Get Plugged In: Electric Grid Economics

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By Brandon Chase and Narayan Subramanian If there is one word that describes electric grid operations, it is balance. Electric supply must always equal electric demand. In the future, bulk electricity storage may provide better options for dispatching power, but currently bulk storage is not economically viable. To balance supply and demand we rely on a centrally operated balancing authority (BA). In the U.S. the most common balancing authorities are regional transmission organizations (RTOs), such as PJM in the Mid-Atlantic or MISO in the Midwest, but this also includes vertically integrated utilities that are outside of the RTO regions.

(MISO Grid Operations)

An essential part of delivering reliable grid operations is determining which energy sources will be employed at various times. In the U.S. the current energy mix is made up of coal (45%), natural gas (24%), nuclear (20%), oil (20%) and renewables (10%). Each resource is classified by its ability to meet certain grid requirements, including: base load/peaking, start-up/notification time, min/max run time and ramp capabilities. For example, Nuclear and coal-fired power plants are able to run for long time periods at full capacity and are therefore used as base load power. Natural gas combined cycle plants are flexible and have short start-up times, so they are commonly used for load-following, or after base load. Combustion gas plants are used for periods of high demand, or peaking. Due to the variability of solar output and the uncertainty of wind output, grid operators consider wind and solar as non-dispatchable resources, but in some cases they are deployed ahead of base load power as a result of their low marginal costs, when available. A commonly used metric in electric power economics is capacity factor (CF), which is the ratio of how much a generator runs relative to its maximum potential over a period of time. Here are the typical capacity factors for the resources we’ve mentioned:

Wind: 20-35% Nuclear: 90+% Coal: 60-70% Natural Gas Combined Cycle: 40-50% Natural Gas Combustion Turbine (Peaker): 3-7% Oil: 1-15%

To determine power pricing, balancing authorities commit and dispatch based on merit-order, where units are operated in order of cost. In contrast, RTOs use markets, where generators submit offers and more sophisticated dispatch algorithms are used that consider congestion value on the grid to further reduce system operating costs.

There are multiple electricity markets where units are bought and sold.

Forward Markets: Operate days, weeks, months and years ahead of delivery Day-Ahead Markets: Operate one day in advance of delivery, helping to pre-position units in optimal manner Real-time Market: Supplements day-ahead market by adjusting for imbalances minutes ahead of delivery period Bilateral-only markets: Rely on forward markets

RTOs use day-ahead and real time markets, but 90% of energy is purchased in day-ahead markets.

The integration of renewable into the electric grid is having a noticeable impact. For example, the electricity supply curve is shifting due to renewables, which is referred to merit order effect. As a result of the low operating costs for renewables, the supply stack is pushed out (see below) which is driving down day-ahead market prices, especially during high demand. The variability of wind and solar power makes it harder to predict supply, which shifts focus to real-time markets, which may result in increased price volatility.

An advantage of RTOs is that they have a greater capability to integrate wind and solar reliably and at lower-cost. This is achieved by leveraging market mechanisms to create financial incentives, using enhanced dispatch and commitment tools and more efficient siting of new units. In addition, energy efficiency and conservation is increasing in popularity particularly because of the ability to delay/avoid building new capital intensive power plants. For economic results, demand-side management must compete with supply-side options in the current utility model or bundle programs together to simulate a larger single resource.

As clean energy resources – including renewables and energy efficiency – become more prevalent, it is important to remember the risks of making an abrupt shift. Following the Fukushima nuclear disaster in 2011, Germany chose to decommission all their nuclear units and shift immediately to renewables. Due to the current limitations for renewables being dispatched on the electric grid, particularly variability and uncertainty, Germany was unable to meet their base load power needs and therefore turned to lignite, a form of coal that produces more greenhouse gases than any other fossil fuel, in place of emission free nuclear.

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As technology, finance and policy continue to drive the U.S. towards a cleaner and smarter electric grid, we must learn from current grid economics and the successes and failures of others, so that we can create an innovative, long-term, and sustainable energy economy. Ultimately, large-scale energy storage could be the game-changer in this field. Until then, the grid will rely on a combination of renewable and non-renewable energy resources.