Tuesday, October 5, 2010

Some More About the Grid, Vermont Yankee, and a Little About the Smart Grid

Vermont Yankee and Connecticut

In a recent post, I described how a lack of transmission lines in eastern Connecticut caused that area to fall below ISO-NE reliability standards. Therefore, ISO-NE to took action by issuing an RFP for diesel generation in that area.

I thought I was done with Connecticut and the Grid for a while. I had used the state as a Warning Example of what could happen here, and it was time to move on. Except that it isn't. Turns out that the Connecticut is quite concerned with its grid reliability and electricity prices if Vermont Yankee closes. Today, in Hartford Business Journal Online, Brad Kane wrote Power Down … Prices Up:Vermont nuclear fight drains Connecticut.

As the article states:
The loss of Vermont Yankee would drop the grid beneath the reliability standards established by Congress in the wake of the August 2003 blackouts, meaning an alternative source of power would have to be found. Since Vermont — like Connecticut — uses more power than it generates, the state must improve transmission and/or import power from less-efficient, more costly plants.....With Vermont replacing the relatively cheap nuclear power with more expensive, less efficient generators, that will drive up electricity costs for all New England....

On top of wholesale prices, each ISO d (sic) state pays costs of transmission. Congestion on the Connecticut grid and losses from sending power over long distances drives the state’s electricity prices 15-16 percent higher than the rest of New England, and rank behind only Hawaii in the nation.

Wow. Connecticut is up there next to Hawaii in costs. Who knew? It was easy enough to look up electricity costs in the Department of Energy EIA report (Numbers quoted are for June of this year.) I found that it was not quite as bad as all that. Connecticut is 19.47 cents per kWh residential, while Hawaii is 28.36 cents. Quite a difference.

On the other hand, Connecticut is indeed the second-most-expensive state, with the U.S. average at 11.92 cents per kWh. Hawaii is expensive because Hawaii electricity generation is mostly diesel. I hope this sort of energy is not part of Vermont and Connecticut's future.

Can the Connecticut Legislature Lower Those Expensive Prices?

Right now, the New England ISO uses the Clearing Price Method of setting costs. For example, if 300 MW are needed in the next five minutes (power is priced in five-minute increments), and they have
  • one bidder for 100 MW at 2 cents,
  • another bidder for 100 MW at 4 cents, and
  • a third bidder for 100 MW at 9 cents,
then all three bidders receive 9 cents. The highest bidder sets the Clearing Price, which in this case in 9 cents.

On the other hand, in the same example, if the grid only needed 200 MW, the Clearing Price would be 4 cents and the lowest two bidders would receive it.

The Clearing Price Method is the standard method for price setting on the grid, though honestly, it always seems a little counter-intuitive. If someone offers to sell me something at 2 cents, why would I pay him 9 cents? But that is how it is done.

According to the Hartford Business article quoted above, the Connecticut Legislature also thinks the Clearing Price Method is counter-intuitive. However, the Legislature believes it may be able to lower prices by passing a law requiring ISO to use the Bid Price (Paid As Bid) as the actual price, and not use the Clearing Prices. Last year, the legislature passed such a bill, the governor vetoed it, and the issue is likely to come up again.

Would Paid As Bid save money? I don't think so. The people who own power plants are interested in figuring out a price structure that will allow them to keep running and make a reasonable profit. After all, they are in a competitive power market. It's regulated, but it is competitive. In the example above, the 9 cents per kWh generator doesn't get to sell any power when the demand is down. Only the 2 cent and 4 cent generators continue to sell power.

I think that if ISO changes its pricing structure to Paid as Bid, this would simply encourage the generators to change THEIR bid prices in response. I don't think you can lower the cost to the consumer this way.

(However, if you believe that the generating companies are not really competitive, and are just sitting there minting money at consumer expense, then you would predict that changing the pricing structure will lower prices to the consumer. If you don't believe they are minting money, then changing the pricing structure will cause the generating utilities to temporarily hire some computer programmers and economic modelers. After a short flurry of activity with these people, the generators will adjust their rates to the new system. Prices to consumers will remain the same.)

In my opinion, electricity prices are set by reality: the cost of natural gas, the losses of power on transmission lines. They are not set by regulatory action. For example, the ISO-NE annual report for 2009 contains this graph:

Double clicking to expand the graph will show that the green line of electricity market prices and the blue line of natural gas prices move together very closely. Natural gas prices basically set electricity prices. This will not be fixed by legislative action, in my opinion.

ISO and Prediction

Intermittent sources (renewables) will require ISO-NE to do an even better job of predicting energy supply and demand than it does now. This video from CNET shows how they are beginning to address the problem.

Removing Vermont Yankee will add difficulties and expense to the grid at a time when the ISO should be working on the major problem of the future: effective integration of renewables. Spending time and money replacing Vermont Yankee baseload with diesels is not the best choice for ISO efforts, for the grid or for Vermont.

Transmission line graphic from Wikimedia commons.
There is no copyright notice on the ISO Financial Report document, and ISO is a quasi-governmental body. I have taken the liberty of assuming that the gas/electricity price graph in that document is in the public domain.

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