- Balancing / Balancing authority – Operationally, there are 66 U.S. "Balancing Authorities" that each operate a portion of the electricity grid, balancing supply and demand at all times and assuring that Federal reliability standards are met. Most balancing authorities are individual utilities who manage their own territories, while most of the total power flow is managed by seven larger regional entities formed by many utilities (ISOs or RTOs) that perform the balancing function. See the balancing authorities figure and our overview of the U.S. electricity system.
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- Baseload power – "Baseload" refers to the minimum amount of electricity needed over the course of a day (typically in the early morning hours); "peaking power" is the additional electricity needed to meet the demand as it changes throughout the day. Baseload power is mainly provided by coal or nuclear power plants, which must have near-constant output and cannot easily be ramped up or down, while the daily variation in demand is met with flexible (rampable) power sources like natural gas and hydroelectricity, and the peak demand (generally in late afternoon) is met by "gas peaker plants." However, as more and more variable renewable energy (solar and wind) comes online, it must be paired with flexible generation to match the daily demand curve. Besides natural gas and hydro, there are now other options, including energy storage and demand-side management. This video (3 min) visually shows why baseload power is no longer as useful as it once was for meeting the variable daily demand.
[RMI's assessment of baseload vs flexible generation] [top] - Co-op (Cooperative) – These are non-profit organizations that are owned by their members (electricity consumers within their territory) and are operated by an elected Board. Co-ops generally sign a long-term contract (often 40 years) with a wholesale electricity provider such as Tri-State Generation and Transmission in Colorado (which is itself a "G&T co-op" whose members generate electricity and/or own transmission lines). Local co-ops, which are generally rural, build and maintain the distribution network and set retail rates at a level needed to operate the network and buy the wholesale electricity. Unlike investor-owned utilities, rates are not regulated by the Public Utilities Commission. Tri-State "all requirements" contracts prohibit co-ops from generating more than 5% of their own electricity locally. All of Colorado's 22 electric co-ops accounted for 27% of the state's 2015 electricity sales (18% receiving their power from Tri-State G&T and 9% from all other wholesale suppliers). [Intro to co-ops]
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- Community Choice Aggregation (CCA) – Some states have authorized communities or other jurisdictions to choose an alternative electricity supplier and use their combined purchasing power to negotiate lower rates and/or cleaner energy sources on behalf of the residents and businesses in the jurisdiction. The electricity is still received through their local distribution utility that owns the "poles and wires." CCA programs exist in some but not all restructured states that allow retail consumer choice of electricity provider, although technically CCA could be implemented in vertically-integrated monopoly states like Colorado (but would certainly be opposed by the monopoly IOUs). Not all restructured states allow CCAs, and CCA program design differs between states.
[State CCA programs] [Our Illinois writeup] [CCA in California] [CCA in New York] [top] - Cost-of-service business model – Vertically-integrated monopoly utilities serve all customers in their territory, without competition, in exchange for accepting state regulation of utility resource plans and their allowed rate of return (profit), which prevents price gouging that would naturally result from monopoly power. The cost-of-service business model provides for a specified rate of return (usually 7% to 10%) on all capital investments (new power plants, transmission lines, etc.). This business model incentivizes utilities to maximize their capital spending (of ratepayer money) in order to maximize returns for investors. The model provides a "perverse incentive" to solve all grid problems with expensive infrastructure even when more cost-effective solutions (for ratepayers) may be available, such as demand-side management, energy storage, distributed energy resources including local renewable energy generation, and other "non-wires alternatives" (examples). Some forward-looking states like New York are exploring "performance-based" utility regulation where utilities are rewarded not for spending more ratepayer money but for saving money, saving energy by operating more efficiently, and implementing some of the above alternatives to large, centralized, capital-intensive projects.
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- Curtailment – Refers to preventing certain electricity generation from being put onto the grid when too much electricity is being produced (supply exceeds demand). Usually it is renewable energy (wind or solar) that is curtailed (wasted) because it is more difficult and expensive to "turn down" inflexible fossil fuel or nuclear power plants. Excess generation can also lead to negative pricing events. Possible alternatives to curtailing renewable energy include: 1) Expand wholesale markets so more customers have access to local excess production (example), which may require new transmission to be built; 2) Absorb excess generation using energy storage to "time-shift" the energy to when it is needed; or 3) Use demand response to make use of the extra energy when it is available. Curtailment is not all bad, as it drives economic solutions to use that energy more efficiently, plus it is normal on the grid to have excess capacity on standby in case a power plant or transmission line trips off suddenly.
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- Decoupling – Refers to a utility regulatory mechanism that separates a utility's revenue from its electricity sales volume (in kilowatt-hours, or kWh). The standard utility business model incentivizes selling as much electricity as possible to recover their fixed costs plus earn a profit; under this model, utilities have no motivation to encourage energy efficiency measures or rooftop solar generation that benefit customers by reducing their energy bills because these measures also reduce utility revenue. This is a classic example of a "perverse incentive." One decoupling approach is to adjust utility rates based on actual sales during the previous time period by an amount that allows utilities to recover their needed amount of revenue to cover costs and profit regardless of whether sales were higher or lower than predicted, so the utility no longer has an incentive to stand in the way of customers using less energy. As of late 2016, about 20 states have some form of electricity decoupling policy. Xcel Energy is set to begin partial decoupling in Colorado in 2017.
[Good explanation of decoupling] [Decoupling map] [top] - Demand response – Refers to various ways of reducing electricity demand on request, or shifting demand to a different time of day, usually to decrease the peak demand in late afternoon when people return from work, when power is more expensive and the grid is stressed. Demand response is also a way to better use variable renewable energy when its production is high (mid-day for solar; often nighttime for wind), by avoiding curtailment (wasting) of excess electricity generation. Traditionally, the supply of electricity is ramped up to meet peak demand by turning on expensive "gas peaker" power plants. One method of shifting demand is to incentivize large industrial or commercial customers to reduce demand during peak periods in exchange for compensation that benefits both the company and the power grid. Another newer method is to aggregate many small customers' discretionary and flexible loads like clothes drying, water heating, and electric vehicle (EV) charging and incentivize them to shift those loads to times of day when power is cheaper or renewable energy is more abundant. Hawaii is a leader in exploring demand response due to its high penetration of rooftop solar and its isolated grid. Demand response is one example of more general strategies for "Demand-Side Management (DSM)."
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- Demand-side management (DSM) – Refers to a variety of ways to shift electricity demand to a different time of day, usually to decrease the peak demand (often late afternoon, especially in summer), when power is more expensive and the grid is stressed, or to better use variable renewable energy when its production is high (mid-day for solar; often nighttime for wind). Traditionally, the electricity supply is adjusted to keep supply and demand in balance (by increasing generation), and it is a relatively recent innovation to focus instead on the demand side of the equation. Common methods of time-shifting demand include demand response (incentivizing customers to shift their big electricity uses to different times of day); using energy storage to absorb renewable energy when it is abundant and cheaper, then discharge it during times of peak demand; or increasing energy efficiency to reduce the energy demand required to perform a given task (examples: super-efficient LED lighting; Energy Star or better rated appliances; more attic or other household insulation; energy-efficient windows; etc.).
[more from Wikipedia]
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- Deregulation – Deregulation of the traditional electricity sector operated by vertically integrated monopoly utilities began with the Energy Policy Act of 1992, which eliminated obstacles to wholesale electricity competition and opened the door to retail-level competition and consumer choice. However, there are big differences between deregulation of the electricity sector and deregulation of other sectors like airlines or banking, because reliability of the critical electrical system can't be left entirely to market forces. The term preferred by experts is "restructuring," which refers more specifically to the breakup of monopoly utilities and introduction of competitive retail electricity markets that offer a choice of electricity provider, with robust and transparent market rules and proper oversight and enforcement.
[See "Restructuring or Deregulation?"] [top] - Distributed Energy Resources (DERs) – Unlike traditional electricity generation at large centralized power plants that are far from load centers (customers), DERs are smaller-scale generation and other energy resources that are located closer to customers. Distributed generation includes rooftop solar and community-scale solar installations, as well as local wind, geothermal, or hydroelectric generation. Non-generation DERs include demand response and other demand-side management resources like energy efficiency, battery energy storage, electric vehicles, and the "smart grid" hardware and software that facilitate their use. Individual DERs can be aggregated and used to manage the electricity supply and/or demand as an alternative to ramping centralized power plants up or down. California is a leader in competitive aggregation of DERs for grid management.
[more at Wikipedia] [top] - Distribution system – This is the low-voltage portion of the electrical system where customers ("loads") are located (cities, residences, businesses). Traditionally, electricity generation occurs in large power plants that are often far from loads, and is delivered to the distribution network over high-voltage transmission wires.
[See the Electricity Grid figure.] [top] - Energy storage – When electricity is generated and put on the grid, it must be used immediately. Supply and demand must be equal at all times or the grid will become unstable. However, excess electricity can be stored in various ways and then put back onto the grid when it is needed. Storage of large amounts of electricity has traditionally been accomplished with "pumped hydro," where excess electricity is used to pump water from a low reservoir to a higher reservoir, then when energy is needed, the water is allowed to flow back down to the lower reservoir through an electrical generator. More recently, lithium-ion and other types of batteries can be used to "time-shift" variable solar or wind energy from times of abundant production to times of peak demand. Other types of energy storage are also used for storage timescales of seconds or minutes (flywheels, supercapacitors) to hours or days (compressed air, hydrogen, various thermal methods, "train to nowhere," ice energy).
[Wikipedia summary | Energy Storage Association | Ramez Naam storage update] [top] - Flexibility – Refers to the ability of an electricity generation resource (or demand-side management resource) to quickly ramp-up or ramp-down as electricity demand changes in the evening or morning. While it used to be common to pair constant-output baseload coal or nuclear generation with more flexible natural gas or hydroelectric generation, it is becoming more important to pair variable renewable generation (solar or wind) with flexible generation, which reduces the importance of inflexible baseload generation.
[RMI's assessment of baseload vs flexible generation] [top] - Gas peaker plant – This is a flexible type of natural gas power plant that can ramp its electricity output up or down relatively quickly. Gas peakers are ramped up to meet the peak demand period that typically occurs in the late afternoon when people return from work. They are operated only when needed because they are less efficient and much more costly to operate than a "combined cycle" natural gas plant (see the energy cost comparison figure). The cost of a new gas peaker plant (16-21 cents/kWh) is now greater than the cost of meeting the peak demand by using battery energy storage (at 11 cents/kWh in 2016) to absorb abundant mid-day solar energy and then discharge it later during the peak demand period . In addition, various demand-side management methods can be used to reduce the peak demand as an alternative to increasing the electricity supply.
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- Generation – Refers to the production of electricity, which has traditionally occurred at large, remote, centralized power plants. The electricity is then delivered to customers located within the distribution system through high-voltage transmission wires.
[See the Electricity Grid figure.] - IOU (Investor-Owned Utility) – These are for-profit utility companies that are responsible to shareholders. Many, such as the two in Colorado (Xcel Energy and Black Hills Energy), are "vertically-integrated monopolies" that have been granted monopoly status over all aspects of electricity production and delivery for all "ratepayers" within their territory. They own electricity generation and/or purchase electricity from third parties, and they own the high-voltage transmission lines that transfer power over long distances, as well as the lower-voltage local distribution network. The retail electricity rates charged to customers are regulated by the Public Utilities Commission (PUC), and are set at a level that allows the IOU to recover their costs and earn a guaranteed profit on anything they build. This "cost-of-service" business model incentivizes IOUs to overbuild infrastructure as the solution to any need on the electricity grid (see "perverse incentive"). Colorado's two IOUs accounted for 57% of the state's 2015 electricity sales (53% for Xcel; 4% for Black Hills).
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- ISO (Independent System Operator) – An independent non-profit operator of a regional high-voltage transmission grid, formed by agreement among numerous utilities and other transmission owners who pool their transmission systems for greater efficiency and lower cost, and who provide open access to transmission resources by electricity generators and by retail electricity sellers. Often ISO is used as a synonym for RTO (Regional Transmission Organization). ISOs and RTOs also operate competitive wholesale electricity markets of several types. In "day ahead" markets, generators bid their electricity into the market, and the low bids are accepted up to the point that all anticipated demand is met. See our "Primer on ISOs and RTOs." Colorado does not belong to an ISO, but we need one here in the West.
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- Municipal utility – These are city-owned utilities, similar to electric co-ops in that they are publicly owned; they contract for delivery of wholesale electricity; they own and operate the local distribution network; they are typically non-profits; and they set retail rates as needed to cover the cost of operations plus wholesale electricity. Municipal utilities are typically governed by a City Council or appointed Board. They differ from co-ops in that there is more variation in how they acquire their electricity; their contracts with wholesale providers are often not as long as with co-ops; and some municipal utilities generate more than 5% of their own electricity. All of Colorado's 29 municipal utilities accounted for 15% of the state's 2015 electricity sales (8% for Colorado Springs, and 7% for all others). The City of Boulder has been working toward breaking from their monopoly investor-owned utility, Xcel Energy, by buying out their distribution system and taking control of their own electricity provision, but it has proven to be a contentious, litigious process (summary).
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- Non-Wires Alternatives (NWA) – As demand for electricity in an area grows, the safe electricity carrying capacity can be reached for the high-voltage transmission lines, the transformers that reduce the voltage for the distribution network, and/or the distribution lines that bring electricity to end-use customers. Rather than building more transmission or distribution lines or bigger transformers to increase the electricity supply, it is often more cost-effective to find "non-wire" solutions that instead decrease the demand for electricity and eliminate the need to overbuild infrastructure. Examples of NWAs include demand response and distributed energy resources (DERs) such as energy storage, energy efficiency, and local renewable energy generation. Some applications of NWA solutions include the California TAC campaign to remove a market distortion that disadvantages NWAs relative to building ever more transmission; cancellation of a transmission project in the Northwest; ice energy on Nantucket; and an open competition for NWA solutions in New York. Also see transmission congestion.
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- Perverse incentive – The utility "cost-of-service" business model often incentivizes a utility to make choices that are profitable for shareholders rather than choices that are more in the public (ratepayers') interest. Monopoly IOUs are incentivized to overbuild expensive infrastructure – meaning more centralized generation, more transmission lines, more distribution lines – because they earn a guaranteed profit on all investments, even if there are more cost-effective "non-wires alternatives" or even if the infrastructure is likely to become a stranded asset, as the costs will be borne by ratepayers rather than shareholders. If, instead, competing proposals were sought to meet grid needs, innovative new solutions that save ratepayers money could be considered. For example, rather than alleviating transmission congestion with expensive new transmission lines and substations, innovative companies could instead propose cheaper projects that address congestion by adding local renewable generation at the distribution level or by reducing the peak demand with a demand response program or a battery storage project that stores excess generation during a time of abundance and discharges it during the peak demand period. It is hard to see how perverse incentives can be eliminated without having retail-level competition, which implies the "unbundling" of vertically integrated monopolies.
Another example of a perverse incentive is the basing of utility revenue on electricity sales volume, as this eliminates a utility's motivation to promote energy efficiency or rooftop solar, options that are in the customer's interest by reducing their bill, but they also reduce utility revenue. This situation can possibly be addressed with well-designed "decoupling" policies that separate the utility's needed revenue from its electricity sales volume. [top] - Restructuring – In the late 1990s and early 2000s, many states "restructured" their electricity systems by ending utility monopolies (sole providers for a territory), and introducing competition into the retail sale of electricity. Vertically-integrated utilities – where a single utility controls the generation, transmission, and distribution of electricity – needed to divest most of their power plants and allow customers to buy electricity from competing third-party electricity suppliers (independent generators or power marketers). The intent of restructuring is to use competition to enhance customer choice and reduce costs. Under restructuring, some states like Texas allow individuals to choose their electricity provider and rate plan, while many states implemented choice at the community level, called "Community Choice Aggregation." Generally speaking, states are either "vertically integrated" or "restructured," depending on whether or not they have some sort of retail-level competition and consumer choice. Almost all restructured states (plus some others) belong to a "Regional Transmission Organization (RTO)" with competitive wholesale markets.
Restructuring is often referred to as "deregulation," but "restructuring" is the more accurate term preferred by experts. Deregulation implies more of a free-for-all with minimal regulation (like deregulation of the airline industry), whereas "restructuring" implies competitive markets with rules and proper oversight and enforcement, which is essential to prevent market fraud and manipulation of the type conducted by Enron in the early 2000s that brought restructuring to a grinding halt for years. Nonetheless, one often hears the term "deregulation" such as in this map of deregulated states that was valid as of April 2014.
["Restructuring or Deregulation?"] [top] - Retail choice / Retail competition – Retail competition means that residential or business customers have some level of choice of who provides their electricity. Retail choice is a characteristic of restructured (or "deregulated") states that have broken up vertically integrated monopoly utilities into separate electricity generation and electricity delivery companies. The transmission and distribution wires remain "natural monopolies," but the electricity itself is sold by power producers or third-party power marketers who are competing for consumers' business based on cost and energy source. In monopoly states like Colorado, ratepayers have no choice about the cost or source of their electricity.
Retail choice requires legislation that eliminates monopolies. There are 21 states or portions of states that have some form of retail consumer choice (map). Some states allow individual consumer choice; some only allow retail choice at the community level ("Community Choice Aggregation"); and some, such as Illinois, allow both.
[Our Illinois writeup] [Our Texas writeup] [top] - RTO (Regional Transmission Organization) – This is an independent non-profit operator of a regional high-voltage transmission grid, formed by agreement among numerous utilities and other transmission owners who pool their transmission systems for greater efficiency and lower cost, and who provide open access to transmission resources by electricity generators and retail electricity sellers. Often RTO is used as a synonym for ISO (Independent System Operator). ISOs and RTOs also operate competitive wholesale electricity markets of several types. In "day ahead" markets, generators bid their electricity into the market, and the low bids are accepted up to the point that all anticipated demand is met. See our "Primer on ISOs and RTOs." Colorado does not belong to an RTO, but we need one here in the West.
[map of RTO states] [top] - Securitization – This is a financing mechanism used to reduce the cost of compensating utilities for "stranded costs" they incur when a monopoly electricity system is restructured to introduce retail competition, costs such as uncompetitive power plants, or above-market long-term power contracts. The state Legislature authorizes issuing bonds to pay down the utility's debt, then ratepayers pay off the bonds over time through added charges on their bills. This is cost-effective for consumers because the bond interest rate (3% to 5%) is lower than the utility's cost of capital that ratepayers are already paying (7% to 10%). The lower interest rate results from the lower risk of state-authorized bonding. The securitization mechanism is also used in other circumstances besides restructuring where utility assets lose value and it makes economic sense to pay them off before they are fully depreciated, such as coal or nuclear plants whose operating costs exceed the value of the electricity they produce.
[Our stranded costs and securitization writeup] [top] - Stranded assets / Stranded costs – These are utility assets such as power plants that become uncompetitive and are taken offline before being fully paid off by ratepayers (customers). In monopoly IOU territory, ratepayers usually get stuck with the bill, even if it resulted from a bad business decision where one might think that shareholders should take the hit. Stranded costs often arise when a utility transitions from a monopoly "cost-of-service" business model to a market-based model with retail competition and consumer choice ("restructuring"). Stranded costs can also arise when a utility joins an RTO with a wholesale market, and some of their power plants become uneconomic when they must compete with other utilities for power dispatch.
[Our stranded costs and securitization writeup] [top] - Transmission system – The network of high-voltage power lines that connect traditional large centralized power generators to customers located within the lower-voltage distribution network. In states with an RTO or ISO, the transmission assets of multiple member utilities and other transmission owners are pooled for greater efficiency and charge a common tariff (rate) for use of the system.
[See the Electricity Grid figure.] [top] - Transmission congestion – Refers to a high-voltage transmission line that is near the limit of its electricity carrying capacity and cannot serve more customers unless changes are made. The traditional solution is to upgrade or build new transmission to carry more electricity, even though the congestion occurs for only a few hours per year during periods of peak demand (such as summer afternoons when all air conditioners are turned on). This solution often leads to expensive overbuilding for most times of the day and year. Overbuilding transmission is a common perverse incentive of the "cost-of-service" business model of vertically integrated monopoly utilities, because they earn profit only on their infrastructure investments. However, rather than increasing the supply of electricity, it is often possible to address congestion with Non-Wires Alternatives (NWA) that reduce the demand for electricity more cost-effectively. This frees up capacity on the transmission lines and prevents the need to build new capacity but is less profitable for utility shareholders. In addition, many markets don't have a mechanism for NWAs to compete against new transmission as a solution to congestion.
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- Unbundle – Refers to separating a vertically integrated monopoly utility's electricity generation business from the business of delivering electricity over its transmission and distribution networks ("poles and wires"). Many states that have restructured electricity markets with retail consumer choice of electricity provider have required these investor-owned utilities to divest their electricity generation to a separate company to ensure fair competition between retail electricity providers (generation companies or third-party power marketers). The poles and wires remain "natural monopolies."
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- Vertically integrated monopoly – This is an investor-owned utility (IOU) that owns all three components of electricity provision (generation, transmission, distribution), and has been granted monopoly status to serve all customers in their territory in exchange for having their retail rates and planning process regulated by the Public Utilities Commission. They operate under a "cost-of-service" business model where they are reimbursed through customer revenue for all expenditures to provide electricity service, plus a guaranteed percentage profit. This business model can lead to "perverse incentives" to maximize expenditures (and hence customer rates). Colorado's two monopoly IOUs are Xcel Energy and Black Hills Energy.
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- Wholesale market / Wholesale competition – Refers to competitive bidding markets for bulk electricity sales to utilities or power marketers in over 30 participating states. Wholesale competition requires belonging to a Regional Transmission Organization (RTO), which operates a regional transmission grid as well as a wholesale market where electricity generating companies bid their generation into the market to meet electricity demand and the lowest bids win. A wholesale market picks the most economical bidders from among competing electricity generating companies that use different energy sources and technologies.
Some of the states with wholesale competition also allow retail competition (consumer choice of electricity provider). Establishing competitive wholesale markets is generally a first step on the path to retail competition. Colorado is a vertically integrated monopoly state that allows neither wholesale nor retail competition (see map of RTO states and map of open market states). The current trend in states with RTOs and wholesale markets is that coal and nuclear power are being priced out of the market by lower-cost natural gas and increasingly by wind and utility-scale solar whose costs continue to decline (see energy cost comparison figure).
[See "How the Price of Power Is Set" (Forbes article)] [top]