Let's Talk Markets

Recently, the State of New Hampshire put out a long-awaited update to our ten-year energy strategy. This document is not binding in any way; no policies are set when it is released, and no policymakers are statutorily bound to following its dictums. But the document serves as a statement of where the Executive Branch would like to steer the state and can signal to regulators or legislators the types of policies the governor and his appointees would like to see.

That document signaled over and over that it wanted such policies to be based on “markets” (a word which appears 188 times in the document) and to be “cost-effective” (64 appearances). However, it has been observed that the strategy didn’t specifically identify any policies that would meet this criteria.

The issue is that the delivery of electricity is perhaps the single most highly regulated commodity in the US economy. Electricity saves lives. It provides the power for ventilators during respiratory pandemics, and air conditioners during heat waves. It is central to our economy, fueling manufacturers, tech start-ups and air compressors at construction sites. As such, around a hundred years ago we decided as a society that access to electricity should be as close to universal as possible, and not left to markets alone.

This being said, the electric industry in most of New England deregulated in the late nineties, and while the infrastructure to deliver it continues to be a state-sanctioned monopoly, there is competition for the electrons sold over those poles and wires. And we at Clean Energy NH have long believed that rationalizing and modernizing these markets will drive deployment of clean energy technologies.

As such, please allow me to volunteer a few ideas. Any state policymaker inclined to make energy cleaner and more affordable is free to pick these ideas up and run with them.

TRANSACTIVE ENERGY RATES

This idea has been kicking around for decades, having been developed and championed by the economists at MIT. When you get your electric bill, chances are, you’re charged a flat rate per kilowatt hour that you use. However, the price of energy fluctuates wildly throughout the day and the year, with the costliest hours coming during our summer peak. Because every piece of infrastructure on the grid needs to be designed to accommodate these peak needs, a rough shortcut is to understand that 10 percent of the hours of the year drive as much as 40 percent of the cost of our electricity.

So, why not charge people more for the hours that cost us more, and drive conservation in those few, peak times? This is the core insight of real-time, or transactive energy rates.

In fact, one such rate is already being piloted by the New Hampshire Electric Coop. For participants, every day at 4pm their devices receive a signal that contains the price of electricity during every hour of the day in the following day. This signal is encoded in an open-source format that any device can be configured to read. This would allow your hot-water heater, your thermostat, your electric car charger, or even your home battery to be configured to automatically respond to those price signals. Your water heater wouldn’t turn on if the price exceeded a certain amount. Your thermostat would automatically dial back the AC by a degree or two during the daily peak. Your backup battery or your two-way EV charger could even be configured to sell a few kilowatt hours back to the grid if the price is good enough.

The NH Electric Coop is actively seeking out partners to take advantage of this new rate. One early adherent is Generac, who has made a huge bet in the home battery space, and will now sell batteries that will come configured out of the box to respond to the Coop’s transactive rate. Another is Nuvve, a national leader in “vehicle-to-grid” electric car charging.

With these market-based rates, you could be paid for your backup battery or your electric vehicle. Every utility should offer them.

METERED ENERGY EFFICIENCY

I love energy efficiency: getting the same thing for less energy and money? What’s not to love? The problem, generally, is that we are not terribly rational when it comes to how we spend our money. We are primates that evolved based on a need for instant gratification, and investments that pay off over a 5- or 10-year period simply don’t jibe with our psychology. (Not to mention that the average American homeowner moves every 8 years and may not fully realize the payback for their improvements.)

These are just some of the reasons why people invest much less in energy efficiency than is economically rational, and we should find ways to encourage it.

However, our existing methods for handing out these subsidies are too burdensome. Contractors must follow formulaic methods that are prescribed by centrally administered utility programs. They run through check lists of what they must do to prove they complied with the program requirements, even if these steps are unnecessary or superfluous. Their methods are circumscribed by what the central planners think their methods should be.

A better approach would be to pay for performance. The energy performance baseline of a building could be established in advance, based on meter readings and fuel delivery records. A contractor could arrive and install improvements in a property, following the latest science or advancements in building trade knowledge, and then be paid based on the measured savings that a customer accumulated after the fact.

The administrative costs would fall, and we would incentivize contractors and homeowners to save as much as possible.

CREATE LOCAL ENERGY MARKETS

As mentioned above, over a hundred years ago we decided that provision of electricity was too important to be left to the markets. However, in the late 90s, we realized that while access to electricity should be universal, the energy sold over the poles and wires could be allowed to compete. Now we have thriving regional electricity markets that run an auction for who the lowest cost supplier of electricity will be every five minutes. There are also auctions run once a year for which power plants will be expected to be ready for peak demand days 3 years out, called capacity auctions. We have markets that determine who will provide voltage support and frequency regulation and spinning reserves.

But when it comes how that electricity is distributed locally, the markets end. Our distribution utilities (think Eversource, Liberty, and Unitil) make all the decisions when it comes to how we will manage our peak demand on hot days. These decisions set our electric rates.

This type of central planning does not need to be.

We could work with our utilities to turn themselves into Distribution System Operators. In this model, we would have our own, local markets. These markets would reward any resource that could reduce the amount of energy we used during the peak moments of each month, and the peak moment of the year. Batteries installed in homes as backup to the grid can do this, by discharging when prices are high. Solar arrays can do this, particularly if they are installed to point west, so they are generating later in the day when demand is highest. Energy Efficiency can do this since it reduces demand all of the time. And lastly, any customer can do this, because if they know that prices are high at certain moments, they can simply not turn on power hungry appliances.

THE LIMITING FACTOR

The only thing standing in between us and all of these “market based” ideas is that the utilities are still operating in a 1950s model, frequently with 1950s technology. Until the utilities begin to invest in technology that allow us to send price signals to individual customers—such as smart meters, or other networked controls—we be physically incapable of implementing any of the ideas laid out above.

This was a key limitation that was laid out in the “Grid Modernization” docket, which was opened at the Public Utilities Commission in 2015, investigated for seven years, and then closed this past spring with no substantive action.

In other words, to date, we’ve had a lot of talk about wanting “markets” to solve the problems of what may be the most regulated sector of the New Hampshire economy, but no action.

I personally hope this latest update to the 10-year energy strategy reverses that trend.