Introduction to Electricity Part II: The Changing Electricity Industry

The Electricity Industry

Electricity systems worldwide are changing for one or more reasons:

Technological advances

Financial/management crisis/inadequate investment

Public opposition

Consumer demand for lower costs, better service

Political cronyism. . .

Vertically Integrated Model

UTILITYDistribution

UTILITY Generation

UTILITYTransmission

Industrial CommercialResidential

Energy & FinanceMinistry

The Changing Industry Structure

Vertically Integrated Model – generation, transmission and distribution controlled by one or several utilities (usually state owned).Government grants utility monopoly powerRegulated by government Centralized planning, operationGovernment-guaranteed investment/regulator ensures cost recovery from consumersCaptive consumers/ratepayersKey problems: high cost AND/OR low quality service

Single Buyer Model

UTILITYNational

TransmissionSystem

Owner/Operator

State Owned

Power Plants

Private – Independent Power Producers IPP

Industrial/Rural Cogeneration

Government Regulator

Small/Renewable Power Producers

UTILITY Distribution Municipal or

Provincial

Consumers/Small Producers

The Changing Electric Industry Structure

Single Buyer ModelPrivate and state producers selling to central utility/no competition Centralized planning, operationTransmission centrally owned/operated by central utilityLarge industrial consumers can buy electricity from central utility or direct from private power producers or self-generateKey Problems:

Small consumers still captive/no choiceGovernment still conflicted as owner/regulatorCentral utility can shut out competitors

NOTE: World Bank promotes this model in China, Thailand, Vietnam but its own experts admit it encourages over-investment, corruption, high-cost power purchase deals, poor regulation.

The Changing Electricity Industry

Market-Oriented Restructuring:

Privatization and unbundling of Generation, Transmission, Distribution

New competitive procedures for power producers

New forms of regulation

Restructuring Theory/Objectives

To raise capital

To improve regulation

To eliminate government/investor conflict of interest

To boost economic efficiency

To lower rates and improve service

To give producers and consumers competitive choices.

General components of market-oriented restructuring

WHICH ONES CAN YOU IDENTIFY IN YOUR COUNTRY? CAN YOU SAY WHICH TRENDS ARE POSITIVE FOR CONSUMERS? WHY?

1. Unbundling of generation, transmission, and distribution into separate businesses.2. Open transmission access.3. Operation of the transmission system assigned to a few distinct organizations.4. Creation of a new class of non-regulated generators.5. Formation of new organizations for dispatch of all generation.6 Competition in power production with dispatch based on quoted prices.7Construction of many gas-fired plants by independent owners.8. Payments for some power production based on ‘market clearing’ price, which is the highest of any accepted bid prices. 9. Retail “wheeling” increasing in stages to smaller and smaller size customers (unsuccessful in many places).11. No central planning, no government guarantees to purchasers. 12. Hedging contracts to guarantee prices to power purchasers in a volatile market.

Competitive Market Model

Industry RegulatoryAuthority

ENFORCEMENTCOMPETITION

T&D RatesPOWER PRODUCERsState/Private

TRANSMISSION PROVIDERsState/Private

DISTRIBUTION Companies/Rural EnergyCooperatives

CONSUMERsCHOOSE

SUPPLIERs

Investors

DISPATCHIndependent System Operator

BUY/SELLElectricity Market

Operator

PolicyLawsRegs

Multiple producers

Rice husk cogeneration

Industrial cogeneration

Reduced demand on central grid

Distribution companies

Can buy power from supplier of their choice or from market exchange

Consumers can sell direct to distribution companies

Old vs New utility regulation

Old regulated utilities make money building new power supply projects, bigger=more revenue/profit

New regulated utilities help customers save energy; help customers buy less of utility product: electricity!

New utility regulation

Utilities earn a return for investment in saving energy that is equivalent to what they earn from investments in new power supply capacity.

More state funding for energy efficiency improvements across sectors

Governments allow utilities to collect money from ratepayers to pay for energy efficiency projects

State-led emission reduction targets

Examples

California – Pacific Gas & Electric Co. helping Subway (30,000 restaurants) install energy-efficient breadbaking ovensWorking with wineries – 2,600 wineries consume one-third of energy consumed by food processorsIn California, state law requires utilities to meet new supply needs first through energy efficiency then renewables, then building new (conventional) power plantsUtilities in California – rate structure rewards them for cutting electricity use, not for pushing energy sales

New Utility Business - Conservation

Iowa Power & Light – advising pig farmers on energy-efficient lighting and ventilation – energy-efficient lighting can save $10,000 a year in electricity cost

Pinnacle West Capital – Arizona utility – is working with district school board to install new efficient heating and cooling systems in schools, adding solar to school rooftops

Consumers as Producers

Homeowners install ~ 10kW solar systemSend surplus to the grid and get paid by utilityUtilities (Sacramento Municipal Utility) willing to pay retail rate because solar systems produce power during peak (mid-day) hours, improve performance and reliability of grid.19 states give homeowners credit to reduce their bill, but not cash10 states require utilities to pay homeowners wholesale rate for surplus solar

Which policy leads to most solar at lower cost?

Still too early to tell

Critics say solar homeowners are getting a free ride: They get a cash rebate for installing system, which comes from ratepayers

They get credit at retail rate even though they don’t pay any transmission maintenance charge

Interconnection charge is waived while other producers have to pay >> critics say unfair subsidy

Critics say paying people for “surplus” will encourage larger-than-necessary systems (See Thai solar producers)

Examples

Duke Energy (North Carolina) – helping Budweiser make its beer chillers more efficient, saving Bud big $

Duke looking to regulator to get special incentives to expand energy efficiency business

Electricity Reform in the Mekong Region

What’s the Future of Big Hydro?

What’s the Future of Coal and Nuclear Power?

What role environmental/community advocates in the Mekong region?

System is changing, for better or worseKnow your power Bright ideas vs dim bulb policiesDefine public interest

Transparency Accountability Participation

Democratize the grid!

END: Introduction to ElectricityPart 2: The Changing Electricity

Industry