The Grid, Part III: The dream of deregulation

Here’s a useful article about how electricity deregulation happened in the US and what the different terms mean. (What’s an ISO?)

In Defense of Electricity Markets (Austin Vernon)

This long blog post is very pro-market but also has some interesting detail about what's happened recently:

The Southeast and much of the West still use vertical monopolies. The process is ongoing - many utilities in the West will join Southwest Power Pool in the next few years. Monopolies still own the distribution system that delivers electricity to your home everywhere.

The slow evolution and need to preserve reliability means markets are a mashup of rules. Technical debt is rife, and many rules aren't well suited for new generation sources like solar or batteries - or sometimes even natural gas.

Many wonder if we should even use electricity markets! I will explain how technology is improving markets, allowing for the deployment of low-cost but inflexible resources, and increasingly checking monopolies through competition.

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Storage is the traditional solution to supply and demand inelasticity. Many US utilities with nuclear power plants built pumped hydro storage. Operators fill the reservoir at night when demand is low and drain it to produce electricity during the day. Both supply and demand become more flexible because the storage unit buys when there is too much electricity generation and sells when there isn't enough. The US has roughly 30 gigawatts and 300-gigawatt hours of pumped storage (batteries are close to the power rating but still a few years from matching the storage).

Today, battery capacity is growing because its cost has fallen dramatically. Texas's grid operator, ERCOT, has 100 gigawatts of battery storage in its interconnection queue. 85 gigawatts is ERCOT's demand record. A small portion of that capacity would eliminate fretting about cold nights or summer evenings.

Batteries can shift daytime solar supply to evening or store excess nuclear power at night. They also simplify the operation of natural gas power plants. In California, Texas, South Australia, etc., thermal power plants ramp as the sun sets and solar production falls. That ramp is challenging, and the need to have all the gas power plants run at once stresses operators and the natural gas delivery system. Batteries can handle the ramp instead. Gas plants can run steadily all day to charge batteries for the evening supply if the supply is short. They have fewer starts, need less maintenance, and reduce their peak impact on gas delivery infrastructure.

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Reducing the need for power line upgrades is a bigger market. It isn't uncommon for utilities to make upgrades because a power line exceeds capacity a few hours per year. Batteries located near customers can charge during the night and reduce stress on the line during peak hours. They are typically a fraction of the cost of an upgrade. The same battery can still provide frequency and load shifting while it isn't needed to offset peak distribution demand. These "extras" mean batteries can bid lower to arbitrage daily prices and still make money.

Green Mountain Power is a smaller utility that wants to do this by installing batteries in homes.

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California is experimenting with programs to reduce peak demand on summer afternoons and evenings. One of the primary programs subsidizes efficiency and time-shifting demand. The critical feature is that home efficiency contractors get paid by performance, measured by a home or business's digital electricity meter. These programs previously paid by "modeled" savings, which are much easier to game. Now contractors are hunting down houses in the Central Valley with old, inefficient air conditioners or putting LED lights in stores that stay open during the evening. The program also allows payments even if electricity use increases (like from replacing a gas furnace with a heat pump) as long as demand decreases during critical periods. A solution like this is less pure than subjecting customers to severe market prices, but it does reduce counterparty risk and short-termism from owners and renters.

Improving building performance may be one area that could justify an influx of government subsidies because the politics of electricity supply failure during extreme events are toxic. The after-effects will almost certainly make market design worse. For instance, Maine wants citizens to switch from oil heating to air-source heat pumps. Ground source heat pumps cost more but might use ~1/4 of the power in the worst cold snaps. Peak demand would be much more manageable than with air-source heat pumps. Another example is homes with resistive electric heaters in Southeast Texas. Pushing these homes to more efficient air-source heat pumps would reduce the stress cold snaps put on Texas's grid.

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An alternative view of ERCOT's reliability woes during [winter storm Uri] could be that the grid was uniquely vulnerable to extreme winter weather as it shifted away from coal to gas/wind but before significant amounts of batteries came online. Texas's lack of connections to the wider US grid also hampered its ability to import electricity. Other market structures with high natural gas market share without many batteries are also vulnerable to load shedding, as seen with Elliot. Energy-only markets deserve more consideration, especially with rapid supply additions and load growth.