The Full Cost of Electricity (FCe-)
The History and Evolution of the U.S. Electricity Industry PART OF A SERIES OF WHITE PAPERS THE FULL COST OF ELECTRICITY is an interdisciplinary initiative of the Energy Institute of the University of Texas to identify and quantify the full-system cost of electric power generation and delivery – from the power plant to the wall socket. The purpose is to inform public policy discourse with comprehensive, rigorous and impartial analysis.
The generation of electric power and the infrastructure that delivers it is in the midst of dramatic and rapid change. Since 2000, declining renewable energy costs, stringent emissions standards, low-priced natural gas (post-2008), competitive electricity markets, and a host of technological innovations promise to forever change the landscape of an industry that has remained static for decades. Heightened awareness of newfound options available to consumers has injected yet another element to the policy debate surrounding these transformative changes, moving it beyond utility boardrooms and legislative hearing rooms to everyday living rooms.
The Full Cost of Electricity (FCe-) study employs a holistic approach to thoroughly examine the key factors affecting thetotal direct and indirect costs of generating and delivering electricity. As an interdisciplinary project, the FCe- synthesizes the expert analysis and different perspectives of faculty across the UT Austin campus, from engineering, economics, law, and policy. In addition to producing authoritative white papers that provide This paper is one in comprehensive assessment and analysis of various electric power a series of Full Cost system options, the study team developed online calculators that allow of Electricity white policymakers and other stakeholders, including the public, to estimate papers that examine the cost implications of potential policy actions. A framework of the particular aspects of research initiative, and a list of research participants and project sponsors the electricity system. are also available on the Energy Institute website: energy.utexas.edu
Other white papers All authors abide by the disclosure policies of the University of Texas at produced through the Austin. The University of Texas at Austin is committed to transparency and study can be accessed disclosure of all potential conflicts of interest. All UT investigators involved at the University of Texas with this research have filed their required financial disclosure forms with Energy Institute website: the university. Through this process the university has determined that energy.utexas.edu there are neither conflicts of interest nor the appearance of such conflicts. The History and Evolution of the U.S. Electricity Industry
David P. Tuttle, Research Fellow, Energy Institute Gürcan Gülen, Senior Energy Economist, Bureau of Economic Geology’s Center for Energy Economics, Jackson School of Geosciences Robert Hebner, Director, Center for Electromechanics Carey W. King, Research Scientist and Assistant Director, Energy Institute David B. Spence, Professor of Business, Government and Society; Professor of Law Juan Andrade, PhD Student, Department of Electrical and Computer Engineering Jason A. Wible, Graduate Student, LBJ School of Public Affairs Ross Baldick, Professor, Department of Electrical and Computer Engineering Roger Duncan, Research Fellow, Energy Institute
Tuttle, David P., Gülen, Gürcan, Hebner, Robert, King, Carey W., Spence, David B., Andrade, Juan, Wible, Jason A., Baldwick, Ross, Duncan, Roger, “The History and Evolution of the U.S. Electricity Industry,” White Paper UTEI/2016-05-2, 2016, available at http://energy.utexas.edu/ the-full-cost-of-electricity-fce/. EXECUTIVE SUMMARY Universally available, reliable, and affordable generating assets by enabling their owners, known electricity is associated with a nation’s as independent power producers (IPPs), to raise improvements in quality of life for its citizens, investment capital, employ tax-exempt bond increased productivity, and competitive advantage. financing, and capture Federal tax credits, enabling The structure of the electricity industry – of IPPs to provide renewable power at attractive long- generation, delivery, and use of electricity – over term fixed prices to utilities. By the mid-1990s, the past century has evolved significantly. For policy makers began to restructure the electricity decades, scale economies associated with large system, seeking to take advantage of these same centralized generation technologies encouraged technological and competitive forces in order to vertical integration and drove down the cost of promote innovation and reduce electricity costs. electricity, fostered universal access, and provided for reliable electric service delivered by a single At the same time, policymakers incentivized utility in a given region. Starting in the 1970s, alternative technologies, such as wind power. Both higher fuel prices, environmental concerns, the federal and state governments implemented technological innovations and a desire for more environmental regulations, tax credits, and economic efficiency led to the rethinking of this other support programs for renewables. Solar vertically-integrated, regional monopoly model. technology, initially much more expensive than wind, did not benefit from these policies until Following the restructuring of the the late 2000s and early 2010s when some states telecommunications industry and the natural instituted programs that specifically supported gas industry, policy makers began to rethink solar installations. For both wind and solar, the notion that power generation and sales are foreign government support for manufacturing (or should be) a natural monopoly. In the 1980s has also been critical (e.g., Denmark for wind policy makers chose to break up the telephone in its early days, and China for solar PV more monopoly in the U.S., unleashing competitive recently). These technologies also enabled some and technological forces that have transformed customers to start generating some of their own the communications sector. In the late 1970s electricity, competing with their local utility and 1980s a series of government decisions or competitive generators, and threatening the deregulating wellhead prices and the pipeline traditional utility business model as well as the industry unleashed powerful market forces in competitive market structure as they exist today. the natural gas industry, ultimately making both natural gas and gas-fired power much less Several technologies will combine to drive expensive. The increased competition from changes in the electric industry: increasingly merchant generators encouraged restructuring cost competitive wind and solar PV, inexpensive of the electric power industry in many states, natural gas combined with flexible and efficient breaking down the vertical integration model. combined cycle gas plants, and electricity energy storage and demand response systems During the same timeframe, innovations in with progressively lower costs. These and other finance were created that complemented these technological changes will continue to encourage new technologies to help make them more cost the industry to adopt new technology and business competitive. An important example is the Power models, policy makers to consider alternative Purchase Agreement (PPA) for independent regulatory and electricity market structures, and natural gas plant electricity production and, electricity customers to pursue self-generation that later, wind and solar plants. These agreements competes with traditional utilities in ways that played a key role in financing non-utility owned may further de-stabilize the existing order.
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 1 1| INTRODUCTION
The basic functions of the electric power industry, as historically structured, are electricity generation (production), transmission and distribution (T&D) to deliver electricity from the point of generation to the point of Iconsumption, and customer relationship management. There are various regulatory approaches for for changing that model. In many cases, the arranging the relationship between electricity historical business structures and regulatory generation and end-use consumption. Historically, models have become challenged across the United a vertically integrated utility in the U.S. was an States over the past few decades. Thus, with investor-owned utility (IOU) and was regulated the background in this document, the reader by an independent public entity typically known can contextualize the drivers for recent and as a public utility commission (PUC) or public future changes within the electricity industry. service commission (PSC) (see Figure 3, Model 1). State-owned utilities in most of the world The rest of this document is organized as follows. tended to also be vertically integrated (see Figure Section 2 provides a history of the interplay 4, Model 5). The customer relationship, where it between technology, finance, and regulation mattered (primarily the U.S.) consisted primarily that formed the traditional regulated electric of monthly billing, outage management and utility business model. Section 3 describes the advertising to encourage either conservation or major ownership (for-profit and non-profit), consumption growth, depending on the situation. management, and regulatory models of modern electricity grids. Section 4 provides some future The goal of this document is to summarize perspectives and technological drivers for the history of the U.S. electric power industry, continued regulatory and consumer changes describe how the utility business model came to before Section 5 provides a brief conclusion. fruition, and introduce the more recent drivers
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 2 2 | FORMATION OF THE ELECTRIC UTILITY MODEL
OVERVIEW
The dominant model for delivering electricity The traditional vertically integrated system to consumers was, and remains, large-scale, persisted into the 1990s, when the federal central generation facilities, and transmission government and some states decided to restructure and distribution networks at regulated prices the electricity industry, breaking vertically (rates) (see Figure 3, Model 1). The traditional integrated utilities into generation and wires utility business model formed within the businesses, and introducing competition in interplay of technology, finance, and regulation. the generation sector. In the late 1980s, Chile and the UK initiated a restructuring of their The business structure was created in the early 20th traditional vertically integrated electric power century as the industry pioneers like Samuel Insull monopolies to introduce competition primarily realized that technology allowed for power plants at the wholesale or “bulk power” level where to become larger (especially, using steam turbines) generators compete in a market. These efforts and to reach economies of scale that reduced the provided some guidance for restructuring in unit cost of power. Insull and other early electricity the U.S. Changes to the traditional model were providers also realized that they could make money also precipitated by a series of laws passed by selling electricity to a more diverse set of customers the Congress between 1978 and 1992, which throughout the day, rather than simply serving laid the foundation for the introduction of evening electricity demand (or “load”), which independent power producers (IPPs) into the was the basis of the early electric systems. This market, the shift to market pricing of power, realization led them to acquire more customers and the unbundling of electricity delivery from and to grow their service territories. These large electricity sales. Today, the roles of both federal power plants and networks necessitated financing and state regulators in states with restructured mechanisms, via holding companies with multiple electricity markets are more complex as they investors or later, access to low-cost financing attempt to maintain grid reliability by managing via the debt markets. These progressively more robust and maturing competitive markets with advanced methods of equity and debt financing more participants, increased integration of new enabled new infrastructure (power plants, sources of electricity generation, and increased transmission and distribution lines) to be built and demand-side participation into the system. paid for over time, but without all the risk falling on a single company or investor. Regulation was TECHNOLOGY considered necessary to allow electric companies to operate as monopolies to avoid waste of capital The modern electric utility industry in America resources in duplicate infrastructure, create a began with Thomas Edison’s invention of regulatory compact that included an obligation the first practical light bulb in 1879. Within to serve within the monopoly service area, three years, Edison built the first “centralized” stabilize the cost of capital by reducing risk, and fossil fuel driven power plant at Pearl Street in provide affordable electricity service. To protect New York City’s financial district. Adoption customers from monopolistic prices, electricity quickly followed in homes, factories, and in rates started to be regulated first by municipal, transportation to maximize the usefulness of then by state governments. Federal regulation this energy source. Entrepreneurs recognized became relevant when grids grew larger across state the potential for electricity to revolutionize borders, thus generating interstate commerce. every aspect of American life from the home
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 3 to the factory, and they engaged government down the cost of electricity, fostered universal first at the local or municipal level to facilitate access, and provided for reliable electric service the construction of infrastructure. delivered by a single utility in a given region.
Thomas Edison’s original system design was based The initial loads on these early power systems upon direct current (dc) and low voltages. Because were mostly lighting, followed closely by electric of high dissipative power losses in wires, this motors, loads that were well suited for ac power. limited the transmission distance from power plant However, over the past few decades the explosion to end use point for electric power, which in turn in the number of computers, microprocessors, and restricted interactions with government to the local telecommunications systems provided loads that level. The power was generated and consumed are inherently suited to dc. These devices require within only a few miles. However, technological better power quality than lights and motors, while advances soon extended the scale and reach the rectifiers (that convert ac to dc) in the systems of electricity generation, and simultaneously often produce power quality challenges. At the necessitated an expanded role for government. same time, distributed energy resources such as solar photovoltaic (PV) panels and batteries The most significant technological advance was provide energy sources that are also inherently alternating current (ac) electricity. By 1896, dc. In order to avoid losing the competition to in the famous “power wars”, Westinghouse serve this new kind of load, utilities may need to Electric (with the help from inventor Nikola adapt by offering new energy delivery models, such Tesla) had introduced ac electricity, expanding as dc microgrid overlays on top of their existing the reach of power plants to dozens of miles ac distribution systems. Legislatures and utility (1000s of miles today) from the point of electric regulators play an important, if not essential, load. The shift from dc to ac technology made role in redefining the regulatory environment larger scale (e.g., larger power plants) systems that defines the incentives and structure for possible. This shift was largely due to the fact utility business models. The traditional vertically that ac permitted the power to be transmitted integrated structures that were appropriate for at high voltage and low current, substantially the 20th century may inhibit desired incentives, reducing power losses relative to dc systems. In investments, or innovation of utilities. turn, the use of ac transmission permitted the exploitation of the economies of scale for power plants, reducing the unit cost of electricity, and FINANCING making electricity progressively more affordable and available to ever more customers. During the very early years of distributing electricity, grids were local, and used small After this dc-to-ac transition, for decades the neighborhood power plants (combustion technology evolved along the lines of what has engines) to generate power. The amount of become the traditional electricity utility model: capital required was relatively modest and then- large scale centralized generation sending ac available financing resources were adequate. electricity over transmission and distribution With the transition to large ac systems (e.g., lines to consumers. While the vast majority of 100+ MW thermal and hydroelectric power transmission is high voltage ac, modern high plants), however, it was obvious that larger-scale voltage dc transmission lines have been selectively financing was required. Electric companies used primarily for point-to-point long distance could issue bonds to build these plants, but the connections to transfer large amounts of power risk was becoming too great for the investors with enhanced stability over an ac connection. that participated in the debt market of the era.
For the past century, scale economies associated To reduce both risk and financing costs, the with large centralized generation technologies concept of a holding company was developed to encouraged vertical integration and drove blend the bonds from existing as well as new power
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 4 plants and to also provide cash flow from one of sized increments can be attractive for utilities in the associated firms to finance further growth an era of low load growth; it helps them to better in another one of the held firms. Samuel Insull, manage cash flows, reduce capital demands and a franchisee of Thomas Edison, recognized the risk, and to simplify the project development, potential for economies of scale and the role for ownership, and operation structures. the natural monopoly in electricity. He invested heavily in centralized power plants. By 1907, REGULATION Insull had acquired twenty companies and formed Commonwealth Edison, beginning a cycle of In terms of the chronological development of centralization in the electric utility industry [1]. electricity regulation, the electric power industry Despite growing state regulation (discussed in the generally evolved from being unregulated, to next section), consolidation and private expansion being regulated first by municipalities, then states, continued in the electric sector through the 1910s and then the federal government. Today in the and 20s, often using the financial innovation of U.S., the states typically regulate the retail sale of holding companies. Applying this tool, Samuel electricity, while federal law authorizes the Federal Insull controlled businesses in 32 states with more Energy Regulatory Commission (FERC) to regulate wholesale markets that involve interstate commerce than $500 million in assets in 1930. By 1932, eight 1 holding companies controlled three-fourths of the and interstate transmission of electricity. IOUs, with most of their operations exempt from The first progressive reformers in New York state regulation due to the crossing of state lines [2]. and Wisconsin expanded regulation of the Financial product innovations served to fuel the industry to the state level at around the growth of the U.S. power system with minimal same time Samuel Insull was consolidating problems until the last quarter of the 20th century, electric companies into what would become when fuel prices increased and some utilities Commonwealth Edison. In 1905, Wisconsin’s began losing money when regulators refused to Governor Robert LaFollete established a state- allow them to charge rates that reflected these level railroad commission to regulate railroad cost increases. Unprofitable operations, in turn, rates, schedules, service, and operations. Two inhibited some utilities’ ability to raise financing for years later, the Wisconsin legislature extended new plants. Moreover, the scale of the new plants regulation to the state’s electric companies, and could sometimes be so large relative to the size of the New York State regulated its electric industry utilities’ assets or revenue that some smaller utilities in the same year. Following the Progressives’ could not afford to own and build a new large power lead, 45 states had established government plant without partners; meanwhile, regulators oversight of electric utilities by 1914 [3]. would not allow smaller utilities to take the risks associated with building such large facilities without The Federal Power Commission & Federal historical precedent in their jurisdiction. This was Energy Regulatory Commission particularly true with new nuclear construction and the reason why some nuclear power plants were Congress first established the Federal Power owned by multiple companies in the 1970s and 80s. Commission (FPC) by the Federal Water Power Act in 1920 to license hydroelectric dams Today, there is a corresponding struggle to on navigable waters or lands owned by the finance large coal and nuclear power facilities Federal Government. It later designated that (with capital costs of several billions of dollars the commission be comprised of five members, each) in competitive wholesale markets. The vast serving staggered terms, with no more than three majority of new generation capacity is relatively from the same political party. This structure smaller natural gas, wind, and PV facilities (with capital costs of $100s of millions). Today, the 1 The ERCOT market in Texas does not include ac transmission of power across state lines, so it is mostly exempt from Federal Power Act ability to add new generation capacity in smaller regulation.
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 5 remains in place today within the Federal Energy period increased from 13% to 94% [6]. TVA then Regulatory Commission (FERC), the subsequent created the Electric Home and Farm Authority federal agency that subsumed the FPC. Since (EHFA) to increase the supply of electric ranges, the Federal Power Act of 1935, the FPC and refrigerators, and water heaters to rural areas now FERC has been charged with ensuring that and to provide low-cost financing for farmers to wholesale power sales and transmission service afford them. The REA and TVA made a significant be offered at rates that are “just and reasonable, contribution to the reduction in poverty in the and nondiscriminatory.” During the early U.S. In addition to rural co-ops, investor owned decades of the FPC, the commission’s power to utilities have shown to be effective providing regulate interstate commerce in electricity and more than half of the electricity in the US. natural gas were further expanded or clarified. The Public Utility Holding Company Act of 1935 After the Great Depression Progressive reformers (PUHCA) also had a lasting influence on the began to warn of the dangers of monopolies electric utility industry in America. Congress combined with lax regulation, and to see electricity passed the PUHCA to facilitate the regulation of as an essential public good. Campaigning for the electric utility sector by either confining their President in 1932, Franklin Roosevelt (FDR) vowed operations to a single state or limiting operations to fight “the Ishmaels and Insulls, whose hand is that cross state lines to a contiguous geographic against everyman’s [4].” Subsequent New Deal service area, easing regulation. PUHCA also reforms established new regulatory frameworks outlawed the highly leveraged and opaque for the electric industry as well as programs multi-level pyramids of holding companies that designed to bring electricity to rural America. contributed to the economic collapse during the Great Depression. Remaining interstate holding Electrification was seen to be an important companies and most companies that delivered a technology to combat poverty and improve the substantial amount of electricity were forced to quality of Americans’ lives. The formation of register with the new Securities and Exchange the Tennessee Valley Authority (TVA) in 1933 Commission (1935). Along with other public introduced public energy policy as a tool to fight companies, these utility companies were now rural poverty in America. By the 1930s, ninety- required to follow the more strict Securities percent of urban households had electricity and Exchange Commission (SEC) rules for compared with only ten percent in rural areas. financial reporting and to obtain approval to Private industry demonstrated little interest in issue stock and bond securities [7]. In effect, serving rural America due to the high construction PUHCA of 1935 established the framework costs, low population density, and perceived lack for the traditional electric utility industry. of ability for customers (e.g., poor farmers) to pay for the electricity. In response, FDR followed TVA with an executive order establishing the Rural National Electric Reform Electrification Administration in 1935 prior to Congress enacting the Rural Electrification Act The traditional regulated utility model, first (REA) in 1936. These federal actions stimulated formalized by the Public Utility Holding Company the introduction of electric service in rural Act of 1935 and governed as a natural and technical areas, substantially improving quality of life for monopoly, remained mostly unchanged until Americans, and encouraging business to enter the energy shocks in the 1970s. The energy price and drive further economic development. spike following the 1973 Arab Oil Embargo set the expectation among utilities and regulators that By 1939, the REA had helped to establish 417 energy prices would continue to increase in the electric cooperatives in rural areas, serving 25% of decades to come. Utilities also expected continued rural households in America. At the time of FDR’s growth of electricity demand driven by a growing death in 1945, an estimated 90% of rural farms population, the need to switch away from more were electrified [5]. Rural electrification in the expensive petroleum fuels for heating and power
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 6 generation, and continued supply disruptions from oil-exporting Arab nations or more BOX 1: specifically from the Organization of Petroleum Exporting Countries (OPEC). As a result of these The Role of Natural Gas Industry expectations and the belief that natural gas supplies were limited, utilities developed ambitious plans Restructuring in Driving Changes for power plants based on coal and large-scale in the Electric Power Industry nuclear technologies, which turned out to have construction costs much higher than historic The Natural Gas Act of 1938 gave the FPC the averages [8]. Some of these utility plans were power to regulate the sale and transportation of natural gas in interstate commerce. In 1940, influenced by the Power plant and Industrial Fuel amendments to the Natural Gas Act enabled the Use Act (PIFUA) of 1978 (repealed in 1987) that, FPC to certify and regulate natural gas facilities, among other fuel use restrictions, prevented the and the 1954 court ruling Phillips Petroleum Co. use of natural gas by regulated utilities in power v. Wisconsin required the FPC to begin regulating plants (except where it was necessary to reduce natural gas wellhead prices. This action proved to be poorly conceived in that it eventually air pollution associated with burning coal or oil). constrained gas exploration, and supply as well as By restricting the use of natural gas for electricity technology innovation along the natural gas supply generation by utilities, PIFUA stimulated a large chain and by end-users. As part of the energy build-out of coal power plants during the 1970’s sector reforms in 1978, the Natural Gas Policy Act and 1980’s. While these coal plants contribute was passed along with PIFUA and PURPA that started the process of phasing out gas wellhead a significant portion of the emissions of the price regulation. Within a decade, rising market entire power generation sector, many of them prices fostered new drilling and the development are now uneconomic and being retired given low of new exploration and production techniques that natural gas prices from the surge in gas supplies led to significant new supplies and price declines. from hydraulic fracturing techniques, efficient Several orders by FERC in the 1980s and early combined-cycle gas plants, declining costs of wind 1990s, were designed to increase competition and solar generation, in addition to implemented in the natural gas sector. The 1985 FERC Order or proposed environmental regulations. No. 436 required that natural gas pipelines provide open access to transportation services, The perception of future energy shortfalls also enabling gas consumers to negotiate prices created an opportunity for smaller scale plants directly with producers and contract separately for transportation. In 1992 FERC issued such as small hydropower sites, industrial co- Order No. 636 (The Restructuring Rule) that generation, burning of municipal waste, and mandated unbundling of sales services from renewable resources such as geothermal energy, transportation services, provided customers wood, wind, and solar. With the traditional with a full choice of providers, and opened these utilities mainly focused on large-scale and markets to competition. In 2000, FERC Order No. 637 further addressed inefficiencies in the capital-intensive projects, the development of capacity release market. Together with PURPA these new smaller and/or renewable resources and PIFUA, these changes in the natural gas was contingent upon the purchase of their output industry fueled the emergence of the IPP sector, by utilities at favorable terms. To encourage facilitating wholesale electricity competition. the development of these new resources and There are many parallels between natural gas to diversify the domestic electric power base, and electricity regulation. Both systems need Congress passed the Public Utility Regulatory to connect producers, via transmission and Policies Act of 1978 (PURPA). Section 210 of this distribution infrastructure, to end-use consumers. federal legislation created a new legal category of The restructuring of the natural gas markets with the unbundling of services and open access to power plants known as qualifying facilities (QFs), transmission provided a model for the subsequent with specific size and other characteristics, that restructuring of the electricity market. enabled new market entrants such as non-utility generators, or NUGs (e.g., power producers that
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 7 were not utilities and did not own transmission FIGURE 1: lines) [9]. PURPA required local investor-owned Milestones in U.S. electricity restructuring utilities to purchase the output from QFs, at full avoided-cost (the cost utilities would incur if they Key Milestones in U.S. Electricity Restructuring were to generate the same amount themselves or purchase it from another source). Some states Northeast blackout enacted laws and regulations specifying avoided- 1973‐1979 Oil crises of the 70s cost rates for power purchases from QFs. Initially, 1978 PURPA, PIFUA, NGPA some states established avoided-cost rates that 1979 Three‐Mile Island: Substantial Nuclear Cost Increases exceeded utilities’ actual avoided-costs, until the 1980s: emergence of IPPs, issues of access for Munis/Co‐ops 2 Supreme Court struck down those laws in 1984. 1985 FERC Order 436 (Gas) Late 1980s: Chile, UK restructuring Congress responded to the 1970s’ energy crises by 1992 FERC Order 636 ( Gas) reorganizing the FPC into to the Federal Energy 1992 EP Act‐wholesale access, No retail access Regulatory Commission (FERC) in 1978 to Strengthening of IPPs, First PTC streamline regulations, encourage greater energy 1996 FERC Orders 888/889 security, and contain the increases in energy 2000 FERC Order 637 (Gas) costs. An important aspect of these efforts was to 2000 FERC Order 2000 (RTOs) wean U.S. power generation from oil (particularly 2001 CA crisis & suspension of restructuring in CA and imported oil) to domestic sources of energy. elsewhere 2002 ERCOT SB7 Implemented Subsequently, in the 1980s and 1990s FERC 2003 Northeast blackout finalized orders that significantly restructured 2004: state RPS natural gas markets (see Box 1). These orders programs start 2000s: enabled merchant developers of electricity global rollback of generation plants to bypass local natural gas full restructuring distribution companies and reduce their fuel costs by buying natural gas in the wholesale market and 1965 1975 1985 1995 2005 connecting to transmission pipelines directly.
Wholesale electricity competition was further plants or independent power producers, or IPPs. strengthened by the 1992 Energy Policy Act Using many of the concepts and lessons from that authorized FERC to order “wheeling” (the the restructuring of the natural gas industry transport of) of third party power over utility in the 1980s, FERC also pursued similar lines. This act also more broadly authorized reforms in the electricity sector; Orders new non-utility generation facilities to sell their 888 and 889, issued on April 24, 1996, were electricity to utilities at market prices. Wholesale particularly significant. These orders: competition would not have been possible at the same pace and scale without the confluence of • Require transmission owners to these laws and actions that allowed natural gas offer nondiscriminatory, comparable fired generation to become a key player from non- transmission service to others seeking such utility co-generation and CHP power plants. These services over its own facilities. This often non-utility generators sold their excess power to is referred to as the "open access" rule; the utilities that could not legally burn natural gas in their own plants. Nowadays, these non-utility • Ensure that potential suppliers of electricity generators are commonly known as merchant have equal access to the market; and • Encourage the creation of a separate 2 Deregulation of the wellhead price of natural gas after 1978 rapidly Price Exchange to reveal market- increased gas supplies. Many of the QFs and NUGs built in the 1980s were gas-fired combined heat and power (CHP) facilities, sometimes also clearing prices for electricity in the referred to as co-generation plants new competitive market [10].
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 8 FIGURE 2: Electricity Restructuring by state (Source EIA [11]). Restructuring implies that a monopoly system of electric utilities has been replaced with competing sellers.
Additional reforms by FERC and Congress have Utility Holding Company Act of 1935, formally continued to progress towards electricity market bringing to a close the original federal regulatory restructuring after 1996. FERC Order 2000 structure established by New Deal-era legislation. called for formation of regional transmission While FERC was opening wholesale power organizations (RTOs), an enhanced version markets to competition in the late 1990s and early of independent system operators (ISOs) with 2000s, some state Public Utility Commissions better regional control of transmission grids. became more active in pushing market In the wake of the California electricity crisis restructuring and/or alternative technologies and of 2000-01 the FERC has continued to work on demand-side participation while others mostly the institutional design of wholesale electricity maintained the traditional utility structure. markets. In 2002, FERC proposed, but later withdrew in response to concerns raised by states The major milestones in the U.S. restructuring and other stakeholders, rules for a Standard process are presented in Figure 1. Market Design (SMD). The Energy Policy Act of Figure 2 presents a summary of the situation 2005 (EPACT2005) gave FERC new authorities at state level for actions initiated. to police manipulative behavior in electricity markets. EPACT2005 also repealed the Public
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 9 3 | ELECTRICITY INDUSTRY ORGANIZATIONAL STRUCTURES
Now that we have provided an overview INVESTOR-OWNED UTILITIES of the historical interplay of technology, (FOR PROFIT OWNERSHIP) finance, and regulation that has shaped the electricity industry, we now represent the There are many ways to categorize the organization various electric grid regulatory structures of electric utilities. From the point of view of via a framework of six simplified models. investor owned utilities (IOUs) there are four
FIGURE 3: Typical Investor Owned Utility (IOU) Electricity Market Structures Different Structures of Electricity Markets Different Structures20th Century of Models Electricity Markets Unidirectional Power Flow20 fromth Century Large Models Scale Generators to Consumers Unidirectional Power Flow20 fromth Century Large Models Scale Generators to Consumers Unidirectional Power Flow from Large Scale Generators to Consumers Generation Transmission Distribution Retailing or Consumer Generation(G) Transmission(T) Distribution(D) WholesalingRetailing Function or Consumer(C) Wholesaling Function Generation(G) Transmission(T) Distribution(D) Retailing or CustomerConsumer (C) Billing Wholesaling FunctionCustomer (G) (T) (D) Billing (C) Model 1: Traditional Customer VerticallyModel Integrated 1: Traditional Utility G T D Billing C Residential VerticallyModel Integrated 1: Traditional Utility G T Regulated D andC C&I Regulated Residential Vertically Integrated Utility G T D andC C&I Regulated Residential Customer and C&I CustomerBilling Model 2: Traditional Billing VerticallyModel Integrated 2: Traditional Utility Customer WithVertically Wholesale Integrated Single Utility Buyer G T D Billing C Model 2: Traditional G T Wholesale Single DBuyer ResidentialC WithVertically Wholesale Integrated Single Utility Buyer WholesaleRegulated Single Buyer Residentialand C&I G T D andC C&I With Wholesale Single Buyer WholesaleRegulated Single Buyer Residential and C&I GIPP Regulated GIPP GIPP Customer Bilateral: LSE, C&I CustomerBilling Generation T&D Provision Billing Procurement Bilateral: LSE, C&I C&I Customers Generation T&D Provision Customer Procurement Bilateral: LSE, C&I C&IBilling Customers Model 3: Wholesale Generation T&D Provision Residential Procurement C&I Customers ModelCompetition 3: Wholesale GIPP T D Residential C Competition Model 3: Wholesale GIPP T RegulatedD Residential C IPP: Independent Competition G T RegulatedD C IPP:Power Independent ProducerIPP Transmission & Distribution Power Producer TransmissionService Provider &Regulated Distribution (TDSP) IPP: IndependentISO/RTO Service Provider (TDSP) Power Producer Transmission & Distribution ISO/RTO Bilateral: LSE, C&I Service Provider (TDSP) Customer Bilateral: LSE, C&I Billing GenerationISO/RTO T&D Provision Retailer: Residential Customer Procurement Retailer:Bilateral: Residential LSE, C&I Billing Generation T&D Provision Customer Procurement Billing Model 4: Wholesale & Retail Generation T&D Provision Retailer: Residential Procurement Model 4:Competition Wholesale & Retail GIPP T D C Model 4:Competition Wholesale & Retail GIPP T D C IPP: Independent Regulated Residential or Competition IPP:Power IndependentG ProducerIPP TransmissionT Regulated & DistributionD C&IResidential CustomersC or Power Producer TransmissionService RegulatedProvider & Distribution (TDSP) C&I Customers IPP: Independent Service Provider (TDSP) Residential or Power Producer Transmission & Distribution C&I Customers Independent System OperatorService Provider (ISO)/ (TDSP) RegionalIndependent Transmission System Organization Operator (ISO)/ (RTO) RegionalSecurityIndependent Constrained Transmission System Economic Organization Operator Dispatch (ISO)/ (SCED) (RTO) RegionalSecurityand Constrained Transmission Transmission Economic ManagementOrganization Dispatch (SCED) (RTO) Securityand Constrained Transmission Economic Management Dispatch (SCED) and Transmission Management The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 10 main ways of structuring the industry, although Model 2 – Single Buyer (limited competitive there are many possible variations on each. generation)
Representations of each of these models are In restructured markets, different arrangements presented in Figure 3. have been pursued to facilitate wholesale In the case of restructuring to competitive markets, competition. One approach allows a single buyer, the operation and control of the transmission (T) the purchasing agency, to choose from a number and distribution (D) system (in essence the grid) is of different generators. Direct procurement of still viewed as a natural monopoly, because of the transmission service from competing generators to requirement of central dispatch and the difficulty final customers is not permitted. The purchasing in building competing T&D systems given the agency has a monopoly on transmission networks costs and right-of-way barriers to entry. As such, and sales to final consumers. This model the grid operations and T&D infrastructure have allows for the integrated utility to introduce remained monopolies in almost all jurisdictions competition from independent power producers, that experienced restructuring. Management of or IPPs, that own power generation facilities. the grid to maintain reliability is handled by such The Single Buyer model is most commonly entities as independent system operators (ISOs) or associated with jurisdictions where a vertically regional transmission organizations (RTOs), with integrated utility remains (often state-owned). oversight by regulators and other stakeholders. Model 3 – Wholesale Competition of Generation Model 1 – Vertically Integrated (monopoly at all levels) Many countries prefer the model of Wholesale This is the traditional vertically integrated utility Competition to the single buyer model. This 3 model. A single monopoly company handles the model allows Discos or load serving entities 4 production of electricity and its delivery over its (LSEs) to buy wholesale electricity directly own transmission and distribution network to from competing producers on the transmission final consumers. Generation is not subject to network and deliver this electricity over a competition and no commercial and industrial distribution network to customers. Discos (C&I) or residential consumer has any choice of or LSEs may still have a monopoly over final supplier (with the exception of self-generation). consumers. There is open access to transmission lines for delivery of energy from any generator State-owned electric companies around the world to carry power to any customer. A system and many traditional IOUs fit this model. The operator manages the transmission system and state-owned utilities do not have the inherent generator dispatch. This system operator is conflict between owners and consumers since independent of the other major market participants the consumers “own” the company (at least, in (generators, Discos, LSEs, and customers). theory). For IOUs, there can be a conflict as the utility owners or debt holders (e.g., stock and bond holders) are not necessarily the utility’s customers. 3 A “Disco” is a company that both owns the distribution wires and retails electricity. In Model 3, Discos continue to serve their captive Even in restructured markets, one can find customers at regulated rates. In Model 4, a retailer is a merchant who examples of this vertically integrated model with sells electricity to final customers, but does not own the wires over which the electricity is transported; this is the purest form of retail competition. a monopoly service area (such as a municipally In some regions, Discos are allowed to continue to serve as retailers in owned utility) selling electricity to its customers. competition with non-wires retailers often driven by the problems of non- There are more than 2,000 publicly owned utilities technical losses (i.e. theft). Sometimes, a retailer will be created as a separate company affiliated with a Disco, which is not ideal even if there in the U.S., serving about 15% of the customers. are strong requirements for the two companies to not share information.
4 Wholesale electricity is the electricity after the point of generation, as it exists on the transmission network, before the electricity reaches final customers.
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 11 Model 3 is close to the UK system as it operated model, or are in a phased transition. The retail immediately after it was restructured in 1990, choice program in Electric Reliability Council as well as some places in the U.S. and other of Texas (ERCOT) represents arguably the most restructured markets in Australia, New Zealand, competitive retail electricity market in the U.S. Asia, and Latin America. It is probably the The market has been open since 2002, allowing most common restructuring approach but even the residential customers to choose their with variations to reflect certain local political, electricity providers. However, municipally socioeconomic, or technical peculiarities. owned utilities and cooperatives have decided not to participate in retail choice. Still, there are tens of retail electricity providers (REPs) Model 4 – Retail and Wholesale Competition offering several hundred rate plans. In this model there are many possibilities. In the UK, most This electricity market model allows all customers retailers sell bundled natural gas and electricity. to choose their electricity supplier. There is open Customers can choose and change retailers as access to transmission and distribution wires, contracts expire. This model is also expected to and as in the case of the Wholesale Competition facilitate deployment of smart grid (e.g., smart model, transmission and distribution companies thermostats, remote control of appliances, are usually still regulated as separate Transmission time-of-use pricing). However, the REPs in the Service Providers (TSPs) and Distribution ERCOT market have been slow to incorporate Service Provider (DSPs) or an integrated “Wires these technologies into their offers presumably and Poles” Transmission and Distribution because of uncertainty of return on investment. Service Provider (TDSP). Thus, the distribution (delivery) is separate from the retail activity, and the latter is competitive. A retailer is a PUBLICLY-OWNED UTILITIES merchant who sells electricity to final consumers (NON-PROFIT OWNERSHIP) but does not own any distribution wires. Electric grid assets can be owned by non- The UK, Norway, Chile, Australia, and some profit entities, such as municipal and federal U.S. states have systems that approximate to this governments or member owned cooperatives
FIGURE 4: Not-for-Profit Municipal Utilities, Generation & Transmission Authorities, Distribution & Retailing Co-ops
Different Structures of Electricity Markets
20th Century Models Unidirectional Power Flow from Large Scale Generators to Consumers
Generation Transmission Distribution Retailing or Consumer (G) (T) (D) Wholesaling Function (C) Customer Billing Model 5: Traditional Vertically Integrated G T D C Municipal Utility Residential Regulated/Muni Oversight and C&I
Generation & Transmission Customer Acquisition Model 6: Billing Generation & Transmission + Distribution & Retailer G T D C Residential Generation & Transmission Authority Distribution & Retailing Co‐op and C&I Regulated/Member Regulated/Oversight Owned
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 12 (see Figure 4). In these cases, the structure of the nearby municipally owned utilities. These areas grid is similar to those models representing grids were without power until rural electrification with for-profit ownership. In some cases, there efforts began in the 1930’s. A few of these is a mix of for-profit and non-profit ownership organizations also experienced significant growth of assets on a single synchronized grid. in capacity to provide massive amounts of energy for critical World War II projects. Generation and transmission services can be provided by Federal Model 5 – Vertically Integrated Municipally Owned Power Marketing Administrations (such as the Utilities Bonneville Power Administration), agencies such as the Tennessee Valley Authority (TVA), state Some cities own their own electric utility. The created non-profit firms (e.g. Lower Colorado municipally owned utility structure (Model 5) River Authority), or generation & transmission in Figure 4 is similar to the investor-owned, (G&T) co-ops. These G&T entities generate fully-integrated vertical Model 1, where the and transmit bulk power to rural co-ops or residential, commercial, or industrial consumer municipal utilities. Even with the separation of have no choice of supplier (with the exception generation and transmission from distribution, of self-generation). Advantages to the electricity the consumer has no choice of supplier (again, consumer can include the elimination of corporate with the exception of self-generation) but possibly income and property taxes that would be has the ability to influence investment decisions included in the cost of IOU-provided electricity (e.g., as a co-owner of a cooperative or citizen service, a source of income for the municipal of a city that owns its municipal utility). government, and local control. Disadvantages can include a lack of scale that may increase costs.
Model 6 – Administrations, Authorities, and Cooperatives (Co-Ops)
Figure 4 also shows the model successfully deployed in areas that did not have sufficient population density to attract service by investor or
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 13 4 | PERSPECTIVES ON THE FUTURE A fundamental assumption that led to the initial demand response), and storage (batteries, regulatory model of the electric industry was that flywheels, compressed air). Some communities the provision of electricity was most economically promote these technologies for social and achieved through scale economies that favored environmental reasons as well as reliability (e.g., vertical integration and centralized generation. community solar). It is interesting to note that RPS Accordingly, the regulatory model was based on programs can be partially driven by state economic the notion that regulatory commissions need to development goals as well as environmental ensure that the consumers pay as little as possible considerations. State regulators have modified for reliable and pervasively available electricity their rules to accommodate these technologies. service. In order to achieve that main goal, regulators have sought to oversee the utilities to These trends pose continuing challenges for grid ensure that the utilities are investing in available operators. Distributed resources and demand side technology to keep current prices low, allow the participation can be particularly challenging with utilities to make sufficient profits so they can retail competition. The retail market structure raise necessary funding in the capital markets, may not encourage the investment required to and monitor to ensure the utilities are operating exploit load that may be flexible. The relative in a manner that does not cause undue harm ease for end-consumers to switch retail electricity to public health and welfare. When it works providers can create disincentives for investments well this is a political process that appropriately in intelligent distributed resources. The trend allocates costs and benefits in a complex, rapidly toward distributed energy resources represents changing environment. When the structure an important departure from historical practice. does not function well, customers can suffer from increased costs and poor service. TECHNOLOGICAL CHANGE CONTINUES The restructuring of the electricity industry Intermittent renewable electricity generation has led to competition in wholesale markets, technologies do introduce some challenges for and, in some cases, retail markets. More utilities, ISOs, and regulators. In competitive efficient generation technologies, such as markets renewables enjoy certain advantages. The combined-cycle-gas-turbines, have benefited zero fuel costs, low operating costs, and low life- from and supported wholesale electricity cycle emissions encourage deployment. However, competition. In most jurisdictions, including the intermittency of these sources is forcing the both restructured and traditionally regulated, grid operators to depend upon (and value) more policymakers have also been increasingly pursuing flexible generation sources elsewhere on the grid environmental goals. However, maximizing to compliment the intermittent renewables in environmental performance and maximizing order to maintain reliable electric service. It is economic efficiency are distinct goals, and are important to note that baseload power generation sometimes in tension with one another. (e.g. nuclear and coal) with more constant output Tax policies (federal and state), state renewable typically also needs to be complimented with portfolio standards (RPS) programs, and flexible dispatchable generation to adjust the total environmental (air, land, water, climate) power supply to match the constantly varying regulations have introduced technologies that demand. Wind power fits the existing traditional compete with existing thermal generators. These electricity model fairly well because it is generally include wind, solar (both distributed rooftop, implemented as large-scale wind farms remote and utility-scale PV, concentrated solar thermal), from the load, a typical scenario for a modern ac demand side management (energy efficiency, power system. The major challenge anticipated
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 14 in system dispatch by the grid system operator is new transmission lines and balancing generation. to maintain stability and reliability by “firming” Incremental transmission and balancing costs the renewable generation by simultaneously may or may not be consequential. The levelized varying the output of traditional gas, coal, or cost of electricity (LCOE) is a commonly used hydro generation. To date, relatively modest metric for comparing different generation levels of intermittency related to wind and solar types. Typically expressed on a $/kWh basis, it power generation within major North American combines capital and operating costs to estimate grids are handled via adjustments to existing the amount of money that it takes for a particular system dispatch protocols that were already in electricity generation plant to produce a kWh existence to handle the intermittency related of electricity over its expected lifetime [12]. to unpredictability of loads and generator trip- outs. Improvements in wind and solar generation The impact of renewables is even more pronounced forecasting techniques have also helped. Despite in dispatch decisions and spot markets for the challenges of forecasting loads and renewable electricity, where the marginal cost of providing generation output, some small electric grids, the next kWh is what matters. Since its marginal such as on Oahu, Hawaii, have been able to reach costs are effectively zero, wind can be dispatched high percentages of wind and solar generation at prices lower than conventional resources, even relatively quickly, through the deployment of at negative prices at times, owing to federal tax new technologies and regulatory adjustments. credits and renewable energy trading credits. Such prices, driven by out-of-market subsidies provided Many believe that eventually solar photovoltaic to these generation technologies, can undermine (PV) power will be more widely adopted than wind energy price signals in competitive electricity power. Solar generation is becoming increasingly markets. However, many of these subsidies attractive. PV can be installed in smaller expire over time. Renewable energy proponents distributed applications or large utility scale solar sometimes argue that the competitive markets farms (30-100MW+) as an IPP. Solar PV power themselves are not complete since they do not fully output is inherently dc and appears to be relatively internalize many important factors, such as health well matched to many modern load patterns. For impacts from air emissions. Many emissions example, peak solar PV generation occurs during regulations have been implemented since the the summer daytimes when air-conditioning 1970s, helping to internalize some of these costs. loads are highest, though the exact hourly timing of the peak PV and air-conditioning load usually Renewable electricity generation output is both does not precisely match. More importantly, PV predictably variable with such factors as the shows promise of becoming cost effective from time of day and sometimes intermittent with large utility-scale installations, community level the changing of wind and cloud patterns. Grid systems attached to neighborhood distribution operators have managed to incorporate significant circuits, and with smaller distributed rooftop amounts of wind power to date with little impact installations on the home or business. Solar PV is on reliability. However, as far larger amounts of a technology that brings back the initial concept renewables are installed, fast ramping thermal of neighborhood dc power, but its integration can generation, energy storage, and more flexible load now be made even more robust by overlaying a are likely to become more important. The electric dc microgrid with the existing ac transmission industry will need to balance the grid using the and distribution grid for those customers with legacy grid assets (e.g., natural gas power plants), the most demanding reliability requirements. even more advanced forecasting techniques, and perhaps eventually increased forms of energy Wind and solar power show promise to be truly storage. These options, however, are not mutually disruptive, as they might become (based on exclusive, and these technology changes are driving current cost trends) the least expensive ways to changes in both regulation, wholesale market generate electricity in some regions on a levelized structure, and financing of the electric sector. cost basis, not considering system costs such as
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 15 Demand that is responsive to price signals (e.g., flexible loads that can alter load profiles, and, lower when prices are high) can reduce generator hence, the way grids operate by changing the or utility revenues. Energy storage can be deployed relevance of demand-side participation. in a number of places on the grid, including on the customer site that might enhance the level of FINANCIAL CHALLENGES FOR UTILITIES demand response. Only a few of these storage configurations are financially attractive at this Utilities face increased affordability of distributed time. As storage prices decline, more regionally generation, particularly rooftop photovoltaic specific market applications for grid storage may (PV) panels, and stagnant or declining electricity become economic for various grid needs. Storage demand in the U.S. since 2007. These trends can can be co-located near intermittent renewable lead to the underutilization of large, costly, and generation to “firm” its output. Large-scale long-lived fixed utility assets (e.g., power plants, storage such as CAES, pumped hydro, or thermal transmission, or distribution assets) compared storage could be attached to the transmission to the expected utilization rates that were used system. Local storage such as batteries could be in the original investment decision-making and installed at various interconnection points with regulatory approval. Thus, these assets are at the distribution network. “Behind the Meter” risk of becoming a “stranded cost” or a cost that storage can be co-located with a customer’s load cannot be fully recovered. When markets were to reduce utility demand and energy charges. being restructured, utilities were concerned that their investments recently approved by There are other technologies that might impact the regulators would not recover their costs if the future of the electricity grid. Some have been the energy prices declined rapidly as a result of around a long time but technology improvements competition or new technology. Finding this and recent changes in market rules might render concern legitimate in certain cases, policymakers them more attractive. For example, micro-turbines granted ways to recover these stranded costs. that burn natural gas to generate electricity might make sense in some places as a distributed In restructured markets, new technologies resource. Combined heat and power (CHP), which can make large and long-lasting investments is one of the most efficient ways to utilize fuels, economically obsolete relatively quickly. The in large commercial and industrial applications electric system includes transformers, transmission may prove to be attractive for communities or lines and power plants that are 50 years old or municipalities. Batteries are not new either, more, for example. The financial markets are but new material compositions may bring lower reluctant to make these longer-term investments battery costs, in which case their deployment can in an uncertain environment, at least not without be accelerated. Other technologies are relatively a significant premium to cover the risk or without newer with a relatively small number of units assurance that stranded costs will be recovered. deployed. Storage options such as compressed The regulatory response can be to identify stranded air energy storage (CAES) or thermal storage can costs that will be recovered independent of system find larger applications if they can be optimized evolution. Stranded cost recovery can in some to reduce costs. The storage of CO2 through circumstances shift the risk from the utility carbon capture and sequestration (CCS) might investors to the consumers by increasing the allow some traditional thermal capacity to remain cost of electricity to customers. For example, if a as part of grids that might need to operate with utility is able to charge its customers for stranded lower CO2 emissions. Small modular nuclear assets (e.g., those retired early due to lack of reactor (SMRs), the first “commercial” site of economic operation), then the customers’ electric which might be built in the next few years, can rates (e.g., $/kWh charged on their bill) or fixed be a game-changer if they prove to substantially charges may increase even while the fuel costs of reduce costs. Finally, there is significant electricity generation decrease creating a customer activity in energy efficiency, conservation, and backlash that may be of concern to regulators.
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 16 The issue of declining revenues, due to distributed cost of electricity (energy charges) will vary generation and lower demand more generally, along with the wholesale price that varies over impacts the ability of electric utilities to access less the course of days, seasons, or longer commodity expensive capital to fund new investments. As price or technology cycle periods, but utility noted by Peter Kind in his report to the Edison economists have become more expert at achieving Electric Institute, “Since practically all utilities an average cost due to the predictability of the have an ongoing need for capital to fund their average (not instantaneous) cost and load. The capital expenditure programs, the industry has proportion of fixed charge related to long-term developed financial policies intended to support the capital asset investments and variable energy access to relatively low-cost capital in (practically) generation related charges in a customer bill all market environments. Under traditional cost- have varied over time and across jurisdictions. of-service ratemaking, customers benefit through lower cost of service and, therefore, lower rates” In some states, ratemaking policies allow for some [13]. If future revenues become more in doubt for cross-subsidies between residential and larger utilities, then they are pressured to raise their rates commercial and industrial consumers. Block (e.g., $/kWh charges) to pay existing debts, and rates can be pursued to encourage conservation future capital might come at a higher cost, again and efficiency (e.g., much higher rates above a putting upward pressure on electricity rates. These certain level of consumption) despite sometimes- upward pressures on electricity rates only enhance lower fixed cost amortization costs with higher the incentives for further electricity conservation volumetric energy sales. Fixed charges can (or load defection to distributed generation) by increase meaningfully if new transmission and consumers, a trend described as the “utility death distribution investments are mandated by the spiral.” The extent to which this death spiral will regulator or the legislature to accommodate remote play out is uncertain, but it is one of the many resources such as wind or solar (e.g., Competitive important motivations for understanding the Full Renewable Energy Zone transmission lines in Cost of Electricity. One of the policies that have ERCOT). These increases in fixed charges may or been helpful to the expansion of rooftop solar may not be offset by decreased generation costs. PV around the country, net metering, has been Historically, reliability has been an important under pressure. Utilities observed that there was objective of all electricity systems. In some a loss of revenues resulting from the expansion of competitive regions, generators are compensated rooftop solar while they are required to maintain for the capacity they make available to the grid via the same infrastructure under rates approved by long-term capacity markets in addition to energy regulators for larger loads. At the time of writing, they sell into the energy markets every hour. a couple of state utilities have revised their rules These capacity charges are also fixed in customer to address this concern deeming it legitimate bills for extended periods of time. As such, from a ratemaking perspective. Other states changes in customer bills can arise from regulated and utilities are evaluating similar policies. infrastructure charges or capacity charges as well as market-based energy charges. In recent years, CUSTOMER ELECTRICITY COSTS given that the low price of natural gas has kept wholesale electricity prices very low, increases A customer’s electricity bill consists of different in customer bills in competitive jurisdictions charges. In jurisdictions without competition, the are most likely the result of investment in new rate will generally reflect generation and T&D costs T&D and/or generation infrastructure. but be set by the regulator or the government. In competitive markets, the regulated T&D charges are fixed over a relatively long period of time. EVOLVING ELECTRIC GRID These rates are fixed because the assets are long- ORGANIZATIONAL STRUCTURES lived (measured in decades) capital investments Technological progress and cost reductions have generally financed with long term debt and introduced additional complexity and challenges to amortized over 20 to 30 years. The unregulated the previously described utility models of Figures
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 17 FIGURE 5: Disruptive Technologiesst to the Existing Utility Model 21st Century Electricity Market Example 21st Century Electricity Market Example Includes Pro‐sumers, Bi‐directional Power Flows, & DER (Pro‐sumers=Includes Producers+Consumers, Pro‐sumers, Bi‐directional DER= Distributed Power Flows, Energy & DER Resources) (Pro‐sumers=Includes Producers+Consumers, Pro‐sumers, Bi‐directional DER= Distributed Power Flows, Energy & DER Resources) (Pro‐sumers= Producers+Consumers, DER= Distributed Energy Resources) Generation Transmission Distribution Retailing or Pro‐sumer Generation(G) Transmission(T) Distribution(D) WholesalingRetailing Function or Pro(C/G)‐sumer Generation(G) Transmission(T) Distribution(D) WholesalingRetailing Function or Pro(C/G)‐sumer (G) (T) (D) WholesalingBilateral: LSE, C&I Function Customer(C/G) Bilateral: LSE, C&I Billing Generation T&D Provision Retailer: Residential Customer Bilateral: LSE, C&I Billing ProcurementGeneration T&D Provision Retailer: Residential Customer Procurement Billing Generation T&D Provision Retailer: Residential Procurement GIPP T D C/G GIPP T D “BehindC/G the Meter” PV,Co‐Gen,or GIPP T >60kV D “BehindC/G the Meter” PV,CoStorage‐Gen,or >60kV “BehindStorage the Meter” 240V PV,CoResidential‐Gen,or >60kV 240V PVResidential orStorage Storage 240V PVResidential or Storage <60kV PV orC&I Storage PV, DR Storage Storage StorageG T D Gc <60kV Co‐Generation,C&I PV, “NegaWatts”DR Storage Storage StorageG T D Gc <60kV CoOr‐Generation, Storage “NegaWatts” Generation Transmission Distribution Community C&I PV, NegativeDR StorageCo‐Located Storage Storage GenerationG T D CommunityGLevelc CoOr‐Generation, Storage “NegaWatts”LoadNegative from Storage LevelTransmission Storage LevelDistribution Storage Co‐Located GenerationLevel ResponsiveLoad from GenerationStorage Level Storage Level Storage Community OrC&I Storage PV, Negative Transmission Distribution Generation ResponsiveDemand Co‐Located Level Load from Storage Level Storage Level Storage Co‐Generation,C&I PV, Demand Generation Responsive CoOr‐Generation,C&I Storage PV, Demand CoOr‐Generation, Storage Or Storage Customer/ Independent System Operator (ISO)/ Customer/Generator RegionalIndependent Transmission System Organization Operator (ISO)/ (RTO) Customer/Generator Independent System Operator (ISO)/ RegionalSecurity Constrained Transmission Economic Organization Dispatch (SCED) (RTO) Generator RegionalSecurityand Constrained Transmission Transmission Economic ManagementOrganization Dispatch (SCED) (RTO) Securityand Constrained Transmission Economic Management Dispatch (SCED) 3 and 4. These changesand Transmission are fostering Management even more technical operation of the grid. The emergence of complex business and regulatory models where distributed energy resources (DERs) either on the customers can increasingly purchase electricity utility side of the meter, or behind the customer services from multiple vendors for multiple meter, may become a transformative force to the purposes (e.g., demand response (DR), distributed utility industry. While the discussions of such generation, energy storage) and in multiple ways concepts as “transactive energy” and the models of (see Figure 5). Storage and generation systems distributed system platforms (DSP) or independent can technically be located on multiple parts of distribution system operators (DSOs) are beyond the grid depending upon capabilities and needs. the scope of this paper, these concepts are part of ongoing restructuring efforts in a number of Community level solar systems connected to states, These efforts are attempts to accommodate the distribution system can reduce transmission new technology alternatives, associated business loading and allow distribution companies or structures, market design, and the supporting cooperatives to own small-scale generation for the regulatory structure to meet stakeholder objectives first time or provide unique customer ownership for their 21st century energy systems [14][15][16][17]. opportunities for those who cannot install rooftop PV on their residences. Rooftop PV or There will also likely be an increased cogeneration systems at homes and businesses can demand for newer and more customer- be a utility-owned distributed generation resource centric regulatory frameworks that allow an or customer-owned generation that reduces utility increased number of technologies to be owned revenue. All of these configurations can provide and operated by a larger number of players an opportunity to improve (or complicate) the that serve more diverse customers. utility model, their finances, and in some cases the
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 18 5 | CONCLUSION For a century, the scale economies associated and state governments implemented with large centralized generation technologies environmental regulations, tax credits, and encouraged vertical integration, drove down other programs that encouraged deployment the cost of electricity, fostered universal access of renewables such as wind and solar. that improved citizens’ quality of life, and provided for reliable electric service. The Continuing declines in the cost of wind and structure of the electricity industry started solar PV, inexpensive natural gas combined with to evolve significantly starting in the 1970s. flexible and efficient combined cycle gas plants, Higher fuel prices, environmental concerns, micro grids, and energy storage and demand technological innovations and efforts to improve response systems with progressively lower costs the economic efficiency of electricity service led continue to provide opportunities to improve to the rethinking of the traditional vertically- the traditional utility business model. These integrated, regional monopoly model. In the technology developments are strongly encouraging late 1970’s and 1980’s a series of government the industry to consider new technology and decisions deregulating wellhead natural gas business models, policy makers to consider prices and the pipeline industry made natural alternative regulatory and electricity market gas-fired electric power much less expensive. structures, and electricity customers to pursue These efficient non-utility co-generation/CHP self-generation, storage, or responsive demand gas powered generators were some of the first capabilities that have the potential to significantly disruptive technologies and firms that threatened reduce utility revenues and profitability. With so the traditional vertically integrated utility model. many moving pieces, the policy and investment environment can be uncertain. The companion By the mid-1990s, policy makers began to papers of the FCe- project and related research restructure the electricity system, seeking to by team members offer more insights into the promote innovation and reduce electricity technologies, trends, or considerations that lead costs while incorporating policies that to disruptive changes and uncertainty. addressed environmental concerns. Federal
The Full Cost of Electricity (FCe-) The History and Evolution of the U.S. Electricity Industry, July 2016 | 19 6 | REFERENCES
[1] “POWERING A GENERATION OF CHANGE.” [10] Warwick, Mike. A Primer on Electric Utilities, Emergence of Electrical Utilities in America, Deregulation, and Restructuring of U.S. Samuel Insull and Chicago Edison. Smithsonian Electricity Markets. Richland, WA. Pacific Institution, 01 July 2014. Web. 06 June 2016. Northwest National Laboratory, 2002. Print.
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