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Smart Grid: Wholesale Market Realities

Granular customer data will revolutionize megawatt markets.

Fortnightly Magazine - September 2009

Wholesale power markets have been in flux over the past year due to many market forces and new regulations. First, the slowdown of economic activity throughout the country has reduced native loads for utilities, making more generation available to the wholesale market. Second, contracting activity in the industrial segment has picked up as some companies are looking to lock in long-term power supply contracts with local utilities and power suppliers. This is counter to past observations where industrial customers historically have been wary of long-term contracts—with an average contract churn of 17 months or less. Third, regulatory activity in many states has introduced aggressive mandates for energy efficiency (EE) and demand response (DR) to curb demand growth and reshape the load curve. Fourth, changes enacted by the Federal Energy Regulatory Commission (FERC)—like the elimination of the interruptible load for reliability (ILR) provision in PJM—brought additional DR resources to the market. Last, an increasing amount of variable generation is being connected to the bulk power system and some operational problems have begun to arise.

Adding to these changes, the deployment of smart technologies—especially smart meters—will dramatically change the utility industry over the next five to 10 years. Retail consumers will be able to monitor their power consumption. More important, the deployment of time-of-use (TOU) tariffs will reduce the asymmetry of information between utilities and customers. For the first-time, consumers will be able to make conscious decisions about their energy-consumption patterns based on almost real-time information. Smart-meter pilots across the United States have demonstrated that the implementation of automated meter infrastructure (AMI) technology, coupled with TOU tariffs, can have a significant impact in the load profile—peak loads were reduced between 8 percent and 33 percent, while the total loads were cut by up to 15 percent.

Looking five years into the future, when many large-scale deployments of AMI technology will have been implemented, utilities will be serving significantly different load profiles than they are today. The degree of change is yet to be fully understood and it will depend mostly on the degree of adoption of variable power tariffs—such as TOU and critical-peak pricing (CPP). These tariffs—as well as the expansion of traditional utility-driven load-control programs—will ensure that the capacity and energy available in the market will consist of a combination of supply and demand resources. Adding to the uncertainty is the increasing cost effectiveness and pending favorable regulatory treatment for distributed generation (DG) technologies that could drive their increased penetration.

Overall, despite these unknowns, it’s safe to say that the wholesale power market will become much more competitive than it is today. The rationale behind this statement is that investor-owned utilities (IOU), independent power producers (IPP), load-serving entities (LSE) and other traditional players in this market will see more

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