America’s dependence on electricity is growing. A report by the North American Electric Reliability Corp. (NERC), the organization designated by the federal government to monitor the power grid in the United States and Canada, projects that demand will exceed planned increases in generating capacity over the next decade.
Emergency situations, NERC has noted, are becoming more frequent as greater strain is placed on an aging grid. With the system continually operating at or near its limits, NERC states that managing equipment failures, extreme weather, and other unplanned events is harder than ever before.
The study of electricity markets and pricing is an emerging specialty field in finance, Ullrich said. His research projects have looked at risk management in the electricity industry, volatility in electricity markets, and the impact of regulatory uncertainty on power plant investment and construction.
In the past, Ullrich worked at a large public power utility in central Florida, where he analyzed capital budgets and operational and maintenance strategies. “A new power plant costs $50 million to $1 billion,” he said.
Besides the expense, building new plants is also very complicated.
“People take electricity for granted and believe it is their right,” he said, “but at the same time, nobody wants transmission lines anywhere.”
Putting off the need to build also delays the ability to address a tangle of financial, regulatory, technical, environmental, and political issues, he said.
Ullrich said providing consumers both information about their power use as well as time-of-use price incentives can shift demand away from peak periods and reduce indiscriminate energy use.
A January 2009 Energy Law Journal article noted that studies have found that consumption dropped by 6 to 20 percent when consumers received “frequent feedback,” on their daily level of electricity use, their cost of consumption every half hour, or daily and weekly electricity prices.
Consumers can buy $100 to $200 devices to track their real-time electricity use. However, Ullrich said he believes that far greater impact can be achieved if all power companies took the initiative and provided their customers a more informative electricity bill as well as a time-based pricing scheme.
Most people, he said, currently get a statement with only a lump-sum charge. They don’t see how much of the bill is due to use of various appliances, or how much of it could have been decreased by using more efficient models, or how much consumption can be shifted to off-peak times.
Also unseen by consumers are the daily, weekly, and seasonal changes in wholesale prices for electricity, which are highly volatile, resulting from the fact that electricity — unlike oil or copper or other commodities — cannot be stored or stockpiled. There is no two-month supply cushion, as in the Strategic Petroleum Reserve.
Electricity has to be produced and consumed instantaneously.
“If you can’t store it, you have to make enough in real time to meet demand,” Ullrich said. “If something goes wrong. If a coal-fired power plant were to trip off line, for example, other plants have to be cranked up instantly to meet demand — and these replacements are necessarily more costly to operate than the plant that tripped.”
Supply and demand shocks, he said, “are transmitted into wholesale prices almost instantaneously — literally at the speed of light — resulting in the price spikes that are endemic to electricity markets.”
During the summer months, when U.S. demand is at its peak, the price at which power companies have to buy can far exceed the price at which they can resell. That happened in summer 2008 when five electricity retailers in Texas failed after wholesale prices spiked up to $4,000 per megawatt hour (typical wholesale electricity prices are $40 to $100).
Showing consumers some of the price volatility borne by their electricity suppliers, along with appropriate price incentives, would make them more mindful electricity users, Ullrich said.
“Right now, we consumers don’t see that volatility, and we don’t have any incentive to change our behavior,” he said.
In the short term, he says, consumers experience few, if any, consequences of price volatility.
“But in the long term,” he added, “if retail electricity companies have to continue to take on such huge risks that it’s no longer a profitable business to be in, fewer companies will be left in the industry — and consumers will ultimately see the impact of that.”
Price spikes are episodes in which the price of electricity can rise rapidly by a factor of 100 or more, followed by a relatively quick return to normal levels.
The swings in gasoline prices of the last few years, for example, from around $2 a gallon to more $4 and back down, are “small potatoes,” Ullrich said, compared to wholesale electricity prices,
Prices “can go from $40 per megawatt hour to $4,000 and even $10,000 and back to $40 within the day, often over the course of a few hours,” he said.
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