ECE 7800: Renewable Energy SystemsTopic 4: Utility Deregulation

Spring 2010

© Pritpal Singh, 2010

US Legislative Background for DG The old model of power utilities as

described in Topic 1 is vertically integrated monopolies with primarily large, centralized power plants, transmission lines, and distribution networks.

Over time, legislation has been passed to encourage competition to the utility monopolies (as in airline and telecommunication deregulation) to bring down the price of retail electricity. Details of these laws are provided in the next few slides.

PUHCA Act of 1935 The Public Utility Holding Company

Act of 1935 was passed to prevent abuses of utility holding companies (companies that held majority stock in several utility companies). There were a few holding company conglomerates that held utilities in a pyramid scheme. The stock market crash of 1929 and the Depression resulted in bankruptcies of many holding companies. PUHCA was passed to prevent financial abuses of such holding companies.

PURPA Act of 1978 The Public Utility Regulatory

Policies Act of 1978 was established after the oil crises of 1973 and 1976 to encourage renewable energy. It required the utilities to buy power from renewable independent power producers (“qualifying utilities”) at a “just and reasonable price”. There were two categories of Qualifying Utilities:

1) Qualifying small power producers 2) Qualifying co-generation facilities

PURPA Act of 1978 (cont’d) Qualifying small power producers were

less than 80MW in size and use at least 75% wind, solar, geothermal, hydroelectric or municipal waste energy as energy sources.

Qualifying co-generators were defined as facilities that produce both electricity and useful thermal energy.

To encourage competition, investor-owned electric utilities (IOU’s) were only allowed a maximum of 50% ownership of qualifying facilities (QF’s).

Energy Policy Act of 1992 The Energy Policy Act of 1992 opened up

the grid to more than just the QF’s, thereby further increasing competition. The new category of access was exempt wholesale generators (EWG’s). EWG’s were not restricted in fuel or size and had no ownership constraints. The main restriction on EWG’s is that they could wheel only wholesale power from one place to any other place in the country not retail power. Other independent power producers could sell retail power but were regulated under the rules of FERC and PUHCA.

FERC Order 888 and Order 2000 Anti-competitive practices by the utilities in preventing access to utility owned transmission lines were addressed in the federal energy regulatory commission (FERC) order 888 in 1996.

To further break up the vertically integrated monopolies, Order 888 encouraged formation of independent system operators (ISO’s) – non-profit organizations to control operation of transmission facilities. In December 1999, FERC issued order 2000 to establish regional transmission organizations (RTO’s). These could manage utility owned transmission lines or own the transmission facilities and operate them for a profit.

Federal Energy Regulatory Commission

http://www.ferc.gov/industries/electric.asp

Utilities and Non-Utility Generators A summary of the effects of PURPA

and EPACT on the categories of power generators is shown in the figure below:

Emergence of Competitive Markets in the US

Restructuring of the electric utility market has been motivated by the emergence of new, small power plants. The trend has moved away from large, centralized power plants to smaller units. By 2000 the largest plants were only a few hundred MW compared to 1400 MW in the 1990’s.

Power Plant Technology Restructuring

The below table shows that only 7% of the anticipated additional 300 GW of new power generation capacity expected by 2020 will be large, coal-fired power plants.

Independent Power Producers

Less capital-intensive power plants give independent power producers a competitive advantage to traditional utilities who have large sunk costs in large power plants. FERC included a provision in Order 888 to accelerate the recovery of sunk costs on power plants that were no longer cost-effective to allow the traditional utilities a fairer chance to compete.

Restructuring in California California was at the forefront of utility

restructuring in an effort to reduce high utility costs. Neighboring states had excess, low-cost generating capacity (e.g. Washington and Oregon’s hydroelectric power). If the utilities could eliminate their QF obligations and quickly pay down their expensive generators, they could buy electricity on the wholesale market and make large profits. In 1994, the CA Public Utility Commission (CPUC) issued a proposed rule to restructure the power industry with the aim of reducing electricity costs.

Restructuring in California (cont’d)

In 1996, the CA legislature passed Assembly Bill 1890 with the following major provisions:• Open up wholesale market to competition and

all customers would have a choice of electricity suppliers.

• Residential and small commercial customers would get an immediate 4-yr., 10% rate reduction. Larger customers would have rates frozen at 1996 levels for 4 yrs.

• Utilities would have the opportunity to recover stranded costs during that 4 yr. rate freeze period.

• A public goods charge would be levied to support renewable energy, energy efficiency and low income rate support programs.

• Utilities were to sell off their generating capacity to create new players in the market.

• By 2002 the market would be free.

Restructuring in California (cont’d)

Following FERC’s Order 888, California established a not-for-profit independent system operator to operate and manage the state’s transmission grid. This was done to ensure that buyers could buy electricity from any seller they choose.

Also, the California Power Exchange (CalPX) was set up to match supply to demand using daily auctions. It accepted price and quantity bids from participants in both “Day Ahead” and “Day Of” markets from which the market price clearing prices at which energy was bought and sold were set.

A major benefit was that customers could choose their supplier of electricity (through energy service providers- power brokers) with different mix of energy generation combinations (including renewables).

Restructuring in California (cont’d)

The structure of California’s initial electricity restructuring is shown below:

Restructuring in California (cont’d)

The wholesale electricity market opened up in March 1998 and worked well for the first two years with wholesale electricity prices hovering around 3.5 cents/kWh. In 2000, however, things changed. Wholesale electricity prices rose to unheard of levels. In August 2000, it reached 17 cents/kWh (5x August 1999) and on one day it reached 80 cents/kWh!!! The big utilities PG&E and SCE were forced to buy electricity at prices much higher than they were able to sell for. SDG&E, however, had eliminated their debt and were able to pass the costs onto customers.

Restructuring in California (cont’d)

Restructuring in California (cont’d) There were several factors involved

but the primary cause was price manipulation by new generation companies, particularly Enron. They found that they could make more money by turning off generating capacity and thereby decreasing power supply. In January 2001 rolling blackouts were common and prices reached as high as $1.50/kWh. By May 2001, PG&E had declared bankruptcy and SCE was almost bankrupt.

Restructuring in California (cont’d)

CalPX was shut down and CalISO began to purchase power as well as operate the grid. By summer 2001, price caps on wholesale power were instituted by FERC and the Governor started to negotiate long-term power purchase agreements. An aggressive energy conservation effort was instituted (“20/20” program) in which customers received a 20% rate reduction if a customer reduced demand by 20% - a target that over 1/3 of customers achieved!

Restructuring in Pennsylvania Electricity restructuring legislation

was passed in the State Assembly (HB 1509) in Pennsylvania in September 1996 with customer choice available from January 1999. In June 1999 it became one of the first states to offer natural gas and electricity supplier choice. Generally the transition in PA has been quite smooth because of price caps for wholesale electricity and natural gas imposed by PA PUC.

Restructuring status in US

http://www.eia.doe.gov/cneaf/electricity/chg_str/restructure.pdf

Restructuring of Utilities around the World

Many countries have broken up their power utilities from vertically integrated, government monopolies to private or state enterprises. Some of these programs have been very successful, e.g. UK, New Zealand while others have run into political problems, e.g. Brazil, Argentina. India and China are both implementing reforms of their energy sectors but these are progressing relatively slowly.