Paying the Price
Expect High Peak Prices with Decentralized Energy, Says CSL Researcher
By Doug Peterson
January 2006
California was devastated by skyrocketing energy costs and rolling blackouts beginning in the summer of 2000 -- a disaster that was blamed on a “perfect storm” of converging forces, including the direct manipulation of the markets by energy companies.
At the time, California had decentralized its energy supply, opening it to the free-market forces of competition. But companies such as the infamous Enron Corporation helped to push prices to the stratosphere with tactics such as performing repairs on generators in the middle of the day when energy demand was highest.
The result: Less energy supply. Higher prices.
In fact, the California market became so volatile that prices sometimes soared to as much as $5,000 per megawatt hour, instead of the more typical $30 per megawatt hour. Other areas of the country, including Illinois, also experimented with deregulation and their prices hit similar peaks. In Illinois in 1998, for instance, wholesale energy prices hit spikes of $6,000 per megawatt hour. These high prices were passed on to consumers, resulting in record-high electricity bills.
Illinois discontinued its experiment shortly after.
When the California disaster grabbed national headlines, some economists blamed the crisis primarily on such factors as manipulation by power companies. However, a CSL researcher and University of Illinois economist have developed a mathematical model demonstrating that the problem goes much deeper.
Sean Meyn, an electrical and computer engineer with CSL, and economist In-Koo Cho have shown that high price volatility and high peak prices for power can be expected in a decentralized energy system. They computed the “unique equilibrium” and found that it is efficient; but the consumer prices for power are highly volatile in a decentralized system, much like in California and Illinois several years ago or currently in Amsterdam.
Meyn and Cho approached the energy problem from a control engineer’s perspective, making two refinements to the standard model of an energy system -- the consideration of uncertainty and constraints on ramping up power generation. As Meyn pointed out, it takes a lot of time to “ramp up,” or bring more power generators online.
According to Meyn, economists are often limited by static models of energy consumption. To explain, he uses the analogy of an airplane. A static analysis would simply look at the force of the jets and natural forces such as wind and gravity in analyzing the system. There would be no consideration of factors such as turbulence and uncertainty, which can affect the plane’s performance.
“The plane would fly beautifully until it went through some clouds, hit turbulence and crashed to Earth,” Meyn said.
“The whole power grid is a very complex system -- much more complex than an airplane,” he said. “If you try to ramp up power quickly in one place, it can suddenly cause voltage oscillations. Things have to change very slowly. The electric power grid is too complex for any mortal to understand it.”
When it comes to deregulation versus regulation, Meyn said, “The debate is usually all or nothing. If you don’t believe in pure deregulation, then you believe in pure centralization. Of course, in reality you have to make compromises.
“I think the power of capitalism is unbelievable in what it can offer,” he added. “The grand challenge is to devise transparent market mechanisms that eliminate manipulation and ensure reliability and fairness.”
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