It's Your (Grid) Weather Forecast

I'm a bit of a grid geek. We are having a hot day here in New England and my facebook/google+ stream is drowning in people talking about 100+ degree temperatures. That's the obvious result of the weather. The less obvious result is that electricity demand is currently surging as everyone cranks the air conditioning to stay comfortable. Almost every generation asset in the region is probably running near maximum right now. Since taking Ignacio's grid regulation class, I have recreationally checked the marginal price map from ISO New England. Today is the worst I have ever seen it. LMPs are in the $200/MWh range right now. During last week's mild summer temperatures the region was about $30/MWh.

What does this mean behind the scenes? Suppliers of base load power are cleaning up right now. If you run a cheap coal plant, you get paid the same as the near-decommissioned fuel oil plant that they crash fired yesterday. If they didn't have long-term power supply hedges, utilities would be losing money like crazy. As a residential customer, NSTAR charges me 7.7 cents/kWh to buy electricity and they could be paying 20 cents right now. Our independent system operator is no doubt going crazy to make sure that all the reliability constraints are being met. EnerNOC is probably calling industrial consumers all over the region and asking them to curtail their electrical load. This is all heroic effort to make sure that we all stay comfortable and cool on an otherwise ugly day.

What does this mean for me, the consumer? Very little. I pay the same rate regardless of heroic effort. Who cares about power balancing, marginal prices, or what the generators had to do in order to get me the electricity? Turn it up and let it rip!

This is an insane way to run a market. Would you act any differently if you knew that your electricity cost was going to be 4x higher today? Personally, I'd be swimming in a lake.

Dirty Power / Shift the Baseline

At an MIT Energy Initiative talk last week, a representative from China"s electric company told us about China's aggressive green energy goals for the next few decades. On one slide, he talked about reducing carbon emissions by 45% per unit of GDP. This sounds great, until you realize that China expects to grow its economy 6x in the same period, so you are looking at a 3x increase in carbon. Putting the two slides together, I felt a bit hoodwinked.

This has been a constant point of contention between the developed and the developing world. Our post-industrial economies hum along efficiently and provide us with a standard of living unimaginable to our grandparents. Meanwhile, 5 billion people are struggling to lift themselves out of a pre-industrial existence. Instituting a nation-by-nation carbon cap freezes the status quo in a manner that probably should be unacceptable to a group of people who largely don't even have indoor plumbing.

In a static, closed system it shouldn't matter much whether you auction off a quantity-limited set of carbon allowances or impose a carbon tax. The magic of price/supply elasticity dictates that the outcome should be the same either way. But that magic only applies within one nation. How do you decide ahead of time the allowable carbon output for each nation? Can you? Should you?

Would you set caps or targets normalized to GDP as implied by the Chinese representative? Could such a system kick an economy while it is down? (A local depression would reduce your relative carbon allowances, making it harder to recover.) Is is verifiable?

There is a simplicity in taxing emissions rather than auctioning quantity limits. A roughly consistent worldwide price on carbon would automatically and dynamically adjust emissions as economies develop and become more or less energy intensive. It is much more transparent and implementable than a single global allowance auction. It would enable developing nations to grow and increase their absolute and relative output while still recognizing the cost of that growth.

Nobody wants to mire developing nations in poverty. Nobody wants them to have a free ride either. We need a regulatory framework which recognizes that 1/3 of the world is growing faster than laws or treaties can adapt.

A Dynamic Pricing Thought Experiment

Imagine that all residential electricity customers experience real-time pricing. We all have smart meters and smart appliances which enable customers to register a spot price beyond which the user is willing to automatically curtail use. Imagine that a popular air conditioner manufacturer ships its unit with a default curtailment price of $.25/kWh. What is your ideal bid?

You certainly don't want to leave it set at the user default. Your bid will be lost amid the others. If you value your comfort, a bid of $.26 will clear out the vast mass of people who just leave their appliance set at the default while still preserving the lowest possible bid. I'm not sure what a $.24 bid says about you, though. Maybe that you're cheap and want to capitalize on savings before everyone else?

ERCOT (in Texas) already limits the pool of demand resources because they can react so fast to an event call that the system goes into overvoltage. I wonder if device manufacturers will be required to ship their smart appliances with a randomized default bid to prevent a sudden shutoff of half the air conditioners at a substation.

The world of real-time pricing is going to be a fascinating place in ways the academics haven't even begun to consider.