By Kumar David –
In most countries, except the biggest, the electricity supply system was, in the past, a single publicly owned monopoly. The best known and most esteemed was the Central Electricity Generating Board of England and Wales (CEGB). In the United States, because of its great size, each state or part thereof was served by a “utility” – a private monopoly that generated, transmitted and distributed power within its franchise area. In France, EdeF was and still remains a state owned monopoly as does France’s famous railway network, SNCF of TGV fame. Japan, Canada, much of Europe, India and China include several monopoly utilities that are public or privately owned. The CEGB was the benchmark for many private and public (provincial or central) utilities.
Then came that Thatcher woman! Together with Ronald Regan she embodied the nadir of neoliberalism; her philosophy: “If it moved, breathed or waddled, privatise it!” Denationalisation of British Rail is legendary – there are several books detailing this ignominious fiasco. (Corbyn has pledged to take back the railways). The counter-lesson that we need to learn from this ruinous neoliberal agenda known as the Washington Accord is that public goods and natural monopolies (defence, justice, electricity grid, spectrum and telecoms-backbone, roads, and water – domestic and schemes like Mahaweli irrigation – must remain under public control. Yes, competition indeed trims prices and improves sector efficiency, but the industry and technology must be well understood by reformers so that they can make socially responsible decisions about competition. This is no game to be entrusted to locals or foreigners with loaded ideological agendas.
The Thatcher drive to break up and privatise the CEGB derived from the “dash for gas”. Huge quantities of cheap gas were discovered in the North Sea. Instead of letting the nationalised utility benefit from it, the Thatcher government privatised the power stations, encouraged private capital to build gas-fired plant, drove coal back underground (recall the miners’ strike) and forced distribution utilities to buy from private generators. The transmission system was retained as a monopoly National Grid Company (NGC). Regional distribution systems were hived off as twelve private distribution companies (Discos) who bought from private generation companies in a power-market and sold to domestic and small industrial customers. Industries were encouraged to buy directly from generators bypassing their local Disco commercially. Of course power still had to pass through the transmission and distribution networks and use-of-system charges were levied.
Initially England & Wales had a ‘Single-Buyer’; the NGC was the only buyer but later this was displaced by a more ‘Power-Exchange’ like arrangement. ‘Single-Buyer’ and ‘Power-Exchange’ are described below. NGC is an Independent System Operator – ISO is also briefly described below.
The experience of privatised power in the UK is not a success. UK small consumer electricity tariffs are the highest in the EU (except Malta) and 57% higher than the EU median in 2015 according to UK government data. (French electricity is among the cheapest in the EU thanks to nuclear energy; telecoms prices plummeted in Lanka and the world thanks to revolutionary technologies). In the UK, at the second stage, even retail customers were encouraged to contract and buy electricity directly from a bunch of about 40 competing middlemen-companies; an absurdity. Nothing has been achieved by this muddle except inane complexity and psychological stress. Imagine the panic of a little old lady facing this mayhem. No other country that did open a power market went this far into bedlam.
The supreme example of power market failure is California. Utilities that had functioned as conventional monopolies for decades had generation taken away from them. Investors bought-out the power stations and a class of private generators emerged who were encouraged to build new plant as demand grew. The old utilities were confined to the distribution end of the business serving customers with electricity they bought on the California Power-Exchange. The California power market ended in an all-mighty crash bankrupting Enron Corporation in a $1.52 billion settlement. This story of capitalism at its wits end is too long to recount here and even gave rise to charming epithets like “megawatt laundering”. For a wrap-up summary of the multi-billion dollar 2000-2001 California power market debacle let me quote Wikipedia: “California had a shortage of electricity supply caused by market manipulations, illegal shutdowns of pipelines by the Texas energy consortium Enron, and capped retail electricity prices. The state suffered from multiple large-scale blackouts, one of the state’s largest energy companies collapsed”.
The post-script is that it derailed power market trends worldwide. Privatisation and power market schemes already in progress were redesigned or scaled back. The lesson is that electricity is not a commodity amenable to simple market practices. David Freeman, Chair of the California Power Authority which oversaw the restructuring after the crash, said: “There is one fundamental lesson we must learn from this experience: electricity is different from everything else. It cannot be stored, it cannot be seen, and we cannot do without it, which makes opportunities to take advantage of a deregulated market endless. It is a public good that must be protected from private abuse. If Murphy’s Law were written for a market approach to electricity, it would say ‘any system that can be gamed, will be gamed, and at the worst possible time.’ A market approach to electricity is inherently gameable. Never again can we allow private interests to create shortages and be in control”.
Power-Exchange: One time-step shown. Generator’s offers are stacked from cheapest to dearest, and customer’s bids from most generous to most frugal. (Self-schedules lie outside the market and resolve technical and business concerns).
How power-markets work
There are two power-market models; Single-Buyer and Power-Exchange.
Imagine a New-CEB which owns the transmission grid and system control facilities, but owns no generators. However it is the sole buyer of electricity from private generators. Imagine the country divided into distribution utilities which buy power from New-CEB and retail to consumers. Imagine many private generators competing to sell to this single-buyer New-CEB. Contracts could be long-term (annual), monthly, daily or spot (real time, say every 15 minutes). The purchase schedules could be short term (say half-hourly) or longer. Prices will be on an agreed basis. What New-CEB charges distributors could be averaged out (with an added charge for transmission and overheads) or could fluctuate depending on what New-CEB itself pays daily or spot. What distributors charge end-users will usually be averaged (with a charge for distribution costs and overheads) and could be in slabs or same-for-all. Generator-to-New-CEB, and New-CEB-to-distribution utility agreements, and end consumer tariffs can be designed case by case as desired subject to approval by a Regulator.
A well-known model is the day-ahead archetype. This is where New-CEB forecasts next day’s load in say 48 half-hourly steps and receives quotations from private generators for this half-hourly schedule. It accepts the lowest quotes to fulfil forecast demands for each time-step. Generators who price low may get purchase orders for the whole day while those who price high may win orders only at peak demand time. Errors in forecasting or unexpected events will create a mismatch between purchase orders and real-time demand. Not to worry; there will be a spot-market (also called real-time market) where generators sell power (at a premium) when called upon to do so at short notice.
This is an electronic market managed by an entity like a stock-exchange authority. Generators submit half-hourly quantity and price offers, buyers (distributors and industries) submit how much they want to buy at each time step and what they are prepared to pay. For each time-step, the lowest generator offers and highest buyer offers are matched until the ‘market is cleared’. This is shown on the diagram which illustrates a post California-crash version. Market clearance means that no buyer is prepared to pay a higher price and no seller is prepared to sell at a lower price after the last transaction has been ‘cleared’. Now, after the ‘market clearing price’ is ascertained, every buyer pays this price (it is lower than his bid) and every seller pockets this charge (it is higher than his quote) and as Adam Smith would declare with glee, everybody should be happy – except sellers shut out because they quoted too high and disappointed buyers who bid too low; both belong to the extreme right hand side of the graphs.
Independent System Operator (ISO)
In the Power-Exchange (PE) model, PE is only a clearing house for energy-versus-money; it has nothing to do with the technical operation of the network or with system control functions. These are the domain of an ISO which operates, owns, maintains and plans the future of the transmission grid and system control facilities. The ISO must maintain strict neutrality; if it favours some generator or buyer it can cause havoc at times when transmission bottlenecks or voltage difficulties arise. There have to be technical protocols worked out in advance and adhered to when the unexpected occurs.
This raises the need for an Electricity Regulator to represent the public interest. The Regulator has to make rules for the functioning of the Power-Exchange, approve operational guidelines of the ISO, and in the Single-Buyer (SB) case, approve procedures between SB and generators, between SB and distributors, and approve consumer tariffs. The Regulator keeps an eye on ongoing activities and adjudicates disputes.
The transmission system is a natural monopoly (there can be only one) and it is a public-good. Distribution systems are each a natural monopoly in their regions (there can only be one in each region; LECO for example has a separate well defined area of its own in Kotte) and also public-goods. Hence in electricity supply there is scope for competition ONLY in power generation. This thought underlies the private power generator model that has caught on in Sri Lanka. Everywhere in the world the transmission network, the queen of the power system, must be answerable to society and not to private interests. Mutatis mutandis this applies to distribution networks as well.
Competition in electricity supply via private power generating companies can be useful if the hanky-panky of the past is not repeated – Lanka, California, wherever. Whether to detach distribution into provincial, district, or LECO-like entities is an issue that has pros and cons. To the best of my knowledge no in-depth study has been undertaken to examine what type of restructuring, if any, is desirable in Lanka. Existing structures need to be examined and compared with costs and benefits of feasible alternatives. Until that is done, let not fools rush in where angels fear to tread, and let us not grind pet ideological axes.
The author is one of very few Sri Lankans elected a Fellow of the IEEE; his citation was ‘For Contributions to Electricity Supply System Restructuring’. He has graduated about 20 PhDs and authored about 100 journal and conference papers on this topic.