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Leaving the Airlines Behind

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Charles Bayless's picture
Retired CEO Tucson Electric Power

Mr. Bayless is a retired Utility Executive and a lecturer on Energy Policy, Climate Change and Ocean Acidification. Until June 30, 2008 Mr. Bayless was President and Provost of the West Virginia...

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  • Apr 6, 2020
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Leaving the Airlines Behind

Several have predicted the fate of the utilities industry by comparing it to other deregulated industries, such as the airline industry. While relevant, that comparison doesn't go far enough. The airline industry is about to be left far behind by the utilities industry on its one-way ticket to the competitive future.

In the early days of deregulation, changes in the airline and utilities industries were similar. First, came new entrants. In the airline industry, Peoples Express, Southwest, and others went head-to-head with the established carriers. In the utilities industry, independent power producers quickly began producing and selling power to utilities. When retail wheeling began, independent power producers, like the new airlines, began selling to consumers.

Price competition in the airline industry drove prices toward marginal cost, driving several carriers into bankruptcy. In the utilities industry, competition has driven energy cost toward marginal cost. Both industries have spent billions of dollars modernizing their fleets and improving their operational systems, so the effects of deregulation at this point seemed similar in each industry.

But the utilities industry is now being thrust into the next chapter — the chapter written by Uber, Lyft and Airbnb — the gig economy. The airline industry, except for business jets, doesn't have its customers building plants and equipment to compete with them — the utilities industry does.

Utilities began the journey through this chapter with the installation of rooftop solar, but this was similar to small IPPs. Now, blockchain platforms are beginning to allow customers to sell electricity to each other similar to Uber, Lyft, and Airbnb. Although currently small, these platforms will continue to grow.

If a technology exists and it is economically viable, it will happen. Within a decade, peer-to-peer trading will seem normal. Further, Amazon-like entities will enter the market and operate trading platforms that will result in utilities losing most of their customers.

But this customer loss will reveal a fundamental difference among the utilities industry, the airlines, and ride-sharing entities like Uber and Lyft. The difference? Platforms. At first it seems the platforms are the same. The Uber platform allows car owners to connect with riders and take them to their destination. The airlines operate sophisticated reservation systems. The electric platforms will allow self-generating customers to connect with other customers and sell them electricity. 

But those aren't the platforms I am talking about. In addition to their own impressive platforms, airlines, and Uber and Lyft operate on other platforms provided by government. The airline industry operates on a sophisticated platform, the air traffic control system, made available to anyone who flies.

Without the massive investment of the federal, state, county, and city governments in the road platform, Uber and Lyft would be unable to operate. These entities pay fees to the governments, but they are not responsible for constructing and maintaining the platform.

Utilities also operate on a platform, which is more complex than either the highway or air traffic control system. The platform, the grid, is not free, and is funded by the utilities industry.

The grid has been called the most complex machine in existence. In February 2000, the National Academy of Engineering announced the twenty top engineering achievements of the last century. First Place — Electrification.

To most, the grid is invisible and certainly not understood. Forget the general population, just walk down the hallway of any utility or regulatory agency and ask employees how many understand frequency bias, droop, generator inertia, symmetrical components, or VARS. But as the required transition is made to renewable energy and trading, the complexity of the grid will explode, requiring the utilities industry to incur large costs to handle intermittency and variability. 

But just as the costs are increasing, utilities will find the ability to recover them will diminish due to customer defection. At the same time as the grid must be redesigned to handle increased intermittency, and dispersed generation, there comes another, maybe even greater task. Grid governance, ownership, and regulation must also be redesigned.

The redesign must insure fair non-discriminatory service for all. It must institute markets for the services required, and institute rules to recover the costs of these services from individual producers and consumers in proportion to their use, effectively cutting the gordian knot of bundled rates. The interaction of increasing complexity and costs with diminished recovery will force fundamental changes on our industry.

It took the airlines thirty years and numerous bankruptcies to arrive at a pricing model that was profitable, and they didn't have competitors to furnish baggage, reservations, and more services. Hopefully utilities can do better, but there will be numerous casualties along the way.

Who Needs the Grid?

Who needs the grid? Simply answer with the word, renewables. Many predict the death of the grid with small microgrids replacing the integrated grid. Nothing could be further from the truth.

Small microgrids certainly have their place. They will help with outage recovery, ride-through in storms, and more. But to operate them on a stand-alone basis will be far more expensive than utilizing the grid due to several factors. Start with looking at reserves.

Consider three small cities in the early 1900s, each having a twenty-megawatt power plant. To obtain reliability, each would need another twenty-megawatt plant that could reach full power quickly. The cities soon realized that by tying their grids together they could probably reach about the same reliability with only one, twenty-megawatt plant.

Today utilities operate nationwide with targeted reserve margin of about fifteen percent reserve margin, a margin not even remotely achievable without utilizing the grid to allow reserve sharing and reduction of the largest single unit size as a percent of the total grid capacity.

Now let's consider the move to microgrids and start with a Cleveland microgrid in the winter. Assume five cloudy non-windy days followed by one bright beautiful sunny-windy day and then by another five cloudy non-windy days.

Everyone realizes that you would need five days of batteries, but you also need six days of generation, one to run Cleveland on the sunny-windy day and five to charge the batteries for the next five days. Admittedly Cleveland weather is not the norm in the United States, nor is Cleveland a typical microgrid, but it illustrates a point.

The point being that to achieve one-day-in-ten-year Loss of Load Probability (LOLP), which is currently required in the United States, will require massive amounts of reserves for individual microgrids. But assume the industry goes ahead with totally disconnected microgrids and installs the extra reserves and batteries. In that case the electric utility industry will gain a great new ally for the continuation of the grid — renewable energy producers.

Optionality

The grid brings us far more than reductions in required reserves. It makes producers profitable and gives consumers alternative suppliers. In short, it gives each optionality, and optionality is worth money. Further, as intermittency and hence prices become more variable, the value of optionality increases as shown by any option pricing model.

Assume that a stand-alone microgrid is in a better climate than Cleveland, which is almost anywhere in the United States other than Detroit or Buffalo, but still must install two extra days' worth of generation and batteries to achieve reliability. Further assume that reliability studies performed by the microgrid show that this generation will only be needed ten days a year during bad weather periods.

What is the owner of these assets going to do the other three hundred and fifty-five days of the year if there is no grid to export power? Several studies have shown that due to its new rooftop rule, California will be exporting large amounts of power in a few years. How are you going to export power without the grid?

Without the grid, these reliability assets located in every disconnected microgrid will give new meaning to the term stranded assets. With the grid, the owner will have the ability to sell twenty-four/seven into distant energy, reserve, battery storage, and balancing markets, realizing the maximum return and giving society the assurance that the cheapest assets are running.

Some may say they do not need one-day-in-ten-year LOLP and they probably don't. But the system isn't being constructed to serve those people. It is being constructed to serve the needs of those who do want that reliability, and one class stands out — manufacturers. If unconnected microgrids do not provide businesses with reliable electricity, manufacturers and businesses will be forced to install gas turbines to achieve reliability.

But the value of the grid in creating optionality goes far beyond energy. With the grid, demand side management can be used in Seattle to free up generation to sell into high prices in Denver. Without the grid, DSM in Seattle can only play in the Seattle market, giving up optionality and revenues. Without the grid, batteries in Phoenix that were designed to carry through the evening peak can only be used to meet the evening peak in Phoenix.

With the grid, the Phoenix Battery Company can scan energy, reserve, ramping, and imbalance markets in the Western U.S. and decide to sell energy to Los Angeles for a high price, say fifteen cents per kilowatt-hour, as it knows it can run gas turbines to meet the evening peak in Phoenix for a marginal cost of two to three cents per kilowatt-hour. That's the optionality the grid brings.

With the grid, renewable assets can be located where their capacity factor will be greatest. Why locate solar in Seattle when you can locate it in Nevada, where it will run at a much higher capacity factor and hence lower cost per megawatt-hour?

This is not new. This is what has been done for years; locate coal plants in Kentucky and transmit the power to Chicago, locate hydropower in the Northwest and transmit it to California. It is what must now be done with renewables to achieve the overall lowest cost. Locating renewables where they run at the highest capacity factor will result in significant price decreases, increased renewable generation, and carbon dioxide reductions.

The grid not only allows operation with fewer reserves, it allows for the cheapest reserves. Consider a stand-alone utility in Utah. Its cheapest plant for balancing reserves may be a three cents per kilowatt-hour plant. With the grid, the utility can access reserves all over that area and choose the cheapest.

In its Q1 2018 report, the Western Energy Imbalance Market reported savings of 42.08 million dollars versus stand-alone utilities, and a sixty-five thousand, eight hundred and sixty megawatts decrease in generation, displacing approximately twenty-eight thousand, one hundred and eighty-eight metric tons of carbon dioxide. 

Further utilizing the grid to obtain a larger control area results in less imbalance needs due to smoothing out load and renewable fluctuations. Thus, the Western EIM reported a decrease in required reserves of three hundred and eighty-seven megawatts to four hundred and ninety-two megawatts in the upward direction, and four hundred and ninety to five hundred and forty-two megawatts in the downward direction. None of this would have been possible without the grid.

Without the grid how do large, and cheaper, central station renewables such as the large solar facilities in the Southwest get their power to the market?

How are large cities served without the grid? My guess is that if you put a windmill on every building in New York and covered the face of the buildings with high efficiency solar you would only generate about ten percent of the loads on sunny days, much less at night. Further, lack of the grid would destroy wind as an energy source, as we could not have central station wind.

Cost Allocation

As new entrants come into the market they will say, I can produce VARS, I can sell reserves, I can sell energy, and I want the option to play in each of these different markets. Free markets for all services will ensure that we get the cheapest services, and the disaggregation of the grid will ensure we solve the most complex cost allocation problems.

For instance, a solar plant with molten salt or a gas turbine should not have the same need for ramping as a solar PV plant. A producer located near a load or with batteries or turbines to smooth the output will not have the same need for VARS as a producer located at a distance. Setting the requirements specifying the need for ancillary services should be the responsibility of the ISO. The provision of these services should be through an open market for each service.

Just as the grid is redesigned, FERC and state commissions must design new markets and rules, and cost recovery rules for capacity, energy, balancing, reserves, ramping, VARS, and more. Consider the energy market if it gets to a hundred percent renewables.

In areas where the marginal plant sets the price, prices would be zero, which is obviously not going to work for many producers. Entire markets would need to be redesigned. Here, only regulation can work. Markets cannot provide these services without regulatory rules, as the services are economically public goods that no one participant will provide due to the free rider problem.

Individual producers and consumers, many of whom will not understand the service or the cost, and each of whom is sure that someone else is more deserving of the cost than they are, will ensure that the regulatory proceedings are interesting. The outcome of this process will probably make deregulated airline rates look logical, simple, and understandable.

Additionally, as the necessary transition is made to markets for services such as imbalance, VARS etc., problems between markets will be a problem, as one market, which has a different goal than another market, promulgates a rule that conflicts with the first market. If FERC thinks the docket is crowded now, just wait. 

Microgrids will be an important piece of the puzzle, but only a piece. They will work much better and cheaper when they have access to the grid. In fact, unless marginal costs for each service within the microgrid are identical to the grid's marginal cost, then you will make or save money by connecting.

If your marginal costs are higher for any service, you can save money by purchasing that service from the grid. If your costs are lower, you can make money by selling to the grid and using the profits to reduce rates for your members.

The Future

The future is unknown, but the primary forces driving us are not. First is climate change and ocean acidification. Each second we add about 2.4 million pounds of carbon dioxide to our atmosphere. The result of the accumulated carbon dioxide is that every single second of extra heat added to our atmosphere is equivalent to detonating three World War II Nuclear Weapons.

The next two forces acting on our industry are changing technology and the move to competition. Technological advances will only continue to reduce the cost of renewables, especially solar, which is on a Moore's Law type of decline curve. Technological advances will enable peer-to-peer trading and the provision of ancillary services by anyone with the ability to provide them. The move to completion will have the greatest effect however, pushing us into the gig economy and its enormous consequences.

Instead of operating with several hundred controllable plants, there will be thousands, and then millions of dispersed uncontrollable plants. At that point, far reaching SCADA systems will monitor every load, generator, customer, line, weather forecast, battery, EV charging schedule, and a host of other variables, giving us millions of inputs per second necessary to control the grid.

The system will make constant real time decisions about whether to charge or discharge batteries now or later, how many contingency, balancing, ramping serves are needed, is it necessary to go into DSM on certain circuits, is the system N-1 compliant, and more. Artificial intelligence will bring control and optimization that no human could.

As the industry starts down this path, the question is not whether a renewable future is cheaper than the present. There simply is no choice. The question is, will a renewable future be cheaper with or without the grid? Simple answer. It is significantly cheaper with the grid.

It is this future of grid connected renewables that all must work for to achieve the quickest transition, as the grid is necessary for a high level of renewables, and to allow optimization.

Many of today's players will not survive, replaced by new competitors as markets move on. Markets will provide most services. Customer choice will be at the fifteen-minute level with Amazon-like companies using AI and making real time decisions on energy procurements for their customers.

All participants, including renewable producers, utilities, regulatory commissions, and environmental organizations, must realize that a grid connected future is the only path to high levels of renewables, with the cheapest overall costs, and the quickest implementation. The path we take to get there will have many dead ends, false trails, failed companies, and hills and valleys but it will lead us to a sustainable future.

 

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Thank Charles for the Post!
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Matt Chester's picture
Matt Chester on Apr 6, 2020

Many of today's players will not survive, replaced by new competitors as markets move on. Markets will provide most services. Customer choice will be at the fifteen-minute level with Amazon-like companies using AI and making real time decisions on energy procurements for their customers.

I have to wonder what this will look like from the customer point of view. Obviously they like choice, but will in aggregate the loss of players be to their collective detriment?

Kent Knutson's picture
Kent Knutson on Apr 14, 2020

Great article Charles!  Lest we forget how complex and important the 'Grid' is and how the future of renewables depends on the power lines and sophisticated technologies that tie everything together.  Thx for sharing.   

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