PEN-L message, Re: [Pen-l] smart grid question

The smart grid may go a long way to facilitate pricing misbehavior and "cooperation" and collusion among power providers.

If by "Enron-like pricing" you mean the pricing scheme that brought California blackouts and bancrupt utilities, yes, we will see that kind of pricing. The idea that economists promote and that utilities and independent power producers embrace is a single "real time" price. What economists have in mind is that the price will be the cost of production of the most expensive unit brought on to supply the marginal or peak unit. This is typically the cost of a once-through combustion turbine, i. e. inefficient techology with a high heat rate (lots of BTUs to produce a kiloWatt hour.) But most of the power being produced for the grid at that moment is coming from the other plants, efficient base-load plants, including hydro and nuclear, with very low running cost.

In other words, the AVERAGE cost of production at the time of the peak is much lower that the marginal cost. To price all kWhs at the marginal cost results in large profits on each kWh sold at that price. And of course the profits will be even larger if plants are withheld from running from time to time so as to drive the marginal cost even higher. Peak Load Pricing or Real Time Pricing is a dream the Chicago types have been pushing for years.

What I am arguing is that the "real time price" is not some definite price, determined by physics rather than system operators. The peak period price can certainly, for public benefit reasons, be set high -- but this must be a regulated price, not determined by "the market."

I would say one more thing about Peak Load Pricing/Real Time Pricing. The world's problem is HOW MUCH energy the customers use, it is not WHEN they use it. We need to focus on reducing how much and forget the fascination with the peak.

If utilities were to set the peak period price without regulatory supervision it would be high and then the revenues would be used to subsidize process industries like oil refineries, cement plants, etc. so as to have a load in the middle of the night for the nuclear and other high capital cost units.

Hans wrote a couple of paragraphs that he said he wasn't sure about and to correct him if he were wrong. I disagree with much of what he says there. I would just say that many of the good things Hans envisions do not need the smart grid. Utility control over switching household appliances on and off has been around for a long time -- i.e. that technology doesn't need the smart grid.

Finally, I don't see the utilities dragging their feet on the smart grid, in fact they are a powerful force behind it. Rolling billions of new meters into the rate base and earning a generous return on it with little risk is very appealing to utilities. And they are doing it. I'll paste below a bit of a story from the June 5, 2009 Dallas Morning News sent to me recently be a Texas friend. California utilities are trying to deploy billions of dollars in investment in new, unneeded meters, as are other utilities around the country. I do not have a URL for the Dallas story but can send a copy directly to those that want it -- off list.

Gene Coyle

On Jun 7, 2009, at 6:45 PM, Michael Perelman wrote:

How much will a smart grid facilite Enron-like pricing?
--
Michael Perelman
Economics Department
California State University
Chico, CA 95929

Tel. 530-898-5321
E-Mail michael at ecst.csuchico.edu
michaelperelman.wordpress.com
_______________________________________________
pen-l mailing list
pen-l@xxxxxxxxxxxxxxxxxx
https://lists.csuchico.edu/mailman/listinfo/pen-l