Climate Change and Alternative Energy Program Part II

Our last meeting in Washington was with the Federal Energy Regulation Commission (FERC). FERC is essentially responsible for regulating the following industries:

• Electric power
• Natural gas
• Oil pipeline
• Hydroelectric

In a jam packed meeting, we learned a huge amount. Firstly, the American energy system is completely and utterly different to the UKs. Nowhere is this more apparent than in electricity, but let me start with the simple example of natural gas. FERC tend to own and regulate the national infrastructure, such as gas stores, LNG stores and the pipelines that take these into the different States. They don’t own the infrastructure for extracting and processing the gas nor do they own or regulate the infrastructure within the State; that is regulated by the State itself. The price of gas used to be set be FERC, but is now deregulated as there is sufficient competition in the system. So the lesson here is that it’s up to individual States to distribute the gas, once it’s been delivered. This lessons, crudely, applies to most energy services – they are managed and regulated at the State level.

So, gas is fairly simple, electricity, however, is not. In fact it’s so complicated I’m going to really struggle to explain it. The role of FERC is to regulate sales from generators to distributors. Distributers then sell power to customers (which might be other distributors, in which case FERC regulates again), which is regulated by the individual States. Electricity price has never been deregulated, so the role of FERC is to ensure a “just and reasonable price” to consumers, which I think means agreeing a reasonable price for sale from the generator (and assuming that mark-ups down the chain aren’t too high).

In the whole electricity system, FERC owns virtually nothing. Almost all power plants and transmission and distribution infrastructure is either privately or State owned, and there are literally thousands of companies involved. There are basically three sorts of arrangements:

• Investor owned utilities – these date back to the days of Edison where the Federal Government allowed monopolies in return for a guarantee of universal, safe, reliable service. Curiously, the power companies did not receive payment per unit electricity, but rather had a profit based on sunk capital meaning they were encouraged to build. Apparently the rate of return was set at a rather healthy 10-11%!
• Cooperatives – These formed in low-population areas, such as farming States, where it would be expensive to lay power lines. Essentially the Federal Government offers a low cost loan (the “Rural Utilities Service”, which is paid back over time by the co-ops. The co-ops are run by a board of directors, which has in some instances lead to corruption.
• Municipal/Public Authorities – is where the State has invested in the supply and transmission and distribution infrastructure. These bodies are essentially self-regulating.

I should also mention that there are a number of Regional Transmission Organisations, where the States or private owners have pooled resources to service a number of States (so that the mnost efficient system can be developed).

Overall, the infrastructure in America is as old as it is in the UK, and it’s very difficult (because of the number of different players) to incentivise new build. Also the private/State ownership of land and T&D networks means that it is extremely difficult to put new power lines down that cross through different States as each one will want to negotiate and have the power to block progress. This means it is difficult to move wind power down from where the resource is, in the North of America, to the demand (typically on the coasts).

The market for electricity is somewhat complicated. It’s regional/local and is typically divided into 24 1-hourly slots per day (where people bid for the next day). Both supply and demand sides bid for power (e.g. supply says I have 200MW available at 13.00 for $X, demand wants 200MW at 13.00 for $Y). Bids are matched, with cheapest dealt with first. This process continues until the gas power is reached (the most expensive/volatile) and at this point the price is set for the next day’s generation at that hour (which can make it very profitable for cheaper technologies). This sort of made my head spin!

The way the market works means that certain areas, such as New York City, which have high demand, little supply and suffer transmission congestion, can face very high spot prices. This is dealt with to a certain extent through demand management. Big users of power will get paid by suppliers if they cut back their demand within 30 minutes of a reliability warning. FERC would like to roll this out more broadly whereby users could get the market price per unit of power not used during crunch times.

It follows that there great interest in smart grids. We saw a strategy that estimated up to 20% of peak demand could be avoided through active demand management of technologies including air conditioners, fridges and electric vehicles. There are some very big plans for smart grids and FERC is currently writing a Strategy paper for Congress. NIST is currently consulting on standards for smart meters, and are open to international collaboration so if this is something you are interested in I can probably get you a contact.

Microgeneration, such as PV, have to be accepted back into the grid with the consumer typically being credited for the power exported (i.e. the meter runs backwards). I didn’t get a feel for whether there is any incentive other than this for consumers to invest in microgeneration (for example capital loans). I think probably not.

So, I’ve mainly learned that the electricity system is hugely complicated. It's a mix of state and private level companies with some cross-State relationships. Federal Government has little power over the system, other than in protecting consumers from excessive prices. If new capacity is required States have to demand and incentivise the producers to do this. Nimbyism is potent in America and is a real problem for upgrading T&D infrastructure. There are extremely ambitious plans for smart grids but it is unclear how these would be deployed.

I am writing this blog on my iPhone as we hurtle west towards Denver. I think the whole group is really looking forward to this part as not only are we visiting national laboratories but we are also going to be celebrating Halloween with American families. I'm glad I bought the Harrods chocolate with me now! We are also looking forward to a visit to the rocky mountain national park on Sunday.

UPDATE

Snowed in!

Denver is under a foot of snow! It's a real shame as it means that we can't visit NREL or indeed the Smart Grid house that we had planned.

Am currently sat in a coffee shop inside a giant sports store writing this after a chilly and slushy walk through a rather beautiful Denver.

Our hotel, the Brown Palace is magnificent, it's 120 years old (which is old over here) and features a superb cigar bar (not that I've been in there, honestly) and a superb, but jaw droppingly expensive breakfast.

Hopefully the weather will clear tomorrow so that we can visit the State energy team at the state.

UPDATE 2

Weather looks much better today (Friday), so the visits are on. This should be really interesting to see how the individual State deals with energy policy. More to follow...