Comments from Amory Lovins, Rocky Mountain Institute
PFP: Shortly after finishing my Smart Powermanuscript I sent a copy to Amory Lovins, Chairman and Chief Scientist at the Rocky Mountain Institute. Amory was extraordinarily kind to send me four pages of dense corrections and comments, some of which (unfortunately) could not make it into the final manuscript. For typos and numerical errors, see the Errata section of this website. Amory also made a number of interesting observations, most of which are reproduced here, some with further comment by yours truly.
Comment 1: Chapter 1: The First Electric Revolution, Page 7
PFP: In my capacity as a principal of The Brattle Group, I’ve studied the Western Power Crisis since 2003 and continue to serve as an expert witness on behalf of the California IOUs, Attorney General, and Public Utilities Commission in federal cases attempting to get refunds from sellers for sales made during the crisis. I’ve submitted too much testimony to summarize it very well, but in short, I have concluded that a bad market design, adverse conditions (sometimes called scarcity), poor reactions by regulators, market manipulation, and market power exercise all occurred during the crisis. Many other distinguished experts have also studied the crisis and/or offered testimony. Here is a partial bibliography of my testimony and other reports on the Western Crisis.
PFP: Phil Hanser, colleague and Principal at The Brattle Group, is a utility industry expert with extensive experience in industry structure and market power. He regularly consults clients on issues such as transmission pricing, generation planning, tariff strategies, fuels procurement, environmental issues, forecasting, marketing and demand-side management, and other management and financial issues. He recently commented on the relationship between the Smart Grid and energy efficiency I describe in Chapter 4: Smart Electric Pricing and Chapter 13: The Energy Service Utility. In general, I expect that the installation of Smart Grid technologies in a retail choice setting will probably lead to greater technological and product innovation, but I am not sure at all it will lead to better energy efficiency and lower carbon, which for me are personally more important. Hence there are tradeoffs. Now admittedly, these tradeoffs can be reduced — maybe even eliminated — by ancillary policies, but that goes both ways.
Comment 1 Chapter 4: Smart Electric Pricing & Chapter 13: The Energy Service Utility
PH: Here's some ways that the smart grid could improve energy efficiency:
First: commissioning. The data on energy consumption has immediate use to let a customer know what's going on with his/her energy consumption. This is particularly useful after new equipment has been installed explicitly for the purpose of reducing energy consumption. A smart meter can provide feedback very quickly on these investments. This has the potential to reduce the commissioning problem significantly, not just in the commercial sector, but also in the residential sector.
Second: inadvertent consumption. This comes in two flavors. The first relates to commercial customers. I've heard numerous stories from commercial customers how when a smart meter was installed they discovered equipment that should have been turned off, but wasn't, for example, parking lot lights. On the residential side, it’s easy to take the data coming from a smart meter and tell a customer pretty precisely what their largest end-uses are consuming. All that is required is for the customer to tell the utility what appliances he/she has and the square footage of the dwelling. I've seen it done and it can have an immediate impact on consumption when customers really find out what their energy-using devices have used.
Third: there are a host of technologies that are usually thought of as only reducing peak usage, but also lower overall energy consumption. For example, there are large scale commercial cooling systems that could be an efficient way to absorb excess wind capacity until a time when electric vehicles penetrate more highly.
Fourth: we've yet to fully think out how we might operate the distribution grid more efficiently if we were given better data on loads on a real-time basis. As of now, nothing smaller than a distribution station is monitored by the distribution system operators. My guess is that we will begin to resize and operate the distribution system differently when real time data at the customer level is available.
Fifth: I am sure we don't yet fully understand how much innovation will come forth as a result of the level of individual meter data we will have. For example, I've been told that there are enormous efficiencies to be gained by splitting the electricity coming to a building, whether it be residential or commercial, into two voltage levels, one at the 35W level to power electronic devices such as computers and fluorescent lights and the other at 220/240 W for running motors, etc. As it stands right now there are huge amounts of electricity and raw materials wasted to reduce voltages to the levels that electronic devices can use. In addition, stepping the voltage of the other half up to 220/240 W permits the use of more efficient motors.
Granted some of these are speculative, but nonetheless if history is any kind of an indicator, that some of these come to fruition isn’t unlikely. Or, as Eric Berne once wrote, "The reader should feel free to carp (but not to gleek or fleer)."
Comments from William Kaul, Great River Energy
PFP: William (Will) Kaul, Vice President of Transmission at Great River Energy, recently read Smart Power and provided some comments on future business models:
Comment 1 Chapter 13: The Energy Service Utility
WK: Nice job in constructing a badly needed economic model around energy services! You took a lot of good ideas that have been floating around and tied them together in a coherent model. In the book, you focus mostly on the investor owned utility (IOU) economic model, though you don’t ignore public power and cooperatives. I’ve always felt good about working for a cooperative because it provides an essential service on a non-profit basis. In general, our objectives line up nicely with the public interest. Of course, one of the strong points of a cooperative in a capital intensive business is its capital structure and its low cost of capital.
If I understand your Energy Services Utility (ESU) model correctly, the distribution company becomes the energy services company and is disengaged economically from the generation company (Genco) and transmission company (Transco), thus freeing it to pursue service delivery, not commodity delivery. For a generation and transmission (G&T) cooperative, which are generally highly leveraged, the ratings agencies always note the contractual arrangements, usually an all-requirements contract with a 30 year or longer term, between the G&T and its members as an essential component in a G&T’s risk profile. The distribution cooperatives generally have much higher equity and together with the G&T, make the G&T a good credit risk. So, if the economic and contractual ties between a G&T and its members were severed, it is likely that the G&T would be downgraded and its cost of capital would increase.
The challenges for a G&T under your model, without long term power purchase contracts, and without the security of some kind of regulatory compact, would be daunting. I also wonder about restrictions in our mortgages.
Comments from Meredith Petrin, Vantage Point Venture Partners
Comment 1 Conclusion: Page 204
MP: This was a helpful read. I strongly agree with your emphasis on the importance of regulators and institutional design, and the need for economic models that enable capturing and tracking of new kinds of value. I don't think enough people fully understand the importance of these.
My only source of "disagreement," on this front, was with this line on page 204: "At its core, economic regulation is an instrument that rewards private firms for shifting from the actions they would choose if left unfettered to efforts more in line with our economic and social goals."
The word "unfettered" is what stands out to me - because there is no such thing as "unfettered" actions in a civilized society. There is no such thing as a "level playing field" or "unregulated market" or "actions prior to regulation." Private firms' very existence and all of their operating parameters are always defined by a whole host of regulations and subsidies etc., from the get-go. Institutional structures and the rules of the game are created by regulation - it's just a matter of what regulation, for what goals, at what points in time.
Obviously you understand this very well, and your book overall does a great job of explaining why things were designed the way they were at the start of the century, and why they need to be different now. I only cringed a bit at the phrasing of this one line because it seemed to imply economic regulation as a form of "intervention" to an otherwise functioning world. Which it's not; regulation DEFINES every market, from the get-go, and always has. The more people can understand this, the more comfortable they will be, I think, with rapid regulatory change to align with our needs and goals today. And we need people comfortable, because we have a lot we need to change.
PFP: You are right. I had to write the book in a simplified fashion. However, I do think there are definite gradations between (a) firms that are regulated as to safety, employment rules, subject to the Uniform Commercial Code (UCC), etc., but not too much more (e.g. retailers); (b) industries with specific rules as to product quality, process quality, environmental restrictions, etc., e.g. chemicals, all in addition to (a); and (c) firms that are what we ordinarily call economically regulated, meaning that there are special economic rules pertaining to entry, exit, sometimes concentration, franchises, and especially rates/prices/terms of service -- in addition to (a) and (b). I simplified by calling (a) and (b) unfettered relative to (c), but of course as you note they aren't.
