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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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How Electricity Markets Could be Upended by this Supreme Court Decision

How Electricity Markets Could be Upended by this Supreme Court Decision

The Supreme Court may shortly decide an obscure case entitled Federal Energy Regulatory Commission v. Electric Power Supply Association (FERC v EPSA). The issue before the court is whether FERC can compel regional power markets to pay consumers who reduce their electricity usage at critical peak periods. And if so, at what price? Consumers have adopted a panoply of energy saving technologies known collectively as Demand Response (DR).

Demand-responders argue that a megawatt saved is financially equal to a megawatt produced by a power generator. The power generators who comprise EPSA recognize that DR will hurt them, reducing both power prices and their profitability, to the benefit of consumers. Adding DR to a power market is the competitive equivalent of adding more generators. Either way, added competition lowers prices.

If our pro-business Supreme Court rules in favor of EPSA and the power generators, electricity prices could rise tens of billions of dollars. More electricity generated by fossil-fueled power stations will produce more pollution. Related: 2016 Spells More Gloom For Oil Producers

High power prices might even tempt generators to build more fossil-fueled power stations at considerable cost. Plants that could soon be rendered economically irrelevant by weak demand for power and loss of market share to renewable energy competitors. And lastly, taking DR out of the market might increase the fragility of our electrical network because DR technologies reduce power demand on the grid precisely at those moments when system resources are the most stretched.

However, even if EPSA and the generators prevail in this case, they will win a Pyrrhic victory. They will raise electricity prices to be sure. But consumers may respond rationally by using still less energy (weak demand is already a major problem for the generators). If this happens, power companies may try to raise prices even further to cover their considerable fixed costs. This self-annihilating business model, continued price increases for a shrinking pool of customers and usage, is called the "death spiral" in the electricity business.

New technologies always hurt and sometimes destroy the incumbent business. Digital photography was not kind to Kodak, Polaroid or their shareholders. But it comes as no surprise when businesses facing a steep decline try to squeeze some residual value from an old product line and its unsuspecting, captive customers. But, for large power users such as retail shopping malls, supermarket chains and steel mills, DR offers the benefit of a dramatic decline in power costs. For power generators the opposite is true. As DR is adopted throughout their systems revenues and profits will inevitably nosedive. Related: This Is Why $20 Oil Is A Possibility

With one change, DR has the potential to deliver a knockout blow to conventional generators and utilities. Right now DR is a passive, collective response to high power prices. Appliances across the grid, linked by the Internet, are programmed to, "Just say no" to high power prices albeit typically for brief periods. But we are now seeing a dramatic surge in interest in large, battery storage devices like Tesla’s powerwall. Those batteries permit before mentioned passive electricity consumers to become power sellers instead if the price is right. Hundreds of these devices, linked by software, are the equivalent of an electric power plant. Except the consumer who owns a storage battery, instead of paying high power prices would receive them instead. Over the long term, this feat of technological and economic jiu jitsu may wield a crushing blow to the power industry. This isn't the "death spiral" it's the Death Star.

Owners of large electricity generating plants may have made bad business decisions. Or they may be suffering from a confluence of unfortunate circumstances. In the uncertain business world stuff happens. For sure, though, they did not anticipate that growth in demand for electricity would approach zero. That natural gas prices would continue to decline as we approach winter is another, although perhaps temporary, negative surprise. Unfortunately for them, natural gas sets the price for electricity in many power markets. But the biggest surprise has been the emergence of thousands of "smart", internet-connected devices all acting in concert in real time. This permits electricity consumers to respond to daily power price fluctuations the way they do in all other markets. Related: Renewable Energy Bankruptcy Threatens Spanish Banks

The Supreme Court may see this is as a case about federal overreach and states' rights. But it is really the first of many attempts to answer four questions. Who decides what price consumers should pay for electricity? Are energy conservation and carbon emission reduction worthwhile societal goals? Should a novel form of competition be permitted to lower prices and profitability for EPSA and the power generators? And lastly, how quickly should new energy resources replace old ones?

This court decision may affect the pace of change within the power generation industry but not its direction. New technologies will do that. And DR looks like the technology to watch.

By Leonard Hyman and William Tilles for Oilprice.com

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  • Bill G on December 10 2015 said:
    Regarding federal overreach and states' rights: the power grid crosses state lines, and so any power generated and put onto the grid crosses state lines, and so immediately enters interstate commerce, and so falls under federal jurisdiction. How exactly would states' rights apply here?
  • Bill Tilles on December 15 2015 said:
    Hi Bill,

    Thanks for the thoughtful comment. But let me first respond with a question of my own. If what you say is right about federal jurisdiction, how do you explain the fact that most electricity regulation on a dollar basis is done at the state public utility commission level? Traditionally, the states have been able to set rates regardless of where the power was actually produced. Retail customers of Georgia Power, for example, part of the Southern Company system pay rates set by the Georgia PSC even though it is quite possible that they are using electricity generated by say another SO affiliate like Alabama Power. Looking for a bright line distinction between intra and inter-state with respect to electric utility regulation is tough.

    Now in this case, the appellants (the electric companies) have brought up the inter/intra distinction. We believe they may have done so because they dislike the potential economic consequences of the FERC's position in this case.
  • Mark, Silicon V Strategies on January 07 2016 said:
    I'd add a suggestion on the tail end of Distributed Energy Storage which ties in nicely to the overall opportunities your article is discussing...

    Why don't leading appliance manufacturers think more about 'smart energy' opportunities - this is an area where major appliances are the natural source of disruptive business opportunity in the home, more so I dare say than adding expensive LCD displays and dubious apps.

    Why not add a modest 2-3 hour capable Li-Ion battery (or even simpler and cheaper a dock to accommodate such a battery), that used together with any smart communication port which current 'smart' appliances have already could allow immediate tangible (even monetizable through existing Demand Response programs) smart grid benefits.

    Adding some local energy storage right at the appliance bypasses all the "smart home energy" headaches of new HW and SW add-ons, garage based battery racks, etc. Utilities and munis/Feds would be immediate cheerleaders. The appliance OEMs are missing a very timely opportunity to steal a leadership position in the new, very real and quickly growing market of energy storage

    (Finally, seeing a demo of such an appliance being unplugged from the wall and still working is actual a pretty compelling user experience too, and of course delivers temporary back up power as well!)

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