Brennan, Electricity 101 – MPPI: Annapolis, MD March 20, 2008 1 Electricity 101: Understanding Maryland's Electricity Market Tim Brennan Professor, Public Policy and Economics, UMBC Senior Fellow, Resources for the Future [email protected]Maryland Public Policy Institute Annapolis, MD March 20, 2008
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Brennan, Electricity 101 – MPPI: Annapolis, MD March 20, 2008 1 Electricity 101: Understanding Maryland's Electricity Market Tim Brennan Professor, Public.
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A few “Electricity 101” basics• Separate wholesale and retail markets
– Wholesale: Bulk energy delivered over high voltage transmission lines to “load serving entities” LSEs (including local utility)
– Retail: The market in which end users choose their LSE
• Supply must equal demand at all times– Too expensive to store– Capacity has to be in place to meet demand at any instant– Top 15% in place used during only 60 extreme peak hours– A problem with “non-dispatchable” sources, e.g., wind
• It’s all one big grid– One failure to meet demand can bring down the system– It’s not like cars – reliability is a collective enterprise
“Electricity Regulation” 101: The wires are regulated• Local distribution
– Don’t need multiple providers digging up the streets– Rates regulated by MD PSC
• Long distance transmission– Nominally separate lines, BUT …– Transmission interconnected into three big “interties” –
Eastern, Western, and Texas– Electricity takes all paths – why it is one big grid– FERC sets rates, access policies, rules for wholesale
markets
• Generation/transmission separation the wholesale issue– Fear of discrimination against entrants– FERC defines “Regional Transmission Organizations” – Functional, full, or no separation? Coordination vs.
Non-storable: What prices should users see?• Why electricity’s non-storability matters
– 15% of use during 60 extreme peak hours, less than 1%– Have to recover those costs in less than 1/100th time– Extreme peak prices can be 50 times normal price
• Case for allowing “smart metering”– Time of day, seasonal pricing only partial solution– Need ability to monitor use, tie to prices
• Focus smart metering on C&I– Enterprise benefits exceed costs of metering
• Political alternative: Pay not to use– Give people $1/kwh for electricity not used at extreme
Do consumers make wrong decisions …• Could result in excessive consumption
• First explanation: Insufficient information– Information on net savings from energy efficiency, e.g.,
CFLs– Is there really an information shortage? Internet, TV, etc.– Perhaps for residential, less so for C&I (worth finding
things out)– Real uncertainty regarding payoff—will energy prices stay
up?
• Second explanation: Do buyers/consumers not make self-interested decisions?– Often assumed on the policy end– But consumers may have quality preferences, e.g., CFLs– Judgment over validity of preferences for energy-intensive
consumption
• Economists lean toward giving people “right prices”
… or do the utilities make us do it? “Decoupling”• Claim that we consume to much because utilities
encourage consumption
• Rationale for “decoupling” utility revenues/profits from amount we use – The utilities make money the more we use– Take away the profit, they won’t encourage us to use as
much
• A few cautionary notes– Any evidence that utilities influence demand away from
what is in the consumer’s interest (given the right prices?)
– The relationship to wholesale price probably drives utility marketing efforts more than
– Deregulation blamed for Isabel repair delays because utilities weren’t getting profits from generation. Will decoupling help?
• Reallocating—not even reducing— a small fraction of overall energy use can have a big effect on reliability, prices– 15% of use during 60 extreme peak hours is about .2% of
overall annual use
• Big reliability gains obtainable at far less than 15%
• Leaves aside environmental reasons for reducing use
• But main reliability questions wholesale– Transmission grid operation– Transmission/generation separation– Control vs. competition