Connecting Customers to a Smart Grid

Transcription

1 Conference on Interdisciplinary Approach to Financial Stability Co-hosted by the U.S. Office of Financial Research and University of Michigan Law School Connecting Customers to a Smart Grid Hung-po Chao* October 22-23, 2015 *Energy Trading Analytics. I am solely responsible for the views expressed here. hungpo.chao@et-analytics.com 1

2 Outline Introduction Three major systemic failures in electric power Connecting customers to a smart grid Priority Subscription Mechanism (PRISM): A risk management approach to a smart grid future Conclusion 2

3 The Northeast Blackout of 1965 A faulty relay On November 9, 1965 an improperly configured protective relay at the Sir Adam Beck Station no. 2 in Ontario, Canada, caused disconnection of a key transmission line Domino effects This incidence precipitated a sequence of cascading failures, resulting in the ultimate collapse of the entire system; it affected over 80,000 square miles and left 30 million people without power Ramifications Northeast (North-American Electric) Reliability Council (NERC) was created in 1968 Electric Power Research Institute (EPRI) was created in 1973 In 2000, National Academy of Engineering ranked electrification as the greatest engineering achievement of the 20 th century 3

4 Electrification is the Greatest Engineering Achievement of the 20th Century, by National Academy of Engineering Source: If Thomas Edison were to return today, he would find that the industry is still operated in much the same manner as he pioneered. - Anonymous 4 4

5 Historical Profile of Electricity Price and Output in the U.S. Average Retail Prices of Electricity, Retail price (Cents per kwh) Electricity/Energy Ratio (kwh/10,000 BTU) 5

6 Electricity Restructuring Year Event Comment 1978 PURPA introduced competition Started the deregulation process 1997 FERC Orders 888, 889 Electricity markets were established in PJM, California, New England, New York, Texas and MISO California electricity crisis Electricity markets are incomplete when consumers are disconnected from market prices Energy Policy Act of 2005 Provided FERC the Congressional mandate for promoting demand response in organized wholesale electricity markets 2011 FERC Order 745 on demandresponse compensation in organized wholesale electricity markets On May 23, 2014, the Court of Appeals for the D.C. Circuit Court issued a decision in EPSA v. FERC vacating and remanding FERC s Order 745; as of 2015, the decision is being reviewed by the U.S. Supreme Court. 6

7 Challenges Incomplete market design was corrupted by exploitative arbitrage and market manipulation Need to introduce price-responsive demand in the wholesale real-time energy market Need to balance between prudence and resilience in reliability management Need to foster customer choice and innovation in retail service offerings 7

8 Priority Subscription Mechanism (PRISM) Enables Customer Choice The three pillars of PRISM A menu of reliability-differentiated subscription services (reverse call options) for diverse end-use devices (demand units) A system of flow rights for network access and congestion pricing A two-stage auction design for regulation of the network monopoly 8

9 PRISM: A risk management tool connecting customers to a smart grid A menu of reverse call options with varying strike prices Consumers can choose different service reliabilities for different end-uses Value Menu Spot price and trigger Value of Consumption Elevator Service availability Elevator Off-EL Off-AC On-AC On-EL Value of lost load Interruption protection Time 9

10 A Sustainable Energy Future Requires Smart Grid R&D, Investment and Financing Electricity/Energy Ratio Global fossil fuel production U.S. electricity output Industrial manufacturing Mass production Mass customization 0 50 Billions barrels of oil equivalent per year Invention of controlled fire 2000 Year CE

11 Conclusion The nature of systemic risk constantly changes as the system grows more complex Essential to learn real lessons from history and think through how to adapt solutions to emerging issues Important to avoid solving yesterday s problem Promote research and innovation in the design of institutional structure, rules and processes for increasingly diverse, dynamic, decentralized, distributed and more complex systems Incorporate consumer s perspective in a comprehensive framework balancing prudence and resilience in risk management 11

12 References Unbundling the Quality Attributes of Electric Power, Electric Power Research Institute (1986) "Multi-level Demand Subscription Pricing for Electric Power," H. Chao, S. Oren, S. Smith and R. Wilson, Energy Economics, (1986). "Priority Service: Pricing, Investment and Market Organization," H. Chao and R. Wilson, American Economic Review, Vol. 77, No. 5 (1987) "A Market Mechanism for Electric Power Transmission," H. Chao and S. Peck, Journal of Regulatory Economics, Vol. 10, No. 1 (1996) Designing Competitive Electricity Markets, H. Chao and H. Huntington et. al., International Series in Operations & Management Science, Kluwer Academic Publishing (1998). "Flow-Based Transmission Rights and Congestion Management," H. Chao, S. Peck, S. Oren and R. Wilson, The Electricity Journal, (2000) Electricity Market Transformation: A Risk Management Approach, Electric Power Research Institute (2005) Price Responsive Demand Management for a Smart Grid World, H. Chao, Electricity Journal (2010) Competitive Electricity Markets with Consumer Subscription Service in a Smart Grid, H. Chao, Journal of Regulatory Economics, Vol. 41, No. 1 (2012) Two-stage Auction and Subscription Pricing for Awarding Monopoly Franchises, H. Chao, Journal of Regulatory Economics (2015) 12

13 13 Thank You