Renewables Dis-integration?
This post is co-authored with Duncan Callaway.
Ahhhh Hawai’i, where the waves are big, the beaches are long, and the renewable energy ambitions are large:
Source Source
As you may have heard, Hawaii has set a goal of 100% renewable energy penetration by 2045. This is pushing the Aloha state to the bleeding edge of renewable energy integration.
We were lucky enough to spend our spring break at a conference hosted by our colleagues at the University of Hawaii. Although the focus of the conference was on the integration of renewables into the grid, there was lots of talk about possible dis-integration.
Living off-grid might seem like a pretty out-there idea. It’s true that, in the past, “grid defection” has been limited to survivalists and bohemian-types who can get excited about living like this:
Source
But with solar PV and storage costs falling relative to conventional grid-supply systems, the economics of grid defection are changing fast. And off-grid living is not what it used to be:
A Hawaii developer is planning a 410-home project that would become the first off-grid community of this magnitude.
If grid defection takes hold, this would take concerns about stranded assets and utility death spirals to a whole new level. Grid dis-integration is a development we should be paying attention to.
The economics of grid defection
Let’s start by distinguishing a grid defector – the subject of this blog- from a load defector (that’s you if you have PV panels on your roof).
“Grid defectors” are consumers who fully disconnect from the grid and supply their electricity needs with their own power generation. “Load defectors” remain grid-connected, but get some fraction of their electricity from a source other than their incumbent utility. Importantly, load-defecting solar PV customers continue to rely on grid services. They draw power when demand exceeds their solar supply, and inject surplus generation when there’s excess supply.
The economics of solar PV load defection already pencil out in many places (even the Kentucky Coal Museum!). For many consumers (the US passed the 1 million solar PV installation mark last year), net bill savings appear to exceed private investment costs. This is partly due to falling PV technology costs. But it’s also thanks to retail prices that can significantly exceed the variable costs of supplying electricity, net metering policies, and other subsidies. For example, the graph below shows how Hawaii’s residential prices per kilowatt hour (kWh) reflects not only the variable costs of generation (green line), but also a substantial amount of fixed cost recovery (black line). When a net metered solar customer generates her own power, she avoids paying the sizeable fixed cost component that was being collected through her volumetric payments for electricity.
Source: This graph shows the average residential electricity price in Oahu. The green line measures the generation component (fuel costs and costs of buying energy from independent power producers). The black line measures non-fuel and fixed costs.
The economics of grid defection are more complicated. If you want to unplug from the grid AND maintain the same level of reliability and power quality, you’ll need to make investments in a battery (or a backup generator) in addition to PV. In 2014, analysts at the Rocky Mountain Institute estimated that an off-grid PV-battery system would average about 80 cents/kWh in Hawaii. The graph above shows how 80 cents/kWh is still a long way from grid parity.
We’ve made some updated calculations with an eye towards rapidly declining solar PV and storage costs (with the help of Berkeley graduate student Jonathan Lee). The graphs below show just how fast PV and battery prices are falling.
Solar PV source: Tracking the Sun IX Battery source: https://www.bloomberg.com/news/articles/2017-01-30/tesla-s-battery-revolution-just-reached-critical-mass. While the battery figure shows costs for EV batteries, these cost reductions carry over. It’s been estimated that over 18 months in 2015 and 2016, grid-connected battery system costs fell 70 percent.
Without getting too far into the weeds, we use a moderately aggressive scenario for solar and storage costs ($0.40/W for solar panels, $100/kWh for batteries), plus a host of other assumptions for system installation costs. We estimate that a stand-alone system would cost about 30 cents per kWh (assuming less than an hour a year of supply shortage). This is within the range of residential electricity prices in recent years (see above graph)… and that’s before accounting for state and federal incentives.
That grid defection could actually be cost-effective may seem inconsistent with everything you thought you knew about economies of scale in electricity generation. It’s true that generation costs per kWh are lower when electricity is generated at utility-scale, versus on your rooftop. The catch is that, as solar PV and storage costs fall, the additional cost associated with generating and storing electricity on a smaller scale could be more than offset by the transmission/distribution/retail service costs you can eliminate with a decentralized system.
If PV and storage costs get low enough, it could become more efficient to start grid dis-integrating (versus making additional investments in grid infrastructure). This is a mind-bending concept for those of us accustomed to thinking that the grid simply can’t be beat.
Stranded assets of the future?
Preparing for grid dis-integration?
Renewable energy developments in Hawaii can read like postcards from the future. Hawaii has been on the forefront of the distributed solar revolution, with PV penetration exceeding 15 percent on some islands. The state was the first to shut down net metering in response to costly solar load defection. Today, Hawaii is anticipating the next challenge that is grid defection.
Economists prescriptions for dealing with inefficient load defection emphasize cost causation: set real-time per-kWh prices at true variable costs. But there’s a hitch. When rates are set to recover real-time marginal costs, revenues can fall far short of total system costs. These residual fixed/sunk costs have to be recovered somehow.
If there’s no risk of grid defection, there’s room to be sloppy about recovering these residual fixed costs with some kind of fixed charge. But in a place like Hawaii, sloppy fixed cost recovery could lead to inefficient grid dis-integration in the not-so-distant future. So what’s the right way to recover sunk investment costs? Lumping them into customers’ fixed cost charges would lead to early/inefficient grid defection. Lumping them into per kWh costs has led to inefficient load defection. Exit fees could offer a solution. The socialization of cost recovery via general tax revenues has also been suggested. The jury in Hawaii is still out.
Grid defection may seem like a long way off for the rest of us. But the regulatory paths chosen in Hawaii’s renewable energy laboratory can inform decisions that the rest of the country will ultimately be confronted with. We’ll be watching this Hawaiian grid dis-integration story closely. And hoping to visit those long beaches and big waves again sometime soon.
Categories
Energy Institute Blog 
Part 1:
First, it is important to appreciate one of the services provided by the electric power grid is to provide the very high starting current for the motors in your refrigerator, freezer, washer, dryer, air conditioner, and HVAC systems for example. If a ratepayer wanted to go “off grid” they would need to supply this peak current. Thus, the minimum recommended power generation system size for an American home is 20 kiloWatts. The storage batteries will likely need to supply this amount of power for short intervals, even if the average demand is lower. The components will need to be more conservatively rated for 24/7 use, instead of the mere “standby” use for the natural-gas powered generator below:
Please search for the following product at the HomeDepot dot com website:
Generac Model # 7040 Synergy 20,000-Watt Air Cooled Variable Speed Standby Generator with Automatic Transfer Switch $5,189.00
The new lineup of home standby generators from Generac were created to save you money on installation while offering the same reliability and peace of mind you get from all Generac home standby generators. Features that simplify the process for our installers include removable door panels, a base pad that requires minimal ground preparation and more efficient wiring techniques that save time on installation. Generac’s synergy is a premium backup power solution that can protect your entire home. Unlike competitive units that run at a constant 3600 RPM, the Generac Synergy features patented G-Flex Technology that allows it to run at slower speeds when household electrical demand is light. The result is a home standby generator that is uncommonly quiet and exceptionally fuel efficient. Even better, the Generac Synergy can deliver cleaner power than competitive units – ideal for today’s sophisticated modern electronics and sensitive appliances.
Please review the practical, real-world information contained in the following 3 PDFs available in the product listing:
Full Product Manual
Installation Guide
Specifications
Part 3:
Here’s more details on the actual, instead of theoretical experience in Hawaii: (The articles may be located via a search engine.)
Hawaiian island to meet evening demand with 52MWh solar storage battery
By Andy Colthorpe, Storage PV Tech, September 10, 2015 12:14 PM BST
Hawaii co-op, SolarCity ink deal for dispatchable power from solar-storage project
By Gavin Bade, Utility Dive, September 10, 2015
website dot kiuc dot coop
Kauai Island Utility Cooperative (KIUC) is a not-for-profit generation, transmission and distribution cooperative owned by the members it serves. Headquartered in Lihue, Hawaii, the cooperative serves 33,000 electric accounts on the island of Kauai. KIUC is a nationally recognized leader in the use of renewable energy and is committed to using solar, biomass and hydropower to produce at least 50 percent of the island’s electricity by 2023.
KIUC’s news release archive chronicles the progress of this system from September, 2015 through March of 2017. It should be clear that Elon Musk’s SolarCity is subsidizing this demonstration project.
Hawai?i’s First Utility Scale Solar-Plus-Battery Storage System Is Energized on Kaua?i
Lihu?e, Kaua?i, HI – Contact: Beth Tokioka – 03/08/2017
__________
Gene Nelson, Ph.D., Central Coast Government Liaison
Californians For Green Nuclear Power, Inc. (CGNP)
1375 East Grand Ave, Suite 103 #523
Arroyo Grande, CA USA 93420
Liaison [at] CGNP dot org
CGNP is an independent pro-environment non-profit educational organization advocating for the continued safe operation of Pacific Gas & Electric’s Diablo Canyon Power Plant since 2013. We have been recognized by the IRS as a 501(c)(3) . We are also a CPUC Intervenor supporting nuclear power in California in CPUC Proceedings including A.16-08-006, among others.
Part 2:
The services of a licensed electrician is required such a power source. CGNP hopes that eventually such a system that generates emissions is subject to a carbon tax reflecting the social cost of carbon in addition to the fuel cost.
It should be obvious that the installation charges for a power source like this are significant. There are also operation and maintenance (O&M) costs, even for a solar powered system.
There are more problems. First, lithium power cells have a nasty habit of bursting into flame, since they have a flammable electrolyte. Usually, once one cell ignites, the others will follow as the fire is very difficult to extinguish. YouTube shows thousands of results for the search “lithium battery fire.”
Then, investigate the warranty for an example lithium power storage system, the Tesla PowerWall (R). The warranty for full power output is very short. The entire storage system will need to be replaced with a new energy storage system in about a decade.
Solar PV cells, the energy capture system typically employed in homes are warranted to last 20-30 years. Corrosion is the culprit. In coastal and marine environments, the lifetime may be shorter. Then, the Solar PV cells must be disposed of as hazardous waste, as constituents such as arsenic remain toxic forever.
I appreciate the candor of the authors when they mention the subsidies that are present with solar and wind. Taxpayers fund such subsidies via taxation systems that are regressive for those with lower incomes. However, the person that can afford such a energy generation and storage system presently is likely to already have accumulated wealth. Thus, there are further social equity issues. After reflecting on the services provided by the electric power grid, a term comes to mind for the typical homeowner who purchases a solar PV system with no storage: The term is akin to “freeloader” as they are not paying the real value provided by the grid to “store” their surplus energy and supply the high currents to start the motors in their residence.
Another problem is already encountered by the California Independent System Operator (Cal-ISO.) They call it the “Cal-ISO Duck.” Solar power is delivered during a peak that is only 5-6 hours wide on most days, centered around solar noon. The actual demand peak is in the late afternoon and early evening. For almost all parts of California, there is a large amount of supply ramping required, which is met by natural-gas-fired “peaker” plants with their ineffencies and emissions. Ratepayers with grid-connected solar should be paying for this ramping.
Actual battery-based utility-scale energy storage systems are too small for California by at least 3 order of magnitude.. The California Energy Commission notes that hydroelectric pumped storage is the only practical energy storage system. There are two large California pumped storage systems, Helms and Castaic. However, U.S. Energy Information Administration production data shows only modest use of Helms between 2003-2016 with annual capacity factors between about 0.8% and 5%. When Californians for Green Nuclear Power, Inc. (CGNP) requested the reasons for this modest capacity factor from Helms’s owner, Pacific Gas & Electric in connection with a current application for PG&E to abandon Diablo Canyon Power Plant in 2025, PG&E refused to supply this information.
Finally, ratepayers with solar PV systems, but no storage may think that their systems may be used in the event of a blackout. For the safety of electrical utility workers, the solar PV systems are designed to shut down if the Sun is shining and there is a blackout.
Part 1:
First, it is important to appreciate one of the services provided by the electric power grid is to provide the very high starting current for the motors in your refrigerator, freezer, washer, dryer, air conditioner, and HVAC systems for example. If a ratepayer wanted to go “off grid” they would need to supply this peak current. Thus, the minimum recommended power generation system size for an American home is 20 kiloWatts. The storage batteries will likely need to supply this amount of power for short intervals, even if the average demand is lower. The components will need to be more conservatively rated for 24/7 use, instead of the mere “standby” use for the natural-gas powered generator below:
Generac Model # 7040 Synergy 20,000-Watt Air Cooled Variable Speed Standby Generator with Automatic Transfer Switch $5,189.00
http://www.homedepot.com/p/Generac-Synergy-20-000-Watt-Air-Cooled-Variable-Speed-Standby-Generator-with-200-Amp-Automatic-Transfer-Switch-7040/300187324
The new lineup of home standby generators from Generac were created to save you money on installation while offering the same reliability and peace of mind you get from all Generac home standby generators. Features that simplify the process for our installers include removable door panels, a base pad that requires minimal ground preparation and more efficient wiring techniques that save time on installation. Generac’s synergy is a premium backup power solution that can protect your entire home. Unlike competitive units that run at a constant 3600 RPM, the Generac Synergy features patented G-Flex Technology that allows it to run at slower speeds when household electrical demand is light. The result is a home standby generator that is uncommonly quiet and exceptionally fuel efficient. Even better, the Generac Synergy can deliver cleaner power than competitive units – ideal for today’s sophisticated modern electronics and sensitive appliances.
Full Product Manual
Click to access ed47bb2d-7f0f-4f6a-8965-dd325697961a.pdf
Installation Guide
Click to access dd8eda29-3ab3-4bc7-aad6-946d9416e342.pdf
Specifications
Click to access 05b7ac0d-d9eb-4a97-89c3-ab904e862dcb.pdf
“Grid defection” often depicted, as here, as a binary choice: Be connected or not be connected. In fact, buying so many kWh from the grid can be an economic decision like buying so many gallons of oil or so many cubic feet of propane or natural gas. States like Massachusetts, with SREC plans, incentivize remaining connected to the grid, because if batteries are put ahead of solar generation, and the household is market-of-first-resort for solar generation, the facility is not eligible for SRECs. Whether it is because of diminishing returns from SREC plans or, in the absence of incentivizers, penalties for self-generation as are being imposed by certain states, these affect the economic decision of the PV-equipped home, essentially incentivizing them to use less grid. If the penalty is steep and binary, say $100 per month, that’s $1200 per year incentive to invest in more independence from the grid. How soon, at that level of penalty, before a third party begins to offer solutions to clusters of homes so they all can completely defect? What will be done then? Will such businesses be declared ilegal? Why? To maintain a Stalinist cooperative “for the public interest”?
So would it make any sense to replace the existing residential grid with a lighter one? In other words, replace the existing 20-40 kW/house (100-200 A at 208 V single phase) with 2-4 kW/house, just enough to keep a refrigerator and HVAC fan going (especially furnace in winter) and let the consumer use their solar/battery combination to handle their air conditioning, car-charging, etc. and sell excess into the higher-priced market (evening or night). Such a lighter-weight grid should have lower construction, operating, and maintenance costs than a heavy one, but would it be enough savings to matter? Would the contract with the consumer expect the consumer to take a certain amount of power each day, or just let them do what they wanted to?
A so-called “light grid” will not work. As you may have noted, when an AC motor in your refrigerator starts up in your residence, the lights may dim momentarily. That dimming is a consequence of the substantial starting current (power) required for a motor, typically twice the current (power) required while running. Thus, the outcome of such a “light grid” will be the eventual burnout of those motors.
But if you have enough battery to handle the surge, you would be OK. You just need the average load to be within the requirements of the light grid.
Actually, one could handle these surges with capacitors that can discharge a lot of energy in a short period and more quickly than batteries, which rely on a chemical reaction which is far slower than the collapse of an electric field.
First, please refer to this short derivation showing that for a DC circuit that the potential energy U = 1/2 CV*V where V is the DC (direct current) voltage. https://www.pa.msu.edu/courses/1997spring/PHY232/lectures/capacitors/energy.html
The problem is that there would also need to be some sophisticated electronics to discharge this capacitor with DC voltage into an AC circuit at just the right voltage and phase. The conclusion is that capacitor energy storage does not solve the surge current (energy) requirements cost-effectively for starting the variety of AC motors found in a residence. Note to Rick French: Similar problems exist when using DC batteries to meet AC surge current requirements for residential motors. The AC grid is designed to supply these large currents without significant problems, as there are massive AC generators providing the input power to the AC grid. You can see these problems more clearly when you attempt to use a small fossil-fuel powered-generator to run your refrigerator. If your generator does not have the reserve current (power) capability, the generator breaker trips off to protect both the generator and the load.
To get an idea of how massive generators can be, each of the pair of AC generator rotors and drive shafts at Diablo Canyon Power Plant .weigh hundreds of tons, so there is tremendous mechanical inertia to provide both frequency and voltage stability to the California power grid. Ditto for the three generator rotors at the Helms Pumped Storage facility. Some Helms photos are found here: http://www.energy.ca.gov/tour/helms/.
Home and auto inverters normally have a peak capacity that is about two-times their steady capacity, so if they can handle the steady load, they can usually handle the starting current. I use one, on the car battery, as a way to keep my freezer cold during a power outage. 750 watts continuous, 1,500 watts peak. So, providing the starting current is not a big problem. Yes, using a 134 hp Honda Civic to power a 750 watt inverter is a poor power match, but I estimate I’ve burned a whopping 3 gallons of gas in 10 years this way, so it’s more attractive than owning a generator.
$39.99 at Harbor Freight.
http://www.harborfreight.com/750-watt-continuous-1500-watt-peak-power-inverter-66817.html
I used a Kill A Watt to measure the starting current, power factor, and kilowatt-hour requirement for both my fridge and freezer before I bought the inverter. I was disappointed to find that my best-of-class Energy Star fridge had a 38% power factor. So I needed 278 VA on the inverter to support 102 watts of consumption.
https://www.circuitspecialists.com/p4400_kill_a_watt_energy_meter.html
Of course, a “light distribution system” can also handle sporadic overloads of 250%. That includes transformers and lines, but not fuses. But the fuse installed on a distribution line transformer is usually a multiple of the kVA rating of the transformer.
I’m curious to know what you assumed about the occurrence frequency of consecutive cloudy days in Oahu in making the storage cost vs. reliability tradeoff.
Thanks for your comment — we used data from NASA — https://eosweb.larc.nasa.gov/sse/ and ran a simulation for the years 1983 to 2005.
Part of the problem here is the expectation that utility grid construction and maintenance should be paid for entirely out of revenues collected at the meter. The utility grid is economically and environmentally efficient to have but in a world with large amounts of distributed generation (and storage), it is likely not feasible to set rates that cover all grid costs. We have faced such a situation before – literally hundreds of years ago – with roads, which are also recognized to be ‘generally useful infrastructure’ with many benefits for trade, transportation, communication, political/cultural integration, and more. We finance roads through many mechanisms such as property taxes, gas taxes, bridge tolls, general state revenues, federal revenues, and more. We need to do the same with the utility grid. It is time to “Roadify the Grid”.
However, a key need is to not over-invest in grid infrastructure. With our future of more local generation and local provision of reliability, the amount of electricity transiting the grid will drop as will the societal value of grid reliability. Thus, we need to be careful to minimize near-term grid investment and put more resources into local generation and storage within buildings.
More on the “Fit Grid” at http://nordman.lbl.gov
We have LOTS of grids in the competitive sector, and we pay for virtually ALL of them through volumetric pricing. That’s how competitive markets work.
When we go to the supermarket, we connect to a global grocery grid, bringing us Cheerios from Buffalo, Steinlager from New Zealand, and Brie from France. We pay for the entire cost of moving those products around the world in the per-unit prices we pay at the cash register. We bear the cost of “connecting to the grid” by walking, riding, or driving to the store; all the upstream costs, above the point of interconnection, are priced volumetrically.
When we go to Macy’s, we connect to a global clothing grid. Those costs are also reflected volumetrically.
When we fill our car with gasoline, we connect to a global petroleum supply system, with billion dollar deep-water wells, expensive tankers, refineries, pipelines, terminal racks, delivery trucks, and mini-marts; we pay for all of these “fixed costs” through volumetric prices.
Now, we do have the option to join Costco. These are more like connecting to the grid at the primary voltage level, where we pay more for the grid connection, and lower volumetric prices. But Costco collects only 2-3% of revenue through membership fees, and my own Executive membership pays a 2% dividend, working out to approximately zero annual membership fees if I spend $5,500/year (which I usually do). So it’s more of a disappearing minimum bill than a fixed charge to be an Executive Member.
The purpose of regulation is to impose on monopolies the pricing discipline that markets impose on competitive industries. Only monopolies can charge a fee for “connecting” to them. And only if regulators allow anti-competitive pricing.
Jim, the examples of network grids using volumetric pricing that you bring up have a common thread: they are competitive industries in which shareholders face risk on their investments. So I think we face an important choice. The status quo of assured return on investment with a shareholder premium is no longer viable in the face of new competitive forces. Instead, we need to either push utilities into the competitive market, which also means allowing them to have variable returns, or we need to make the grid a public asset like roads and much of our water system. Each option has its benefits, costs and risks, but we need to start asking the questions rather than trying to just jury-rig the current system.
Precisely: these grocery, hardware, and gasoline “grids” are in competitive industries. And, since the original PURPOSE (Munn v. Illinois) of regulation is to impose on monopolies the pricing discipline that markets impose on competitive industries, we can learn a lot from these competitive grid pricing models.
Roads are an interesting allegory. Our state and federal highways are paid for, overwhelmingly, with volumetric gas taxes. Not exactly proportionate to roadway use, since different vehicles use different amounts of fuel, and because diesel fuel has 30% more joules per gallon than gasoline. But roughly volumetric. Add to that toll roads and HOV and HOT lanes, and some real-time HOT pricing options, much like optional critical peak pricing rates in electricity. BUT, ~80% of the cost of city and county road costs are paid out of property taxes — and we had roads before we had automobiles or used petroleum as a transportation fuel (The Roman Empire had 70,000 miles of paved roads). Roads have been considered an essential public service for millennia. Perhaps there is something to learn there as well.
The so-called “regulatory compact” is of questionable genesis. That’s what Market Street Railway decided: a company with fundamentally uneconomic assets is not entitled to cost recovery. That was cited in MANY of the nuclear cost disallowance cases in the 1980’s. In some cases, full recovery with a return was allowed; in some recovery over time without a return was allowed, in some only partial recovery was allowed, and in some no recovery was allowed. The prudence of the investment, in reasonable anticipation of evolving technology, was an issue in many of these dockets. That same issue might apply today to investments in conventional generation, transmission, and in distribution capacity made obsolete by technological innovation. It may apply to solar power towers or battery storage systems.
California is addressing some of this through a distribution resource planning process; other states are waiting to learn from California (or perhaps not interested in learning).
Jim, I think we’re on the same page then.
The author makes an assumption that creates the conditions for the conclusion reached.
“When rates are set to recover real-time marginal costs, revenues can fall far short of total system costs. These residual fixed/sunk costs have to be recovered somehow.”
Rates should NEVER be set to recover real-time marginal costs on a utility system that has a reliability reserve margin. Such systems are not in equilibrium BY DESIGN, and short-run marginal cost pricing is inappropriate under those conditions. Pricing based on Total System Long-Run Incremental Costs (the cost of building and operating a new system, with today’s technology, optimally sized to serve the load) is the appropriate standard for such pricing. That allows new entrants to compete fairly.
If a utility system is in equilibrium, then short-run marginal cost is equal to long-run marginal cost. No more kWh can be extracted from baseload resources, as they are fully obligated, and the only way to get extra kWh, even off-peak, is to run an expensive peaker, with variable costs equal to the fully distributed costs of a baseload unit. In equilibrium, the only way to extract an additional kWh during on-peak hours is to build a new unit. Thus, in equilibrium, the short-run marginal costs are significantly higher than average variable costs, and produce a significant return on the embedded capital in existing power system resources.
But the Hawaiian system is NOT in equilibrium. Growth of solar, and deployment of efficiency means that existing power plants are under-utilized. Whose responsibility is it to achieve equilibrium? The history of regulation answers that question.
First, in Munn v. Illinois, the situation was that monopoly grain elevators and railroads were charging customers without competitive alternatives more than they charged customers served by two or more railroads. The Court ruled (based on common law practices of the King of England regulating what remote road houses could charge for overnight accommodations) that regulators could set prices for goods and services “affected with the public interest.”
Then, in Hope and Bluefield, the Court refined that utilities were entitled to a fair return, but not an entrepreneurial return, on their low-risk investments.
Finally, and perhaps most important today, when the automobile challenged the streetcar for market share, the Court ruled in Market Street Railway that a utility with an obsolete system that was not matched to its customers’ needs had no right to recovery the stranded costs. That is, regulation should prevent utilities from exercising monopoly pricing powers on remaining captive customers, the original point of Munn v. Illinois.
That may be the situation in which Hawaiian Electric now operates.Punishing the customer who has conserved energy, or has installed systems to help the state meet its energy goals, by exercising monopoly pricing is probably not the right answer.
In Smart Rate Design for a Smart Future, the Regulatory Assistance Project looks at all of these issues, and has developed three guiding principles for electric rate design:
Principle 1: A customer should be able to connect to the grid for no more than the cost of connecting to the grid.
• Principle 2: Customers should pay for grid services and power supply in proportion to how much they use these services and how much power they consume.
• Principle 3: Customers who supply power to the grid should be fairly compensated for the full value of the power they supply.
http://www.raponline.org/knowledge-center/smart-rate-design-for-a-smart-future/
Indeed, Hawaii is in disequilibrium. It got there with a combination of rapid technological evolution, slow adaptation by the incumbent utility, and generous renewable energy incentives at the state and federal level. But the author’s suggestion, imposing fixed charges to recover grid costs, will simply compound the problem, by driving smaller users to go off-grid completely (and it’s easy to see how for a highly efficient household using 200 kWh/month, a $30 or $50 fixed charge could quickly push them over the $0.30/kWh “grid defection” threshold when the utility has variable costs of ~$0.15/kWh. )
This would accelerate the potential death spiral. We know this from experience. In the early 1990s, the incumbent telecom companies succeeded in getting utility regulators to allow them to charge for the “local loop” in fixed charges. Basic telephone bills went from $6/month (with most costs recovered per-minute for calls) up to $30/month (with long-distance rates plummeting). Since that time, those phone companies have lost 60% of their access lines. My own home no longer has wireline service. Cellular service is available for as little as $4/month, with the minutes charged volumetrically, a much better deal for small users. Or, with limited talk, text, and data for $8/month. https://www.tracfone.com/serviceplan/basic Two non-profits that I serve on choose these plans in order to “have a phone number” without paying high fees. At least in Telecom, small users have a low-price option, with volumetric recovery of network costs.
Another option in Hawaii is to combine “ohana” services into a single connection to the grid. Many homes in Hawaii have “ohana” or “family” dwelling units attached to the main house. You may know these as “mother-in-law” apartments, or “accessory dwelling units” in land-use speak. Most are separately metered, so each dwelling unit pays its own electric bill. BUT, with high fixed charges, they could easily take service through a single meter. One of the reasons to have low fixed charges is to avoid the adverse impacts of master metering. Millions of households share internet service, due to the fixed charge nature of the rate design. The same could extent to electricity.
If Hawaii utilities had traditional volumetric time-varying rates, lowest in the daytime, and higher at night (when solar does not work), they could probably recover their costs equitably, efficiently, and reliably. The solar customers would get less credit when they feed power to the grid than when they receive power from the grid, and make a significant net contribution. Small-use customers could still pay only for what they use. Those who can shift usage to lower-cost hours (including both fixed and variable costs incurred to serve those hours) will save money.
If that does not work, then the fundamental economics may drive us towards the Market Street Railway solution: funding the grid as a public enterprise, because it is unable to stand on its own without the exercise of monopoly pricing power. Yes, “streetcars” still operate along (under) Market Street, operated by the San Francisco Municipal Railway. While they were not economical on a business basis, the public decided there was a public benefit to having a reliable transportation network with affordable prices.
Jim is to be commended for his thought-provoking comments. However, I have to disagree with some of his assumptions.
But first, let me start by questioning the authors’ assertion that “The residual fixed/sunk costs have to be recovered somehow.” Although this is consistent with today’s regulatory compact, if the utility no longer has monopoly power due to the existence of competitive products (e.g., solar plus batteries) the ability to fully recover sunk costs will be limited so utility shareholders may have to absorb the some of those costs. I think this is where the entire US electric power industry is headed and the regulators and utility CEOs better prepare for that end result so as to negate, or at least minimize, its negative impact. Investments in distribution systems need to be carefully made with a weather eye on how those investments will be recovered.
Now let me turn to Jim’s comments.
“Pricing based on Total System Long-Run Incremental Costs (the cost of building and operating a new system, with today’s technology, optimally sized to serve the load) is the appropriate standard for such pricing.” I TOTALLY disagree with this statement.
The economically efficient way to price of any good or service, including electricity, is to price it at short-run (i.e., real-time) marginal cost, just as the authors suggest. However, the definition of short-run margin cost include a scarcity rent component when the system is running at capacity. Further demand that would overload that capacity needs to be discouraged through higher prices. Thus, one role of scarcity pricing is to ration available system capacity in a manner that allocates the use of that capacity to customers with the highest-valued needs. This is allocatively efficient.
Note that during such capacity-limited periods the utility will earn profits in excess of its short-run costs. These profits (scarcity rents) allow the utility to recover some, or all, of its fixed (and sunk) costs over time and to do so in an economically efficient manner. These scarcity rents will also serve to attract investment in new capacity when they are economically justified and in an optimally timed manner, thereby producing economically efficient reserve margins.
In contrast, power system engineers today do not plan and implement capacity additions in an efficient manner, resulting in systems that typically have overcapacity, which electricity consumers are forced to pay for. As long as a utility has monopoly power it can get away with such inefficient practices. But when consumers have viable competitive alternatives to grid service those inefficiencies will no longer be tolerated. Hawaii is rapidly approaching that state and the mainland utilities will be there perhaps in 10 years – certainly within 20 years.
Jim’s references to Munn, Bluefield and Hope provide an interesting historical perspective but are largely irrelevant to Hawaii (and ultimately to the Mainland as well) because it assumes that the utility will continue to have monopoly power that supports regulatory solutions. As I have already mentioned, those days are numbered.
Obviously, RAP’s three guiding principles of electric rate design are also relevant only to the extent that the utility has monopoly power. Even so, principle 2 appears flawed as it is based on an equity concept (proportional cost allocation) which is almost certain to be inefficient. Carefully crafted price discrimination (e.g., Ramsey Pricing) would be a better approach as it can be both efficient and equitable. Furthermore, it has been used for years. Of course, what is equitable exists in the eyes of the beholder.
Lastly, I didn’t get the impression that the authors advocated the use of fixed charges for recovering grid costs. In fact, they pointed out the shortcomings of that approach and also said that the “…Jury is still out.”
My own view is that the way to address this problem is through scarcity pricing. That won’t guarantee full cost recovery but at least it will provide economically efficient outcomes. Nobody ever said that investing in utility assets is riskless. While it has generally been low risk due to the regulatory compact, it was never riskless (think nuclear power plant disallowances). Utility risk associated with grid investment is likely to increase substantially in the future.
As the authors rightly stated, grid defection is very real – and perhaps not all that far off. Yes, Hawaii will be an interesting test case for how to deal with it.
Aloha!
Robert, first I agree that utility shareholders must now be prepared to share risk in this changing industry. If they don’t want to take on that risk, then we should take away any risk premium in the rate of return and base revenue requirements on the corporate bond rate.
On the other hand, we can no longer rely on short-run marginal costs as a price signal in electricity. First, most procurement today is for renewables with low or no operating costs. That procurement, not mythical fossil fueled surrogates, represents the marginal resources. And second, as we move toward 100% renewable systems, we may no longer have any observable short-run costs. In the world you describe, 100% of the marginal “costs” would be represented by scarcity rents with no ties to actual costs.
The real question is: what is “short run”? An hourly or even 5 minute market is an arbitrary decision. The definition of what constitutes the relevant costs and markets has not been handed down from on-high. There is not clear, definitive guidance on these issues and we have to make them in the pragmatic context of actual conditions.
mcubedecon:
“And second, as we move toward 100% renewable systems, we may no longer have any observable short-run costs. In the world you describe, 100% of the marginal “costs” would be represented by scarcity rents with no ties to actual costs.”
Yep! Your observation is correct and quite perceptive.
As I stated earlier, the generalized definition of marginal cost includes a scarcity premium that produces scarcity rents if demand needs to be discouraged in order to not overload the available capacity. That scarcity premium is measuring the marginal cost to consumers that forego usage to avoid paying the premium. We need to stop thinking of marginal cost as being exclusively set by supply-side resources.
“The definition of what constitutes the relevant costs and markets has not been handed down from on-high. There is not clear, definitive guidance on these issues and we have to make them in the pragmatic context of actual conditions.”
Right again.
I made reference to hourly marginal costs because it is appears to be an convenient interval for end-use consumers to understand. However, most smart meters in use today measure usage in 15-minute intervals so there is some scope for further disaggregation.
I made reference to 5-minute marginal costs because the software used by ISOs solves for LMPs in each 5-minute interval. Ideally consumers’ smart meters should measure demand in the same intervals used in the wholesale markets. I say this because the wholesale LMPs are the logical starting prices for a distribution system operator (DSO) to use when solving for the locational prices (i.e., DLMPs) to charge customers (or to pay supply resources) that are connected to the distribution grid. Note that:
DLMPit = LMPt + DISTRIBUTIONLOSSit + SCARCITYPREMIUMit
where i indexes the connection point on the system and t indexes the time interval.
The function of the scarcity premium is to ensure that the net load connected at location i does not overload any upstream system components during time period t. In fact, the only reason why there is a need for a DSO is to manage the system constraints. If the system were always unconstrained the principles of transactive energy could set all prices.
This is really a simple but elegant concept for integrating all loads and distributed resources that eliminates the need for regulators to be dorking around setting tariffs and sets the stage for creating competitive markets for electricity at the distribution voltage level. What surprises me is the lack of interest at the state level for going down this road.