Marriage of convenience eyes retail market.
By Richard S. Green and J. Michael Parish
Enron's proposed entry into the electric energy business is a "wake-up call." Open...
from such facilities.
To attract customers, electricity need not remain in storage for a long period of time, such as a full calendar season. Today's "just in time" economy and real-time inventory management techniques render longer-term storage unnecessary. Electric customers will more likely desire services such as "instantaneous load balancing." In this sense, the electric industry may stand better prepared for competition than the gas industry, where time of day plays a less critical role in system operations.
Given the instantaneous nature of electric power flows, transmission operators require some direct or indirect control over generation assets to maintain reliability, protect against unscheduled transmission outages, and ensure network coordination. However, with the coming functional (and perhaps structural) separation between generation and transmission, grid operators will exert less direct control over generation resources. Ancillary services will provide grid operators with the means to maintain reliability under open access and vertical disaggregation.7
Historically, the cost of these ancillary services remained hidden and internalized within the vertically integrated utility structure. Now, the FERC's open-access policy for electric transmission will unbundle these services and price them separately.8 In fact, the FERC is applying lessons learned from the gas industry. The six ancillary services identified in the final rule in Order 888 have clear corollaries in the gas industry (see Table).
Transmission providers must provide or at least offer these six services, although the FERC will allow transmission customers to supply some ancillary services from their own generation assets or purchase them from third parties. This policy should spur formation of a competitive market for these generation-based ancillary services.
Storage technologies like CAES and HPS appear well-suited to support ancillary services such as load following, because they are designed to sustain frequent startup-shutdown cycles and variations in loading with a minimum of equipment stress or operational inefficiency. They operate like efficient shock absorbers (em helping to smooth out fluctuations in supply, demand, and price. A CAES plant is designed to cycle on a daily basis and to operate efficiently during partial load conditions. It can also swing quickly from a generation to a compression mode (effectively doubling a unit's swing capability). CAES plants are the most cost-effective generating technology at annual capacity factors ranging from 10 to 40 percent.
An increasingly competitive ancillary services market has developed in the United Kingdom since privatization and disaggregation of its electric industry. The National Grid Company (NGC) owns and operates the transmission system. It also operates an ancillary services business that executes contracts to buy ancillary services from independent providers (generators, the regional electricity companies, large consumers, or external pool members).9,10 For the most part, NGC employs a competitive bidding process to procure the ancillary services it needs to maintain target reliability levels at least cost. It then recoups the cost of these services through a customer surcharge or "uplift fee" on its unbundled transmission services.
Ancillary services contracts in the United States will most likely resemble those from across the pond, as stateside utilities unbundle generation from transmission and turn to an independent system operator (ISO)