Panel Lecture for Energy Systems Week

Is there a deregulated electricity market operating in the world today? Sean Meyn Department of Electrical and Computer Engineering and the Coordinated Science Laboratory University of Illinois

Is there a deregulated electricity market operating in the world today? Short answer: No, and why you should be grateful

Is there a deregulated electricity market operating in the world today? Short answer: No, and why you should be grateful Key question: How should we regulate?

I Why Markets? ORGANIC FLOUR

Market Goals Incentives for improved services, reduced cost Decentralized regulation of activities Also require Reliability and Adaptation Details of the market depend on these goals, and the intended application... Fundamentally, there are only two ways of coordinating the economic activities of millions. One is central direction involving the use of coercion - the technique of the army and of the modern totalitarian state. The other is voluntary cooperation of individuals - the technique of the marketplace. -MF Only two ways?

How Should We Think About Market Design? Commodities Flour free of bugs Garbage Collection Flour free of gluten(?) ORGANIC FLOUR Proper trash disposal Garbage truck tra c Services for the poor Transportation Service guarantees Safety Incentives for construction Service guarantees Disincentives to harm environment Incentives for re department given volatile market Services How should we think about market design in di erent settings?

II How do others regulate? Control Algorithm Continuous Glucose Sensor Insulin Pump

Goals and Methods from Control Engineering Goals: Regulation, Reliability, Adaptation, Reasonable costs

Goals and Methods from Control Engineering Goals: Regulation, Reliability, Adaptation, Reasonable costs Typical steps for design: 1. Build simple models that capture key features 2. Construct control solution based on model, taking into account constraints and costs 3. Simulate design, and revise 4. Test on physical system in highly controlled environment 5. Revise design, add additional redundancy and safety enhancements

Goals and Methods from Control Engineering Goals: Regulation, Reliability, Adaptation, Reasonable costs Typical steps for design: 1. Build simple models that capture key features 2. Construct control solution based on model, taking into account constraints and costs 3. Simulate design, and revise 4. Test on physical system in highly controlled environment 5. Revise design, add additional redundancy and safety enhancements Choices for step 2: PID, Loop shaping, MPC, HJB, MDP, Q/TD-Learning ... Approach depends on system and goals.

Goals and Methods from Control Engineering Goals: Regulation, Reliability, Adaptation, Reasonable costs Typical steps for design: 1. Build simple models that capture key features 2. Construct control solution based on model, taking into account constraints and costs 3. Simulate design, and revise 4. Test on physical system in highly controlled environment 5. Revise design, add additional redundancy and safety enhancements Choices for step 2: PID, Loop shaping, MPC, HJB, MDP, Q/TD-Learning ... Approach depends on system and goals. Justi cation for 1? Control solution is highly robust, so that significant modeling error is tolerated.

Applications of Control Aerospace Atomic Clocks Wind Farms HVAC Soil-Moisture Hysteresis Chemical Engineering Tokamak Plasmas Inventory Systems Arti cial Organs Control Algorithm Continuous Glucose Sensor Pancreas Pancreatic Insulin duct Pump duct Duodenum Design involves common principles, but details are very di erent!

Regulation of Gigawatts or Glucose Control Algorithm Continuous Glucose Sensor Pancreas Pancreatic Insulin duct Pump duct Duodenum Design involves common principles, but details are very di erent! A mechanical pancreas does not tell each cell what to do It measures global variables and sends global signals to ensure that the cells have resources necessary to do their individual jobs This is precisely our goal when we design a market for electricity

Mechanisms The value of markets is clear The question is, how we can create markets that will achieve the diverse, critical goals in the energy industry ? • Price caps 5000 Purchase Price $/MWh • Long-term contracts; capacity supply obligation Previous week 4000 3000 • Penalties 2000 1000 0 Mon Tues Weds Thurs Fri • Dynamic prices and responsive demand On windy nights in northern Germany, consumers are paid to keep the lights on... - April 23 (bloomberg.com) • Load Shedding • New technology for generation and storage • Market architecture redesign?

III What’s special about power?

Economics Challenges Complexity Power Networks are Complex Interconnected network of ENTSO-E http://www.entsoe.eu

Economics Challenges Uncertainty 32 Available Resources Forecast (GW) 30 28 California ISO 26 www.caiso.com 24 22 Day Ahead Demand Forecast 20 Actual Demand (GW) 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Hour California ISO Mission For the bene t of our customers, we: * Operate the grid reliably and e ciently * Provide fair and open transmission access * Promote environmental stewardship * Facilitate e ective markets and promote infrastructure development

32 Available Resources Forecast (GW) 30 Economics Challenges Uncertainty 28 26 24 22 Day Ahead Demand Forecast Will the wind blow tomorrow? 20 Actual Demand (GW) 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Hour 7 Load (GW) Bonneville Power Administration 6 Load and available wind generation 5 January 16 - 22, 2010 Wind generation 1 0 Sun Mon Tues Weds Thurs Fri Sat 250 150 April 20, 2010 April 21, 2010 April 22, 2010 200 Day ahead forecast generation (MW) 200 Real-time generation (MW) 150 100 150 100 100 50 50 50 0 EirGrid plc

Economics Challenges Dynamics Power Networks are Dynamic Malin substation August 10, 1996 Growing oscillations seen at the California-Oregon border 4600 MW 4400 4200 4000 Time in Seconds Mass-spring model

Economics Challenges Political Renewable Portfolio Standards www.dsireusa.org / February 2010 VT: (1) RE meets any increase ME: 30% x 2000 WA: 15% x 2020* New RE: 10% x 2017 MN: 25% x 2025 in retail sales x 2012; MT: 15% x 2015 (Xcel: 30% x 2020) (2) 20% RE & CHP x 2017 NH: 23.8% x 2025 OR: 25% x 2025 (large utilities)* ND: 10% x 2015 MI: 10% + 1,100 MW MA: 15% x 2020 5% - 10% x 2025 (smaller utilities) x 2015* + 1% annual increase (Class I RE) SD: 10% x 2015 WI: Varies by utility; NY: 29% x 2015 10% x 2015 goal RI: 16% x 2020 NV: 25% x 2025* CT: 23% x 2020 IA: 105 MW W OH: 25% x 2025† CO: 20% by 2020 (IOUs) PA: 18% x 2020† 10% by 2020 (co-ops & large munis)* IL: 25% x 2025 WV: 25% x 2025*† NJ: 22.5% x 2021 CA: 33% x 2020 UT: 20% by 2025* KS: 20% x 2020 VA: 15% x 2025* MD: 20% x 2022 MO: 15% x 2021 DC DE: 20% x 2019* AZ: 15% x 2025 NC: 12.5% x 2021 (IOUs) DC: 20% x 2020 0 10% x 2018 (co-ops & munis) NM: 20% x 2020 (IOUs) 10% x 2020 (co-ops) TX: 5,880 MW x 2015 HI: 40% x 2030 State renewable portfolio standard Minimum solar or customer-sited requirement 29 states + * State renewable portfolio goal Extra credit for solar or customer-sited renewables DC have an RPS Solar water heating eligible † (6 states have goals) 6 Includes non-renewable alternative resources

Economics Challenges Market Power Ripping o those poor grandmothers Sempra agrees to major refund for energy crisis California, July 2000 Spinning reserve prices PX prices $/MWh Enron traders openly discussed manipulating pay about $410 million to settle claims Sempra Energy has agreed to California’s power played Enron-style games with California's electricity market that it market during profanity-laced 70 250 telephone conversations in which they merrily during the 2000-01 energy crisis, state o cials said Wednesday. gloated about ripping o “those poor 60 200 grandmothers” during the state’s energy crunch 50 in 2000-01 ... money will be refunded to California utility customers, who are The [AP by Kristen Hays, 06/03/04] 150 40 still paying the costs of the crisis through a charge on their monthly 30 But how competitiveSempra was just one of the companies accused of manipu- bills. . . . is the electricity market? 100 20 lating California's newly deregulated energy market, starting in the What makes California's power crisis politically 50 explosive summer of 2000it's not just about is the suspicion that 10 inadequate capacity, but also about arti cially 0 in ated prices. Weds Thurs Fri Sat Sun Mon Tues Weds . . . The crisis forced the state to buy expensive long-term power con- How might market manipulation work?are still paying o ,July, with air-conditioners across the state running full blast tracts that Californians Suppose that it's a hot month by month, on their and the power industry near the limits of its capacity. If some of that capacity suddenly went o line for whatever reason, utility bills. . . . the resulting shortage would send wholesale electricity prices sky high. So a large producer could actually increase its pro ts by inventing technical problems that shut down some of its generators, thereby driving up the price it gets on its remaining output. Does this really happen? A recent National Bureau of Economic Research working paper by Severin Borenstein, James Bushnell and Frank Wolak cites evidence that exactly this kind of market manipulation took place in Britain before 1996 [David R. Baker, Chronicle Sta Writer Thursday, April 29, 2010] and in California during the summers of 1998 and 1999. [NYT by Paul Krugman, 12/10/00]

Economics Challenges Friction Transmission Constraint Separating Tasmania Victoria January 16, 2007 19,000 Tasmania January 16, 2007 10,000 1,400 9,000 Demand 1,200 1,000 Price (Aus $/MWh) Price (Aus $/MWh) 8,000 1,000 Volume (MW) Volume (MW) 7,000 Demand 6,000 800 10,000 5,000 0 Prices 600 4,000 3,000 400 2,000 Prices 200 - 1,000 1,000 1,000 0 - 1,000 0 - 1,500 00:00 01:00 02:00 03:00 04:00 05:00 06:00 07:00 08:00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 24:00 00:00 01:00 02:00 03:00 04:00 05:00 06:00 07:00 08:00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 24:00 Power price pledge SUE NEALES February 16, 2010 09:02am www.themercury.com.au THE State Government has pledged to cap power price rises ... Tasmanian power prices have jumped more than 30 per cent in the past three years ... The Government said its pledge to protect Tasmanians for a year from massive power price rises would be funded from government co ers.

Economics Challenges Friction Price dynamics in power markets around the world Illinois, July 1998 Cho & Meyn, 2006 Prices 5000 Purchase Price $/MWh Reserves Previous week Normalized demand 4000 choke 3000 2000 r∗ 1000 0 0 Mon Tues Weds Thurs Fri Ontario, November 2005 APX Power NL, April 23, 2007 Forecast Demand Demand in MW Last Updated 11:00 AM Predispatch 1975.11 Dispatch 19683.5 Current Week Volume Current Week Price 21000 7000 400 Prev. Week Volume Prev. Week Price 18000 6000 300 Price (Euro/MWh) 5000 Volume (MWh) 15000 4000 Hourly Ontario Energy Price $/MWh Last Updated 11:00 AM Predispatch 72.79 Dispatch 90.82 200 2000 3000 Forecast Prices 1500 2000 100 1000 500 1000 0 3 6 9 12 15 18 21 3 6 9 12 15 18 21 3 6 9 12 15 18 21 Time 0 0 Tues Weds Thurs Tues Wed Thus Fri Sat Sun Mon

Mechanisms The value of markets is clear The question is, how we can create markets that will achieve the diverse, critical goals in the energy industry ? • Price caps 5000 Purchase Price $/MWh • Long-term contracts; capacity supply obligation Previous week 4000 3000 • Penalties 2000 1000 0 Mon Tues Weds Thurs Fri • Dynamic prices and responsive demand On windy nights in northern Germany, consumers are paid to keep the lights on... - April 23 (bloomberg.com) • Load Shedding • New technology for generation and storage • Market architecture redesign?

IV Research Frontiers

Research Frontiers • Mechanism design: Appropriate tradeo s between e ciency and reliability. Policies must evolve with environment, and with unexpected consequences of regulation. • Incentives to achieve long-term societal goals • Rethinking Real Time Markets Is this a free market for re ghters?

Research Frontiers • Demand response

Research Frontiers • Demand response 400 350 300 250 Interconnected 200 network of ENTSO-E 150 100 50 0 Mon Tues Weds Thurs Fri Sat Sun Beyond arithmetic. What are the dynamical properties of the power grid in LA county with dynamic pricing, hybrid cars, and automated water pumping?

Research Frontiers Complex networks: Control issues in a complex, coupled network.

Research Frontiers Complex networks: Control issues in a complex, coupled network. Highways are complex, but complexity is reduced with proper “rules of the road”

Research Frontiers Complex networks: Control issues in a complex, coupled network. Research requires collaboration among economists, control engineers, mathematicians, computer scientists, information theorists, ... Highways are complex, but complexity is reduced with proper “rules of the road”

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Panel Lecture for Energy Systems Week

by Sean Meyn

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