Why we can’t have nice things, Part 532: Our electricity situation


One question I’m often asked is why low-carbon alternatives to fossil fuel energy haven’t taken off here to the extent that they have in other countries. Clearly, there isn’t just one reason. We have LOTS of ways to avoid progress! Today I’d like to explain one reason among many, because I think it illuminates a fundamental philosophical mistake in how we think about energy. We will be talking today about demand response resources. 

If you’re planning out how to meet energy needs for a given region over the next few years, you’re working out a balance between supply and demand. In the electricity game, generation resources are suppliers who generate megawatt-hours of electricity; e.g., power plants, wind farms, etc. You need to know how much electricity can be reliably generated, when, and where. But you also need to be able to predict and (to an extent) control demand. Enter demand response resources. DRRs are ways to reduce demand from the consumer end. This can be done a number of ways: reducing use during critical times, increasing efficiency of delivery, shutting the goddamn door, for crying out loud, were you born in a fucking barn, etc.

Here are some examples of demand response resources:

  • A third party company helps a large-scale energy consumer reduce its electricity usage during peak hours by installing technology that cycles water chillers and air conditioning on and off during those times.
  • A third party company installs monitors that notify a plant manager in real time how electricity load is distributed and where to make adjustments.
  • A company provides on-site generation (called distributed generation) for peak hours only.

So how do these kinds of service fit into the larger electricity market? Organized energy markets have been the central tool for planning since the mid-90s. They function through a kind of auction process. Suppliers (generation resources) bid a certain number of megawatt-hours they can reliably provide at a particular price. Based on the bids received, a market price is set, called the locational market price (LMP). Everyone bidding at or under the LMP gets paid the same market price for each megawatt-hour supplied. If there isn’t enough to meet all the forecasted demand reliably, we know we need to either build more generation resources or reduce demand. That’s an advantage of planning electricity systems a few years in advance–it takes awhile for a new power plant to be built.

Wouldn’t it be faster and cheaper just to reduce demand? GENIUS! But how do you get major energy consumers to do that when their parents aren’t around to yell at them? In some markets, demand response resources have been allowed to bid into the market alongside generation resources. The idea goes like this: if I can reliably reduce consumer demand in a quantifiable amount, it’s functionally equivalent to generating the same amount of electricity in that system for planning purposes. And it’s cheaper than actually generating the electricity. And it’s less carbon intensive than generating the electricity. So, if I’m a demand response resource company, I get paid for the number of megawatts I’ve eliminated from the demand side–they call these “negawatts;” so awesome. The question is, should I thereby get paid the same market price for reducing demand as generators get paid for producing actual electricity?

The Federal Energy Regulatory Commission (FERC) ordered in 2011 that demand response resources should be paid at the same market price as generation resources (order No. 745). Megawatts equal negawatts. FERC did this, they said, in order to remove market barriers to participation in the market, and to encourage low-carbon-intensity alternatives. But the order was overturned by the courts.

Here’s the argument: generation resources agree that it’s important to remove market barriers to demand response resources. However, they say that FERC stepped way past removing barriers by setting a compulsory price for demand response (effectively, a price floor). Generators and regional system operators argued: 1) this is something that should be organized at the regional, not the federal, level, and 2) reducing demand is a market service, but not part of the energy market in the same way that generating electricity is.

In other words, generators say there’s a metaphysical difference  between megawatt hours produced and megawatt hours reduced–producing something vs. not-producing something–so DRRs shouldn’t get paid the same market price as generation resources (no kidding: the courts actually say “metaphysical difference” in the ruling). I guess an analogy from this angle would be a class bully getting bluejay stickers for not beating kids up this week, because he’s improved the overall balance of happiness in class.

On the other side of the argument, the two sides function identically in the world of energy planning and pricing. Both supply-side and demand-response resources have to prove their reliability before they can bid, and they are both penalized pretty heavily for failures, so they’re regulated similarly. And DRRs have effectively lowered the overall market price for energy by increasing efficiency, reducing peak load, and solving some regional congestion issues. Planning and pricing of energy supply already include these services on a functional level.

Further, existing energy generation resources (usually high-carbon-emissions sources) have an advantage over newer, renewable generation sources in the auctions because their cost per megawatt hour is significantly lower. If we really wanted to change our electricity production mix, we’d give a little discount to low-carbon generation sources’ bid prices in the auctions. That’s probably not going to happen any time soon, because it reads as a carbon tax. But it’s certainly within reason to let DRRs get paid the same price as generation resources–no existing power plants would actually lose market share that way, because DRRs are already functionally influencing the market just as if they were producing electricity.

So, here is where I think we are making a philosophical mistake: thinking of energy as a commodity (like coffee or pork bellies) necessarily requires that we think of energy as identical physical units that we can store and use across applications. The closest we come to “stored” energy on this level is fossil fuels. When we think of energy as units produced, we think of it in terms of property rights; as something to be bought and sold, and, specifically, to sell more of. And that is a massive philosophical barrier to decarbonization.

However, I believe energy is better thought of as the expression of a community’s values. That which we value more, we necessarily expend more energy getting/doing.  This implies that we also value not-expending energy when we don’t have to.  If we have a way to express that we value not-expending unnecessary energy, such as paying for demand response resources, we can put all kinds of values into market terms that weren’t accurately reflected there before. I think we need policy that nudges us toward thinking of energy as long-term shared community commitment; as commons rather than commodity.

Now, was this FERC rule the right way to do that? At first, thinking of DRRs as functionally equivalent to and thereby worth the same price as electricity generation seems like a step in the right philosophical direction. BUT I worry that it may tend to reify the idea that energy belongs in this kind of market structure. I’m not sure I’m ready to say energy shouldn’t be privatized (I swear I’m not a commie, mom!), but I’m certainly uncomfortable with the way it’s currently handled in profit terms (I think I should be admonished to turn the damn lights off). And it seems obvious that central control of this price structure can’t possibly reflect regional transmission details and environmental impact nearly as well as local control (cf.: fracking ban in Denton, Texas). But not all local market auctions are going to let DRRs compete, because hard-working Americans work hard to make electricity out of dinosaur juice. Think of the jobs! THE JOBS! I’m at a loss; I swear.

Later this month, the Supreme Court will decide whether or not to take up FERC’s appeal on the overturn of this order. I’ll be watching with great interest.

2 thoughts on “Why we can’t have nice things, Part 532: Our electricity situation

  1. devin

    The challenge of negawatts is accurately accounting for real savings that take place due to intentional demand reduction vs a claim of reduction. If a manufacturer has a boom year and consumes some N MWh, then has a slow year and claims negawatts to offset their decrease in sales, for example, or a manufacturer continues to grow and upgrades all of their equipment to more efficient models to meet demand and not to reduce use, should they be rewarded?

    There is already a strong incentive beyond savings due to use reduction for large electric consumers, Peak and Coincident Peak charges. These usually account for more than the actual usage charges, and they are also the types of use that cause new power plants to be built because they represent the total maximum consumption of energy. If demand shifts the need for inefficient peaker plants decreases and nuclear in particular and wind to a degree are rewarded by demand shifting to off peak periods. This time of year Comanche Peak actually gives power away several hours per night due to unbalanced demand. Free electricity several hours a night for a few months a year and no coincident peak charges is a very strong incentive, but there aren’t any large scale users that have figured out how to take advantage of this yet.

  2. Kathleen

    I struggle on a consistent basis with trying to avoid peak electric and water charges. I am home most of the day which makes it very difficult to not use any energy/water during the day. I keep the tv off, play music using my phone, try to keep lights off, use a timer in the shower, turn the water off when soaping up and shaving, use a bucket to capture extra water and use this water in my fountains and planters etc. I do my laundry during the early morning hours but every now and then have to do it during the day when it’s reasonable, otherwise I would be doing laundry all night long. BTW we don’t have air conditioning so I have to keep the doors open. 🙂 We purchased a new computer, a new refrigerator, changed lights etc. My point is, I conserve all of the time then I am asked to conserve 25% more. Not sure how I am going to pull it off. We are still penalized no matter how much we conserve while our neighbors burn all the energy on their pools, 2 story homes, washing down their driveways and using their air conditioning.

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