Storage and the Failure of Energy Markets.

As we build markets between intelligent buildings and the intelligent grid, there are two paths we can take to demand-response. One imposes central control, and is essentially the voluntary acceptance of a specific brown out with some local control of timing. This mode is traditional, as when the power company turns off the home hot water heater. The other path creates market mechanism to encourage local energy arbitrage between time-dependent markets. I’m betting that the second offers considerably more potential.

In today’s public concept and in the political world, the simple load shedding model is the only one. When you get a price signal, you should turn off your A/C. No hot showers in the afternoon. We will be happy to sweat in the dark because we will be saving the planet. Belief in the sustainability of this model right up there with the sustainability of the economic model posed by the red-suited man at the local grocery store this last weekend. It is a desire for how one wishes things worked trumping how things actually do. Very few people not already in monasteries will commit to long term privation, however slight.

Arbitrage is a little harder to think about but easier to sustain. Arbitrage between time markets lets buildings not only respond to times of congestion and shortage, but to also take advantage of times of abundance, to use resources that currently go to waste.

In simplest terms, arbitrage between time markets is the decision by the building operator to buy power when it is cheap, and to refrain from buying power when it is expensive. It no longer matters how inefficient local storage of energy is, just whether that inefficiency is less than the price differential. If I can make 50% return on investment by buying at night rather than during the day, then a 40% loss due to storage inefficiency is inconsequential.

Early adopters will pay a premium for this ability, but will also earn a premium as one of the few able to shed the load. As the market develops, both premiums will come down, as storage becomes more efficient ad as the market broadens, driving prices at both times toward the mean.

The largest barrier to large-scale adoption is the systematic under-pricing of power during peak use. This failure of pricing is yet another symptom of a market that has always foisted it costs off on others. Dirty coal plants push the costs of generation off on those downwind. Storm recovery costs push poor capital allocation and sub-market labor contracts into cost recovery allowed by the utilities commission. Brownouts push the costs of poor pricing strategies onto the general public; except during system failure, every brown-out is a failure of pricing. These systematic failures are predictable symptoms of an industry that has been a regulated monopoly managed for cost recovery for the last 80 years.

Proper pricing will validate and reward the energy storage market. Owners will embrace energy storage when they can see clean numbers from the market. Energy storage will flood the market when the owners want it.

Energy storage is coming. I ask you, my readers, what energy storage strategies do you think will be the early winners? I have some ideas that I will share this weekend.

Carbon Sequestration to Improve Energy Yields

A tip of the hat to Lynne Kiesling for pointing out one of the more interesting energy plays in the carbon neutral realm.

The company Blue Source is offering a carbon sequestration solution that increases oil production. They make this cost effective by producing revenue at each end of the pipeline. CO2 is captured at a cola plant, pumped to a nearly depleted oil field and pumped into the ground where it rejuvenates oil production.

This is yet another example of an important principle. The best solution to most problems is to increase transparency and let more detailed information flow. Regulatory plans are too subject to meddling and patronage. Mandated solutions are too prone to technical lock-in. Liability issues make companies reluctant to try anything other than a “recommended” or pre-approved solution.

oBIX will make the operations of buildings visible. Utility-to-Building communications, of which standards such as DRAS are the beginning, will make visible the actual costs and instabilities of grid. Visibility will alert creative minds as to what problems are worth solving. Markets will take care of the rest.

The solutions may be long term; Stirling Energy systems worked for thirty years before their technology became the viable basis for one of the more interesting solar power production projects in the Southwest. Blue Source needed a very short time to put together a bridge between newly visible carbon disposal costs and newly expensive oil.

Storage and buffers will solve many of the problems of the grid. These problems have been intractable. Making these costs visible and assigning economic value to them in an open market will hasten their solution. Will it be old-school floor-by-floor thermal storage? Will it be new school vanadium cells in the basement? It doesn’t matter – markets will show us the way. And free markets come from free information.

How do you buy a Green Volt?

Several readers have written to me contesting the entire idea of Green Power, and buying from the producer of choice. Electrons are Electrons they say. They all come down the same wire. It makes no sense to try to buy green power.

I assume these people are also not participants in the modern economy, and barter for all goods. Money is a way to transfer value between multiple producers of commodities more efficiently than direct trades. I don’t need to accept direct value in turnips for my work. The banking system takes this a step further. I get my dollars and put them in the bank. This allows me to write a check and send it to you. You take that check to some entirely different bank and get cash. Neither of us worries whether your dollars have the same serial numbers that I deposited in the bank.

Buying green power should work in the same way. Green producer puts volts onto the grid. I buy volts from the grid. Electronic transactions mediate these processes. Neither of us needs to worry about the quantum serial numbers on each electron.

There is an old parable about Stone Soup. An itinerate comes to town, and asks not for food, but for a pot and water to make stone soup. He places a stone in the water and begins cooking. Soon he tastes it and proclaims that it is wonderful soup, but would be better if it had some carrots. Overcome by curiosity, one of the townsfolk produces some carrots. In the same way, he soon gets some potatoes, and cabbage, and onions, and so on. All the time he extols the virtues of stone soup.

The problem is, today, the doubters are closer to correct. My power company has a portfolio that they claim is green power. They augment it with power from other sources because there is no way to temporally allocate that green power. I, as the customer, have no way of knowing if they have sold the output of a single windmill several hundred times, or if the price is sufficient to encourage adding more windmills. I am suspicious of paying a premium for green power—it may be just stone soup.

If there were markets, then I could buy green power at a higher price. There are those who would do this just as there are those who buy expensive potatoes at Whole Foods. Because of Whole Foods, there are now many more producers of organic potatoes—and no one suggests that the industrial potato farms should get a share. In the same way, honest markets would incentivize green power far better than do today’s regulated offerings.

Some people see no sense in paying higher prices for such power. Some may even argue that flying organic raspberries in by jet from Chile in February may not actually save the planet. It doesn’t matter. In that market, people have choices, and can buy in accord with their values. These purchasing decisions would be reflected directly in Alternate Power profitability (and thus in Alternative Power investment).

With green power comes some reliability issues. Perhaps I want to purchase reliability assurances from a generator consortium. Perhaps I want to store power locally to tide me over. Either way, markets will offer me solutions if we let them.

We have the technology, today, to make each choice available. We have the technology to make these choices transactive, including support for time of day or dynamic congestion pricing. Installing such technology will be cheaper by an order of magnitude or two than building out the transmission infrastructure of today under the cost recovery innovation-averse regulations of today.

And it will create a market wherein I can choose the green power I want, just as I can choose organic raspberries in February. I won’t need to justify it to a utilities commissioner or to an engineer. I’ll be able to do it because I want to. And it won’t be because I like stone soup.