Smart Grids – Creating Transparent Markets

Blog, Energy, Les Routledge

Lawrence Solomon continues to vocalize on his views that smart grids are an uneconomic, politically motived fantasy. Instead of seeing the potential for Smart Grids to usher in competitive, market-based pricing for electricity, he appears to believe that we are best served with the current rigid system where it is quite difficult to balance supply and demand.

Perhaps clarifying some of the assertions from his most recent post can help people understand the situation more clearly.

Faulty Assertion #1 – The Internet network, which is profitable, carries high-value data such as movies, which are profitable, from laptops and other capable devices, which are profitable. In contrast, the smart grid, which is unprofitable, would carry mostly low-value electricity

Correction #1 – Like the Internet, the electrical grid is a system that transports a commodity from where it is produced to where it is consumed.  The Internet transportation network itself is not any more inherently profitable than the power network.  Both systems can be subject to congestion and both operate as a cost center, not a profit center.

Correction #2 – Assigning profitability to customer equipment is a somewhat misleading concept.  Are laptops and other capable electronic devices inherently any more profitable than electrical appliances such as water heaters, lighting fixtures, fridges, stoves, dishwashers and air conditioners?

Correction #3 – Value can and should be defined by the interplay of supply and demand.  In the media world, a proxy for that interplay of supply and demand is advertising spot rates that sell for premium prices during prime time hours.   Why would it not make sense for the spot price of electricity to move up and down in response to the interaction of the forces of supply and demand in a comparable manner?

Faulty Assertion #2 – Unlike most conventional power plants, solar and wind technologies can’t be powered on and off as needed to meet the varying demands of customers.

Correction #4 – In Ontario, 46% of power capacity is supplied by the combination of coal and nuclear thermal electric plants.  These plants required several hours to several days to ramp up from a cold start. They operate most effectively when they operate at full capacity all the time.  As a result, coal and nuclear plants tend to be operated more constantly and contributed 63% of power produced in 2010.  The ideal customer for these plants is one that has a steady demand around the clock and from day-to-day.


Generation by Fuel Type - 2010

Unfortunately, customers are not ideal.  Demand can and does cycle up and down by over 35% during the course of the day.  Peak demand on hot or cold days can be even more extreme.  If the increase of demand is predictable, a gas fired plant can be fired up to produce power, but that comes at the cost of consuming fuel.  Hydro is much more flexible, but there is a limited amount of hydro power that can be generated at any one time or can be ultimately developed.

Another issue that arises is capacity utilization.  Both hydro dams and natural gas plants are expensive capital infrastructure assets.  Those assets may operate 50% or less of the time to meet peak demand.  The rest of the time they are idle.  In 2006, for example, peak power consumption reached 25,000 MW for only 32 hours of the year or the equivalent of a 0.3% capacity utilization rate for the last 1 MW of production capacity.  At a capital cost of at least $1 million per MW of production capacity, some might consider that peak power quite expensive.

Hydro power has one very appealing characteristic, most dams can store water so that power can be produced on demand.  Sometimes, the call for that power may come from peak demand by customers, at other times, it may arise because alternative sources of production are not available.  They are the closest thing to an energy storage “battery” in the system.

Coupling wind and solar systems with hydro assets can be an elegant solution because the combination enables hydro operators to conserve water to be used to meet peak demand and hopefully capture premium prices for that energy.  The hydro capacity that needs to be in place to meet peak demand, can also be used to shape and firm power from intermittent sources of production.  In a sense, the coupling of solar and wind with hydro is somewhat equivalent to expanding the storage capacity of the hydro reservoir to store more water and thus sell more premium priced electricity when prices are at their highest.

Faulty Assertion #3 – The smart grid would solve the problem of instability by controlling the customers instead of the technologies. To protect the grid from sudden drops in the power being produced, for example, the smart grid engineers would reach into our homes and businesses to instantly turn off our refrigerators, freezers, washing machines, air conditioners, and other smart appliances as needed to match the sudden power losses.

Correction #5 – The scenario presented is more characteristic of a dumb grid instead of a smart grid.  A smart grid should include “smart appliances” that can be preset to consume power in response to changes in pricing.  Some uses of power, such as heating water for the house, a pool or a hot tub can be deferred to a period when energy is inexpensive.  The same goes for energy consumed by cooling storage systems like fridges or freezers.  Why not set the dishwasher to run at night when prices are lower?

At any time, the customer would still have the ability to over-ride the programming if they wanted power on demand.  The only difference would be those “energy hogs” would be paying a premium to satisfy their desire to consumer energy during periods of peak demand.  How is this situation any different than a home owner who uses a programmable thermostat today?  Does the consumer really need to keep the temperature of the hot tub at 104 degrees around the clock when it is not being used?  Does it matter if the freezer varies in temperature a bit as long as the food remains frozen?  If the consumer had a price signal that turning on the air condition during peak hours will require buying premium priced power, might they opt to turn on a fan instead?  Do the dinner dishes really need to be washed right now?

Smart Grids are not about enabling “the grid engineer to reach into our homes.”  No, a true Smart Grid will present visible, transparent, and competitively-determined price signals to consumers so they can see the cost associated with individual actions.  That would be a substantial improvement over today’s situation where price signals are not getting through to end users in on a timely basis.  To parrot the CRTC and Bell UBB line, why should I pay for the slothful, anti-social habits of energy hogs who persist on loading the network with demand during peak periods when supplying energy is quite expensive?  Smart Networks enables the system to make those energy hogs pay for their behavior.

Faulty Assertion #4 – …smart grid engineers would reach into our pocketbooks, by pricing power cheaper in the middle of the night, on political criteria, to encourage us to soak up an excess of power that their anti-fossil fuel scheme has produced.

Correction #6 – If Smart Grids present real-time pricing to the consumer and those prices are determined by competitive markets that balance supply and demand, how can it be a bad thing to price energy at a cheaper price when it is less expensive to produce and deliver it?  It will be the market sending the price signal not some bogeyman “network engineer.”  Where is there “political criteria” embedded in this type of market-based system?

Correction #7 – That excess power that needs to be soaked up will primarily come from big coal and nuclear thermal plants that need operate 24-7 to be most efficient.  If anything, the operation of wind or solar during off-peak hours enables hydro plants to store water so it can be used when energy prices produce peak revenues.  Referring to the pattern of demand going up during the day, is it not apparent that solar energy will tend to generate power when it is needed during the day instead of the middle of the night?

Faulty Assertion #5 – Most of that excess power, they fantasize, will recharge the batteries of our electric vehicles as we sleep. But electric cars are going nowhere, the marketplace has made clear — they remain unaffordable even with big rebates on the vehicle’s purchase price.

Correction #8 – As indicated previously, there are uses of energy in the home, such as hot water heating, operating fridges and freezers, washing dishes, and space heating/cooling that can behave like a battery in that the benefit can be stored or deferred to a less expensive time to operate.  Why won’t a consumer want to heat their pools and hot tubs or wash their dishes at night when power prices are at a minimum?

Second, I wonder how demand for plug-in electric cars or even fully electric commuter cars would fare if they could be “filled up” over night with low cost electricity instead of consuming expensive gasoline?  I might purchase one as a second commuter vehicle if I could operate it at a per-kilometer cost that is lower than the gasoline powered alternative.  Why not let the Smart Grid reflect market pricing and let consumers make an informed decision?

Faulty Assertion #6 – The world’s electricity systems will remain predominantly fossil fuelled, and because fossil fuels are both flexible and cheap, they won’t require a smart grid to manage them.

Correction #9 – As indicated previously, coal fired thermal plants are not very flexible.  Neither are nuclear thermal electric plants.  Presenting real-time price signals to consumers can enable those components of the production mix to operate a peak efficiency and rates of profitability.

Natural gas itself is plentiful and is currently reasonably inexpensive.  However, if natural gas was used to both replace legacy coal capacity and meet new demand, is there sufficient capacity in pipeline networks to meet that demand?  How many billions of dollars would need to be spent to expand that capacity?  Even if that pipeline capacity is expanded, will the increased demand for natural gas result in escalating natural gas prices that could be double or triple current prices?  How inexpensive will electricity from natural gas plants be under that situation?

Replacing legacy power plants with new capacity and expanding capacity to meet future growth of demand is not going to be inexpensive.  Hydro capacity is limited and recent experience indicates their costs and the cost of their long transmission lines can be subject to considerable inflation over time.  Besides, there is not enough potential hydro resources that can be developed in North America to fully satisfy the market.

Assertion #7 – The one smart grid that was completed — a small smart grid in Boulder, Colo., called Smart Grid City — came in at $100-million, three times the original cost estimates, and at a cost of $2,000 per billpayer, it has little value to show for itself.

Explanation #10 – This assertion could benefit from having Paul Harvey around to tell “the rest of the story.”  The Boulder Smart Grid system included a build out of a broadband fibre communications network into the neighborhood level of distribution.  They essentially built out a broadband delivery network that could compete with cable or telco broadband services.  To suggest that the full $2,000 cost per subscriber should be allocated to the Smart Grid purpose is akin to suggesting that the full cost of cellular telephone service should be allocated and paid for by people’s texting use of the network.

If Lawrence dug deeper, he would find that several Canadian utilities, including Toronto Hydro, have built out fibre communications networks in the past to support both their internal needs and the delivery of commercial broadband services. Some of the municipal utilities in Ontario went on to sell a portion of those networks for a considerable profit.  For example, Ottawa Hydro booked a $20 million profit on their network to Atria Networks.  Rogers in turn bought that company for $425 million.  It is premature to write the Boulder network off as a loss or a boondoggle.

What should concern Lawrence is the situation where a power utility deploys fibre optic infrastructure to satisfy its internal needs and then enters into a non-compete agreement with incumbent telco’s to never make that broadband capacity available to third parties.  If the utility is going to string fibre lines to support internal communications with their substations and other equipment in the distribution network, surely it must make sense to use those assets to support competition and the delivery of competitive broadband services.

Concluding Comments

Smart Grids can offer a means to send price signals to consumers that enables competition and competitive supply markets to work effectively.  What we need today is informed discussion about how the system can be used to create open and dynamic competition throughout the system instead of perpetuating the past model of dumb networks, dumb pricing, and dumb regulation by government.  The technology offer the possibility but steps need to be taken in corporate and public policy to ensure the benefits are realized.