Most discussions of the competitive electric industry focus on the behavior of entities at the wholesale level--those that supply electricity, own transmission lines, operate the power system, and so on. Demand at the retail level is handled as an aggregate that is generally unresponsive to prices or system conditions. The behavior of the individual consumer is lost in the shuffle.
But competition is supposed to benefit the consumer, and one of the main benefits is meant to be the right to choose higher or lower reliability of service. Right now, all consumers pay to receive (generally) uninterrupted electricity service. But some people may be willing to accept less-reliable service in return for a reduction in price. If some consumers were flexible, system operators would no longer have to maintain the excess capacity and conservative operating practices that now ensure that electricity flow is uninterrupted.
The first step toward achieving consumer choice is to provide a means for consumers to make their wishes known. According to Dr. Ilic, a critical missing market participant in the current electric industry is the load-serving entity (LSE). The LSE would be a profit-making company (although until many competitive LSEs form, it would be subject to price-cap regulation). The LSE would sign long-term contracts with consumers to provide their electric service at specified levels of reliability and price. All contracts would include "reliability insurance"--an agreement that specifies a fee that the LSE will pay the consumer if the LSE fails to perform with the promised level of reliability. The LSE would thus be paid to remove consumers' uncertainty by promising to deliver electricity with a certain level of reliability regardless of any disturbances on the system.
What practical problems would be encountered in implementing the LSE-consumer contracts that specify different levels of reliability? Most electricity is still generated by large, central power plants serving big regions. The system operator's job of coordinating power flows while providing different levels of service for individual consumers would be difficult at best.
Analyses by Dr. Ilic and graduate students Elena Fumagalli, Jason Black, Charles Chalermkraivuth, and Jill Watz, with support from Professor Paul Kleindorfer of the Wharton School at the University of Pennsylvania, suggest that the solution may lie in a new type of power system--one based on distributed generation and many small decisions made by the actual users. Rather than having large power plants serving big regions, many small, local generating units would supply different neighborhoods. Numerous interconnected distributed generators could form a self-sufficient, stand-alone system called a mini-grid. High reliability would be achieved simply by having many small, interconnected suppliers and consumers. If one or two generating units on the mini-grid were to fail, other small generating units could easily fill the gap. And growing demand would be met by building additional local generating units rather than by building more transmission wires to a central plant.
A mini-grid of interconnected generating units and consumers could provide cost-effective consumer choice. A switch installed in each house would receive price signals via the Internet. When prices go up because the mini-grid is stressed, supply to a consumer who has chosen low reliability would automatically be reduced. Household demand would be adjusted accordingly, perhaps by lowering the house thermostat by a degree or two or by raising the refrigerator temperature slightly.
According to Dr. Ilic, several technological advances now make this arrangement commercially feasible. Various distributed generation and support technologies are now available and cost-effective; examples include fuel cells, microturbines, cogenerators, flywheel or battery energy storage, and devices for maintaining power quality. Most houses now have access to the Internet, the perfect source of real-time prices to which consumers can respond. And switching technology is available that can cut or reduce flows on low-voltage lines that carry electricity through neighborhoods.
Simulations performed by the MIT researchers show that their proposed setup of LSE-consumer contracts plus mini-grids would lead to near-optimal system performance. Problems at generating units or on transmission lines would not lead to the "cascading reliability failures" that occur with large generators on a traditional power system. The logical and physical switches for reducing service to selected consumers are relatively simple because they need respond only to local measurements, not systemwide conditions. And the mini-grid should need little coordination because it can self-correct. If electricity is in short supply or transmission lines are congested, prices displayed on the Internet will rise. As prices go up, more and more consumers will have their demand lowered; and the system will once again stabilize. This self-adjustment concept was first proposed by the late MIT Professor Fred C. Schweppe and his Energy Laboratory colleagues in the 1970s. They called the scheme "Homeostatic Control," drawing on the word "homeostatis," a biological term that refers to the tendency toward equilibrium among associated but independent elements of an organism.
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A small case study showed that the use of reliability insurance in contracts stimulates investment in performance-enhancing technology. The MIT researchers, in collaboration with economist Professor Ingo Vogelsang of Boston University, analyzed the investment behavior of participants in a hypothetical mini-grid, both with and without reliability-insurance contracts. As seen in the table above, implementing reliability insurance induces more investment and reduces outages relative to the case without explicit reliability incentives. For comparison, the researchers also examined the impact of a "penalty" fee, a more conventional scheme proposed by others wherein all consumers receive a set reimbursement for each outage, regardless of their selected reliability level. Again, reliability insurance elicits a better outcome.
One problem that arises with consumer choice is social welfare. Some consumers may not be able to afford reliable service; and others may be located in remote areas that make them hard to serve, thus less attractive to LSEs. Such issues need to be addressed, perhaps using government subsidies.
Once tailored for industrial users, the MIT simulation tools can help companies estimate the value of potential investments in distributed generation systems and transmission capacity. Investments aimed at creating mini-grids would encourage deployment of small generating technologies that may be undervalued on a traditional power system. While their generating capacity may be low, such technologies should receive credit for their ability to enhance reliability and for the environmental advantages they offer over conventional large-scale plants. Mini-grids can provide market niches for such technologies so that their real value can be demonstrated and they can play an increasing role in the competitive electric power industry.
Elena Fumagalli is a visiting scholar at the Energy Laboratory. Jason Black is a PhD candidate and Charles Chalermkraivuth and Jill Watz are master's degree candidates, all in the Engineering Systems Division. This research was supported by ABB Power T&D Company, Inc. Ms. Fumagalli's doctoral scholarship was financed by the Italian Ministry of University and of Scientific and Technological Research. Further information can be found in references.