Shorting the Grid

Tags:  non-fiction,

Meredith Angwin’s Shorting the Grid primarily covers what the author calls “the policy grid.” As opposed to “the power grid,” which is a physical entity delivering electricity from generation facilities through transmission and distribution infrastructure, the policy grid refers to the collection of organizations that regulate the production and distribution of electricity. These include the Federal Energy Regulatory Commission (FERC), Regional Transmission Organizations (RTOs), state utility regulators, and state and federal legislatures.

These regulations, layered one on top of the other, often work at cross purposes to defeat the goals they’re supposed to promote. Angwin gives a prime example early in the book.

Before digging in to this example, I’ll note that a Regional Transmission Organization (RTO) is an authority responsible for coordinating, among other things, power generation and transmission within a region that spans multiple states. RTOs demand regular reports from electric utilities about their transmission capacity. They balance production and demand through online markets in which utilities and power generation facilities buy and sell electricity, which may be generated in one state and consumed in another.

The RTO in the Northeastern US, ISO-NE, had set up a plan called the Winter Reliability Program. The RTO knew that most of the electricity in the region came from gas-fired power plants. During winter cold snaps, which can be extreme in this part of the country, electricity demands spike as electric heaters work harder to warm homes. Demand for natural gas also spikes, as homes with gas heat require additional fuel to stay warm.

Regulations on natural gas distribution stipulate that gas must be routed to residential customers first and commercial customers second. This puts the Northeast’s power plants in a bind during a cold snap. At a time when demand is at its peak and they most needed gas, they may have a hard time getting it.

ISO-NE foresaw this problem, and their Winter Reliability Program required generation facilities to keep a stock of oil on hand during the winter months. That allows generation facilities to burn oil when gas is unavailable. The generation companies complied, and in the bitterly cold winter of 2017-2018, oil reserves kept the power flowing and saved thousands of homes from freezing.

After that winter, FERC said the Winter Reliability Program violated federal rules by prescribing what type of fuel the generation plants had to burn. ISO-NE had to scrap a well-intended, well-designed and effective program that had prevented a potential disaster. Still committed to reliability for its customers, it had to come up with a new plan to try to provide winter reliability without running afoul of federal regulations.

The new program turned out to be arcane, difficult to understand, and not very effective. The new program was arcane because it had to adhere to complex and conflicting federal regulations. While ISO-NE wanted to serve its customers (whom Angwin always calls “ratepayers”), it was legally bound to serve FERC’s requirements at the expense of its customers.

Angwin is upfront about having an agenda in this book. Put simply, her agenda is to make the regulation of power generation, transmission and distribution more simple, open and clear, and to have regulation explicitly serve the needs of customers by making electricity as cheap, reliable and clean as possible.

It’s hard to argue with those principles. So, why is the policy grid such a mess right now?

Many of the problems trace back to the history of the grid, which Gretchen Bakke describes so clearly in her 2016 book, The Grid. Electric utilities used to be monopolies, because it didn’t make sense to build multiple sets of transmission and distribution lines in every state. The cost of running even one power line into every home is enormous. Imagine having five power companies in each state, with five sets of lines atop every utility pole, five pole-top transformers in on every block, and five lines running into every home. That’s just not feasible. One power grid is plenty.

As local monopolies, the power companies were heavily regulated to prevent them from doing what monopolies do, which is gouge people. In exchange for limiting how much the companies could charge for electricity, the regulating agencies promised them a guaranteed return on investment. If a power company spent a billion dollars on a new generation facility, the regulator guaranteed they would recoup all of that investment over time, plus a percentage profit on top.

Angwin notes that this incentive led power companies to build more generation facilities than they needed. That, in turn, led to a very reliable grid, as there was always some excess capacity to meet demand, even during the heaviest spikes. The utilities were vertically integrated monopolies, meaning they controlled both the production and distribution of electricity. Generation was the money maker. Transmission and distribution were the means of delvering the product to the customer.

Deregulation of the electric utilities began in 1982 with a Supreme Court ruling requiring utilities to transmit power regardless of who created it. This broke the vertical monopoly of the grid. The utilities were no longer entirely in control of the system.

Over time, as more private generation facilities came online, the responsibilities of the electric utilities moved away from money-making generation and toward money-losing maintenance of transmission and distribution networks.

The federal government loosened market regulations on the power industry, hoping to move the grid closer to a free market model, and to replicate the successes of airline and telecom deregulation. After those latter two industries were deregulated, airfares and phone service prices went down, and quality, availability and consumer choice improved.

The power industry, as Gretch Bakke notes, is fundamentally different than every other industry in that its product (electricity) is consumed the instant it is produced, and in that production must always match demand, exactly, down to the second.

RTOs came into existence to try help state and local utilities deal with these two unique challenges. How could a utility in one state balance generation and demand when the power being produced and consumed crossed state lines? RTOs are non-profit organizations that help interconnected utilties plan for and manage this balance on a minute-to-minute basis. They provide a marketplace by running an ongoing auction of electrical capacity in which prices change every five minutes. They also set rules on how much capacity utilities must maintain to deliver adequate power to their customers.

So, when ISO-NE created its Winter Reliability Program to try to ensure adequate power under the most adverse conditions, it seemed to be operating under its legal purview.

In an attempt to create a truly open market, however, the federal government had prevented RTOs from demanding that any power be generated by any specific fuel. In a truly open market, the only things that matter are commodity and price, not how or where the commodity was produced.

This sort of regulation works in other markets. We don’t tell Ford how to make their cars, or Papermate how to make their pens. They choose how to make products based on customer needs, and the market either approves or rejects what they’ve built.

Once again, however, electricity is different. It must be available in life-threatening situations such as extreme cold and extreme heat. Because it’s consumed the instant it’s created, it depends on a real-time supply chain. When there’s no sun, solar panels simply won’t produce. No wind, no power from the turbines. No natural gas, the gas plants go offline. Power goes out that very second, and thousands of people freeze.

This was the scenario ISO-NE foresaw and attempted to prevent by requiring generation facilities to maintain oil reserves for a worst-case scenario that did in fact come to pass. FERC then said this plan violated federal regulations by dictating what type of fuel had to be used to generate the required power.

Both entities were trying to protect the consumer: ISO-NE by guaranteeing availability and FERC by promoting low market prices. In practice, however, the regulations work against each other and in the end, everyone loses.

Angwin points out that these multi-layered, conflicting regulations pervade the entire industry and that they’re so complex, even seasoned professionals have a hard time understanding them. Many of the rules are made behind closed doors to benefit narrow interest groups, and many of them make no sense at all from a consumer perspective.

For example, Angwin describes what happens when a utility buys power in an RTO auction to meet the needs of the next five minutes. The RTO lists three sellers whose rates can be described as cheap, more expensive, and most expensive. The utility needs to buy power from all three sources to meet coming needs. So how much do they pay?

In a normal market, they would pay the cheap price to the cheap supplier, the more expensive price to the more expensive supplier, and the highest price to the last supplier. In the RTO market, they have to pay the most expensive price to all of the suppliers. The rule basically says that if they pay a high price to one supplier in an auction, they have to pay the same high price to all suppliers, even when those other suppliers explicitly said they would sell for less.

What sense does that make?

For the consumer, none. But in a world where cheap renewables threaten to drive traditional generation plants into bankruptcy, there is a place for this seemingly irrational rule.

The grid, as Gretchen Bakke points out, has to serve many conflicting interests. It has to be on all the time, or our lives come to a halt. It has to be profitable for the companies that supply and maintain it. It has to clean to keep from poisoning the world it serves.

Angwin argues that the various regulatory bodies that try to address these conflicting needs have themselves become a major threat to the grid’s long-term viability. They don’t play well together. They often work at cross-purposes, with one agency’s regulations nullifying the effects of another’s. Many of their regulations have unintended consequences that cause more harm than good. (Angwin notes as an example some California regulations of the early 2000s that incentized companies to take generation facilities offline, deliberately causing rolling blackouts and increasing profits for the generators that remained online).

Angwin argues that the secrecy of the rule-making processes at RTOs and other regulatory bodies is a big part of what enables this regulatory mess. She advocates for open and transparent regulatory decision-making, so the public can see whose interest is being served by various rules, and how.

This is an informative book, but unfortunately, it’s poorly structured and would have benefitted from a professional editor. Angwin’s prose is undisciplined, meandering, repetitive and unclear. In most chapters, it’s hard to understand what the author wants to you to take away. If she manages to get a point across, it’s in spite of her words, not because of them.

Still, the book is useful and may be better skimmed than read.

After reading Bakke and Angwin back to back, and after doing some work in the power industry, I wonder about the future of the grid as a whole. Cheap renewables put so much economic pressure on traditional generation facilities that they may not be able to survive without subsidies. And they will need to survive for some time, because solar and wind can’t produce when the sky is dark and the wind is calm.

Electric storage technology does not yet exist at the proper scale to provide power for the masses when wind and solar are idle. We still need the traditional power plants to fill that gap.

Meanwhile, the transmission and distribution components of the grid remain incredibly complex, fragile, and vulnerable to storms and other disasters. Maintaining the existing infrastructure is incredibly expensive and not at all profitable for the utility companies responsible for its care.

As Angwin notes, a major threat to today’s grid is that there’s no answer to the question of who is ultimately responsible for keeping the power flowing, the power on which all our lives depend. The generation care only about producing megawatts. The utility companies barely turn enough profit to keep up the lines that wheel power from state to state and from substation to home.

Unlike the regulated monopolies of the twentieth century whose existence depended on keeping all parts of the system working in harmony to serve the customer, in today’s partially deregulated, partially hyper-regulated grid, “The buck stops nowhere.”