Benjamin Franklin is known for his saying “A penny saved is a penny earned.” Given Franklin’s fondness for frugality and his precarious kite-flying experiments with electricity, I’m sure he would agreed as well that “A kilowatt-hour saved is a kilowatt-hour earned.” Although most traders and power markets don’t quite see it this way, PJM – the US’s largest Regional Transmission Organization (RTO) managing 163,500 MW of generating capacity over 56,350 miles of transmission lines—recently announced plans to move towards Benjamin Franklin’s vision.
In order to maintain adequate generation capacity on the electrical grid, PJM runs an annual capacity auction (called the Reliability Pricing Model) to pay new power plants to simply show-up and commit to selling their power into PJM’s grid regardless of whether those plants are actually dispatched during the year. This process began in 6/1/2007 and although the results of the auctions are complicated by the various pricing locations across PJM’s 13-state territory, the capacity auction can clear at roughly $60/kW per year of capacity to be paid each year over a 4-year period.
Franklin would argue (as do I), “If PJM will pay me $60 to commit a new kW of supply, why wouldn’t they pay me that same $60 to reduce a kW of demand of equal reliability?” The answer is that starting in PJM’s 2009 RPM, they will. (See p. 91 of link). PJM has allowed demand response resources to bid into the RPM since the auction began. But they are just beginning to allow energy-efficiency to participate as well. To qualify, energy efficiency projects must represent permanent base-load reductions in electrical usage, must not already be include in PJM’s load forecast, and must include a measurement and verification (M&V) plan to demonstrate that the savings were actually realized. It is unclear, however, exactly which conservation assumptions are included in PJM’s current load forecast. For example, much of the federal stimulus plan funds weatherization and energy efficiency programs. Were these considered in the PJM’s forecast? If so, could these efficiency projects collect both stimulus funds and RPM funds? PJM will need to clarify their definitions of “additionality” and free-ridership.
PJM is not the first RTO to pay an equal market price for efficiency and supply. In February 2008, the New England ISO allowed energy efficiency to bid in their capacity auction referred to as the Forward Capacity Market. To the surprise (and dismay of the generators bidding), nearly 18% of all new “capacity” was purchased from energy-efficiency resources (see figure). Combined with demand response resources, demand-related resources accounted for over 65% of all of the 1,814 MW procured by the 2008 Forward Capacity Market. The figure below shows the breakdown of these resources. (Data adapted from ISO New England Forward Capacity Market Presentation). When supply and demand resources are both given an equal footing, past markets have clearly shown a preference for efficiency and other demand side resources which can typically be deployed more rapidly, more reliable, eliminate the need for a reserve margin (i.e. 1MW of demand savings “counts” as 1.09 MW of avoided supply with a 9% reserve margin requirement), eliminate all associated emissions, avoids complicated siting/NIMBY issues, and provide better press than new coal plants. I think Franklin would be pleased to see our energy markets slowly becoming more “healthy, wealthy, and wise”.
Our efforts to reduce carbon emissions will undoubtedly utilize many different strategies. Pacala and Socolow of the Princeton Environmental Institute first illustrated the concept of stabilization wedges in 2004, in which they identified a desirable CO2 emissions rate and prescribed various existing technologies we can use to achieve emissions reductions (1). The wedge concept reiterates the important, and sometimes overlooked idea, that a diverse array of technologies and practices are necessary, and that we should emphasize the use of existing technologies to make emissions reductions. One of the wedges I would like to discuss is the Efficient Building wedge, specifically lighting as it is the lowest hanging fruit of them all.
The inefficiency of incandescent light bulbs is well known; about a 5% efficiency with the rest wasted as heat. Many countries have passed regulations to phase out incandescent bulbs, Australia, Brazil, Switzerland, U.S. (by 2014), and recently the EU (by 2012). The substitute lighting of choice for the majority of residential and commercial applications are CFL's. Lasting 10 times longer than incandescents (10,000 hrs) and using 75% less energy, CFL's will greatly reduce energy use and carbon emissions(2). But why stop there?
The promise of cost competitive light emitting diodes (LED's) may be closer. LED's boast even greater energy efficiencies and life spans (45,000 hrs) than CFLs, but up to this point have been prohibitively expensive. Recent production breakthroughs, noted in the latest Economist, may greatly reduce the cost of LED's. The breakthrough involves using cheaper silicon wafers instead of expensive sapphire-based wafers. Using silicon wafers means a lower cost for materials, and a production process that can utilize more economical 6 inch wafers and more common fabrication equipment(2).
The potential future energy savings of switching to LED's has been noted by the DOE. They estimate that LED's can reduce the electricity demand of lighting by half and avoid adding 130 new power generation facilities. DOE's Next Generation Lighting Initiative, started in 2003 and funded through 2011 with $450 million, sole objective is to "research, develop, and conduct demonstration activities" "based on white light emitting diodes" (3). The goal is to make LED's cost competitive with incandescents and CFLs, while maintaining desirable lighting qualities, by 2011. Identified by DOE as a major obstacle to meeting this goal is the cost of materials and manufacturing. Perhaps the recent production breakthrough is on their radar, and hopefully the commercialization of these LEDs is not far off. It would be ideal for LED commericialization to take place during the lighting replacments now mandated, instead of a second lighting renessiance further down the road.
Decisions related to investments in the general energy industry are complicated by the large capital requirements, volatile operating expenses, varying time-scales, uncertain technologies, uncertain (or absent) values for externalities, and a web of non-aligned decision-makers.As we discussed on Thursday, it’s no surprise, then, that the electric utility industry is going through a process of deciding exactly what business they want to be in.
This is not a new discussion and many different revenue models have been explored.Thomas Edison’s original 1882 power plant on Pearl Street in New York was built not to sell electrons, but rather sell the service of light, and thus benefit from the ever-improving technologies that convert electrons to lumens (i.e. light).Over the past two decades, electric utilities (which often have a monopoly to sell electricity within a given service territory) and the regulatory bodies (typically state public utility commissions) that govern these potentially dangerous monopolies have explored various “decoupling” models where the revenues (or profit) of the utility are not simply “coupled” to either the amount of electricity they produce or power plants they build.After all, as Edison astutely noticed, nobody really wants electrons or power plants, but rather the services that they enable.
Organizations like The Regulatory Assistance Project have done a great job in teaching various decoupling “tools” and regulatory structures to both utility companies and their regulating bodies.Only six states currently have decoupled electric utilities, but presentations like this by Wayne Shirley help spread the benefits of these more aligned structures.Progressive utilities such as PG&E (CA) and Duke Energy (NC) have embraced this change (see appendix here). PG&E will receive a regulated return of 9% or of 12% on all capital spent on saving energy if they achieve 85%-100% or >100% (respectively) of the targeted energy savings goal set by their regulatory body (the CPUC).They receive zero return on these funds if they meet less than 85% of this savings target.Duke has proposed their “Save-a-Watt” incentive mechanism that allows them to recover 90% of the customer’s avoided costs (levelized over the life of the investments) on money they spend on saving energy.
These business models have not been limited to regulated utility industry.A $3.6 billion industry exists in the US where firms install energy-efficient equipment for customer at no cost (See Chuck Goldman’s regular over view of the ESCO industry).A “performance contract” allows these firms to recoup their capital plus profit over time based on the savings generated.During the late 90’s, I worked at Enron Energy Services where we invested over $250 million dollars in energy-efficiency projects because their levelized costs (as well as the associated option value based on volatile commodity prices) was less than the Enron’s forward commodity curves that showed the “market value” buying energy.To my knowledge, this was the first time the supply-side and the demand-side were valued as economic substitutes based on real-time markets.
But let’s return to this post’s opening statement.The primary concept expressed is clearly that our energy future is rooted with uncertainty.In a highly uncertain environment, one may best achieve robustness (i.e. an ability to survive frequent perturbations) by focusing on core capabilities rather than a clearly defined business model.Metaphorically, the craftsman may not know what type of house is required nor how he’ll be paid, but proficiency in hammering, sawing, bricklaying, and painting will serve him well.Therefore, I therefore pose the question, “What core capabilities will best position an existing electric utility for the future?”
Traditionally, a utility may have stated their mission as “bringing safe, reliable, and low-cost electricity to our customers.”These mission statements have evolved to include broader ideas around environmental externalities, trade-offs, economic development, and even quality of life.To fulfill such ambitious missions amidst the uncertainty of our energy future, the electric utility must excel at four primary capabilities.Electric utilities must be experts at:
Energy Conversion:Traditionally a utility may have included “energy generation”.I broaden this capability to an expertise in all energy conversion.This more abstract expertise includes understating the broad portfolio of energy decisions and knowing when and how to substitute a demand-side solution for a supply-side solution.From a supply and demand perspective, improving the energy conversion of lighting equipment from 50 lumens/watt to 100 lumens/watt should be given equal (arguably more) attention than improving the conversion efficiency (or heat rate) of a natural gas generator.
Energy Delivery:The logistics of delivering energy (be it natural gas, liquid fuels, or power) is a substantial task.In addition to the traditional delivery model, the broader energy delivery capabilities of the future include distributed generation and demand response as well.Sometimes the lowest-cost solution to delivering power behind an overloaded substation would be to add distributed generation such as solar photovoltaics.Energy delivery will include securing and delivering intermittent wind power to customers at distance load centers or may include remotely dimming lights, shutting off pool pumps, and raising set-points on air conditioners to match supply resources and demand loads over a “smart grid”.Energy delivery also means an ability to deliver energy efficiency.During California’s energy crisis of 2000, they leveraged their existing infrastructure for delivering energy efficiency to allow them to reduce their peak load even further.
Risk Management:Originally, risk management focused on safety and reliability.These aspects hold true today without doubt.However, electric utilities are managing a portfolio of highly uncertain solutions over long time periods.The price paths of oil and natural gas over the last six months are proof of this challenge.Risk management should broaden to include the value of externalities (e.g. carbon).Finance theory must quantify the impact of correlated risks (i.e. covariance) in a portfolio of energy systems as well as the true option values of perpetual rights to turn-off loads or use stored power from plug-in hybrids to “firm-up” intermittent wind.Of course, in an environment post 9/11 and post Katrina, systems with concentrated points of failure will simply appear silly.
Stakeholder Service:Since traditional utilities were regulated monopolies, their primary “customers” were not the real customers (i.e. end-users), but rather their regulators.Going forward, utilities will need to be increasingly responsive to customer needs and understand the needs of a diverse and growing set of stakeholders who include state/federal regulators, environmentalists, technologists, suppliers, R&D groups, and employees.
Over the next decades, the electric utility industry will undergo substantial change matched only, perhaps, by that when Westinghouse’s AC model beat out Edison’s DC model in the late 1800’s during the “War of Currents”.Regulators will likely experiment with various business models and the costs of generating CO2 will likely change the traditional competitive landscape.However, if utilities can excel at the four capabilities discussed above, they will be well positioned to provide a fundamental enabler to our safety, prosperity, and society.
I recently bought 2 new 500 GB external harddrives, which brings my total number of individual external drives to 7, for a grand total of 2,480 GB of external storage space, entirely filling up one-and-a-half power strips.
As we have discussed in class, servers and computer equipment are taking an increasingly large bit out of the net energy consumption of homes and businesses. As computers become more sophisticated and performance and speed become increasingly important, servers and storage become hotter and more energy-intensive.
Now, the EPA and DOE have entered the scene, instituting a voluntary program to improve energy efficiency for enterprise servers and storage devices. Read the article here.
Though this is an important step in the right direction, a voluntary program represents an insufficient approach and mindset to a real burning issue. Durable goods that consume electricity for years should be subject to mandatory efficiency limits. As is the case with many environmental programs, market based or mandatory programs yield superior results than voluntary programs like this one.
