Category — Electricity Policy

“The [Federal Energy Regulatory] Commission’s recent progress in promoting competitive wholesale energy markets has the potential to be undone as a result of this well-meaning, but misguided Rule.”

- FERC Commissioner Philip Moeller, ”Demand Response Compensation in Organized Wholesale Energy Markets,“ Order No. 745 (2011).

Renewable energy subsidies are at the forefront of the public policy debate with constant talk of “green” jobs and the looming expiration of the production tax credit, a familiar subject at this blogsite. But qualifying renewables get other subsidies too, such as accelerated depreciation and state-level must-buy mandates.

The Federal Energy Regulatory Commission (FERC), regulating interstate electricity, is arguably subsidizing another favorite “green” resource – the practice of energy abstinence called “demand response.”

FERC Order Nos. 745 and 745-A established, for the first time, a uniform compensation scheme for demand response in organized electricity markets. Before Order No. 745, each regional transmission organization was free to develop its own compensation scheme, and demand response was already being implemented in organized markets such as PJM. Commenters disagreed with several aspects of the order, including the appropriate level of compensation. When FERC denied rehearing on that issue (and others), protesters sought review by the Court of Appeals (Electric Power Supply Ass’n, et al. v. FERC, No. 11-1486, et al.). The case is at the briefing stage, with oral arguments to be scheduled.

The MasterResource-worthy part of this case is the amicus brief filed by a group of academic energy economists. It takes a lot for economists to agree in the first place, let alone to jointly file a 30-page brief on a nuanced issue in the field of electricity markets. To raise the stakes a bit, I should also note that one of FERC Chairman Jon Wellinghoff’s main priorities, along with integrating renewables, is encouraging demand response. A reversal on this issue would be a big deal.

Background: ’Demand Response’

Retail electricity customers tend to pay a fixed rate for their electricity. However, in organized wholesale markets, the price of electricity at different points in the transmission grid can vary widely between seasons and even throughout the day depending not only on demand and supply, but also on transmission constraints. That wholesale market price is often referred to as the Locational Marginal Price (LMP).

That price structure means there is a disconnect between wholesale and retail electricity markets, and therefore retail customer usage is not responsive to wholesale price fluctuations. This can be troublesome as price-insulated electricity demand reaches the upper limits of the grid’s physical capacity to supply. Grid reliability is threatened, and despite sky-high prices at the wholesale level, retail customers carry on using electricity, blind to the wholesale price signal.

Enter demand response (or imputed demand response to be fair to the electricity nerds out there). The promise of demand response is to bridge the wholesale-retail gap by giving retail customers the incentive to withhold consumption when wholesale prices are high, easing the strains on the system at times of peak electricity usage. This “peak-shaving” effect can strengthen the reliability of the system and put off costly transmission investments. However, significant differences of opinion remain as to the best way to send wholesale price signals to retail customers. This is where the economists and the FERC majority are at odds.

The FERC Majority: Pay Demand Responders Full LMP

In Order No. 745, FERC reasoned that, “when a demand response resource has the capability to balance supply and demand as an alternative to a generation resource,” the demand response resource should be paid the full LMP. Some commenters agreed – some not so much. As FERC stated: [Read more →]

In an earlier post, I asked readers to consider four thought experiments regarding the reprioritization of our public-policy work on energy. Here is my response to your much-appreciated comments and a proposed path forward.

Thought Experiment 1. Let’s demote oil and climate change to secondary status as analytical issues.

To my surprise, no one seemed to disagree with my proposal. Yet popular media coverage of these issues is probably 90+%.

Thought Experiment 2. Let’s elevate the dialogue about fundamental electric industry reform to primary status.

Again to my surprise, no one seemed to disagree with my proposal, which leads me to wonder why this issue does not get the attention it deserves. My best guess is you cannot boil the solution down to a three word sound bite (Drill Baby Drill! or Climate’s Always Changing!). Maybe it will take a major catastrophe to get our attention à la India.

I make many analogies to other major, successful industry restructurings from statist to market models: airlines, railroads, natural gas, telecommunications, and trucking. I don’t remember that they were either reduced to a three-word slogan or needed a catastrophe to get D.C. moving.

Why is electricity different? Is it possible that we free market fetishists have not put forth a coherent model?

Thought Experiment 3. Let’s debate what is wrong with current electric industry policy.

This will be the subject of this post, more later.

Thought Experiment 4. Let’s identify the set of policies needed to permit the electric industry to enter the 21st Century.

This will be the subject of future posts after we have carefully defined the problem. [Read more →]

Last Saturday, I spoke at the American for Prosperity’s Defending the American Dream Summit in Washington, D.C. I was one of three presenters on energy and energy/environmental issues.

Dan Simmons of the Institute for Energy Research documented the U.S.’s abundance of energy resources from two studies he helped put together: North American Energy Inventory and Hard Facts. Myron Ebell of the Competitive Enterprise Institute reviewed climate change issues and the U.S. Environmental Protection Agency’s war on coal.

I took a different tact and would like to highlight some of the points I made in this post.

Time to Reprioritize?

As tragic as Obama’s policies have been to the fossil industry, and as wasteful as his fetish over “green jobs” has been to the taxpayer, emphasizing these points of disagreement with his administration overlooks a much more serious sleeping energy giant—electric industry policy.

I wrote on some of these issues recently on Master Resource in comments on Rob Bradley’s books on political capitalism. So consider these four points:

1. Oil is a fungible commodity that trades in a reasonably efficient and competitive global market. Thus we face price risk but not supply availability risk. Opening up more U.S. reserves would improve our economy (domestic jobs and a slightly lower price of oil) and improve our balance of trade. But none of this amounts to a “crisis” in energy markets. Similar arguments could be made about improving many other sectors of the economy.

Thus, I believe a disproportionate (compared to the risk) amount of time is spent handwringing on oil issues (from an analytical point of view; I realize the political advantages of such focus). The heartbreak of psoriasis is tragic but hardly worth a national debate.

2. Radical climate change policy was a real threat from 2009 to 2011 when the Democrats had an undefeatable trifecta in DC. Due to the tireless efforts of many “realists” and a little luck, we dodged a bullet and the threat of really dumb climate policy is no longer seriously on the table, at least for the next decade. Yet we waste a lot of resources fighting the last war. [Read more →]