Peak Power: What drives carbon emissions and costs in the Power Grid
This is a pre-requisite to solar energy which is the next blog entry. It’s essential to first understand this topic, because the economic justification for residential solar energy panels in the US is all about peak power (and tax benefits). This is true about many alternative electrical power generation technologies. In addition, reducing our dependency on oil while reducing greenhouse gases requires technologies such as electric vehicles. The electric car is only half the equation; the other half is the power grid and this is much more complicated than electric vehicle technology. It’s about base power, peak power, tariffs, the political process, international efforts to reduce greenhouse gases, tradeoffs in being clean vs. being competitive, consumer behavior, etc. Technology itself can be complex, but technology is easy compared to the technology business. The power grid is an extremely complicated topic, and we will not delve into the intricate details here. The purpose of this article is to provide an overview (or a reminder) of the key points about the power grid that are essential to know in order to understand the role of alternative energy and electric vehicles.
Electric Power delivery is generally divided into the following components:
- Transmission (the big high voltage towers that transmit power from the plant to a substation in your town/community)
- Distribution (the wires on the street that transmit power from the substation to your home/business)
We tend to think of electric power in terms of just generation, but much is driven by distribution and transmission. On average, distribution is more than half the cost. Generation is somewhere between 30% – 40% of costs. Transmission is a small fraction of total costs – when power is generated locally or near locally and comes from plants with a high capacity vs. those with a lower capacity such as solar or wind. Much of this distribution and transmission infrastructure was built decades ago and is at capacity. Understanding peak power is similar to understanding how a highway is built for peak traffic – there is plenty of capacity except during rush hour. The cost of the highway is driven mostly by rush hour traffic, not average traffic. In the power grid, the highest peaks are during the summer, in the middle of the day in hot and/or humid climates. If one is out of capacity, there are generally 2 ways to reduce the stress on the system – add more capacity, or have a mechanism to drive demand off the peak by charging more during peak hours. The latter is simpler, quicker, and takes less capital/risk – but of course, there are limits. You could charge more for electricity overall which will allow you to squeeze a little more blood out of that one, but that has obvious limits.
Power generation is also driven by peak power and is also at capacity. Fuel is not necessarily the biggest driver of costs – for nuclear plants it’s approximately 15% – 25% of costs, for coal and natural gas it’s 40% – 75%. Much of the cost is driven by capital costs and the amount of time it takes to build a plant (for example 2 years for coal, 20 years for nuclear). And by the way, the cheapest power is also generally the dirtiest unless you’re lucky enough to live in Switzerland. So we’re trading off capital costs, fuel costs, lead times to add capacity, utilization, and cleanliness, all while managing peak power loads. Woe, what does all this mean?
There are several ways to look at the relationship between the power grid and our environmental concerns:
- At a macro level – what technologies are best for the environment
- At a regulatory level – how should prices be set to cover costs, encourage investment and efficiency, encourage clean technologies, and move peak usage to off-peak as much as possible. (Keep in mind that prices are set every 3 years for example and require a regulatory review).
- Cost to the consumer and how this affects their behavior to optimize their costs, and if we’re lucky, have this drive efficiencies to deal with our environmental concerns (i.e. if our regulators have set the prices correctly to bridge the gap between #1 and #3 – all while considering that deploying any new technology/infrastructure takes years)
Where do we being to boil this down? Well, this is not a book, so let’s go for the jugular – peak power & pricing/tariffs, and let’s focus on generation. When a utility runs out of generation capacity they become less efficient – they have to fire up low efficiency “peaker plants” and/or purchase power on the spot market (i.e. buying power on demand and paying a higher rate). This is reflected in average costs and greenhouse gas emissions. Why don’t they build more capacity using efficient plants? Well that costs money and takes time; for example 20 years for Nuclear, 6 years for Wind in California. Coal plants are 1-2 years, but you need critical items like permits, and you’ll have to build transmission lines at $1.5M per mile if you want to locate it in nobody’s back yard. So it’s cheaper and politically easier in the short run to mange peak power with peaker plants (which don’t require the time and capital) and relying on the spot market, etc.
OK, so we have narrowed our focus here to dealing with managing our requirements for cheap & clean energy within the context of the infrastructure that is currently available and will not change significantly in the next few years. This is where we get started to build markets for clean energy and hope that long term we will nudge the industry in the right direction for our future. Smart Meters have arrived in our homes to promise energy efficiency through a variety of mechanisms. In order to use our biggest short term leverage point peak power, one needs a smart meter to allow for time-of-day pricing to drive usage off-peak, but more importantly to allow solar energy and other technologies to get a foothold. The biggest impact of smart meters to date has been to reduce the utility’s operating costs and increase profits; using rate payer’s money to fund the meters which allows them to layoff their meter readers, and these savings are split with the rate payers. But in order to realize a true return on this investment, we need to make time-of-day pricing matter.
Firstly, there is a limit to how much time-of-day pricing alone will change consumer behavior enough to make a difference. If you analyze the usage patterns for a home, there isn’t all that much that can be moved to off-peak (e.g. peak power is typically 2PM – 9PM). You “need to” run your AC during the day, your refrigerator runs on and off throughout the day, you do your laundry at night often anyway, etc. It turns out the pool motor (if you have one) is the only no brainer. But it’s worse than that. If you switch to a time-of-day tariff you might move some power off-peak to take advantage of those lower rates, but now all your peak power is more expensive, and in most cases your total costs will go up! This has already happened, for example PG&E’s embarrassing rollout of smart meters in Bakersfield – they didn’t notify their customers of the change in tariffs and require them to opt-in. This has been corrected by keeping them on the old flat rate pricing plan.
So we need to generate more power during peak. And this is where alternative technologies like solar come in. Solar is a good example because it naturally produces more power during the peak hours, but what if you don’t use all of it (for example if you’re not home often during the day). The economics of technologies like wind and solar are all about capital costs and utilization – you must use it as much as possible to get it to pay off. It’s not economical at the moment to store power you generate at home, but you can get the same effect with a form of arbitrage. If you have a time-of-day pricing plan, you could sell the power to the utility during the day when they need it and you don’t (and the price is high), and purchase power off-peak (when the price is lower). There are various ways to accomplish this. One is to move as much power to off-peak as you can, for example that pool motor, or do your laundry at night. Another example is use the power grid at night to charge your electric vehicle when the prices are low, and use your solar panels to sell power back to the grid, instead of charging the car with the solar panels. This may sound counterintuitive, but it’s actually very efficient from both a market point of view and from the electric car/home owner’s point of view. In order for this work, the utility must purchase power in this manner. If the State utility commission has mandated a “feed-in tariff“, the utility is required to purchase power from you (typically a credit on your bill) at rates that vary depending on the jurisdiction. Doing this on a large scale is referred to as “Distributed Power Generation” and can be effective at providing for peak power needs efficiently and more cleanly than firing up low efficiency plants. This of course requires that policy and feed-in tariffs are designed properly to take into account the kind of power that is being generated (e.g. is it clean), the time-of-day, how to best distribute it and encourage investment on a grid that was not designed for distributed power generation, etc.
Many people (myself included) are split between wanting to take part in a sensible way to make a difference (e.g. saving our environment) while at the same time earning a decent living – i.e. an entrepreneur. So we can first assume that regulators are smart enough to develop rate plans and tax incentives to take all of this into account – i.e. creating an efficient market. For example, the peak pricing is set just right to encourage people to move power off-peak and/or generate clean power during peak. We could assume that this takes into account the actual costs of various forms of energy production, and maybe even the amount of greenhouse gases they emit. And this has already happened to some extent. In addition to increased prices during peak, many states have tiered pricing, where as you use more power, you pay a higher rate (the opposite of volume discounts) to encourage conservation. And this is often justified by viewing it as a subsidy – heavy power users pay more to allow the lite power users which may include those in lower income brackets to have a lower rate.
So as an entrepreneur and a consumer, there are opportunities to deploy clean alternative power generation technologies economically within this framework. But as a policy maker (i.e. one who is concerned about efficiency on a more broad scale), can we assume that regulators are smart enough to do this properly? Which really means that they have the resources, incentives, and information at their disposal to analyze this problem at a broad level and essentially create an energy policy through their power of regulation and taxes. This is a complex topic beyond the scope of this particular blog entry, but the first question that comes to mind is: does this belong at a Federal or State level. As we have already seen, ideally it may belong at a Federal level, but often it’s up to the States to step up to the plate because the States often have more power than the Federal government because they have less lobbyists to deal with and often more clear mandates from their more limited electorate.
If you’re in the business of providing clean (and competitive) alternative energy technologies, you have to view things in terms of both how to market within the context of the existing regulatory/policy framework, and the future of that framework. You might even decide to go to the State or Federal government to encourage changes in regulations and policy. And you might be able to contribute towards providing that balance between our desire to have (true) clean power and requiring an economic incentive and environment to do so.