, and have markets support fuel diversity based on proper price signals. It is noted that customers want an environmentally sound grid. The goal is to enable nonutility finance to offer advances from which the customers could choose. The financial goal is a reduced price to customers compared to the present price trajectory. It is hoped that utilities should see third parties as an advantage just as Apple feels that companies providing apps are a benefit.

The financial viewpoint centered on the trends within the industry and which utilities are responding to those trends. The financial industry notes that there is a move to a decentralized grid, more renewable resources, more natural gas (especially by micro turbines at residences), that an intermittent grid exists due to congestion and to other ­ancillary service contracts, and that risks need to be mitigated locally. The financial view is that markets are aware of these economic forces, new market participants are responding, market-based transmission is changing the grid, and the credit for reliability to resources on the supply and demand side.

Renewables are the main concern for the traditional utility from the ­financial viewpoint. The new environmental rules and the cost, making traditional units a must for reliability, is questioned. How long can distributed resources rely on tax credits? Improvements in battery storage heighten the viability of local storage, dramatically improving reliability. The financial key variables include the cost of battery storage, environmental rules, state/regional rules and policies, the impact of commodity pricing volatility and trends, the speed of decentralization, and the impact of energy efficiency especially at the demand end.

The sense is that infrastructure chang­­es are cheaper than continuing with the status quo over time (an implied real option analysis) as change is inevitable in a global economy. The transition cost is expected to be more expensive as
one waits.

The perception is that many states are going with grid neutrality, especially DR and DG inclusion as demonstrated in many states such as Texas, New York, and California. It was noted that the European market is expanding as Germany plans to sell excess DG to the market.

The financial sector expects regulatory reform due to new markets. Thus, a higher risk is perceived when one is waiting, and a significant risk of overbuilding is present. Stranded costs may not be recovered as utilities are moving slowly and not responding to the customer (voter). They expect penalties in the future as lagging companies, none seen as proactive, are compared to proactive ones that are making progress, even when the economy is down. The focus is on commodity prices as investors will not tolerate that risk not for much longer.

The financial sector notices that participants (customers) are forcing regulators to change and that there is the need for a reliability foundation, the ability to support business risk analysis in the markets. The global economy demands a low energy price for the United States to be competitive.

Key Questions

Are distribution system operators (DSOs) to be a new corporate entity with all of the same services as an independent system operators (ISOs)? Why duplicate central services? Should DSOs be an extension of an ISO? Are the markets separate from the wholesale markets? It seems that TE can ­simply be the second side of the double-sided wholesale market.

We should estimate the cost of this transition and the time to savings to society for these expenditures. Is the cost for the prototype as stated? Is there a transitional path that would be more economically efficient? I also would offer that the implementation would take a very long time as many states do not wish to reregulate. Many have not done so, and there is no mandate that they must do so.

The expansion of the California Independent System Operator Energy Imbalance Market to include Oregon and Washington is another market for TE participation. Will TE include EIM?

The other major hurdle is the building code that allows almost all cities to condemn and seize homes that are “off the grid.” Homes from which the power meter has been disconnected within the last four years have been seized. The loss of city tax re­­venue is large when meter readings decline. The building codes are standardized across the United States. Many public-service utility com­­missions are raising rates for homes with solar cells, especially the roll back in Nevada that has caused a political backlash. Not only are customers picketing, but solar companies are shutting down. The governor now has to justify that Nevada is “business friendly” and the need for jobs. This is turning out to be a city-by-city legal battle. Will these be extended to net meters registering zero consumption?

Implementing these systems may well increase stranded costs for distribution capacity. How is this to be paid? The last buyout was and is a major contention. The present political drive, to not follow establishment rules, has shown momentum not expected nor monitored. Such issues have spread to the utility industry.

Previous Questions Remain Relevant

I include paraphrased excerpts and ideas from some of my earlier magazine columns to give examples of the subjects in focus. These show the span of ­disconnection. These particularly address demand side management (DSM), DR, and customer representation.

“Disputing Deregulation: Is Industrial Disorganization on
the Rise” (January/February 2006, pp. 16–22)

Deregulation was renamed as restructuring. Restructuring is still obviously incomplete. FERC and state public utility commissions (SPUCs) have struggled to redefine horizontal industrial reorganization. Basic questions were posed at each level: customer, distribution, transmission, and generation. Many have not been finalized. Who does this? Who does that? Who pays? Who is paid? Who monitors? Who verifies? Who levies fines? Who collects fines? Who arbitrates between companies? And that’s only the “who” questions! Similar “what,” “where,” “when,” and “how” questions are not answered. There are prohibitive price tags for each potential answer. Transparency is now the key to regulations.”

I still opine that all of the various markets used from the stock and bond markets through the labor and operating expenses markets must be factored into the price.

“Forward to the Past: Envisioning the Future Energy Industry” (July/August 2009, pp. 16–25)

The implementation of thermal districts for heating and cooling was extensive during the early utility stages, such as in New York City. The use of steam systems for neighborhood heating was a common practice before the plants were sited remotely. Will TE include such combined heat and power projects?

Fred Schweppe patented and analyzed a DSM device to provide blackout avoidance. Schweppe’s “frequency adaptive, power-energy rescheduler” (FAPER) patent details a device that turns an appliance off if the frequency or the voltage is too low. Will TE include such devices through contracts?

DSM was very su­ccessfully applied for frequency control (AGC) in Florida and for load balancing using thermal storage in New Brunswick. Should these be included with TE?

“Demand Is Very Elastic! Which Grid Is Best” (March/April 2011, pp. 14–20)

DSM has been on the agendas of many SPUCs. Many utilities bought meters and control devices with the large ­communication infrastructure to comply with SPUC orders to implement or to test DSM. Is this TE?

Will deferred capacity, already committed, be economically justified under new rate regulations? What will the new tariffs be after abandonment of present capital expenditures? Can such tariff increases be afforded by the ­customers in today’s economic environment?

Closing Opinion

Proper price signals depend on all expenses rolled in from all resource as well as financial markets over the product expected lifetime. The market price should be an “expected average” price subject to Porter’s five forces. Most consumers want increased energy commodities in the future, especially electric energy. The need for more electric energy is very clear. The primary question is if the present industrial structure is the best for the future. If not, what structure is and what is the cost to get there?

In my view, government should ­regulate under a uniform ­commercial code with rules within a given time line. Offering tidbits to offset the megatons of future profits cannot change ­corporate directions, objectives, or ­responsibilities.