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Can Dynamic Pricing Help Manage Load And Prevent Rolling Blackouts?

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  • Aug 26, 2020

Between 2000 and 2001, a series of rolling blackouts hit California’s grid when traders from energy company Enron hijacked electricity markets for profits. The traders created artificial scarcity by taking critical power plants offline, leading to extremely high power prices. 

Memories of those blackouts were rekindled two weeks ago as the state’s grid, whose composition has changed significantly in the last two decades, again experienced a series of  blackouts in response to peak demand during a heat wave. Power prices in wholesale markets spiked briefly, doubling to $387 and subsequently climbing to $800 within the span of a few hours. 

Profits, however, do not seem to be a motive for the blackouts this time around. Some blame the state’s insufficient reserve margin requirements. Others point to its reliance on energy imports and intermittent renewable energy. Still others point to California’s convoluted method to plan for, forecast and implement power requirements. 

Regardless of the reason, the brief jump in prices provided a not-so-pretty glimpse into the future, when a delicate balance of multiple energy sources in the grid is challenged by sudden occurrences. The resulting confusion in pricing could upend conventional energy economics and inflate customer bills.    

Dynamic Pricing and Blackouts

Can dynamic pricing in energy markets help alleviate peak load and prevent future blackouts? 

Yes, says Dr. Ahmad Faruiqui, economist at The Brattle Group, an energy consultancy. “...As the grid becomes more and more renewable, we will be dealing more and more with the kinds of ramping up and ramping down that we just saw in California, necessitating the deployment of dynamic pricing,” he says. 

According to him, this form of pricing can make a “serious dent” to the problem of blackouts by ensuring load flexibility. In other words, prosumers switch off from the grid during peak loads, when prices are high, contributing to a decline in demand and reconnect in off-peak hours, when prices are low. Referring to the jump in wholesale prices that occurred in the heatwave, Dr. Faruqui says electricity usage will decline if the price increase is passed onto retail customers. “That will bring demand and supply back in balance in wholesale markets, thus reducing wholesale prices,” he says. “As someone said in the context of oil prices a while back, “The best cure for high prices is high prices.” 

Dr. Faruqui himself has battery storage in his home. While his power was not cut off during the heatwave, the San Francisco resident connected five essential circuits to his battery to boost his power generation capabilities. If he did have a power cut, however, the battery would not have helped in keeping his house cool. “It is not big enough to run the air conditioner,” he explains. 

Faruqui says a ToU rate or a demand charge benefits customers because it enables them to purchase from the grid during off-peak periods and generate power when prices are high.

Adequate numbers of such prosumers could help reduce peak demand periods. A 2019 study by the Brattle Group estimated that upto twenty percent of system peak at the national level could be served through load flexibility programs with dynamic pricing in which consumers pay time-of-use (ToU) rates that increase or decrease based on the time of day. 

A Long Road Ahead 

But it might be some time before dynamic pricing makes a “serious dent” to load flexibility. The neat economics of theory do not always line up with practical implementation. 

I wrote earlier about a study from UT-Austin which found that ToU rates can create additional peaks of demand, during off-peak hours, that are substantially higher than the original peaks. A grid powered by multiple energy sources may be as susceptible, in frequency and severity, to blackouts in a dynamic pricing regime due to unforeseen peak loads as it is today. Large prosumers in the grid can also distort its economics, much like traders did during the 2000 blackouts, by colluding to take their production units offline. “There is always that risk but it goes away if price responsiveness is there,” says Faruqui, noting that elastic demand can lower the ability of firms to earn high profits. But dynamic pricing does not always follow the rules of price elasticity.  

Since the 2001 blackouts, several utilities in California have installed smart meters in customer homes and moved customers to Time of Use (ToU) rates. But Faruqui says it is not enough . “They have deployed smart meters but there is very little dynamic pricing,” he says. Even the battery storage mandate enacted by the state may not be sufficient in size to deal with situations similar to the one that occurred two weeks ago, he adds. 

He has a point. Power plants representing 15 percent of electricity on California’s grid (approximately 6,000 MW) went offline during the heatwave. Replacing that capacity with limited battery storage and an assortment of other sources will be difficult. Making the economics of storage work will also require major advances in research and production.  

The study’s estimates, then, are contingent on the expansion and development of existing and new load flexibility programs respectively and harnessing the expected surge in alternate technologies, such as electric vehicles and Internet of Things (IoT) devices, to calibrate market supply and demand.

It might be some time, then, before dynamic pricing helps prevent another blackout.

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