Power Dispatch More than a Supply Stack
The most used tool for new comers to the power market is the dispatch stack. The dispatch stack is basically the variable cost of production of power by each generating unit, stacked from least cost to most cost. Clearly units with low fuel to no fuel cost will be the lowest to the least efficient, highest fuel cost being the far right. EIA put out the hypothetical 2011 stack – http://www.eia.gov/todayinenergy/detail.cfm?id=9430
Those not directly involved in power markets will first take note of the low cost of renewables. However, you will also note nuclear being near zero cost. The stack does not take into account the capital cost portion of the project. As economic nature would have it, the high capital cost projects typically have the lower fuel cost and vice versa. The best of both worlds is very hard to achieve, hence a complicated process of developing a cost effective resource plan to balance the various tradeoffs. Besides the stack not accounting for capital cost therefore the typical dispatch cost does not account for operational issues.
Once again economic nature also produces higher variable power cost units as the unit becomes more flexible (the ability to turn off and on and ramp quickly). Case in point, most coal or nuclear plant cannot quickly ramp or turn off and on rapidly to account for the fluctuations of the market whereas inefficient gas units have extreme flexibility, but it comes with much higher power cost. If the market had constant energy level than perhaps supply stacks would be useful tools for analyzing power markets. However that is not the case as documented in my other blog. A deeper analysis is needed for the power markets – http://allenergyconsulting.com/blog/2012/06/05/levelized-cost-of-electricity-lcoe-analysis-potentially-misguides-you-in-the-power-markets/
Detailed analysis is needed on at least an hourly basis to really understand what is going on in the power markets. Another important feature of the power market due to the instantaneous issues is how the market gets priced. In the power market, all generators get the marginal price. As an example, if we had a system with 500MW of demand with only three power plants. Each power plant is sized at 200MW of capacity. Plant A bids at $50/MWh. Plant B bids at $5/MWh. Plant C bids at $35/MWh. If we assume a flat load the following outcomes occur based on varying demand.
Demand 550MW – Plant A gets to dispatch 150MW. Plant B and C gets to dispatch at 200MW each. They all get $50/MWh.
Demand 300MW – Plant B gets to dispatch 200MW. Plant C gets to dispatch 100MW. Plant A does not get dispatch and gets no revenue. Plant B and C get $35/MWh.
With this bidding mechanism, many of the renewable plants given that they only get their tax credit when they produce power will actually bid into the market to a NEGATIVE $22/MWh to ensure they are dispatched to collect their tax credit. Renewable plants typically already have a fixed power purchase agreement with the rate payer typically paying the bill. This dispatch price just impacts the wholesale market. The only concern utilities should have is when the wholesale price diverges so far away from the arranged power purchase contracts. At this point commissions should step up and question the decision making from the utilities and perhaps even their own mandates. This difference is really the true cost impact of renewables on society. Calculating wholesale power price as the cost to society from renewables is misleading and misrepresenting reality given most renewable deals are fixed. Another potential outcome of large digression between wholesale prices and retail prices is further push for more de-regulation.
There is much to discuss in how power markets work, but in a nutshell I tried to explain at high-level the dispatch stack and the realities of the market place. If you have further questions or are in need of examining the power markets please do consider All Energy Consulting.
Happy New Year – May you have a prosperous year!
Your Energy Analyst,
614-356-0484
Energy Independence Misguided Focus
A recent article posted in the NY Times by Michael Levi highlights my past concerns about Energy Independence talk. Amazingly enough I wrote about Energy Independence last December – http://allenergyconsulting.com/blog/2011/12/15/energy-independence-really/
I want to fine tune my message.
I do see Michael’s perspective in being concerned that we are mistaken about being energy independent as allowing the US to be ambivalent to the worlds energy markets. Clearly, the energy markets are global and will likely to be in the distant future. The theme I think Michael leaves out is the real message politicians and the like need to focus on, versus the concept of being energy independent – that is being productive with the resources we have.
I disagree with many about allowing exports of natural gas. If we are under full employment and the economy is humming along perhaps I could change my mind. However, since this is not the case, we need to think long and hard about why we can’t use our resources in a productive manner. The focus needs to be on stimulating manufacturing. We need to grow America to regain some of what we have lost over the last 30 years.
I like to note, manufacturing is not a path to riches for people, but it is a path to productivity and opportunity. What we have in this country is binary thought. If the working class can’t get a standard of living that allows 40-60K in income plus benefits, we shall accept nothing. It is no doubt a global economy for better or for worse. I have a very contentious thought about wealth which I mulled around with and discussed at bars with my most educated friends. I believe wealth is just like mass. It cannot be created or destroyed. There is a finite wealth in this world. Wealth is discrete globally and when one does better the other will have to do worse.
Let me define wealth more generally than just buying power, but also influence, and the ability to make others act. I believe my thesis holds water when you think about global economic growth. China and much of Asia, at one time, was thought as “third” world; they have grown to become an economic power.
With my thesis in place, the US and Europeans have slowly lost some ground to them holding the economic wealth in balance. The direct impact is the shift in “lower” end jobs in manufacturing. Time would eventually not allow a person making $60K plus benefit with the sole purpose to screw in 4 bolts to be able to compete with people in Asia, making less than $1 dollar a day. Likewise, let me not focus just on the lower income case. CEO’s in the US who do not add value but perpetuate the same concepts and ideas from previous CEO’s that are increasingly making more money than past CEO is also unsustainable. The competing landscape and the wealth balance that will occur, will produce sacrifices to allow others in the world to rise. In a holistic way and perhaps Altruistic – people living in such low standards of living for prolong time becomes inhumane and the sacrifices made from the developed regions have promoted a better lifestyle for them.
However as I point out to my kids that nothing in life is free. The sacrifices have been real and have been exaggerated by the binary thought – all or nothing. In order to balance wealth so that there is reasonable living standards for the masses, the developed country will need to reduce the standards of living, as their standards must compete with the other parts of the world standards. Alternatively one can be stubborn and go with the nothing attitude and live off the state, but this will lead to a very unstable society. I go back to my first point the value of manufacturing is not wealth building. The value comes from volume of employment it can produce. The ability to give masses something to do from 8 to 5 Monday thru Friday. Without this there will be trouble.
The US needs to innovate and take advantage of the abundant resources by creating efficient process to produce things the world uses from fertilizers to plastics to even vehicles. The abundant energy along with sacrifices from the top can ease the lowering of standard of living for the masses as parity is met with the rest of the world. Once again, let me stress both the low paying and high paying jobs. Both tails of the economic spectrum will have to sacrifice; a message that no politician can give since they need funding (high income) and volumes of vote (low income).
Happiness is not derived from money, but money is a requirement in today’s society. In addition, happiness does not come from consuming. We need to move off the binary thoughts and allow compromise. The US should move away from consumerism and regain our productivity focus. Letting any of our resources be exported is giving up on the American dream without fighting for it.
I wish all a safe and Happy Holiday. God bless this country and may we make the right choices.
Please do consider All Energy Consulting for all your energy consulting needs.
Your Energy Consultant,
614-356-0484
Trashing of QE – Plug In Energy Wasted? – Mechanism to choose power providers
A very poignant article by Citi supports my underlying thesis that QE will not be effective enough to outweigh the long-term implications. In summary the article highlights the adaption of people. The reduction of yield creates multiple choices, not a single choice of investment. Case in point is the VIG ETF, those stocks with high dividend are being rewarded as they have been seen as the “new” investment vehicle relative to the treasury.
As noted in the article; “It seems that the market is sending clear signals to companies “if you want your shares to outperform then distribute, don’t invest.” I would also add the traditionally larger and stable stocks are given an extra “safety net” as one could consider them too big to fail and we have seen what the government does for those types of investments. My own investment habits have changed and I am to be a “proud” owner of VIG as I just can’t have my money “SAFE” earning less than 1% in the bank. Also not noted in the article is the explosion MLP traded stocks. These stocks are forced to distribute earnings and investors are diversifying their portfolio with this type of stock as they give you significant yield.
QE is borrowing from the future growth. In some sort of selfish way one could justify it, assuming it was producing enough bang for the buck to reduce the near term misery in order for the future to have growth. However, I believe time will show that it will not be worth it.
On a lighter subject matter I came across this article largely from a tweet indicating “wasted” plug in power. What I found fascinating is the number one plug-in was aquariums. I consider myself an aquarist. At one time I had almost 10 aquariums active in my house with a large 75 gallon salt water tank. I had to get rid of most of them as I have become very busy. The “wasted” statement really struck me. To put the connotation of waste on using energy to have an aquarium is questioning discretionary entertainment.
Many would consider driving to a theater – whether movie or play – a waste of energy and money. In addition in the grand scheme of things in order to have something that entertains you year round, the energy portion of the bill is around $250 a year (2190kwh *0.15-0.10 $/kwh). A true aquarist would tell you the energy portion represents a very small part of your cost structure. They also note the high consumption of video game consoles XBOX and PS3. Of course the footnote on those are assuming you left them on 24X7. If we assume a more reasonable level of half that time we are looking at entertainment cost of less than $80/year. This amounts to much less than a weekly trip to Starbucks. I do agree with their one conclusion “Individually, the energy-savings opportunities of any given single plug load tend to be relatively small; only in aggregate do efficiency gains really start to make a difference.”
My other conclusion from the report is to highlight the value of electricity and how it has allowed entertainment to drift to the household in a very cost effective manner. Before we had to drive and gather significant funds to go to the arcade, zoo, aquariums, or theater now we can do much more in the comfort of your own home. Those wanting the quickest solution to being less “wasteful” need to think about increasing the cost of power. Based on my years of experiencing forecasting load for all parts of the country, electricity is one product which can buck the trend of economic growth, but at certain price levels people will change their behavior.
Last but not least, this relates to a recent job I did for my client. I had a client who was a relatively large energy consumer. I structured a quite competitive RFP for his energy load and saved them millions a year. Alternatively they could have gone to broker and had them help them. However the broker would have made the deal with his incentive tied to the provider plus have taken a much larger share of the savings. Case in point is this article describing the Belleville city aggregation which they later approved. I believe the statement made by the “consultant” is misleading –“ Good Energy does not charge the city for its services, McMorris said. The company’s consultant fees are factored into suppliers’ bids. “Our company is on your side… We are negotiating for you with the energy supply company,” McMorris said.”
Based on the statements, the “consultant” gets nothing unless the deal goes through. They are not acting as consultants, but I consider them aggregators/brokers. A real consultant will tell you the best decision for you AND not be incentivized to make you do something versus status quo. This is the position I have taken. I am trying to engage people and help them evaluate their energy planning decisions. And I want no part in getting compensation from the entity that has the greatest stake in making you change. Shopping your load is smart but you got to do it and to understand all the issues. If you are thinking about shopping your load AND you have significant quantities of load, please give me a call and I could save you millions – 614-356-0484.
I had a great year and have much to give, thanks to Thanksgiving. As always please do keep All Energy Consulting in mind for all your energy consulting needs – from market outlooks, to training , to engineering issues, and to energy planning.
Happy Holidays from Your Energy Consultant,
Road Tax (Electric Vehicle Issue), De-regulation (Natural Gas), & Gasoline prices
Given my fortunate position of being so busy that I can’t blog as much as I want; I am trying a new format for blogging. “Quick” summaries of blogworthy articles.
I have been telling people to look, re-examine the economics for non-traditional gasoline/diesel vehicles and make sure it includes some sort of recovery for the loss of tax revenue. Many show the calculation for comparing electric vehicles, assuming the gain from tax revenues will be there forever. I am surprised it is coming to the forefront this early with penetration of alternative vehicles still in the low single digits. Article on electric and hybrid vehicles draining dollars from road tax
My neighbors always ask about who they should choose for their energy provider. In many markets, the ability to choose a provider for natural gas and electric generation is now available. The system is still not fully de-regulated given the providers still have regulated rates of distribution which will be paid to the incumbent utility, commonly called non-by-passable cost/rates/riders. In theory, the open choice concept will reduce the inefficiencies in a regulated company by offering a form of competition. By doing so the consumer in the long run should save.
However, like most things involving customer decisions, it is more complicated than that. Many things influence the decision of the consumer and as the article alludes to the key thing is knowledge. Knowledge is not just information but the ability to understand the information to make informed decision. The consumer has significant amount of information available to them via the internet. I would suspect information is not the issue, it is the consumer who does not have the ability to really convert the information to knowledge, particularly given their decision will only impact them less than their monthly cell phone bill.
As I point out to my neighbors, I don’t have time to analyze each of their choice for them, but I do suggest not doing anything about their gas bill. Why would I do that? Natural gas really offers no competition in order to weed out inefficiencies that a utility may build up. In electricity, there are many opportunities to make inefficient decision making. An example of poor decisions is building a coal plant assuming natural gas prices will be greater than $8/mmbtu. Natural gas is natural gas. Commodity risk is limited through hedges. The pipeline and delivery cost has to be recovered through the regulated rate portion which all providers must pay. The ability for the gas utility to make a poor capital allocation is limited compared to electricity. Alternatively a provider in natural gas can only give you so much of their margin before they are equal to the competing regulated utility. Article demonstrating natural gas choice as a failure for the consumer
Word of caution for the administration – don’t take credit for the lower gasoline prices. Each year around this time the administration takes a look at the gasoline prices and starts taking credit for lower prices. However the market is seasonal; prices typically always come off in the fall and into the winter time period when people drive less! Article falling gasoline prices
We positively and evocatively challenge the current thinking involving any aspect of energy use. We look for projects that offer meaningful, transformative, with impactful outcome to the marketplace or society. Please consider and contact All Energy Consulting for your consulting needs.
Your Energy Consultant,
614-356-0484
Positive Externalities Exist
Ed Dolan recently posted on his blog: “Why do we Need Government to Tell Business to be Energy Efficient?” .
Of course, I wouldn’t blog about it if there wasn’t something I could highlight. Thanks Ed for the inspiration to write something – I have had bloggers block. The first issue to comment on is the following:
“…stopping government subsidies that make the prices of some inputs artificially low. For example, without subsidies to corn farmers and ethanol blenders, we would use less corn ethanol in our automotive fuel. According to most studies I have seen, less ethanol would mean a more efficient fuel mix.”
The thing here is that Ed is not relating the context of why the subsidies in ethanol must occur. Clearly every action is not about efficiency or even energy itself. It is a balancing mechanism – though not the best – for the subsidies that occur in several middle east countries for petroleum. In those countries their citizens are paying a fraction of the world market prices. As Ed should know those areas are also seeing one of the largest growths in petroleum demand. We have seen an unprecedented price rise in petroleum prices in such short time period. The cure for high prices has been high prices. However if the areas observing the greatest growth for petroleum do not see the high price signal then the responsibility for the demand destruction lies on economies like the US. Our continued purchases of the high prices support/subsidizes them. Without stronger trade restrictions, a subsidy on what we produce the most and what the rest of the world needs makes sense; in this case it is corn. In essence the US is swapping food for oil to balance out the trade and price discrepancy issue. It is not perfect, but until we come up with a better way, I wouldn’t want it to go away.
“…fixing government policies that allow businesses to take resources without paying for them. Promarket economists like my early mentor Murray Rothbard have long argued that pollution is a form of “taking” via uncompensated harm to other people and their property. That means harm to people and property owners who live downstream or downwind from a specific factory or power plant, and in the case of some pollutants, it means harms that are felt even more widely, even globally….Look at it this way: A business owner is like a dog owner. Just as the burden of cleaning up the dog’s poop is the owner’s responsibility and becomes part of the cost of owning a dog, the harm that pollution does to downwind residents and property owners is a both a moral and an economic responsibility of the businesses”
This thinking has become very common – the values of externalities need to be incorporated into the price of energy. However most people assume externalities are only negative value. I will agree there are negative values for downstream/downwind people who are not directly consuming the energy – e.g. particulate matter. However even the downstream/downwind people are seeing positive value ,even though they are not directly consuming or paying for energy. What are those values?
Societal stability through economic prosperity. As complicated as tracking negative externalities, there is a complex web for tracking positive externalities. I will state a few potential examples. Because the upwind region has local energy to consume, though potentially polluting to downwind. Their ability to use the local resource limits the population from migrating downwind and potentially causing instability through crime, disruption of supply/demand of other resources, etc… Also there is value that the upwind region is consuming a source of energy. If they did not consume the local source of energy they may demand the source that the downwind region is using. This will likely cause economic harm to the downwind region particularly if the upwind region has more capability to buy the resource. There are numerous examples I could come up with among the numerous examples discussed for negative value externalities.
The value for the negative externalities is as real as those of the positive externalities. And how to value each of them is complicated. The dog poop example Ed brings up really doesn’t work unless you add more reality to the situation. The caveat could be: by allowing the dog owner to have the dog, you are reducing your chance, the owner would be a grumpy and potentially go postal on you one day. Therefore potentially an occasional poop missed is worth the trade-off on not allowing him to have a dog because he doesn’t always clean up. There is some level of pollution that balances the trade-off. What that balance is becomes very variable and will depend on the situation and societal choices. Ed does note at the end:
“to safeguard the integrity of energy pricing we can use government fines, or pollution charges, or taxes, or whatever you want to call them. So much per ton of SO2, so much per ton of carbon and so on. Yes, in some philosophical sense, that is a second best, a less elegant solution than one that internalizes all pollution costs through voluntary contracts and the enforcement of property rights. Yes, it is hard to get the prices just right. But I see it as the best hope we have for making our planet cleaner, healthier, more sustainable and–importantly–more efficient.”
However society needs to know all the facts not just the negative side of things. In Ed’s article, he did not balance the negative externalities with the positive externalities. How will the price ever be close to being “right” if we don’t have a comprehensive dialogue’s of both the pros and cons?
I take pride in making sure I take a 360 perspective. One always needs to challenge one’s own thinking to make sure all bases are covered. If you are looking for an unbiased well-rounded perspective on energy issues please, consider contacting All Energy Consulting.
Your Energy Consultant,
614-356-0484
