Brennan, Electricity 101 – MPPI: Annapolis, MD March 20, Electricity 101: Understanding Maryland's Electricity Market Tim Brennan Professor, Public Policy and Economics, UMBC Senior Fellow, Resources for the Future Maryland Public Policy Institute Annapolis, MD March 20, 2008

Brennan, Electricity 101 – MPPI: Annapolis, MD March 20, Many issues; few answers? A little Electricity 101 What’s in Maryland’s control? Residential not the whole picture, either for or against Why electricity’s distinctive features matter The pillars of Maryland policy Some thoughts on “decoupling” Last words: reliability, and “yes, this is really hard” Skipping environmental policy considerations (e.g,. RGGI) but can discuss (some) in Q&A

Brennan, Electricity 101 – MPPI: Annapolis, MD March 20, A few “Electricity 101” basics Separate wholesale and retail markets –Wholesale: Bulk energy delivered over high voltage transmission lines to “load serving entities” LSEs (including local utility) –Retail: The market in which end users choose their LSE Supply must equal demand at all times –Too expensive to store –Capacity has to be in place to meet demand at any instant –Top 15% in place used during only 60 extreme peak hours –A problem with “non-dispatchable” sources, e.g., wind It’s all one big grid –One failure to meet demand can bring down the system –It’s not like cars – reliability is a collective enterprise

Brennan, Electricity 101 – MPPI: Annapolis, MD March 20, “Electricity Regulation” 101: The wires are regulated Local distribution –Don’t need multiple providers digging up the streets –Rates regulated by MD PSC Long distance transmission –Nominally separate lines, BUT … –Transmission interconnected into three big “interties” – Eastern, Western, and Texas –Electricity takes all paths – why it is one big grid –FERC sets rates, access policies, rules for wholesale markets Generation/transmission separation the wholesale issue –Fear of discrimination against entrants –FERC defines “Regional Transmission Organizations” –Functional, full, or no separation? Coordination vs. competition

Brennan, Electricity 101 – MPPI: Annapolis, MD March 20, What can Maryland control? Many question regulation –The California fiasco –The Northeast blackout –The run-up in prices –Low residential take-up But Maryland controls only the retail side –Can regulate rates customers pay –But has little control on upstream cost of electricity Part of the PJM wholesale market –Competitive market, FERC-approved RTO –Multiple markets (day ahead, spot) –Zonal vs. nodal –Capacity markets (“Reliability Pricing Model”)

Brennan, Electricity 101 – MPPI: Annapolis, MD March 20, Where Maryland gets its electricity – PJM’s territory

Brennan, Electricity 101 – MPPI: Annapolis, MD March 20, Residential isn’t everything Residential nationally about 1/3 of the market –Commercial and industrial (C&I) 2/3 –Source of impetus for opening markets –C&I advantaged even under old top-to-bottom regulation –Credible threats to leave – like tax breaks C&I seems to work in MD, but not residential –Less than about 3% of residential served by new suppliers –70% C&I, 94% large C&I Why the residential reluctance? –In some cases, retail price held down as part of dereg. bargain –But maybe they don’t want to be bothered! –Leave shopping to the MD PSC?

Brennan, Electricity 101 – MPPI: Annapolis, MD March 20, Alberta

Brennan, Electricity 101 – MPPI: Annapolis, MD March 20, Non-storable: What prices should users see? Why electricity’s non-storability matters –15% of use during 60 extreme peak hours, less than 1% –Have to recover those costs in less than 1/100 th time –Extreme peak prices can be 50 times normal price Case for allowing “smart metering” –Time of day, seasonal pricing only partial solution –Need ability to monitor use, tie to prices Focus smart metering on C&I –Enterprise benefits exceed costs of metering Political alternative: Pay not to use –Give people $1/kwh for electricity not used at extreme peaks? –Sources of funds?

Brennan, Electricity 101 – MPPI: Annapolis, MD March 20, Pricing leads to Maryland Energy Policy Pillar 1: Electricity prices are too high Pillar 2: People consume too much electricity –Stress on system at peak times: Only about.2% –Environmental harms, e.g., greenhouse gases Seemingly irreconcilable, to an economist –Excessive consumption means price below cost Believe it or not, prices may be too low, as we’ve seen Economic ideal: Charge the “right” price –Real time, environmental surcharge (e.g., carbon permit price) –Potential painful distributional effects, however! If pricing stays low, possibly justifies conservation subsidy –Watch out for rebound effect!!

Brennan, Electricity 101 – MPPI: Annapolis, MD March 20, Do consumers make wrong decisions … Could result in excessive consumption First explanation: Insufficient information –Information on net savings from energy efficiency, e.g., CFLs –Is there really an information shortage? Internet, TV, etc. –Perhaps for residential, less so for C&I (worth finding things out) –Real uncertainty regarding payoff—will energy prices stay up? Second explanation: Do buyers/consumers not make self- interested decisions? –Often assumed on the policy end –But consumers may have quality preferences, e.g., CFLs –Judgment over validity of preferences for energy-intensive consumption Economists lean toward giving people “right prices”

Brennan, Electricity 101 – MPPI: Annapolis, MD March 20, … or do the utilities make us do it? “Decoupling” Claim that we consume to much because utilities encourage consumption Rationale for “decoupling” utility revenues/profits from amount we use –The utilities make money the more we use –Take away the profit, they won’t encourage us to use as much A few cautionary notes –Any evidence that utilities influence demand away from what is in the consumer’s interest (given the right prices?) –The relationship to wholesale price probably drives utility marketing efforts more than –Deregulation blamed for Isabel repair delays because utilities weren’t getting profits from generation. Will decoupling help?

Brennan, Electricity 101 – MPPI: Annapolis, MD March 20, Reliability Greatest risk to grid on-peak Reallocating—not even reducing— a small fraction of overall energy use can have a big effect on reliability, prices –15% of use during 60 extreme peak hours is about.2% of overall annual use Big reliability gains obtainable at far less than 15% Leaves aside environmental reasons for reducing use But main reliability questions wholesale –Transmission grid operation –Transmission/generation separation –Control vs. competition “Have markets met their match”?

Brennan, Electricity 101 – MPPI: Annapolis, MD March 20, It really is hard – reasonable people can disagree!