PNE_20150701_Jul_2015

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US Energy Policy: Trends and ResultsPresenter: Mike Ahern, Direct of Power Systems, WPI

HVDC and FACTS Devices: Future of Power SystemsPresenter: Dr. Edvina Uzunovic, Associate Director of Power Systems and Adjunct Professor, WPI

Energy Management Best Practices and Career OpportunitiesPresenter: Will OBrien, Consultant, WPI Center for Sustainability in Business

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july/august 2015 IEEE power & energy magazine 1

7PMVNFt/VNCFSt+VMZ"VHVTUwww.ieee.org/power

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m a g a z i n e

features18 An Era of Many Options

By Randell Johnson

The Green ImpactBy Jos Pablo Chaves-vila, Klaas Wrzburg, Toms Gmez, and Pedro Linares

Halfway ThereBy Arne Olson, Amber Mahone, Elaine Hart, Jeremy Hargreaves, Ryan Jones,Nicolai Schlag, Gabriel Kwok, Nancy Ryan, Ren Orans, and Rod Frowd

Solar, Solar EverywhereBy Bruce Mountain and Paul Szuster

61 Its All About GridsBy Goran Strbac, Christos Vasilakos Konstantinidis, Rodrigo Moreno,Ioannis Konstantelos, and Dimitrios Papadaskalopoulos

76 Distribution PricingBy Furong Li, Jose Wanderley Marangon-Lima, Hugh Rudnick, Luana Medeiros Marangon-Lima,Narayana Prasad Padhy, Gert Brunekreeft, Javier Reneses, and Chongqing Kang

4Digital Object Identifier 10.1109/MPE.2015.2416115

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columns & departments 'SPNUIF&EJUPS 6 -FBEFST$PSOFS (VFTU&EJUPSJBM 88 )JTUPSZ 4PDJFUZ/FXT $BMFOEBS *O.Z7JFX

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2 IEEE power & energy magazine july/august 2015

President, Olken Group, IncMelvin I. Olken245 East 19th Street #20KNew York, NY 10003-2665 USA+1 212 982 8286 (phone fax)+1 917 751 7859 (phone)[email protected]

Associate EditorsGerald B. Shebl, Business SceneCarl L. Sulzberger, History

Editorial BoardS. Massoud Amin, L. Goel, A.P. Hanson, N. Hatziargyriou, M.I. Henderson, S.H. Horowitz, P. Kundur, R. Masiello, K.M. Matsuda, A.P.S. Meliopoulos, M.I. Olken, M. OMalley, A.G. Phadke, R.J. Piwko, C.E. Root, H. Rudnick, P.W. Sauer, M. Shahidehpour, B.R. Shperling, S.S. Venkata, B.F. Wollenberg

AdvertisingErik HensonNaylor Association Solutions+1 352 333 3443, fax: +1 352 331 [email protected]

IEEE Power & Energy MagazineIEEE Power & Energy Magazine (ISSN 1540-7977) (IPEMCF) is published bimonthly by the Institute of Electrical and Electronics Engineers, Inc. Headquarters: 3 Park Avenue, 17th Floor, New York, NY 10016-5997 USA. Responsibility forthe contents rests upon the authors and not upon the IEEE, the Society, or its members. IEEE Operations Center (for orders, sub-scriptions, address changes): 445 Hoes Lane, Piscataway, NJ 08854 USA. Telephone: +1 732 981 0060, +1 800 678 4333. Individual copies: IEEE members US$20.00 (first copy only), nonmembers US$80.00 per copy. Subscription Rates: Society members included with membership dues. Subscription rates available upon request. Copyright and reprint permis-sions: Abstracting is permitted with credit to the source. Libraries are permitted to photocopy beyond the limits of U.S. Copyright law for the private use of patrons 1) those post-1977 articles that carry a code at the bottom of the first page, provided the per-copy fee indicated in the code is paid through the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923 USA; 2) pre-1978 articles without fee. For other copying, reprint, or republication permission, write Copyrights and Permissions Department, IEEE Operations Center, 445 Hoes Lane, Piscataway, NJ 08854 USA. Copyright 2015 by the Institute of Electrical and Electronics Engineers, Inc. All rights reserved. Periodicals postage paid at New York, NY, and at additional mailing offices. Postmaster: Send address changes to IEEE Power & Energy Magazine, IEEE Operations Center, 445 Hoes Lane, Piscataway, NJ 08854 USA. Canadian GST #125634188

Printed in U.S.A.

IEEE POWER & ENERGY SOCIETY (PES)The IEEE Power & Energy Society is an organization of IEEE members whose principal interest is the advancement of the science and practice of elec-tric power generation, transmission, distribution, and utilization. All members of the IEEE are eligible for membership in the Society.Mission Statement: To be the leading provider of scientific and engineering information on electric power and energy for the betterment of society, and the preferred professional development source for our members.

OfficersM.M. Begovic, PresidentD. Novosel, President-ElectF. Lambert, Vice President, ChaptersK.S. Edwards, Vice President, Technical ActivitiesP.W. Sauer, Vice President, EducationM. Crow, Vice President, PublicationsT. Mayne, Vice President, MeetingsH. Louie, Vice President, Membership & ImageR. Podmore, Vice President, New Initiatives/ OutreachC. Root, TreasurerL. Bertling-Tjernberg, SecretaryN.N. Schulz, Past-President

IEEE Division VII DirectorW.K. Reder

IEEE Division VII Director ElectA. Rotz

Region RepresentativesM. Chaganti, D. Diaz, T. Hiemer, N. Logic, J. Skillman, E. Uzunovic, United StatesM. Armstrong, Canada J. Milanovic, Europe, Middle East, & AfricaN. Segoshi, Latin AmericaL. Goel, Asia & Pacific

Governing Board Members-at-LargeT. Burse, C.Y. Chung, J. Giri, L. Ochoa

PES Executive DirectorPatrick Ryan, +1 732 465 6618,fax +1 732 562 3881, e-mail [email protected]

Standing Committee ChairsD. Morrow, Awards & Recognition N. Nair, Constitution & Bylaws C. Root, Finance & AuditN. Schulz, Nominations & AppointmentsK. Butler-Purry, Power Engineering EducationW.K. Reder, Scholarship Plus

Chapter RepresentativesB. Allaf, W. Almuhtadi, A. Bakirtzis, R. Cespiedes, C.Y. Chung, C. Diamond, D. Drumtra, B. Gwyn, J. Khan, I. Kuzle, J.C. Montero, J. Morelos, R. Nagaraja, P. Naidoo, N. Nair, P. Pabst, G.N. Taranto, D. van Hertem, Z. Zakaria

Chapter Committee ChairsS. Chakravorti, Chapter SecretaryN. Mariun, Chapter/Section RelationsC. Diamond, Electronic CommunicationsE. Carlsen, Awards & ResourcesY. Chen, Distinguished Lecturer ProgramC. Diamond, Chapters Web site

Membership & Image Committee ChairsA. St. Leger, Young ProfessionalsA. Bonthron, PlatinumJ.C. Montero, Social MediaH. Louie, Web Site DevelopmentS. Bahramirad, Women in Power W. Bishop, Marketing

Technical CouncilK.S. Edwards, Chair M.P. Sanders, Vice-Chair F. Rahmatian, Secretary J.H. Nelson, Past-ChairM. Maytum, Web Master

Technical Committee ChairsK. Mayor, Electric MachineryM. Basler, Energy Development & Power GenerationT.C. Champion III, Insulated ConductorsG. Ballassi, Nuclear Power EngineeringD. Niebur, Power System Analysis, Computing, & EconomicsD. Nordell, Power System Communications P. Pourbeik, Power System Dynamic Performance F. Rahmatian, Power System Instrumentation & Measurements A. Conejo, Power System OperationsM.L. Chan, Power System Planning & Implementation M. McDonald, Power System Relaying R. Tressler, Stationary Battery M. Etter, Substations R. Hotchkiss, Surge Protective Devices T.W. Olsen, Switchgear D. Platts, Transformers W.A. Chisholm, Transmission & Distribution

Technical Council Coordinating CommitteesN. Hadjsaid, Emerging TechnologiesS. Pullins, Intelligent GridD. Alexander, Marine SystemsR.J. Piwko, Wind & Solar Power

Technical Council Standing CommitteesJ.H. Nelson, Awards M.P. Sanders, Technical Sessions F. Rahmatian, Organization & Procedures T. Burse, Standards Coordination

IEEE Periodicals/Magazines Department445 Hoes Lane, Piscataway, NJ 08854 USAwww.ieee.org/magazines

Geraldine Krolin-Taylor, Senior Managing EditorJanet Dudar, Senior Art DirectorGail A. Schnitzer, Associate Art DirectorTheresa L. Smith, Production CoordinatorPeter M. Tuohy, Production DirectorFelicia Spagnoli, Advertising Production ManagerDawn Melley, Editorial DirectorFran Zappulla, Staff Director, IEEE Publishing OperationsIEEE prohibits discrimination, harassment, and bullying. For more information, visit http://www.ieee.org/web/aboutus/whatis/policies/p9-26.html.

Digital Object Identifier 10.1109/MPE.2015.2416116

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OpenStreetMap contributors

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Generic C-Interface for controller models with automatic DSL to C converter

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New and fl exible Heatmap background colouring scheme

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New Transmission Network Tools, featuring:PV Curves Calculation tool for contingency constrained voltage stability analysisCalculation of Power Transfer Distribution FactorsTransfer Capacity Analysis toolEnhanced Distribution Network Tools, including improved Voltage Profi le Optimisation

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Mel Olken

facing new paradigmschanges abound in the worldwide power sector

OOUR GUEST EDITOR HUGH Rudnick, who proposed the issues theme to the IEEE Power & Energy Magazines Editorial Board at its 2014 meeting, begins his introductory col-umn by pointing out that we are fac-ing new paradigms in the worldwide power sector. These paradigms affect every aspect of the system, includ-ing the technologies that exist today coupled with environmental factors, renewables, demand response, and regulatory concerns, among others. The challenges are global, but the responses from around the globe reflect conditions that are presentas well as anticipatedin different parts of the world. As a result, there is a crying need for innovation to create logical, workable electricity mar-kets directed toward specific needs and requirements.

A Critical Global SubjectThe issues six feature articles focus both on overall surveys of the land-scape and on specific areas. We offer views of what is ongoing and planned in the European Union, Australia, Great Britain, and California, in addi-tion to an overview of challenges faced and an article focused on issues related to distribution pricing and smart grid applications. The feature articles are introduced in detail in the Guest Edi-torial column.

Hugh, who has been a stalwart con-tributor and supporter of our publica-tion, has produced an informative is-sue with global coverage of a critical

subject. Hugh, thank you once again for this contribution.

Required Reading for MembersOur issues Leaders Corner column, authored by Society and technical coun-cil leaders, is of great importance to the future of the IEEE Power & Energy Society (PES). It represents the second part of the reorganization plans directed at realigning the PES technical com-mittee structure to reflect todays elec-tric power industry and the emerging technologies that have arisen and are foreseen. These subjects will be a point of discussion at the upcoming General Meeting, where member input will be sought and talked about. Also includ-ed in the column is a timetable with deadlines to help us reach these goals. This column is required reading for all PES members.

Society News focuses on the forthcoming PES elections where we will be selecting our 20162017 PES RIFHUV 7KH HOHFWLRQV FRPPHQFLQJin August, will be contested by three TXDOLHG FDQGLGDWHV IRU WKH SRVLWLRQ

of president-elect (Erich Gunther, Bruno Meyer, and Saifur Rahman) DQG WZR TXDOLHG FDQGLGDWHV IRUeach of the positions of secretary (Jessica Bian and Henry Louie) and treasurer (Juan Carlos Miguez and &KULVWRSKHU5RRW7KHFROXPQZLOOintroduce each of the candidates with photos, biographies, and can-didate statements. Given the impor-tance of these elections, this col-umn is also required reading for all

PES members.

Surveying the Past, Looking to the FutureAn unusual (for IEEE Power & Energy Magazine) History column is offered this issue. The subject is the evolution of the loss of load probability (LOLP) in-dex that has been a industry standard for the past 50 years, beginning with a bib-liography presented by Roy Billinton at the 1966 Winter Power Meeting in New York City. The column, written by Bil-lington and Kelvin Chu and edited and introduced by History Editor Carl Sul-zberger, offers multiple references and concludes with pertinent supplementary commentary as background.

In his guest editorial, Hugh Rud-nick has introduced the closing In My View column. But allow me to also offer some brief commentary about a piece that offers cogent arguments for the imposition of market-driven emis-sion taxes. I hope that you make certain to read this column, and I look forward to reader commentary.

p&eDigital Object Identifier 10.1109/MPE.2015.2423212Date of publication: 25 June 2015

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lead

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Miriam Sanders, Ken Edwards, Damir Novosel, and Miroslav Begovic

member feedback wanteda continuation of PES technical committee updates

OONCE AGAIN THIS COLUMN IS coming to you, the reader and IEEE Power & Energy Society (PES) mem-ber, from the PES president, president-elect, vice president of Technical Activi-ties, and Technical Council vice-chair to update you on the restructuring of the PES technical committees (TCs) and technical activities.

As noted in our previous column Our Technical Committees: How They Can Best Serve Our Member-ship, in the May/June 2015 issue, groundwork has been laid for realign-ing the TCs to the changes that are happening in the power and energy in-dustry with new technologies and their applications and impact. The Techni-cal Council has formed the Commit-tee Structure Task Force, led by Doug Houseman, to make restructuring rec-ommendations. Based on those rec-ommendations, the Technical Council formed the Committee Structure Task Groups (CSTGs), currently in the pro-FHVVRIUHYLHZLQJVSHFLFDUHDVRIWKHproposed structure changes with feed-back from TC members. Our goal is to have a transparent review process of the proposed structure and to include membership comments in the process.

This is an important and far-reaching endeavor, and it behooves every PES member involved in technical activities to provide his or her views on the changes being proposed or discussed. The end goal is to eliminate the shortcomings of the system we have had in the past and to

prepare for the changes brought about by new technologies and the way we will all do business. Some of the salient features of the structural changes being evaluated are outlined in the following text.,Q WKH SUHVHQW FRQJXUDWLRQ WKHUH

are 21 TCs encompassing traditional subjects such as transmission and distri-bution, transformers, switchgear, relay-ing, communications, substations, op-erations and planning, battery storage, and energy development, as well as co-ordinating committees addressing wind and solar power, intelligent grid, marine systems, and emerging technologies.

But through technical council re-view (as described in the previous Leaders Corner) and three surveys conducted with the TCs, several areas of no coverage or weak coverage were exposed. Some of those areas are cy-ber and physical security, microgrid systems and operations, direct current systems (although related components have been covered), customer premise (such as home area networks), markets, and environmental aspects. In addi-tion, several subjects, such as commu-nications, are covered across several committees but require improved co-ordination.

So the proposal by the task force was to combine several coordinating committees, redistribute subject mat-ters among them, and create new com-mittees where needed. Two coordinat-ing committees (Intelligent Grid and Emerging Technology) were combined, and the Wind and Solar Coordinat-ing Committee was folded into a new

Energy Development Committee. Fur-thermore, several TCs were merged with existing or new TCs, and several were renamed. This resulted in 18 coor-dinating and TCs as shown below. (Note that those marked with an asterisk indi-cate no change.)

Proposed Coordinating and TCs

Intelligent Grid and Emerg-ing Technologies Coordinating Committee

Marine Systems Coordinating Committee*

Conductors Electric Machinery* Energy Development Energy Storage and Stationary Battery

Grid Communications and Cy-ber Security

Nuclear Power Engineering* Power System Analysis Methods Power System Dynamic Perfor-mance*

Power System Planning and Op-erations

Smart Buildings, Loads, and Customer Systems

System Protection Substations Surge Protective Devices* Switchgear* Transformers Transmission and Distribution.

These changes to the names and to-tal number of committees will require updating the scope of existing commit-tees and restructuring the subcommittees

Digital Object Identifier 10.1109/MPE.2015.2423213Date of publication: 25 June 2015





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and working groups to accommodate WKHFKDQJHVDQGUHHFWWKHVFRSHVRIWKHmerged committees as well as anticipated changes in technology.

Smart Buildings, Loads, and Custom-er Systems is a new committee focusing on an evolving area of end uses, load control, and demand response, as well as home and building energy management networks. PES is excited to bring this new area into focus for our members.

We should emphasize that these changes are not being arbitrarily in-troduced: they are the result of many meetings and deliberations of the lead-ership of PES Technical Activities, and WKH\ UHHFW WKHSUHYDLOLQJRSLQLRQVRIthose experts who are currently shap-ing the activities and their many conse-quences. However, that is not a guaran-tee of the best outcome, and we would like to use this opportunity to attract our members attention to the complete set of changes (which will be discussed

at the General Meeting in Denver in July 2015 and will appear on the Web site). Your comments and opinions will help us formulate the end result, which ZRXOGWUXO\UHHFWWKHQHHGVDQGZLVK-es of the majority of PES members.

Another area of interest is the forma-tion of the Grid Communications and Cyber Security Committee, which takes the existing Power Systems Communica-tions Committee and adds physical and cyber security to its scope, while bring-ing in several subcommittees from the Substations and Power Systems Relay-ing Committees that address communi-cation technologies. This group is being led by Roger Hedding with assistance from Dan Nordell and Craig Preuss.

Power Systems Planning and Imple-mentation is proposed to be combined with Power Systems Operations to create one area of focus for the overall opera-tions of the power systems, including eco-nomics from the Power Systems Analysis,

Computing, and Economics Committee. The Power Systems Analysis, Comput-ing, and Economics Committee will be renamed the Power System Analysis Methods Committee. This effort is being led by Hong Chen and M.L. Chan.

While much work has been put in by our volunteers such as yourself, it is still QRWQDOL]HG:HQHHG\RXULQSXW$3(6Web site, which has more details on the recommended changes, has been estab-lished for your input. We will then take that input and include it in our further re-structuring process.

Furthermore, during the 2015 PES General Meeting in Denver, we will be holding town hall meetings to person-ally hear your feedback. Please look for this in the schedule.

Our process to include your input and QDOL]HUHVWUXFWXULQJLVGHVFULEHGEHORZ

Inform the PES membership about the status and ask for feedback us-ing PES media.



_________________



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rThe Committee Structure Web site will be set to provide in-formation and collect feedback (by end of June 2015).rTown hall meetings will be

held at the PES General Meet-ing to inform the membership in person and collect feedback (July 2015).rThe PES Membership provides

feedback on the PES Web site (by 28 August 2015).rThe PES staff collects and

summarizes the feedback for input to the CSTGs (by mid-September 2015).

Based on membership feedback, the CSTGs will update the pro-posal and submit it to the PES Technical Council/TCs, the Long-Range Planning Committee, and the Governing Board for review.rThe restructuring proposal

will be updated (by the end of October 2015).

rThe updated proposal will be reviewed by the PES Technical Council/TCs, the PES Long-Range Planning Committee, and the Executive Committee (by the end of November 2015).

The Committee Structure Task Force will incorporate these comments (by the end of 2015).

Implement the issue resolution process in cooperation among the PES Technical Council, the Long-Range Planning Commit-tee, and the Governing Board to review and vote on the docu-ment. All approvals will be with a 2/3 majority affirmation.rThe proposal will be voted

on during the Joint Techni-cal Council and Long-Range Planning Committee meeting (January 2016, in conjunction with the Joint TC Meeting).rThe PES Governing Board will

meet to vote on the proposal in

January 2016 (in conjunction with the Joint TC Meeting).

Update PES membership about the status using the PES media and ask for the membership to approve the changes (by the end of March 2016).

If approved, start implementing this new structure (April 2016).

Hold a town hall meeting in conjunction with the 2016 PES General Meeting to further in-form the membership about the changes (July 2016).

The proposed time line and process is tentative and, just like everything HOVH VXEMHFW WR FKDQJHV DQGPRGLFD-tions, including incorporating your feedback. We would like to offer our assurances that every effort will be ex-tended to evaluate and incorporate all constructive comments and suggestions received during the process of updating the TC restructuring proposal.

Stay tuned. p&e



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Hugh Rudnick

economics of electricitythe market impacts of developments in supply

AAS THE FIRST ARTICLE IN THIS issue indicates, electric power sectors worldwide have entered a new era and face many unprecedented options that transcend generation, transmission, distribution, and demand, creating conditions that threaten the traditional foundations of those sectors. Increas-ing environmental emission restric-tions on fossil fuels, the massive arrival of intermittent renewables, low-cost natural gas and combined cycle gen-eration revolutionizing energy prices, distributed generation transforming consumers into prosumers, demand response and smart grid and metering extending, innovations already being explored in regulatory approaches to drive electricity marketsthese are just a few of new developments impact-ing the power sector.

With that framework in mind, we contacted authors from all over the ZRUOGWRUHHFWRQWKHVHGHYHORSPHQWVDQGVKDUHVSHFLFH[SHULHQFHVLOOXVWUDW-ing how different countries and states are reacting to them. Preferably, we wanted to answer questions such as:

How will these changes affect electricity prices to final con-sumers in the long term?

How will they influence the re-muneration of the current conven-tional generation and networks?

What changes may take place in the way businesses develop?

Which are the primary challeng-es to market design?

The In My View column, by the Raymond Plank Professor of Global Energy Policy at Harvard University, William HoganTXHVWLRQVWKHSROLF\DS-SURDFKWKDWKDVEHHQFKR-sen around the globe to UHGXFHHPLVVLRQLPSDFWVDQGH[WHUQDOLWLHVE\IRUF-ing renewable technolo-gies through mandates or subsidies. He warns that solar levelized costs for 2019 entry would be PRUH H[SHQVLYH LQthe United States than an advanced gas combined F\FOH SODQW HYHQ ZLWKHPLVVLRQWD[HV+HIDYRUVinstead a better market GHVLJQ WKURXJK DQ HPLVVLRQ WD[ WKDWwould work through the market to affect SURGXFWLRQFRQVXPSWLRQDQGLQYHVWPHQW+HFODLPVVXFKDWD[ZRXOGEHWWHUVWLPX-late technological innovation in economic UHQHZDEOH VXSSO\ DQG LQ GHPDQGVLGH alternatives.2XU UVW DUWLFOH by Randell John-

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The second article, by Jos Pablo Chaves-vila, Klaas Wrzburg, Toms Gmez, and Pe-GUR /LQDUHV H[DPLQHVWKHLPSDFWRIUHQHZDEOHVRXUFHVRQWKH(XRSHDQUnion (EU) electric-LW\SULFHVZLWKDFORVHUORRNDWWKH6SDQLVKDQGGerman markets. In its search for a cleaner

HQHUJ\PDWUL[(XURSHWRRNWKHZRUOG-ZLGH OHDG LQ SURPRWLQJ UHQHZDEOHenergies, through generous feed-in-tariffs. For the 2030 horizon, the EU has agreed on ambitious targets: 40% reduction of greenhouse gas emissions, RI HQHUJ\ FRQVXPSWLRQ IURP UH-newables, and 27% increase in energy HIFLHQF\7KLV KDV UHVXOWHG LQ GLIIHU-HQW LPSDFWVRQHOHFWULFLW\PDUNHWVDI-fecting wholesale markets, markets for ancillary services, network costs, and QDOO\UHWDLOSULFHV$YHUDJHUHWDLOUHVL-GHQWLDOHOHFWULFLW\SULFHVKDYHLQFUHDVHGE\IRU6SDLQDQGIRU*HU-many from 2007 to 2014.

The third article, by $UQH 2OVRQ$PEHU 0DKRQH (ODLQH +DUW Jeremy Hargreaves, Ryan Jones, Nicolai Schlag, Gabriel Kwok, Nancy Ryan, Ren Orans, and Rod Frowd H[DPLQHV RSWLRQVto achieve a 50% renewable grid in

Digital Object Identifier 10.1109/MPE.2015.2423214Date of publication: 25 June 2015

Electric power sectors worldwide have entered a new era and face many unprecedented options.





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California by 2030, with high wind and VRODUSHQHWUDWLRQXQGHUVHYHUDOVFHQDU-LRV ,W H[DPLQHV WKH RSHUDWLRQDO FKDO-lenges of achieving it, concluding there are no technical barriers, just different SRWHQWLDOLQWHJUDWLRQVROXWLRQV$WKLJKSHQHWUDWLRQVRI UHQHZDEOHJHQHUDWLRQDVLJQLFDQWDPRXQWRIUHQHZDEOHFXU-tailment will be necessary to avoid overgeneration and to manage net ORDGUDPSVZKLFKZLOOQHFHVVDULO\LQ-FUHDVHFRVWVDQGQDOHOHFWULFLW\UDWHV)LQDOO\ WKH DXWKRUV H[DPLQH WKH UH-sultant greenhouse gas reductions and PDNHVHYHUDOSROLF\UHFRPPHQGDWLRQVon regional coordination, renewable SRUWIROLR GLYHUVLFDWLRQ DQG LGHQWL-cation of a sustainable, cost-effective renewable strategy.

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The last two articles focus on how traditional network businesses are facing

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risk of stranded assets than under invest and considerably constrain the available ZLQGHQHUJ\RXWSXW7KH VL[WK DUWLFOH

by Furong Li, Jose Wanderley Marangon-Lima, Hugh Rudnick, Luana M. Marangon-Lima, Narayana P. Pad-hy, Gert Brunekreeft, Javier Reneses, and Chongqing Kang, dis-cusses the challenges IDFHG E\ GLVWULEXWLRQ SULFLQJ XQGHUgrowing distributed generation, de-mand-side management, and smart grid GHYHORSPHQWV7KHPDMRULW\RIWKHWDULIIstructures and charging methodologies LQ SUDFWLFH ZRUOGZLGH ZHUH GHYHORSHGin the 1970s and 1980s, with distribu-tion being one of the most conservative segments of the electricity chain and WKHRQH WKDWFRXOGEHKXUWUVW&KDUJ

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1540-7977/152015 IEEE18 IEEE power & energy magazine july/august 2015

An Era of Many Options

By Randell JohnsonDigital Object Identifier 10.1109/MPE.2015.2418077 Date of publication: 25 June 2015

GGLOBALLY, POWER SECTORS HAVE ENTERED AN ERAof unprecedented optionality that transcends supply, transport, and demand. Renewables are increasingly penetrating power systems; greater effi ciency in lighting has been achieved; manufacturing capability for energy storage technologies is expanding, smart grid technologies have evolved, and emissions technology has advanced; energy effi ciency and demand response adoption rates are rising; and distributed resources are increasingly competing with central station supply even as central station technologies have themselves become more effi cient and diverse. Today, the savvy prosumer has a choice between utility supply and self-sup-ply or can opt for a combination of both. Just as important, innova-tive supply, transport, and demand options have led to an emerg-ing array of complementary policy and regulatory approaches.

Thus, traditional utility business models face the threat of rev-enue erosion from both reduced wheeling of energy through utility assets and overall lowering of energy demand. Traditional central station power generation also faces greater revenue risk as increas-ing renewables penetration having no, or only minimal, marginal costs defl ate spot prices. Competitive power market structures have led to greater transparency in price formation for various products: day-ahead energy prices, real-time prices, reserves and regulation prices and shortages, congestion and basis risk differentials, mar-ginal-loss prices, and capacity prices. Because wholesale markets alone as currently structured are unable to factor in revenues for renewables and energy effi ciency to project profi tablility and eco-nomic feasibility, many out-of-market fi nancing optionssubsi-dies, tax credits, in-feed tariffs, and othershave been introduced to make doing so more feasible.

The challenge is adapting exising utility business models and wholesale market structures for future technology innovations as well as a vast array of policy and regulatory movements.




This article looks at how the creative destruction engendered by

great innovation has historically impacted elec-tricity rates and pricing models

how new options for the grid are influencing electricity prices today

why innovations in energy transportation will affect future pricing models.

Also discussed are macroeconomic power sector futures, evolution in planning processes, wholesale power mar-ket structures, shifts in the fossil fuel markets, and the effects of environmental regulations on energy pricing.

Creative Destruction Engendered by Great InnovationCreative destruction is a term in economics describing the process of industrial mutation that incessantly revo-lutionizes the economic structure from within, inces-santly destroying the old one, incessantly creating a new one, according to J.A. Schumpeter.

For example, humans have a basic need and desire to control lighting beyond the illumination from the sun. So we marvel at the innovation that Pearl Street Station represented in 1882a power facility fi red by coal to supply electricity to incandescent lamps for lighting,

shown in Figure 1. Incandescent lamps were superior to the kerosene lamps then in common use because the power generation and the transmission and distribution required for electric lighting are more cost effective and cleaner than the former alternative: producing oil to be refi ned as kerosene, which then had to be trans-ported via rail or pipeline for distributing, packaging, and burning in lamps.

Todays lighting technologies are superior to the incandescent lamps; they have a greater life span, consume much less than incandescent bulbs for a similar light output, and provide short-term marginal cost benefi ts in that, for example, less peak demand of electricity supply is required to power a city. While purchase costs for modern lighting technologies may be more than incandescent lamps, manufacturing learning rates still reduce the overall cost, and greater lighting effi ciency also has broad benefi ts, reducing requirements for supply, transport, and distribution as as a fraction of total peak megawatt (mW) and annual lighting energy require-ments. This means fewer assets fi nanced via utility rate cases, reduced emissions of burning fossil fuels for lighting, and concurrent benefi ts of reduced operational costs.

In fact, however, transformation to more effi cient lighting was fairly slow in the years after the Pearl Street Station went into operation. Over the last century or so, we have witnessed many gradual changes in the various power sectors:

the monopolization of utility franchises (John D. Rockefeller of Standard Oil pioneered unregulated

Future energy planning must take into account unprecedented numbers of options.

IMAGE LICENSED BY GRAPHIC STOCK, LIGHTBULBIMAGE LICENSED BY INGRAM PUBLISHING




capitalist monopolies in the early 20th century), fol-lowed by regulation for just and fair returns

multiple reforms or liberalizations in production, transport, and distribution

an era of an emphasis on rural electrification that con-tinues in some nations today

the advent of nonutility generators, self-supply mecha-nisms, and cogeneration

more recently, deregulation of supply and the growth of power markets.

In addition, numerous other innovations have occurred since the Pearl Street Station went into operation: a plethora of prime mover technologies, electric generator types, and efficiency improvements; more efficient electromechanical conversion, topology control, and automation; transmission and transformation developments; and advances in sanita-tion systems and pumping, to name just a few.

Today, the world is evolving away from coal and incan-descent lighting technologies toward renewables and even more efficient lighting technologies. Prospects and oppor-tunities for further creative destruction are vibrant from supply, transport, and demand impacting revenues affecting utility business models and structures of wholesale markets.

Many Options for the GridWhat is different today compared to the past (when tech-nologies like the example in Figure 2 were the norm) is the sheer number of options available simultaneously for future grids. These options span policy, regulation, technology, markets, the environment, manufacturing, and other dimen-sions. The oil crisis of the 1970s inspired numerous new

ideas for power grids as well as for energy production and con-sumption, many of which are available today or will be in the near future.

Solar and Wind PowerFirst, the largest available energy source is the sun, but until recently we were unable to trans-form the suns energy via solar power generation to useful quanti-ties of power at reasonable costs. We have seen the first large-scale adoption of solar generation in Germany, and, based on current trends in terms of costs and pol-icy, many forecasts suggest wide-scale global adoption of solar gen-eration in the coming years.

The advantage of solar is that it has no fuel cost and can come in utility-size projects or widely

distributed implementations. This advantage, however, comes at a cost and currently requires subsidies, credits, and out-of-market financing to be economically sound or profit-able. Further, distributed solar upsets utility business mod-els and wholesale market marginal pricing (although there are examples now where solar is comparable on a per kWh generation cost to traditional technologies such as gas-fired generation).

In addition to solar, wind power generation is increas-ingly improving yield and reliability, controlling costs, and contributing to market share globally. Many projections 20 years or so ago only began to recognize wind power pro-duction technologys growth potential. Now, that worldwide experience with wind development and as learning rates in manufacturing processes improve, wind power is becoming more a part of the landscape, as shown in Figure 3, as well as more competitive.

Both wind and solar have a tendency to lower short-run power prices with no marginal costs of production such as the fuel purchases fossil plants require. Although solar and wind projects require subsidies such as in-feed and production tax credits, they rely on energy market revenue from production as well. Wind power development often leads to transmission development signals more so than solar futures.

New Storage TechnologiesWith increasing numbers of storage technologies lowering storage costs, a solar and wind revolution is within reach within the next few decades. Storage in the electrical grid is seeing new entrants and start-up manufacturers angling for

figure 1. An 800-kW generator at South Pearl Street Station circa 1880. [Source: The Street Railway Journal, 1884; https://www.flickr.com/commons, Creative Commons (CC) License.]




future market position outside the traditional large manufac-turers. Various storage technol-ogies have raised the cycle life and reduced costs, and these are being developed for distrib-uted networks as well as utility scale installations.

Storage has potential for price setting in terms of energy prices, ancillary prices, and capacity prices and can provide other value streams. Charging energy storage at off-peak prices as available to offset peak demand provides value to energy prices and capacity offset. In addi-tion, energy storage can provide multiple reserve and regulation products while charging and discharging, thus competing directly with fossil plants for pro-viding flexibility and peaking.

Distributed NetworksMore and more emphasis is being given to distributed resil-ient networks to account for natural weather events as well as for security against extremists, and also because of these technologies decreasing costs. The retirement of coal plants is indirectly the retirement of a traditional form of energy stor-age as a backup for system security; coal plants have days, weeks, even months of coal on site that can be relied on in the case of extreme events such as a polar vortex, which can stress

energy supply and delivery sys-tems for millions of people.

As pricing structures change for distributed resources, the conventional wisdom of central station economics is being chal-lenged and so are traditional business models of the franchise area utility that have regulated supply. As distributed resources increase, the traditional utility business model has simultane-ous multiple revenue stream devaluations in terms of supply revenue and retail sales, so utili-ties may need to reinvent them-selves to survive.

A slippery slope for regulated utility businesses has emerged of prosumers opting for partial self-supply arbitraging against utility rates with net metering where utilities get left with van-ishing market sales for regulated returns on asset investments yet the prosumer expects the utility to maintain its obligation to serve

during self-supply shortages. Many utilities have regulated and unregulated businesses where in some situations the regulated businesses are being assessed as more risky than the unregu-lated businesses.

Power-flow control technologies are emerging that have the ability to optimize the operations and the utilization of the existing transmission and distribution grids.

figure 2. Transmission lines circa 1920s. (Source: Chilectra.)

figure 3. Sheep and windmills on the Sacramento delta, California. [Source: Franco Folini, https://www.flickr.com/pho-tos/livenature/11618997244, Creative Commons (CC) License.]



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Energy Efficiency and Demand ResponseAnother set of options that have increasingly emerged in the past ten years is adoption rates of energy efficiency and demand response. Energy efficiency and demand response are having a profound impact on planning processes that have those inputs for transmission planning; for example, transmission development signals are eroding with demand response and energy efficiency assumptions in many situa-tions. Also demand response is price sensitive and impacts short-run marginal electricity costs where energy efficiency impacts long-run costs of electricity.

New Fossil Fuel SourcesIn addition, a new world of fossil fuels has emerged over the past ten years in terms of merit order and resource potential. North American shale oil and shale gas finds have led the United Statestraditionally, a large con-sumertoward greater domestic production than off-shore production. Shale has led to forecasts of larger dependence on natural gas in the power sector, as well as fuel switch-ing from coal to natural gas, and has opened up options for further environmental compliance of stricter emissions standards.

Nuclear PowerInnovative design and development on small modular nuclear reactors have provided hope of a nuclear energy renaissance. The small modular reactors can generate tens of megawatts, which will be sufficient to supply power to a small region like a city without requiring much maintenance or opera-tional workforce and without the bulky capital investment that large nuclear plants require.

However, the perception of the general public about nuclear power after major incidents at Three Mile Island, Chernobyl, and Fukushima, as well as perceived proliferation risks, can influence the adoption of such technology in the future.

With a high number of choices like these available for the future grid, it is a more difficult decision process to plot a path forward. Consequently, we see trends of operations research helping us to economically assess winners and los-ers subject to public policy and regulatory and reliability requirements.

Energy Transport With most commodities, supply and demand are separated geographically so transport is required. Often, transport constraints can cause price signal impacts. This is particu-larly true in energy transport systems including power.

Over time, there can be innovations to transport such as, for example, when Rockefeller began using the railroads to move kerosene from his refineries to consumer demand cen-ters for lamp oil; the railroads used market power of trans-port to increase returns. However, Rockefeller also devel-oped the first pipeline systems for his products to circumvent the rail transport charges, and this was another successful

innovation in energy transport, reducing costs while increas-ing reliability and certainty in transport.

Regulating Transport Separate from ProductionIt is common that the transport systems are largely regulated or separated from production or supply for many commodi-ties. Power market deregulation has left transmission regu-lated with supply being separated or unregulated. Are we getting enough innovation in transmission if transmission is regulated, and are the planning processes for transmission efficient? Moreover, do current planning practices lead to least-cost electricity prices and a level playing field of open access outcomes?

Regulators in states that have competitive markets insist that the market provides incentive signals for resource development. However, transmission planning and devel-opment are separated from resource development or sep-arated from market signals for resource developments. Transmission planners often use heuristic assumptions about resource developments, removed from resource com-petition economics, for purposes of assessing reliability of future networks. This is the state-of-the-art approach, although trends are emerging that resource solutions can compete with transmission solutions such as demand response, energy efficiency, distributed generation, energy storage and others.

Transport and DemandIn vertical systems and competitive markets, transmission is planned outside of resource planning or market signals for resources. This has partly been due to the lack of computa-tional ability to cooptimize transport with demand and with supply to place all solutions on a level playing field economi-cally and allow economic optimization to lead the indica-tors of likely winners and losers, which can then be used as assumptions for technical network planning.

In the past decade, optimization algorithms have emerged that, when applied to power grids, can cooptimize the trans-mission with other resources. While many planning processes have not adopted this approach, we do see an increasing inter-est in this area. The need to do so will grow as open-access principles advance deeper into the planning process.

Increased InterdependenceThe power of economic optimization algorithms combined with physical models of transport have increased in combi-nation with low cost computing resources. Increased inter-dependency of commodity transport systems has emerged where regulators, development banks, independent service operators, utilities, and others have become interested in understanding the coordination between commodity mar-kets and transport.

An example of this is the rapid growth of shale gas with the increased reliance on gas-fired generation in the power sector. For example, the basis risk of transport constraints




in the natural gas network inflate electricity prices and can also impact reliability. Also tradeoffs may be necessary depending on whether it is better to use transmission and distribute energy electrically or to use a combination of pipelines and distributed generation. Additional examples include cooptimization of transport and other resources of power; water, gas, and coal transport; liquid natural gas (LNG); and fuel oil.

The retirement of coal plants may lead to transport short-ages and electricity price impacts for dual fuel units. In the arid desert environments of Africa or the Middle East, coop-timization of water production, renewables, power, sanita-tion, and so forth with transport is becoming a greater con-cern, given that renewables may be intermittent; the idea is to optimize all options for flexibility at the lowest cost within resource scarcity constraints.

Future DirectionsCurrent state-of-the-art transport planning methods, such as those for transmission, plan for some distant year via a snap-shot analysis; policy makers, regulators, investors, and devel-opers must understand the evolution of time sequencing in transport and resource investments to meet demand forecasts.

Cooptimizations of transport with resources can also be applied at distribution level as the options and penetrations of distributed resources increase, as Figure 4 suggests.

Research and development in the areas of transmission switching and smart grids will lead to cheaper and more efficient ways to operate the bulk electric power system. Transmission switching and power flow control, in conjunc-ton with dynamic line ratings, allow better utilization of transmission during stress conditions to maximize economic efficiency in terms of generation dispatch, which can lead to production cost savings that impact wholesale electricity prices. It is likely we will see many further innovations in energy transport.

Macroeconomic Futures in Power SectorsIn an era of many options, with multiple technology innova-tions and an array of new policy guidelines and regulatory instruments, macroeconomic futures are an effective meth-odology to bound and bookend various potential impacts: for example, on utility rates; energy, capacity, and ancil-lary prices; transport costs; technology adoption rates; and other matters.

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figure 4. Cooptimization in generation and transmission planning in Australia prices. (Source: Australian Energy Market Operator.)




Macroeconomic futures can define paths of power sec-tor development where each future may have an internal consistency of assumptions. For example, a macroeco-nomic future with high LNG prices might lead a country to develop alternatives to generating with LNG. Alter-natively, an island nation dependent on fuel-oil burning and thus having risk in electricity rates tied to world oil market volatility may assume a renewables future, trading high short-run marginal costs or financing capital costs for renewables.

Macroeconomic futures can be based on the status quo, where it is business as usual: burning fuel oil or burning coal for relatively significant electricity production. On the other hand, macroeconomic futures can be help construct scenarios based on a high penetration of renewables, nuclear renaissance, global war, fossil fuel persistence, and other variables.

In addition, macroeconomic futures may take into account particular sensitivities such as high/low fuel prices, high/low demand, high/low capital costs for renewables, and others. State-of-the-art approaches used today to forecast tomorrows electricity costs and prices combine the mac-roeconomic frameworks with advanced least-cost resource optimization methods that can reflect energy, transportation, and reliability constraints.

Evolution of Planning ProcessesFor decades, state-of-the-art accepted practice among power engineers has been to design the networks around peak load. The rationale of designing the grid to peak load was that this was often the point of highest stress in terms of thermal capability of transmission, angular stability, voltage stabil-ity, and so forth. Many major transmission projects have been justified for reliability concerns of transferring power, maintaining voltages within a threshold, and maintaining angular stability, as well as for other reasons such as security of supply under contingency.

New Algorithms and Computing PowerInnovations in computing algorithms and computing power have enabled power engineers to develop complex models of the physics of network power flows and test many condi-tions around an instantaneous condition. These power flow algorithms have been largely based on a snapshot in time such as a moment of peak demand or a moment of mini-mum demand.

Longer ChronologiesMore recently, concern has arisen over long-term chronological reliability. In the past, chronological concerns in the planning process focused primarily on short-duration transients. An example of a longer duration chronological concern is the inter-mittency of renewables and the constraints of maneuvering a thermal plant on a subhourly basis while regulating reserves and spinning reserves in subhourly intervals, taking into account the previous state of the system and future potential system states where grid stress can emerge in off-peak hours. While snapshot and transient analysis at peak conditions is still necessary in macroeconomic futures, these methods may no longer be sufficient in grid design for adoption of technologies in supply, transport, and demand. There can be scarcity and abundance of quantities of energy, reserves and regulation, and capacity at peak or off peak, which can drive electricity price processes both in the short and long run that snapshot load flow/transient analysis cannot explain or forecast.

Heuristic Versus Economic ConsiderationsOften we see power engineers highly focused on thermal transfer capability of transmission, maintaining voltage thresholds, angu-lar stability, and security of supply under contingency for what are called base cases. These base cases are a set of assumptions of demands, generation, network developments, and others of the future that then the power engineer subjects to a cadre of tests for reliability measures and assessment of the robustness of the future systems to such assumptions.

It is the process of deriving these assumptions that is challenged by the economics of technology options and macroeconomic futures. Given that we have many options for future developments of power sectors globally, in the past we have seen all kinds of heuristic assumptions as inputs to the power flow programs such as demand fore-casts, dispatch assumptions, generation assumptions, and assumptions about future policy and regulatory constructs. Heuristic assumptions might be deterministic or manual, and the absence of economic competition of assumptions might be, for example, the power engineer assuming loca-tions and amounts of deactivated generation units, locations, and capacities of new generators, levels of penetration of dis-tributed generation, energy efficiency, and other impacts of regulatory and public policy.

In the era of many options, a heuristic assumption pro-cess can only bias the planning of future systems where it is necessary to economically test options in optimizations that

Traditional utility business models face the threat of revenue erosion from both reduced wheeling of energy through utility assets and overall lowering of energy demand.




figure 5. Ideal nexus of production costs and capital costs. (Source: Energy Exemplar. PLEXOS Ingegrated Energy mode.)

Cost $

Total Cost C(x)+P(x)

Investment Cost/Capital Cost C(x)

Production Cost P(x)

Investment xMinimumCost Plan x

discern between likely winners and losers in demand, trans-port, and production rather than using manual engineer-in-the-loop assumptions. In other words economic optimiza-tions can provide guidance of plausible capacity additions and retirements to better inform network design.

Integrated Computational ToolsIntegrated computational tools have been developed that embody facets of power engineering technical analysis along with economic optimizations to justify the assump-tions that go into the technical analysis. The trend of low cost multicore CPUs has facilitated advancement in parallel computing such that it is feasible to perform calculations in a relatively cheap server cluster.

Thus, today it is possible not only to assess snapshot power flows at peak loads but to run hourly and subhourly produc-tion cost with inputs from capacity expansion algorithms that can be populated with a universe of expansion options to choose from based on least-cost economics. In summary, the objective of the power engineer can no longer be least-cost innovative network designs to obtain reliability but least-cost network designs that minimize costs across energy prices, ancillary services prices, capacity prices, and the cost of reli-ability. This is better stated as the minimization of the nexus of short-run production costs and capital costs subject to reli-ability constraints, as shown in Figure 5.

Considering All OptionsIn an era of many options, superior planning processes will place all options both economically and technically on a level playing field in terms of capital and production costs dur-ing the assessment of future grids, including transmis-sion options competing with resource options. We see an interesting trend in deregu-lated or liberalized markets that have adapted and have adopted many of the emerg-ing trends in the planning process including advancing market structures to provide incentive signals to options of demand response and energy efficiency.

However, most planning processes still sequentially optimize transmission in more of a reactive manner. Given the advancements of comput-ing power and optimization algorithms, only a few of the worlds planning processes have adopted cooptimization of transmission with other

resources. Some countries are exploring cooptimizations and are becoming educated on the advantages of cooptimizations as this places all options on a level playing field i.e. transmis-sion solutions compete with resource solutions leading to system development that is consistent with open access outcomes.

Power Market StructuresOver the past decade or so, the world has observed many deregulations of supply via wholesale power markets around the globe. Many products have been developed alongside the electricity energy day ahead markets such as real time market, reserves, and regulation products, congestion products, deriv-atives, forwards and futures, capacity markets, and others. We see many permutations in terms of vertical markets and liber-alized markets and a diversity of regulations and market rules.

Competition PricingLargely, power markets have been successful in making short-run electricity prices transparent and bringing com-petition to supply. Some competitive power markets have attempted to address pricing of and securing capacity; how-ever, these capacity markets tend to be designed similar to spot markets that do not match the time frame of capacity technical and economic life.

When designing capacity market key parameters for cost of new entry and shortage price-setting, economists approach the problem in terms of what it will take to incen-tivize reference technologies to enter markets to maintain minimum grid reliability standards. Should we meet a reli-ability standard at an incentive capacity price for a refer-ence technology? Or should we take the viewpoint of the




prosumer and minimize the cost of energy, ancillary, and capacity payments to meet a minimum level of reliability using energy efficiency, demand response, energy storage, and other resource options if it is more economic than cen-tral station generation reference technologies? What is the value of the reliability to the prosumer?

Demand and ResponseThe western world, motivated by vertical utility cost plus regulatory structures, could be unbundled with supply com-peting in wholesale power markets. Now the trend is to over-lay public policy and regulatory of adoption of renewables in resource developments where many renewables choices cannot be profitable via wholesale market revenues only and instead require out-of-market incentives such as in-feed tar-iffs and/or production tax credits and investment incentives.

Yet the renewable technologies then deflate spot prices in wholesale markets, increasing revenue risk for tradi-tional supply mix that is needed for reliability when the renewables are intermittent. Should power market struc-tures be adapted to provide price signals and financing for public policy resource developments alongside providing the necessary pricing signals for reliability and energy sup-ply, or should the world continue with out-of-market incen-tives for renewables?

For certain options, we see trends of this taking place in advanced power markets with demand response and energy efficiency gaining access as products in capacity markets and competing against central station generation. Also, there are must-take feed-in tariffs that get renewables dispatched ahead of other resources and evolving market rules for dis-patch of renewables and locational marginal pricing.

Competitive power markets have fallen short of leveling the economic playing field of cooptimizing transmission investments and other resources. Transmission can provide resource options to serve demand, and resource options and demand options can reduce transmission development sig-nals. Most power markets have yet to accomplish placing all options on a level playing field and producing market signals for different types of options such as transmission instead of local resources or vice versa.

Fossil FuelsThere has been a fundamental shift in the underlying fossil fuel markets, influencing changes in the electric sector. In

general, fuel diversity encourages new generation entrants when the new unit is more efficient or has cheaper fuel costs than the system marginal unit. During peak periods, if oil-fired generation is setting price, then other more efficient or cheaper fuel units are normally profitable.

There has been a recent change in the generation fleet in many markets with the retirement of older coal- and oil-fired generators in favor of natural gas, typically the more efficient combined-cycle generator. With a decrease in fuel diversity, electric prices in both deregulated spot markets and vertically integrated or regulated electric markets have trended toward the short-run marginal costs of the combined cycle plant fired with natural gas. This has made it more dif-ficult for new entrants to justify the cost of building addi-tional resources in an environment of low market prices and how to pay for the continuing fixed costs.

As the penetration of intermittent renewable generation increases, short-term production costs for electricity will gradually fall below the production cost of natural gas com-bined-cycle plants as well. This change will require addi-tional incentives in macroeconomic futures of renewables plus natural-gas-fired fleets, either through the wholesale market or utility rates for vertically integrated utilities, to compensate future generation for the shortfalls in short-term production costs as well as fixed charges to cover debt, equity, and return on capital.

Fuel diversity also encourages security of generation sup-ply in the event of a particular disruption event in another competing fuel source. An example is the overreliance of gen-eration on natural gas and the operating risks that then places on the natural gas pipelines; potential outages from the natu-ral gas pipelines impacts generation supply where dual fuel may be relied on. With the retirement of coal and phenomena such as polar vortex, the natural gas systems may be leaned on more for energy security of large population centers.

Some electric systems have limited fuel supplies for their generation fleet. For example, small island economies or isolated grids must often rely on oil as the primary source of fuel due to a lack of natural gas or other fuel infrastruc-ture. In this case, these systems tend to operate relatively inexpensive combustion turbines from an initial capital cost or fixed cost perspective. The tradeoff however is the high operating costs associated with fuel oil. Replacing these units with wind or solar units becomes a economic proposal due to the relative high capital costs for renewable technologies

In addition to solar, wind power generation is increasingly improving yield and reliability, controlling costs, and contributing to market share globally.




(although learning rates are rapidly reducing capital costs of renewables). But the system overall would gain from the substantially cheaper operating costs. Again, this shift cre-ates a natural tension; however, as high cost fuel oil units are replaced with generation with zero or near-zero operat-ing costs; in the case of wind and solar, the system short-run marginal costs will erode the profitability many of the fossil based generators on the system.

In addition, there has been a decoupling of natural gas prices in some world markets, primarily the North Ameri-can natural gas market, from the rest of the world. Many regions rely on the additional supply of LNG for their natural gas supplies, including parts of Europe and Asia. Due to the limited supplies of LNG in the world market and the high development costs for new LNG, the cost of LNG is reflected in both cost of natural gas supplies in these regions. In North America, however, with the large scale of shale natural gas development, natural gas supplies have created an overhang of supply and driving down natural gas prices.

This natural gas price decoupling has created economic opportunity in North America to build export LNG facili-ties to increase the supply of LNG to the rest of the world markets. While there has been some political opposition locally to LNG export facilities in North America, this development may have tendency to increase the price of natu-ral gas in domestic markets in the United States and Canada and decrease price pressures on those countries receiving the additional LNG supplies.

Environmental RegulationsEnvironmental regulations have had both an indirect and direct impact on electricity supplies and the cost of sup-ply and utility rates. The most common form of environ-mental regulations is typically the control of air emissions from fossil fuel generating plants, for conditions like those shown in Figure 6.

For example, air quality environmental regulations are currently changing the landscape of generation in North America, with coal-fired power plants subject to the Mercury and Air Toxics Standards, requiring significant reductions in emissions of mercury, acid gases, and toxic metals with plant upgrade requirements of expensive emission clean up technol-ogies. A coal plant operator with high coal prices or located in a market with lower wholesale electricity prices (often tied to natural gas prices as noted previously) could make the addi-tional investment in equipment like scrubbers uneconomical to the plant. Plant operators also have to weigh whether they can seek to pass on these additional costs to rate payers. In spot markets for electricity, the additional capital costs could only be recouped from higher spot prices for electricity. In the regulated markets, the installation of additional environmen-tal equipment would have to be approved by the

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