The Retail Electric Provider and the Smart Grid: Reviewing the Past and Anticipating the Future to Understand the Present: Part Three of a Three-Part Blog

By Stream Energy Director of Market Research Mike Rowley

The Present

A prevailing issue in the move from regulatory compact to competition is overcoming the paranoia of losing reliability without all of the regulation-required redundancy that is built into our electricity grid operations. As long as electricity consumers see our product as being in the same class as air and water, they will be willing to pay for 99.9999% reliability. But with near real-time energy markets, the need for ancillary service capacity markets will dwindle, and I predict that other than the ever-present need for the “regulation” capacity market, and the ability to buy energy-only products in near real-time, the responsive and non-spinning reserve markets will be done away with.

Second point, ERCOT showed in the extreme freeze of 2011, that the current system works like clockwork. ERCOT should be lauded for its success in maintaining grid reliability by using rolling black outs. The cost of being any more reliable, not just in ERCOT but in any region, would quickly reach the point of diminishing returns and cost consumers billions more than the current system.

Now, there is a marked difference in how Stream Energy currently does business in Texas and in the Northeast. In Texas, Stream Energy does the billing in a manner called Supplier Consolidated Billing, where Stream has possession of the customer relationship via the bill and a large portion of the customer contacts. 

ERCOT

–      65% Smart Meters, 100% by 2013

–      ERCOT settles Imbalance Market with Suppliers based on Load Profiles, settlement process disconnect from smart meter data

–      Supplier Consolidated Billing Model

In the Northeast we are privileged to be a virtual subcontractor to the incumbent utilities, while they maintain the billing and usually the first contact with the customer on most issues that require the customer to ask a question. Some retail electricity providers are very satisfied with this process because it simplifies their life and places issues like credit management and bad debt as minor or non-existent issues.

I do not see the long-term benefits of a utility consolidated billing model outweighing the risks. It is imperative to maintain the customer relationship through the billing and customer service channels in order to become the “lifestyle products” vendor in the future.

PPL

–      95% Smart Meters

–      Smart Meter Actual Use Data used for determining supplier’s exposure to the PJM Imbalance Market

–      Utility Consolidated Billing Model, Supplier loss of contact hinders customer relationship

Currently, there are operational disconnects in both Texas and the Northeast that must be overcome to allow AMI/AMR to become a driving force in the creation of an efficient smart grid.

In Texas, our imbalance market is settled using by ERCOT-generated customer profiles and not the reality of our customer’s real-time energy usage. 99.999% of the time, in a steady-state environment, the error generated using this method is acceptable; but a few of our smaller retail electric providers had issue with this process in the massive freeze ERCOT experienced in 2011. 

One retailer in South Texas saw a huge number of power outages for its customers – they were not consuming power at all; some even had empirical data from smart meters that verified their non use. But ERCOT’s profile-driven process stated that there was consumption in every 15-minute settlement period of all the settlement periods where the empirical data showed no usage.

On top of that issue, 1) the ERCOT weather-adjusted profiles showed excess usage over and above the supply hedges the retailer had in place, and 2) the imbalance market clearing price was pegged at the maximum of $3000 per MWh. So, that retailer paid a premium for energy that was not actually consumed, instead of being compensated for the difference between the supplier’s actual load, which was lower, than its scheduled load.

Lower Prices and Innovative Products

As for deregulation and lower prices, with the assistance of a former PUCT manager turned consultant, I was able to piece together this slide. The question for Stream’s Chairman Rob Snyder from the Dallas Morning News on a panel of experts which included PUCT Chairman Barry Smitherman was, “Has the ERCOT region of Texas seen a drop in residential electricity prices since state-mandated deregulation occurred in 2001?”

Inflation 2001 to 2009 22.21%
 2001 actual TXU Rate before deregulation  9.67
 TXU actual 2001 rate adjusted for 9 years of inflation 11.82
 TXU’s 2001 rate with fuel cost adjustment reflecting 2009 $6 gas market  10.64
 TXU 2001 rate reflecting 2009 $6 gas market adjusted for 8 years of inflation 13.00
 2009 Actual TXU Rate (Product: Fixed Rate12 month with ETF) 11.80

As you can see, we needed to take into account two things in our conversion: 1) the cost of Natural Gas, which is the fuel source for electricity at the margin 100% of the time in Texas; and 2) the Consumers Price Index stating actual inflation over those 8 years. The answer is a resounding “YES.” 

And if you look at 2011 data, you can see gas prices have gone down, inflation has gone up and we have seen another 10% decline in the electricity rate TXU Energy currently offers. 

May 2011 TXU Published Rate

I use TXU Energy data because they still serve three million residential meters. If a consumer is willing to do some research, they can find more and differing products at lower costs from reputable suppliers.

The original question was, “Has deregulation lived up to its promise of lower prices and innovative products?” I believe that the inefficiencies that the regulatory compact has perpetuated have been squeezed out of the deregulated markets (with market power issues being the remaining issue) and that the “still regulated” markets are taking notice and doing their best to eliminate the inefficiencies in order to stave off being deregulated. 

Has deregulation offered innovative products? I think yes, mostly in the renewable offerings and payment options. Now, look at telecom! 20 years ago (1991) I was paying about $25 a month for all of my telecom services and long-distance calls were an additional incremental charge. Today, my monthly telecom costs exceed $175 a month, but the innovations that I have the choice of using are astronomical and almost unbelievable to a 1991 mind. As for the future of electricity, to quote Frank Sinatra, “The best is yet to come … we ain’t seen nuthin’ yet.”

Lastly, the fate of the DR Companies

The DR companies that have sprung up all over North America are taking advantage of the ability to aggregate customers into blocks of negawatts (thank you, Jim Rogers, for such a descriptive term) that are bid into the capacity and imbalance energy markets of the ISOs.  I personally believe that these companies are “stop-gap” entities that are taking advantage of the limitations of the DR marketplace where, even with smart meters, customers cannot directly participate in the selling of their negawatts

With the advent of a fluid and unconstrained DR market where every entity is a participant, as described in Dr. Cazalet’s white paper, the need for aggregators of negawatts will disappear, energy suppliers or “lifestyle products” suppliers will develop their own methods of assisting/aggregating their customers in taking advantage of DR markets.  The best move I have seen in the DR Company environment is when Constellation purchased CPower in anticipation of the future needs of even their smallest customers, of which they just collected 650,000 more with the announcement of the purchase of MX Energy and StarTex Energy.

As kind of an afterthought, because I read something interesting in Restructuring Today recently …

Jim Rogers, CEO of Duke Energy, again introduced a new term into the industry’s vocabulary - DISINTERMEDIATION. It’s a term that has been used in financial circles for a while, and when I broke the word down, I discovered it means “no bilateral problem solving.” 

Jim pointed out that if DR market participation and conservation by the consumer is done without the suppliers cooperation or coordination, there may be issues as to long-term planning and real-time load following, as well.

At first blush, I think Jim has something here; but, my second thought is that conservation and DR market activity would follow the same patterns, based on economics, whether the supplier manages the customer or a 3rd party manages the customer. I think those patterns could easily be deciphered and planned for.

My colleagues at Stream Energy asked me two great questions, based on the fact that the Smart Grid will allow all participants to transact, and that the credit issues will be extremely manageable, if not virtually eliminated.

Question #1: Is it feasible that the DR companies could actually evolve into a supply-side entity the size of an NRG or Calpine?

Answer: Again, in reference to what the Constellation/Excelon move of incorporating a DR company into their operation, I personally believe that my sector, the retail electricity providers, will incorporate DR services into our offerings and use our relationship with our customers to eliminate the need for the customer to use a separate entity for DR. I also believe that when the ability exists that a homeowner can place a bid into a market bid stack on his own, a certain percentage of consumers will bypass all service companies and do it for themselves, bypassing even their trusted electricity supplier. However, I perceive that the total customers that play the DR markets, in the future, will never exceed 10% of the market.

Question #2: Could the demand-side entities, like homeowner associations, municipal aggregators or even consumer protection groups, become the agent buyers of a huge magnitude?

Answer: NO! The credit issues that will be mitigated in the future are the supplier’s exposure to bad debt. A supplier still has the same credit issues on the wholesale side of the house at to hedging supply for customers on long-term contracts. Besides, as municipal aggregators have experienced, there is no loyalty to their “cause” and every state that has adopted municipal aggregation has legislated that the customer can opt-out at any time with no penalty. Municipal aggregators may still be around, but I believe that the homeowner’s association would be less knowledgeable and successful in operating this kind of aggregation and the consumer protection entity would not see this as a core competency.