Some excellent insight here! I can see price signal and efficient markets as effective tools as many economists would tell you. But real world results show how hard it is to implement becuase humans are so... human. It made me think of homer simpson https://youtu.be/lgi1LFVWurg?si=BZeBEZhoL9rq4n8V People don't want to become day-traders just to keep their lights on.
For perspective though, look at riparian water rights in California. we're locked into a riparian water rights system that, on its face, seems to incentivize wasting water during a drought. It's logically baffling, but it persists because of the immense human and political history behind it. Your article is a great read as I research water markets, which seem like a potential solution but, as you've shown, are fraught with these same human-centric challenges.
Brilliant piece! It seems very true that without relatively expensive on site infrastructure demand response is experienced as a strictly worse electricity consumption experience for poor compensation. That said, if we move towards a future where solar and batteries are Casey Handmer-cheap and the powerwall is an appliance in 95% of homes then ideally the burden of hedging and providing DR can become invisible to the consumer and a game played entirely in a market, at which point the clearer price signals Duncan describes are obviously advantageous.
I do think entirely regardless of the state of the the great DER buildout, the muniutility-institutionalcapacity-noblesseoblige-maxis such as your self should be more skeptical of capacity markets! They do not perform well theoretically or empirically. Market design is a powerful axis that utilities and PUCs can exert real influence over and there are market designs that are strictly better and worse than each other. I fear that clinging to existing market mechanisms that deliver poor results that push price sensitive customers toward BTM is not something that will actually help this bottom tranche of customers in the long run.
1) I will believe Handmer-cheap DERs when I see them. Right now I only see upward pressure on the material inputs.
2) DER-pilled critiques of capacity markets undersell how risk-averse I am on behalf of customers. If we assume a scarcity price, there is always a risk that a Uri-style power crunch leads to a sudden spike to, say, 0.75/kWh electricity for one month. Customers will see triple-cost bills. They will understand 0% of why this happened. They will assume I stole their money, and they will bring pitchforks. If price curve is $0 for 23 hours and $1000 for one hour, the 80th-percentile customer will reject that arrangement whole cloth vs. paying $75 for 24 hours. I represent THAT customer. I will pay a LOT to hedge up front (e.g. with capacity markets), because then, when a Uri style power crunch hits, someone _else_ takes the L. I will accept paying 2x per MWh for 19 years to protect myself from that 20th year where a crunch happens.
And like…I get how stupid that sounds. But customers are _so much stupider_ than you think. The true DER-pilled move would be to them to forward-calculate someone’s electric costs for an entire year, give them a FLAT rate for 12 months straight, true-up at the end of the year, and then amortize that true-up over the next year.
And then all your DERs would automate under that flat rate.
2) Yes, I completely agree that it’s your job to hedge on behalf of the customer and this is something DER crew is not sensitive enough about. However, there are non-DER pilled critiques of capacity markets (ie that still fully place the burden of hedging with the utility) that are very important because, while you are obviously willing to pay a premium to hedge this exposure on behalf of your customer, the level you get filled at on that hedge still matters a lot! The difference between paying 2x and 3x for that MWh is really important, even if we are in agreement that it must be hedged. PUCs and the public writ large do not have infinite willingness to pay for unrealized hedges and the losses can be hard to explain retroactively, there are many examples of this. There is a golden path between spot price anarchy and poorly performing capacity markets (and other market design decisions) that, overtime, push price sensitive customers away.
Agreed. It would somewhat tragic if the outcome of all of the AI capex money is a bunch of quickly depreciating btm gen assets. I really think more nimble governments/utilities/PUCs could leverage this moment to build infrastructure that makes the retail customer relatively less important to the utility business model and therefore possibly less squeezed. But there has to be some positive vision. It can’t just be I’m going to overhedge these risks and go punitive if you try to leave.
Some excellent insight here! I can see price signal and efficient markets as effective tools as many economists would tell you. But real world results show how hard it is to implement becuase humans are so... human. It made me think of homer simpson https://youtu.be/lgi1LFVWurg?si=BZeBEZhoL9rq4n8V People don't want to become day-traders just to keep their lights on.
For perspective though, look at riparian water rights in California. we're locked into a riparian water rights system that, on its face, seems to incentivize wasting water during a drought. It's logically baffling, but it persists because of the immense human and political history behind it. Your article is a great read as I research water markets, which seem like a potential solution but, as you've shown, are fraught with these same human-centric challenges.
Brilliant piece! It seems very true that without relatively expensive on site infrastructure demand response is experienced as a strictly worse electricity consumption experience for poor compensation. That said, if we move towards a future where solar and batteries are Casey Handmer-cheap and the powerwall is an appliance in 95% of homes then ideally the burden of hedging and providing DR can become invisible to the consumer and a game played entirely in a market, at which point the clearer price signals Duncan describes are obviously advantageous.
I do think entirely regardless of the state of the the great DER buildout, the muniutility-institutionalcapacity-noblesseoblige-maxis such as your self should be more skeptical of capacity markets! They do not perform well theoretically or empirically. Market design is a powerful axis that utilities and PUCs can exert real influence over and there are market designs that are strictly better and worse than each other. I fear that clinging to existing market mechanisms that deliver poor results that push price sensitive customers toward BTM is not something that will actually help this bottom tranche of customers in the long run.
1) I will believe Handmer-cheap DERs when I see them. Right now I only see upward pressure on the material inputs.
2) DER-pilled critiques of capacity markets undersell how risk-averse I am on behalf of customers. If we assume a scarcity price, there is always a risk that a Uri-style power crunch leads to a sudden spike to, say, 0.75/kWh electricity for one month. Customers will see triple-cost bills. They will understand 0% of why this happened. They will assume I stole their money, and they will bring pitchforks. If price curve is $0 for 23 hours and $1000 for one hour, the 80th-percentile customer will reject that arrangement whole cloth vs. paying $75 for 24 hours. I represent THAT customer. I will pay a LOT to hedge up front (e.g. with capacity markets), because then, when a Uri style power crunch hits, someone _else_ takes the L. I will accept paying 2x per MWh for 19 years to protect myself from that 20th year where a crunch happens.
And like…I get how stupid that sounds. But customers are _so much stupider_ than you think. The true DER-pilled move would be to them to forward-calculate someone’s electric costs for an entire year, give them a FLAT rate for 12 months straight, true-up at the end of the year, and then amortize that true-up over the next year.
And then all your DERs would automate under that flat rate.
1) Agreed
2) Yes, I completely agree that it’s your job to hedge on behalf of the customer and this is something DER crew is not sensitive enough about. However, there are non-DER pilled critiques of capacity markets (ie that still fully place the burden of hedging with the utility) that are very important because, while you are obviously willing to pay a premium to hedge this exposure on behalf of your customer, the level you get filled at on that hedge still matters a lot! The difference between paying 2x and 3x for that MWh is really important, even if we are in agreement that it must be hedged. PUCs and the public writ large do not have infinite willingness to pay for unrealized hedges and the losses can be hard to explain retroactively, there are many examples of this. There is a golden path between spot price anarchy and poorly performing capacity markets (and other market design decisions) that, overtime, push price sensitive customers away.
_That_ I agree with, and it keeps me up at night. The kicker is that the threshold for going off-grid are remarkably close for customers who can front the cash: https://www.energycrystals.io/p/the-cost-per-kwh-to-go-off-grid
Agreed. It would somewhat tragic if the outcome of all of the AI capex money is a bunch of quickly depreciating btm gen assets. I really think more nimble governments/utilities/PUCs could leverage this moment to build infrastructure that makes the retail customer relatively less important to the utility business model and therefore possibly less squeezed. But there has to be some positive vision. It can’t just be I’m going to overhedge these risks and go punitive if you try to leave.