Terrific idea and great explanation. However, I couldn't help but chuckle at this idea "the company could offer voluntary subscription services for customers who want to pay for wind and solar while keeping costs lower for those who don’t." While it would be a perfect indicator of the conviction by those who advocate most strongly for the transition, I would wager that essentially zero customers would sign up for the subscription.
Yes but that only matters when they pay the electricity bill not when they have a job which allows them manage the electricity supply for others e.g. In the United Kingdom we have government (national & local) & medium to large businesses voluntarily pay more for electricity for specialist renewable tariffs instead of finding the lowest cost electricity deal.
Many utilities already offer such a subscription service. I don't want to pick on Rocky Mountain Power, but they call their voluntary subscription service the "Blue Sky Program". You have to smile at this subscription service adopting the traditional euphemism for an investment without underlying substance.
I vaguely remember something like the “voluntary subscription services” being available when I lived in the Houston, Texas suburbs. Since you got to pick your retail power provider, some providers offered options emphasizing wind and solar. They weren’t anything that interested me, and they tended to be more expensive based on my usage, but if that was someone’s thing, they could put their money where their mouths were.
Great article once again guys...er, bad boys. A month ago I testified before the Wyoming Senate regarding rising utility costs, and was asked to make some recommendations. Something I pointed out in my recommendations was that a potential tool for tamping down rising costs to consumers already exists in those states which specify "used and useful" in their PSC enabling legislation as a means of deciding if rates are "just and reasonable."
Let's suppose a utility approves the construction of a wind plant that can be expected to provide a 10-15% capacity factor during typical times of high demand. When the subject of rates comes up in a later hearing the PSC could allow all O&M costs and full depreciation over the life of the plant, but when it comes to figuring out rate base, perhaps only a fraction of the plant could earn the full 7-8% rate of return -- in other words make a rate base that eventually reflects a weighted average of true usefulness to rate payers.
I think the "used and useful" tool is already available for this purpose. Unfortunately "used and useful" has traditionally applied to assets that utilities have acquired for future expansion, like land, and which presently are not used and useful. However, assets with poor utililization are used and useful in much the same negative way. Thus, this new tool it simply needs a PSC with the courage to use it, or maybe they just need a full understanding that these new energy generating facilities are not at all like traditional thermal assets.
This is very interesting. Basically the same premise which makes sense because we’re not the only people thinking about these problems. Thanks for sharing and feel free to share this article with lawmakers who might find it useful!
This is an excellent idea for vertically integrated utilities that build their own generation. However there are a number that have divested their generation assets and by energy off the market via a bid structure. This includes PG&E, SCE, and SG&E, some of the highest cost utilities in the nation. What is the proposal for these utilities? It appears that AEP is following a similar model.
Now to "whisper in the ear" of your favorite Federal Congressperson or State or County and have them draft the legislation for this common sense regulation of utilities and take it to a vote. Chance, slim to none, as money corrupts almost everybody!
"the Only Pay for What You Get Act. This legislation would protect electricity customers by only allowing utilities to earn a profit on the reliable portion of a power plant."
Excellent proposal! Hopefully a bill like this will soon be legislated.
It seems to me that the problem with our electricity grids has more to do with electricity market designs than any technical issues. In traditional vertically integrated markets, utilities are paid a guaranteed rate of return on their capital investments and volumetric charges to cover their variable costs. The market in this case incents utilities to over invest with the potential downside of higher prices, but with the potential upside of better availability. In the restructured markets (no market is deregulated) generators become part of the dispatch stack for a variety of reasons. Some plants have minimum run times or minimum start up times, some are must-take resources (such as run-of-river hydro), and some generation is obtained through bilateral contracts.
Most of the remainder of the generation is obtained through security-constrained economic dispatch in merit order (see “The value of economic dispatch. A report to Congress pursuant to section 1234 of the energy policy act of 2005” for some details). Merit order means dispatching the generator with the lowest marginal cost (i.e. variable cost) first. Wind and solar have effectively zero marginal costs so they are always dispatched if they are available. Restructured markets suffer from the possibility of a race to the bottom dues to prices that can incentivize under investment in generation. In theory capacity markets or an operating reserve demand curve (Texas) are deployed to provide resource adequacy.
All US electricity markets suffer from some or a significant amount or market distortion from such things as subsidies or renewable mandates. Since many energy markets span multiple states, that can impose different mandates, the actions in one state can affect markets in another state. See “Understanding the Interaction between Regional Electricity Markets and State Policies Nicholas Institute for Environmental Policy Solutions” for more details.
It think the solution described in this Substack is how to improve availability in verticality integrated markets which probably suffer less from underinvestment in generating capacity than the restructured markets.
Electricity markets don’t function like other markets. I live in Minnesota where winters can be cold. Retailers, such as Target, have to decide how many winter coats to stock on their shelves at the beginning of winter. If the winter is warm, such as this winter, coats pile up and Target has to run a sale to clear the excess inventory in the spring. If the winter is colder than expected, shortages can appear. If one too many or one too few winter coats are on the shelves to handle customer demand, the entire Target store does not “crash”. Inventory is flexible. This is not the case for electricity. If the supply of electricity does not exactly equal the demand for electricity at every second of every day, the entire grid could go down. The electricity market operates on a hair trigger.
Most markets (outside of healthcare) provide price visibility to customers. If I want piano lessons or lemons for dinner, I can see the price and react accordingly. For many of us, we are presented with a flat electricity charge regardless of the state of the grid. I see the same price in a late spring day when I am not running my heater or air conditioning, when I might be grilling out rather than cooking on my stove, and when there is light enough that I don’t use much indoor lighting as when it is 30 below and dark in December. The demands on the grid are different but I don’t have any price signals to tell me that.
I also don’t see qualitative differences either. Someone buying a car has to make a choice as to the types of qualities they need or want. Do they need a pickup with towing capacity? Do they need a high millage car such as a Toyota Prius? Do they want a sports car or a luxury car? Do they want a car with high reliability? A car buyer can see the different prices for these different kinds of cars and decide what they want. In my electricity market, I can only see an average price. I can’t choose qualities of services such as availability. I can’t pick nuclear and coal vs. wind and solar.
I wonder if we made distribution utilities responsible for obtaining all their capacity through bilateral markets and make them responsible for availability would this help? Would there be a technical way for me to pick the distribution utility of my choice (with the qualities of service I want) and if there is load shedding event (i.e. rolling blackouts) those people who picked a distribution utility that did not prioritize availability would be the only ones to suffer from blackouts where those that did pick perhaps a higher cost, but more available generators see no blackouts? Right now we are doing a limited amount of this as some people can afford, or are allowed to have, backup generators. I would rather have the grid be my backup generator than to have to buy and maintain one of my own.
Thanks for the input, John. Eliminating subsidies and mandates for renewables would go a long way. No matter how one shapes the market, these distortions will continue to act on them - though some are definitely better than others.
How does this square with grids in deregulated states like NY. Only transmission and distribution are subject to Rare of Return regulation. Solar and wind still enjoy significant tax incentives which distort the market making it uneconomical for dispatch-able generators to compete. The Production Tax Credit can allow wind to bid $0.00/kWh and pocket the credit
That’s correct. The PTC makes these markets hard for dispatchable generators to survive. I’m not sure out idea would work in areas where generation isn’t vertically integrated
This is an interesting idea, but I am not sure how this would work for energy sources that generate base-load and can load-balance intermittents or peak consumer demand. For example natural gas and hydro. In those sources of energy, the utility determines the amount of electricity that is generated, not the technology.
Here are four different scenarios:
1) You could, for example, use Combined Cycle Gas Turbines or hydro as base-load which would have a capacity factor of 90+%.
2) You can also use CCGT or hydro to cover increased consumer demand in the late afternoon and early evening. That would lead to a much lower capacity factor, as it is not used for much of the day.
3) You also those same technologies to load balance wind and solar. Again that leads to a low capacity factor, but that is caused by the inefficiencies of wind and solar.
4) You could also use some blend of 1, 2, and 3 together.
This flexibility is a tremendous asset to the electrical grid that no other technologies can perform, but anything other than scenario #1 would cause a lower capacity and hence a lower rate. I would think that we would want to incentivize technologies that can quickly react to changes in electrical supply and demand.
Or perhaps, I am just misunderstanding your proposal...
Hi Michael, you’re exactly right that basing the rate of return on generation would disadvantage dispatchable generators. Thats why we use capacity value, which is how much capacity is assumed will be available during periods of peak demand as our metric for utility profits. We may need to edit the piece to elaborate on that further.
I am not quite sure what “how much capacity is assumed to be available” means.
Does it mean “Can this energy source be used to generate electricity at this point in time even if it is not actually necessary to do so?” So shut downs due to maintenance and repairs would reduce capacity, but deliberately choosing not to use it due low demand would not, correct?
If so, then both natural gas and hydro would have an assumed capacity factor of 90+% just like coal and nuclear. If that is what you mean, then it might work.
And, by the way what is the +15 BILLION "storage" for, and how effective is this "storage" ie. how long does it provide power when the grid is endangered by power shortages? Numerous electrical and climate "reality" authors have pointed out the fallacy and mind boggling costs of this so called storage - Robert Bryce, Cfact, CEI, GWPF etc.
Aligned incentives of producers and consumers is the path to success in any market. Especially with consumers willing to pay for the value they receive. Eg. My smartphone or my new car.
Unfortunately, the electricity system has been set up, intentionally or otherwise, to relegate the consumers interests to the goodwill of others or the ballot box.
Neither offers much defence against politicians or corporations ruthlessly pursuing their interests, in a game that appears more and more set up to allow them to do so.
Your suggestion is in the right direction - finding a way to reward cheap, boring, reliable power over the long term.
The big hurdle is that your suggestion goes against anyone pushing a wind or solar agenda. Which covers the President down to the local utility administrator.
Perhaps the answer lies in reassessing the basic assumption that having more than one set of power lines to your house is a non-starter economically. It’s what allows others to capture the system and play their game.
Thanks Tim. It's a huge hurdle. At some point common sense has to enter the conversation again, (hopefully before another major blackout event occurs). When that happens, we're hoping policies like Only Pay can be part of the solution.
This is an intriguing idea, but please explain how the model would work for a public utility. In Nebraska, all utilities are "publicly-owned," meaning (ostensibly) that profit is not included in the rate. Unfortunately, one of those utilities is infatuated with wind and solar, to the point of threatened blackouts this past winter.
Legislation was introduced in our Unicameral this year that required a utility, when replacing generation, to replace it with dispatchable energy or equal or greater capacity. Unfortunately, late session "politics" (a euphemism for ass-kissing) managed to delete "dispatchable" and replaced the language with a requirement for an optional public hearing, with no requirements for quality of energy. not exactly a win for customers, just more virtue signaling and window dressing.
What controls do regional transmission organizations have over member utilities? Can an RTO dictate the need to replace dispatchable power with dispatchable power? Structuring rates according to capacity value makes the most sense of anything now in use, and would likely make California's rates prohibitive, with Texas a close second. I worry that midwest states like Nebraska, Iowa, and Minnesota that have wind will become America's Pin-Cushion Belt.
Terrific idea and great explanation. However, I couldn't help but chuckle at this idea "the company could offer voluntary subscription services for customers who want to pay for wind and solar while keeping costs lower for those who don’t." While it would be a perfect indicator of the conviction by those who advocate most strongly for the transition, I would wager that essentially zero customers would sign up for the subscription.
I thought the folks would like that. The voluntary signups for programs like that in MN are a very small portion of the customer base.
Virtue signaling is much easier on Twitter than when you have to pay for it
Yes but that only matters when they pay the electricity bill not when they have a job which allows them manage the electricity supply for others e.g. In the United Kingdom we have government (national & local) & medium to large businesses voluntarily pay more for electricity for specialist renewable tariffs instead of finding the lowest cost electricity deal.
Many utilities already offer such a subscription service. I don't want to pick on Rocky Mountain Power, but they call their voluntary subscription service the "Blue Sky Program". You have to smile at this subscription service adopting the traditional euphemism for an investment without underlying substance.
I vaguely remember something like the “voluntary subscription services” being available when I lived in the Houston, Texas suburbs. Since you got to pick your retail power provider, some providers offered options emphasizing wind and solar. They weren’t anything that interested me, and they tended to be more expensive based on my usage, but if that was someone’s thing, they could put their money where their mouths were.
Our electric utility actually tried this. The response was predictable - meh. I think they quietly discontinued it.
Wonderful idea. I can see it in Galt’s Gulch. Now if I could only find Galt’s Gulch.
Everyone there will have the free power from static electricity engines!
(Head slap). But of course!
Great article once again guys...er, bad boys. A month ago I testified before the Wyoming Senate regarding rising utility costs, and was asked to make some recommendations. Something I pointed out in my recommendations was that a potential tool for tamping down rising costs to consumers already exists in those states which specify "used and useful" in their PSC enabling legislation as a means of deciding if rates are "just and reasonable."
Let's suppose a utility approves the construction of a wind plant that can be expected to provide a 10-15% capacity factor during typical times of high demand. When the subject of rates comes up in a later hearing the PSC could allow all O&M costs and full depreciation over the life of the plant, but when it comes to figuring out rate base, perhaps only a fraction of the plant could earn the full 7-8% rate of return -- in other words make a rate base that eventually reflects a weighted average of true usefulness to rate payers.
I think the "used and useful" tool is already available for this purpose. Unfortunately "used and useful" has traditionally applied to assets that utilities have acquired for future expansion, like land, and which presently are not used and useful. However, assets with poor utililization are used and useful in much the same negative way. Thus, this new tool it simply needs a PSC with the courage to use it, or maybe they just need a full understanding that these new energy generating facilities are not at all like traditional thermal assets.
This is very interesting. Basically the same premise which makes sense because we’re not the only people thinking about these problems. Thanks for sharing and feel free to share this article with lawmakers who might find it useful!
This is an excellent idea for vertically integrated utilities that build their own generation. However there are a number that have divested their generation assets and by energy off the market via a bid structure. This includes PG&E, SCE, and SG&E, some of the highest cost utilities in the nation. What is the proposal for these utilities? It appears that AEP is following a similar model.
My plan for California is to pump seawater into the San Andreas fault until Nevada and Arizona are coastal states. I got nothing for Ohio 🙃
Bahahaha 🤣🤣
Now to "whisper in the ear" of your favorite Federal Congressperson or State or County and have them draft the legislation for this common sense regulation of utilities and take it to a vote. Chance, slim to none, as money corrupts almost everybody!
We have draft legislation. I should have mentioned that. Will add now
"the Only Pay for What You Get Act. This legislation would protect electricity customers by only allowing utilities to earn a profit on the reliable portion of a power plant."
Excellent proposal! Hopefully a bill like this will soon be legislated.
It seems to me that the problem with our electricity grids has more to do with electricity market designs than any technical issues. In traditional vertically integrated markets, utilities are paid a guaranteed rate of return on their capital investments and volumetric charges to cover their variable costs. The market in this case incents utilities to over invest with the potential downside of higher prices, but with the potential upside of better availability. In the restructured markets (no market is deregulated) generators become part of the dispatch stack for a variety of reasons. Some plants have minimum run times or minimum start up times, some are must-take resources (such as run-of-river hydro), and some generation is obtained through bilateral contracts.
Most of the remainder of the generation is obtained through security-constrained economic dispatch in merit order (see “The value of economic dispatch. A report to Congress pursuant to section 1234 of the energy policy act of 2005” for some details). Merit order means dispatching the generator with the lowest marginal cost (i.e. variable cost) first. Wind and solar have effectively zero marginal costs so they are always dispatched if they are available. Restructured markets suffer from the possibility of a race to the bottom dues to prices that can incentivize under investment in generation. In theory capacity markets or an operating reserve demand curve (Texas) are deployed to provide resource adequacy.
All US electricity markets suffer from some or a significant amount or market distortion from such things as subsidies or renewable mandates. Since many energy markets span multiple states, that can impose different mandates, the actions in one state can affect markets in another state. See “Understanding the Interaction between Regional Electricity Markets and State Policies Nicholas Institute for Environmental Policy Solutions” for more details.
It think the solution described in this Substack is how to improve availability in verticality integrated markets which probably suffer less from underinvestment in generating capacity than the restructured markets.
Electricity markets don’t function like other markets. I live in Minnesota where winters can be cold. Retailers, such as Target, have to decide how many winter coats to stock on their shelves at the beginning of winter. If the winter is warm, such as this winter, coats pile up and Target has to run a sale to clear the excess inventory in the spring. If the winter is colder than expected, shortages can appear. If one too many or one too few winter coats are on the shelves to handle customer demand, the entire Target store does not “crash”. Inventory is flexible. This is not the case for electricity. If the supply of electricity does not exactly equal the demand for electricity at every second of every day, the entire grid could go down. The electricity market operates on a hair trigger.
Most markets (outside of healthcare) provide price visibility to customers. If I want piano lessons or lemons for dinner, I can see the price and react accordingly. For many of us, we are presented with a flat electricity charge regardless of the state of the grid. I see the same price in a late spring day when I am not running my heater or air conditioning, when I might be grilling out rather than cooking on my stove, and when there is light enough that I don’t use much indoor lighting as when it is 30 below and dark in December. The demands on the grid are different but I don’t have any price signals to tell me that.
I also don’t see qualitative differences either. Someone buying a car has to make a choice as to the types of qualities they need or want. Do they need a pickup with towing capacity? Do they need a high millage car such as a Toyota Prius? Do they want a sports car or a luxury car? Do they want a car with high reliability? A car buyer can see the different prices for these different kinds of cars and decide what they want. In my electricity market, I can only see an average price. I can’t choose qualities of services such as availability. I can’t pick nuclear and coal vs. wind and solar.
I wonder if we made distribution utilities responsible for obtaining all their capacity through bilateral markets and make them responsible for availability would this help? Would there be a technical way for me to pick the distribution utility of my choice (with the qualities of service I want) and if there is load shedding event (i.e. rolling blackouts) those people who picked a distribution utility that did not prioritize availability would be the only ones to suffer from blackouts where those that did pick perhaps a higher cost, but more available generators see no blackouts? Right now we are doing a limited amount of this as some people can afford, or are allowed to have, backup generators. I would rather have the grid be my backup generator than to have to buy and maintain one of my own.
Thanks for the input, John. Eliminating subsidies and mandates for renewables would go a long way. No matter how one shapes the market, these distortions will continue to act on them - though some are definitely better than others.
How does this square with grids in deregulated states like NY. Only transmission and distribution are subject to Rare of Return regulation. Solar and wind still enjoy significant tax incentives which distort the market making it uneconomical for dispatch-able generators to compete. The Production Tax Credit can allow wind to bid $0.00/kWh and pocket the credit
That’s correct. The PTC makes these markets hard for dispatchable generators to survive. I’m not sure out idea would work in areas where generation isn’t vertically integrated
This is an interesting idea, but I am not sure how this would work for energy sources that generate base-load and can load-balance intermittents or peak consumer demand. For example natural gas and hydro. In those sources of energy, the utility determines the amount of electricity that is generated, not the technology.
Here are four different scenarios:
1) You could, for example, use Combined Cycle Gas Turbines or hydro as base-load which would have a capacity factor of 90+%.
2) You can also use CCGT or hydro to cover increased consumer demand in the late afternoon and early evening. That would lead to a much lower capacity factor, as it is not used for much of the day.
3) You also those same technologies to load balance wind and solar. Again that leads to a low capacity factor, but that is caused by the inefficiencies of wind and solar.
4) You could also use some blend of 1, 2, and 3 together.
This flexibility is a tremendous asset to the electrical grid that no other technologies can perform, but anything other than scenario #1 would cause a lower capacity and hence a lower rate. I would think that we would want to incentivize technologies that can quickly react to changes in electrical supply and demand.
Or perhaps, I am just misunderstanding your proposal...
Hi Michael, you’re exactly right that basing the rate of return on generation would disadvantage dispatchable generators. Thats why we use capacity value, which is how much capacity is assumed will be available during periods of peak demand as our metric for utility profits. We may need to edit the piece to elaborate on that further.
I am not quite sure what “how much capacity is assumed to be available” means.
Does it mean “Can this energy source be used to generate electricity at this point in time even if it is not actually necessary to do so?” So shut downs due to maintenance and repairs would reduce capacity, but deliberately choosing not to use it due low demand would not, correct?
If so, then both natural gas and hydro would have an assumed capacity factor of 90+% just like coal and nuclear. If that is what you mean, then it might work.
This might help https://leap.sei.org/help/Transformation/Capacity_Value.htm#:~:text=The%20capacity%20value%20is%20defined,reflecting%20their%20lower%20average%20availability.
And, by the way what is the +15 BILLION "storage" for, and how effective is this "storage" ie. how long does it provide power when the grid is endangered by power shortages? Numerous electrical and climate "reality" authors have pointed out the fallacy and mind boggling costs of this so called storage - Robert Bryce, Cfact, CEI, GWPF etc.
Exactly, batteries will not solve the reliability and cost issues associated with wind and solar.
Aligned incentives of producers and consumers is the path to success in any market. Especially with consumers willing to pay for the value they receive. Eg. My smartphone or my new car.
Unfortunately, the electricity system has been set up, intentionally or otherwise, to relegate the consumers interests to the goodwill of others or the ballot box.
Neither offers much defence against politicians or corporations ruthlessly pursuing their interests, in a game that appears more and more set up to allow them to do so.
Your suggestion is in the right direction - finding a way to reward cheap, boring, reliable power over the long term.
The big hurdle is that your suggestion goes against anyone pushing a wind or solar agenda. Which covers the President down to the local utility administrator.
Perhaps the answer lies in reassessing the basic assumption that having more than one set of power lines to your house is a non-starter economically. It’s what allows others to capture the system and play their game.
Thanks Tim. It's a huge hurdle. At some point common sense has to enter the conversation again, (hopefully before another major blackout event occurs). When that happens, we're hoping policies like Only Pay can be part of the solution.
https://open.substack.com/pub/richardnielsen/p/what-is-energy?r=1o5l1g&utm_campaign=post&utm_medium=web&showWelcomeOnShare=true
Nice!
This is an intriguing idea, but please explain how the model would work for a public utility. In Nebraska, all utilities are "publicly-owned," meaning (ostensibly) that profit is not included in the rate. Unfortunately, one of those utilities is infatuated with wind and solar, to the point of threatened blackouts this past winter.
Legislation was introduced in our Unicameral this year that required a utility, when replacing generation, to replace it with dispatchable energy or equal or greater capacity. Unfortunately, late session "politics" (a euphemism for ass-kissing) managed to delete "dispatchable" and replaced the language with a requirement for an optional public hearing, with no requirements for quality of energy. not exactly a win for customers, just more virtue signaling and window dressing.
What controls do regional transmission organizations have over member utilities? Can an RTO dictate the need to replace dispatchable power with dispatchable power? Structuring rates according to capacity value makes the most sense of anything now in use, and would likely make California's rates prohibitive, with Texas a close second. I worry that midwest states like Nebraska, Iowa, and Minnesota that have wind will become America's Pin-Cushion Belt.