To upgrade California's energy marketplace with more efficient trading paradigms, College of Engineering researchers are looking to Wall Street for ideas.
"The wholesale prices behave like a free market but the retail prices are essentially frozen, so retail customers don't experience what the commodity really costs," says Professor Shmuel Oren of UC Berkeley's Department of Industrial Engineering and Operations Research.
Oren, with electrical engineering professor Pravin Varaiya and other UC Berkeley researchers, are hoping to "upgrade" California's energy marketplace with more efficient paradigms. To hash out fair rules for a next-generation energy marketplace, the team is borrowing trading techniques from the stock market.
For example, Oren explains, take the "options" model found in any commodity market. With this system in place, utilities could sell energy to industrial consumers and then "buy back call options allowing them to interrupt your power when spot prices exceed some agreed upon level."
With CITRIS Smart Energy technology and the much-discussed real-time pricing of power in place, he explains, consumers will finally have a say in how much they're willing to pay for electricity at any given moment. Indeed, wholesale suppliers will lose sales volume unless their prices balance with the retail demand.
Hal R. Varian, Dean of UC Berkeley's School of Information Management and Systems and a collaborator on the College of Engineering's energy endeavors, outlined the need for real-time pricing in a New York Times Op-Ed last month.
"Economics teaches us that the structure of prices should reflect the structure of costs," Varian wrote. "Electricity generation is characterized by low marginal costs of production until plants are near capacity, at which point marginal production costs soar… The best way to deal with this sort of cost structure is with real-time pricing, in which prices are higher when the system is operating near capacity and lower during off-peak periods."
According to the CITRIS white paper "Smart Energy Distribution and Consumption," as little as a one percent load reduction due to demand response, can lead to a ten percent reduction in wholesale prices, while a five percent load response can cut the wholesale price in half. In other words, the demand responds to the price and vice versa.
"Economists understand market forces, but you need market engineers to control those forces," Oren says.
Oren plays out his scenarios with traditional mathematical analysis and computer simulations but also in mock energy auctions involving students. With colleagues at Cornell University, he creates auction environments where students are given imaginary generators with differing operational costs. The students win actual dollar prizes based on how much profit they can earn from their power sales. Meanwhile, the researchers search the student's methods of competition for "gaming opportunities" that could also be used by utilities in the real world to drive up prices artificially.
"It's all about trying to facilitate the invisible hand of the market in the context of electricity," Oren says. "How do you design the right pricing so that there's incentive to build more power lines and generators when they're needed?"
CITRIS: www.citris.berkeley.edu
White Paper: "Smart Energy Distribution and Consumption:" www.citris.berkeley.edu/SmartEnergy/SmartEnergy.html
"FAQ About Implementing Real-Time Electricity Pricing in California for Summer 2001" from the University of California Energy Institute: www-path.eecs.berkeley.edu/ucei/Recent_Presentations/recent_present.html
