August 17, 2003

The nature of electrical markets

Markets set price, but the question is how often and how well? If someone has fluctuating demand that changes by the day but can only contract for power by the month, what happens to that fluctuating demand information? In reality, that information dies. In the discussion of a smart electrical network, one thing that is critically important is the ability to transmit pricing information more widely and quicker.

In a true smart market, you would be able to price electricity down to the individual circuit, perhaps even the individual electricity using device. The reason for this is you might be willing to pay 1x for a light in your bedroom but the electricity running your dialysis machine might be worth 10x and the respirator might be worth 10000x. Right now such pricing information is impossible to transmit in all its complexity. Without a smart grid it will remain impossible to transmit or route. With a smart grid, the capability will grow until eventually, all of it can be captured and prioritized real time. If price rises can happen in real time, all of a sudden unreliable power systems create incentives for distributed generation because taking advantage of the blackout price spikes gets you much better ROI.

But how will such a grid be built? In a country with a static or shrinking population, the only mechanism is through replacement. Every year, meters go bad, lines exceed their lifetime and are replaced, and transformers die from various reasons and are also replaced. Replacing as you go is one realistic method. That might get you 1%-3% in yearly smart grid rollout. But in a growing country like the US, this is not the only mechanism. Every time a new subdivision is built, the electrical grid is extended. There is no reason that you couldn't make a central skeleton of a market and subdivision by subdivision, create smart grid subdivisions. Realistically, add another 1%-3% depending on housing conditions (and the US mania for destroy and rebuild).

The good news is that computing cycles are cheap and growing cheaper and thus an imperfect market can be created that will improve things even at a small scale. At first, trading could occur within the subdivision. As information spreads about the benefits of the smart grid more and more people would want to join to gain the benefits. Early adopters would be environmentalists who would want to do it for mother earth, tinkerers who like the engineering aspects (the geek value of taking part in such a project is off the charts), and power entrepreneurs who think they can make a bit of extra cash flow a month.

As the network grows it will reach a tipping point where network effects will explode into the national consciousness and it will become the next hot bubble. Like the Internet, the ultimate crash will also have virtually no effect on the positive engineering effects of that future bubble.

A few things about the smart network. The smart network is already partially here. For large industrial users, it's been here for some time. For mid sized businesses, they've come on board a bit more recently. This isn't a matter of subsidy but of simple business sense. If you have a need to generate power, there's simple sense in selling that power when the spot price exceeds your generation price.

But remember, market conditions have changed. It's no longer just about economic value. There are those who want to create panic, despair, and terror among us to achieve their goals. It's no longer acceptable to have a system that fails in such a stupid way, giving relatively small attacks the ability to create large effects.

How much money we invest in infrastructure improvements to get around this right now is a separate question but simultaneous to all the power improvements that need to be put into place to scale our dumb network out of its present crisis we need to start putting into place a smart network that will have smart failure modes. With smart failure modes we end up getting small attacks creating small effects. A resilient system will actually create a disincentive to attack at all.

Posted by TMLutas at August 17, 2003 10:53 PM