Question

CASE study Electricity Generation

Case study 8.1: Electricity generation

Electricity Generation

Here and now

Distributed power generation will end the long-distancetyranny of the grid. For decades, control over energy has been deemed too important to be left to the markets. Politicians and officials have been dazzled by the economies of scale promised by ever bigger power plants, constructed a long way from consumers. They have put up with the low efficiency of those plants, and the environmental harm they do, because they have accepted that the generation, transmission and distribution of power must be controlled by the government or another monopoly. Yet in the beginning things were very different. When Thomas Edison set up his first heat-and-power co-generation plant near Wall Street more than 100 years ago, he thought the best way to meet customers’ needs would be to set up networks of decentralised power plants in or near homes and offices. Now, after a century that saw power stations getting ever bigger, transmission grids spreading ever wider and central planners growing ever stronger, the wheel has come full circle.

The bright new hope is micropower, a word coined by Seth Dunn of the WorldWatch Institute in an excellent report.* Energy prices are increasingly dictated by markets, not monopolies, and power is increasingly generated close to the end-user rather than at distant stations. Edison’s dream is being The new power plants of choice the world over are using either natural gas or renewable energy, and are smaller, nimbler, cleaner and closer to the end-user than the giants of yesteryear. That means power no longer depends on the vagaries of the grid, and is more responsive to the needs of the consumer. This is a compelling advantage in rich countries, where the digital revolution is fuelling the thirst for highquality, reliable power that the antiquated grid seems unable to deliver. California provides the best evidence: although the utilities have not built a single power plant over the past decade, individuals and companies have added a whopping 6gW of nonutility micropower over that period, roughly the equivalent of the states installed nuclear capacity. The argument in favour of micropower is even more persuasive in developing countries, where the grid has largely failed the poor. This is not to say that the existing dinosaurs of power generation are about to disappear. Because the existing capital stock is often already paid for, the marginal cost of running existing power plants can be very low. That is why America’s coal-fired plants, which produce over half the country’s power today, will go on until the end of their useful lives, perhaps decades from now – unless governments withdraw the concessions allowing them to exceed current emissions standards.

While nobody is rushing to build new nuclear plants, old ones may have quite a lot of life left in them if they are properly run, as the success of the Three Mile Island nuclear power plant in Pennsylvania attests. After the near-catastrophic accident in 1979 that destroyed one of the plant’s two reactors, the remaining one now boasts an impressive safety and financial record. Safety and financial success are intimately linked, says Corbin McNeill, chairman of Exelon and the current owner of the revived plant. He professes to be an environmentalist, and accepts that nuclear power is unlikely to be the energy of choice in the longer term: ‘A hundred years from now, I have no doubt that we will get our energy using hydrogen.’ But he sees nuclear energy as an essential bridge to that future, far greener than fossil fuels because it emits no carbon dioxide.

GOOD OLD GRID

The rise of micropower does not mean that grid power is dead. On the contrary, argues CERA, a robust grid may be an important part of a micropower future. In poor countries, the grid is often so shoddy and inadequate that distributed energy could well supplant it; that would make it a truly disruptive technology. However, in rich countries, where nearly everyone has access to power, micropower is much more likely to grow alongside the grid. Not only can the owners of distributed generators tap into the grid for back-up power, but utilities can install micropower plants close to consumers to avoid grid bottlenecks. However, a lot of work needs to be done before any of this can happen. Walt Patterson of the Royal Institute of International Affairs, a British think-tank, was one of the first to spot the trend toward micropower. He argues that advances in software and electronics hold the key to micropower, as they offer new and more flexible ways to link parts of electricity systems together. First, today’s antiquated grid, designed when power flowed from big plants to distant consumers, must be upgraded to handle tomorrow’s complex, multi-directional flows. Yet in many deregulated markets, including America’s, grid operators have not been given adequate financial incentives to make these investments. To work effectively, micropower also needs modern command and communications software. Another precondition is the spread of real-time electricity meters to all consumers. Consumers who prefer stable prices will be able to choose hedged contracts; others can buy and sell power, much as day traders bet on shares today. More likely, their smart micropower plants, in cahoots with hundreds of others, will automatically do it for them.

In the end, though, it will not be the technology that determines the success of distributed generation, but a change in the way that people think about electricity. CERA concludes that for distributed energy, that will mean the transition from an equipment business to a service business. Already, companies that used to do nothing but sell equipment are considering rental and leasing to make life easier for the user. Forward-looking firms such as ABB, a Swiss- Swedish equipment supplier, are now making the shift from building centralised power plants to nurturing micropower. ABB is already working on developing ‘microgrids’ that can electronically link together dozens of micropower units, be they fuel cells or wind turbines. Kurt Yeager of the Electric Power Research Institute speaks for many in the business when he sums up the prospects: ‘ Today ’s technological revolution in power is the most dramatic we have seen since Edison’s day, given the spread of distributed generation, transportation using electric drives, and the convergence of electricity with gas and even telecoms. Ultimately, this century will be truly the century of electricity, with the microchip as the ultimate customer.’

* ‘Micropower: the next electrical era’, by Seth Dunn.WorldWatch Institute, 2000

Questions

(a) Explain why power generation has traditionally been a monopoly in all developed countries.                                                                                                                               

(b) Why is it easy for the operators to exploit consumers in this market?       

(c) What is the nature of barriers to entry in the market?        

(d) How is the transmission grid related to a monopolistic market structure?  

Answer 1

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(a) Power generation has traditionally been a monopoly because it has the features of a natural monopoly with gargantuan capital investment and setup costs along with extremely high fixed cost which continuously reduce as the company grows in size and customer base obtaining a large number of customers which serves to facilitate spreading of fixed costs which finally allows for providing the facility at a reasonable price for the consumer. If Electricity production was split among two companies each having a separate power source setup and power lines for distribution it would lead to a doubling of the price which finally has to be paid by the consumer and would be extremely unfeasible for an essential commodity. Because of electric companies being monopolies it is essential to provide government to control to ensure that corporate greed is not allowed a free rein as even if the company would double price of electricity consumers would have to pay as no other option exists for availing an essential service. Therefore competition is not the optimal option for electricity generation. the scenario has changed due to various options cropping up in power generation other than the transmission grid, which allow for power to be generated closer to the consumer low investment and the possibility of existence of a competitive market.

(b) It is easy to exploit consumers in this market because for decades, control over energy has been deemed too important to be left to the markets. Politicians and officials have been enticed by the economies of scale promised by ever bigger power plants, constructed a long way from consumers. They have put up poor efficiency of those plants, and the environmental harm they do, because they have accepted that the generation, transmission and distribution of power must be controlled by the government or another monopoly.  Energy prices are increasingly dictated by markets, not monopolies, and power is increasingly generated close to the end-user rather than at distant stations.

(c) There are several barriers to entry because the rise of micropower does not mean that grid power is dead. On the contrary, a robust grid may be an important part of a micropower future according to CERA. In poor countries, the grid is often so lacking in infrastructure and inadequate that distributed energy could well supplant it; that would make it a truly disruptive technology.First, today’s antiquated grid,  designed when power flowed from big plants to distant consumers, must be upgraded to handle tomorrow’s complex, multi-directional flows. Yet in many deregulated markets, including America’s, grid operators have not been given adequate financial incentives to make these investments. To work effectively, micropower also needs modern command and communications software. Another precondition is the spread of real-time electricity meters to all consumers. All of these factors make this market still subject to many variables which naturally act as barriers to entry for newer parties.

(d) Electric power transmission is the movement of electrical energy in large quantities from its site of generation at a power plant to an electrical substation. This is facilitated through a vast network of interconnected lines known as the transmission network. these transmission lines form the electrical grid which is an interconnected network for delivering of electricity from its point of production to its point of consumption including the stations which generate electrical power and the high voltage transmission lines which transmit the electrical energy at high voltages from distant locations of production to the demand centers and finally the distribution lines which connect the individual consumer to the transmission lines. Transmission grid can be small in size covering a small area National greens which cover entire countries with others which can cover different continents being transnational grids. This feature is related to monopolistic market structure as it requires extensive capital investment for setup of the power plant along with the transmission and distribution lines with fixed costs also being high cooperating the grid and supplying electricity until and unless it is setoff by economies of scale through large scale consumption.