The Supreme Court explains our electricity system
We all know the electric system isn’t rocket science….but explaining how our electric system operates sounds well….confusing.
Enter the US Supreme Court, yep that one.
The court entered a ruling in which they had to understand and rule on the economic and structure of our electric system (from utilities, power marketers, wholesale market, demand response, etc.)
Here is a quick review of their explanation/finds:
- ….understand demand response, you first need to grasp a key detail: You and I generally pay the same price for every kilowatt hour of electricity that we use at home, but that’s an artificial arrangement that protects us from shifts in electricity’s true price on wholesale markets. This price varies greatly based on the demand for it, and that demand fluctuates constantly — even if we tend to be individually insulated from these market shifts by our utility company, its regulators, and so on.
- wholesale electricity markets….suppose that at 9 a.m. on August 15 four plants serving Washington, D. C. can each produce some amount of electricity for, respectively, $10/unit, $20/unit, $30/unit, and $40/unit. And suppose that LSEs’ [load serving entities, aka utility companies] demand at that time and place is met after the operator accepts the three cheapest bids. The first three generators would then all receive $30/unit. That amount is (think back to Econ 101) the marginal cost—i.e., the added cost of meeting another unit of demand—which is the price an efficient market would produce. FERC calls that cost (in jargon that will soon become oddly familiar) the locational marginal price, or LMP.
- What happens during extreme days when power demands surges (think days of “polar vortex” and 100F/95% humidity). To keep providing power to their customers, utilities and energy marketers must ask their market operator for more electricity. To meet that spike in demand, the operator will have to accept more expensive bids from suppliers. The operator, that is, will have to agree to the $40 bid that it spurned before—and maybe, beyond that, to bids of $50 or $60 or $70. In such periods, operators often must call on extremely inefficient generators whose high costs of production cause them to sit idle most of the time….As that happens, LMP—the price paid by all LSEs to all suppliers—climbs ever higher. And meanwhile, the increased flow of electricity through the grid threatens to overload transmission lines…..
- “real time pricing” — electricity rate schemes in which individuals will pay more (or — and here’s the big opportunity — considerably less) depending on how they behave during periods of peak demand.
- “time demand pricing” – electricity rate schemes in which individuals will pay different amounts during different times of the day more (say; 8am-8pm is morning vs. 8pm-8am night)
- …how demand response can effect LMP….. what would happen if wholesale market operators could induce consumers to refrain from using electricity during peak periods? Whenever doing that costs less than adding more power, an operator could bring electricity supply and demand into balance at a lower price. And simultaneously, the operator could ease pressure on the grid, thus protecting against system failures. That is the idea behind the practice at issue here: Wholesale demand response, as it is called, pays consumers for commitments to curtail their use of power, so as to curb wholesale rates and prevent grid breakdowns.
So the court waded through and came to an understanding that this is all legal and the system it being operated fairly. It sound complicated but it’s supply and demand economics with price incentives to reduce consumption when it gets too expensive to generate or deliver.
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