Unraveling the Power Grid's Secrets

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Which Power Plant Does My Electricity Come From?

Practical Engineering

Nov 19, 2024

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Education

Electricity's complexity involves engineering and economics

  1. In June 2000, a major power outage affected the San Francisco Bay area due to insufficient electricity supply, marking California's largest load shed event since World War II. This was part of the Western Energy Crisis, characterized by blackouts, high electricity prices, and significant economic losses, primarily due to market manipulation by companies like Enron.
  2. The crisis was not primarily caused by engineering failures but by economic factors, including market manipulation in the deregulated electricity market. Utilities faced high purchase prices for electricity but were restricted in how much they could charge customers, leading to financial distress for companies like PG&E and Southern California Edison.
  3. Electric bills often contain complex and cryptic line items, reflecting the financial complexity of the power grid. While consumers simply pay their bills, the financial intricacies of the grid have significant impacts, making it important to understand the basics of how the system works.
  4. Electricity is unique as a commodity because it cannot be stored or stockpiled on a large scale, requiring real-time generation to meet demand. This creates challenges due to the inelastic demand for electricity, necessitating a supply system capable of adjusting to real-time demand fluctuations.
  5. The electricity business is capital-intensive, requiring expensive infrastructure for generation, transmission, and distribution. The shared infrastructure model helps distribute these costs among all users, highlighting the technical and organizational challenges faced by engineers and policymakers.
  6. Historically, electric utilities were vertically integrated, controlling generation, transmission, and distribution within their service areas, leading to monopolies. This required regulation to ensure fair pricing for consumers, as there was no competition in the market.

Electricity grid complexity and deregulation

  1. Electricity is a commodity with unique properties, where the source of generation doesn't affect its utility. This allows for power sharing among utilities, especially during outages or adverse weather conditions.
  2. Power pools emerged as utilities interconnected to share electricity, spreading out risks and variability due to different weather conditions and outages. This led to the creation of large interconnected grids across North America, including the Western, Eastern, Quebec, and Texas grids.
  3. Historically, the wholesale price of electricity was regulated to prevent large utilities from overcharging smaller ones, based on the actual cost of generation.
  4. In the 1990s, deregulation allowed for more competition by enabling various entities to produce electricity, aiming to lower prices and shift investment risks from customers to investors.
  5. Deregulation led to a mix of regulated and deregulated states, with significant differences in how electricity is produced and traded, even within individual states.
  6. The process of deregulation introduced new challenges, such as companies attempting to exploit the system, exemplified by the situation in California.
  7. An analogy is used to explain electricity distribution: like water in a lake, electricity is pooled and distributed, making it difficult to trace the exact source, though consumers know which company they paid.

Electricity market operates on supply-demand matching

  1. Electricity on the grid flows like water in a lake, moving from high to low potential, influenced by the actions of all users on the system.
  2. Utilities do not generate electricity themselves; they contract with wholesale power providers who specialize in electricity generation.
  3. In deregulated markets, electricity is often bought and sold on a day-ahead market, where utilities submit bids for their expected needs.
  4. Generators offer electricity at prices based on production costs, fuel availability, and operational constraints, aiming to match supply with demand.
  5. The market facilitator matches bids to ensure the right amount of energy is available at the lowest cost, a process known as economic dispatch.
  6. An example auction involves different power sources like nuclear, natural gas, coal, and wind, each submitting bids based on their costs.
  7. Wind and solar can offer low or even negative bids due to no fuel costs and external incentives, ensuring they remain connected to the grid.
  8. The clearing price is determined by the last unit of supply needed to meet demand, and all producers are paid this price, regardless of their bid.

Electricity markets balance supply and demand

  1. Electricity markets are complex, involving both mechanical and financial elements. They ensure that supply meets demand through various types of auctions and markets.
  2. Power plants, especially renewable ones like wind and solar, often bid zero dollars to ensure they are selected to supply electricity. This is because they have low operational costs and are incentivized to produce as much as possible.
  3. The electricity market operates on both day-ahead and real-time bases. Day-ahead markets predict demand and supply, while real-time markets adjust for any discrepancies due to unforeseen events or equipment issues.
  4. Real-time markets can adjust prices upwards to reflect the true value of electricity, especially during shortages. This includes considering the societal cost of power outages, known as the value of lost load.
  5. Capacity markets exist in some regions to ensure long-term availability of electricity. These markets hold auctions for generators to add capacity, rewarding them regardless of actual usage.
  6. Ancillary services markets provide additional support to maintain grid stability. These include regulation for short-term supply-demand balance, reserves for quick grid connection, and contracts for reliability and inertia services.
  7. Some services, like black start and reactive power, are contracted directly to ensure grid stability and operational readiness without relying solely on auctions.
  8. Demand-side management is also a part of the market strategy, where reducing demand is as viable as increasing supply to balance the grid.

Electricity grid complexity and market dynamics

  1. Electricity demand is generally inelastic, but customers can reduce demand if compensated, especially large industrial users like refineries. They can adjust schedules or use their own generators when grid resources are scarce.
  2. Cryptocurrency miners sometimes earn more from electricity markets than from mining Bitcoin. Companies aggregate smaller power users with flexible demands to sell demand reduction as a service in the wholesale market.
  3. Utilities offer demand response programs, providing bill credits for using smart thermostats. Deregulation of wholesale markets expands possibilities for grid management.
  4. Transmission and distribution lines are not like a lake but a series of interconnected canals, requiring construction and maintenance costs covered by electricity rates. Deregulation of these costs is impractical.
  5. Regulators oversee rates for transmission and distribution companies. Wholesale purchasers must buy power, reserve transmission capacity, and pay operators, despite power flowing according to physics, not financial transactions.
  6. Transmission reservations and tariffs ensure reliable electricity movement and fair compensation for transmission asset owners, despite imperfect payment reflection of power flow.
  7. Transmission systems have limited capacity, similar to canals. Grid operators manage congestion by varying prices based on location, known as Locational Marginal Pricing, reflecting demand, generation location, and transmission congestion.
  8. Grid operators face complexity in managing electricity flow, considering both cost and ability to deliver power to needed locations, akin to managing rush hour traffic for electrons.

Electricity billing involves complex financial systems

  1. The electricity grid is complex both mechanically and financially, affecting consumers who simply pay their monthly bills without engaging in the intricacies.
  2. Distributed generation sources, like home solar installations, add complexity by contributing energy to the grid from the consumer side.
  3. Retail electricity providers often do not generate electricity or own the infrastructure; they buy power on the wholesale market and sell it to consumers.
  4. In deregulated markets, consumers can choose their electricity provider, who acts as a middleman navigating the complex grid system.
  5. Retail providers differentiate themselves by offering various rate plans and connecting consumers to specific energy sources like renewables.
  6. Griddy Energy, a Texas provider, offered real-time wholesale prices, leading to bankruptcy after a winter storm caused high bills.
  7. Electricity bills may include various charges such as base rates, distribution service fees, and adjustments for wholesale market variability.
  8. Understanding electricity bills can reveal the complexity of the grid and the financial systems behind the cost of electricity.

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