Views on Restructuring

This month, Speakout features three distinct views of the problems inherent in the deregulation of electric energy, along with some solutions. "Electricity Restructuring in Britain: Not a Model to Follow" and "Putting Consumers First"—Ed.

The rolling blackouts and soaring prices now besetting California's electric system are only the first and most visible signs of deeper problems affecting the U.S. grid. Among them are neglect of the nation's electrical infrastructure, poorly structured electricity markets, and a lack of incentives for new investment.

ILLUSTRATION: J. D. KING

Ultimately, most of these problems spring from a lack of understanding of the power system's unique nature and technical complexity, resulting in a hodgepodge of policies that ignores both technological and economic reality. Fortunately, a variety of new technologies are available to help resolve these fundamental issues in a cost-effective, expeditious manner.

Because electricity is so fundamental to our emerging digital society, economic growth will depend critically on providing more reliable, lower-cost electric power. Meeting these twin goals has been the primary aim of the country's experiment with electricity deregulation, and understanding what went wrong in California can help other jurisdictions achieve a smoother transition to competitive power markets. More vigorous competition will be needed if the electricity infrastructure is to keep pace with demand growth, as will the simultaneous incorporation of new technologies that can revolutionize power generation and delivery. Therefore California's mistakes must not be misinterpreted as controverting the urgent need for change. Rather, it is vital that the causes of the current crisis be identified and that the viability of different solutions be explored, both for California and for the rest of the global power market.

Inadequate infrastructure incentives

Neglect of the power system has resulted primarily because restructured electricity markets have not yet matured enough to supply adequate incentives for infrastructure investment. Until the 1990s, U.S. utilities retained a comfortable capacity margin of 20-30 percent over peak demand; but since restructuring began in 1992 with passage of the National Energy Policy Act, margins have declined to less than 15 percent on average. The situation has been particularly acute in California where a booming economy and a dearth of major new power plants have raised demand until it is outstripping supply growth by a factor of 10 to 1.

Transmission capacity has done no better, having failed to keep up, particularly along the state's main north-south corridor. Even now, projected growth of the California transmission system is only about half a percent over the next decade.

Three serious market flaws are also illustrated by the California experience. First, wholesale power was made too dependent on the spot market. Utilities had been strongly encouraged by regulatory policy to sell their fossil-fuel generation facilities, yet discouraged from locking in stable prices through long-term contracts. Second, the wholesale market organization was fragmented by a poorly structured separation of the independent system operator (ISO) from the power exchange (PX). This separation allowed generators to "game" the market by bidding only a portion of their capacity ahead of time into the PX, and then reaping exceptionally high prices when the ISO was forced to buy power in real time to balance supply and demand. Third, retail prices were frozen, which meant rising wholesale prices could in no way be moderated by being passed on to consumers so as to reduce their demand.

Pennsylvania provides a contrasting example of how deregulation can work. Electricity rates there, once 15 percent above the national average, now are more than 4 percent below. Several differences from California are worthy of note: Pennsylvania has taken a regional approach by joining with four other states to form the country's largest electricity market. Within the state itself, utilities generate more than 95 percent of their electricity from relatively inexpensive coal and nuclear plants, while California relies heavily on natural gas, which fluctuates more widely in price and has recently become very expensive.

Moreover, new plant construction has kept pace with demand in Pennsylvania, and its utilities were not required to sell off their generating plants to out-of-state companies. Utilities were also encouraged to enter long-term contracts for power, rather than be forced to rely on a volatile spot market. Finally, restructuring was not imposed all at once. Instead, a two-year pilot program allowed the state to work out any bugs.

Load management is key

The most effective short-term step that can be taken to ease the California crisis and help prevent its spread is to improve load management. Electricity customers need to be given incentives to conserve energy when it would do the most good from a power market standpoint. For those customers who are particularly risk averse, a fixed-price rate can still be offered, but with an "insurance premium" tacked on to protect against rising rates.

Large customers can be offered special rates to interrupt power when conditions are tight, or opportunities to sell power they generate. Probably the most effective option is to institute time-of-use rates and real-time pricing. In this way, the customer would know the price of electricity at any given time. The price reflects the cost of power generation and delivery at that given time, changing minute to minute, hour to hour.

My organization, the Electric Power Research Institute, has studied the benefits of real-time pricing and found, for example, that it could lower peak demand in California this summer by 2.5 percent, thus helping reduce wholesale prices by 24 percent. Inexpensive electronic meters, now being introduced, can facilitate the spread of real-time pricing.

Other technologies can be applied on the supply side in the medium-to-long term. Fossil-plant upgrades, for one, could add 5 percent to the capacity of many units, including an estimated total of 3700 MW in California. Transmission system capacity, too, can be improved by advanced technology, even before new lines are added. Using tools such as the dynamic thermal circuit rating (DTCR) software package can increase the throughput of some thermally constrained transmission paths by 10-30 percent. For areas of the transmission system that are stability constrained, power electronic technologies known as FACTS (flexible ac transmission systems) can boost power flow by 20-40 percent, at a much lower cost than building new lines.

Still other technologies are available to upgrade maintenance practices throughout the industry, assist service providers with rate design and market simulation, and help system security coordinators integrate grid operations on a regional scale. Now is the time for engineers to help policy-makers better understand the technical complexity of power systems and become aware of new technological opportunities for solving the current problems before they spread even further.