Electric industry restructuring: A continuing challenge for MIT


With the recent referendum votes in both Massachusetts and California that uphold each state's laws requiring the breakup of monopoly electric utilities, you might think that all the major economic, organizational, engineering and operational issues have been resolved. This is far from the case. While the "Yes on 4" media campaign here in Massachusetts emphasized near-term pocketbook issues, the longer-term impacts of the bill, both economically and environmentally, and with respect to long-term electric system reliability, are still unknown and deserve much attention.

To date, MIT faculty, researchers and alumni/ae have played major roles in both the call for competition and in its initial implementation. In 1984, Professors Paul Joskow and Richard Schmalansee (currently head of the Department of Economics and dean of the Sloan School of Management, respectively) published Markets for Power, a book that called for the breakup of monopoly utilities into separate generation companies and "wire companies" for transmission and distribution.

By 1988, the late Professor Fred Schweppe of electrical engineering and computer science (EECS) and his colleagues published Spot Pricing of Electricity, which dealt with the real-time dynamics of a cost as well as frequency and voltage responsive power system.

An MIT graduate, Jeffrey Tranen (SB 1968, SM) currently heads the California Independent System Operator (which assumed control of the transmission systems of that state's three investor-owned utilities), with new software systems developed by MIT alumni in the power systems division at Asea Brown Boveri.

Professor John Kassakian, head of the Laboratory for Electromagnetic and Electronic Systems, is on one of the advisory boards for the New England ISO, and of course numerous MIT faculty and researchers consult and advise a broad range of industry participants.

Unfortunately, these contributions have lagged behind the industry's transformation as regulators, lawyers and economic theorists create new markets for electric services which don't adequately address all the physical requirements of the system. As many power system engineers are quick to note, "You can't repeal Maxwell's laws of electromagnetics."

Furthermore, lawmakers have gone well beyond the competitive architectures discussed by Professors Joskow, Schmalansee and Schweppe, calling for competition at both the wholesale (generation) and retail (customer) levels. This past summer, several of these fledgling markets in California, the midwest and the mid-Atlantic have exhibited significant volatility and have subsequently come under federal scrutiny. Power systems do not operate as close to economic equilibrium as many regulators have assumed. Therefore, savvy market players may be able to take advantage of thin markets for reserve capacity and opportunities for cycle-by-cycle arbitrage.

These inconsistencies indicate that significant basic questions, balancing the laws of electromagnetism with those of economic efficiency, remain to be explored at both the operational and strategic levels. Much work remains to get wholesale generation and transmission systems to work properly under full, competitive "open access," as called for under the new laws. And significant technology and policy-related work is still required to make competition worthwhile for the individual consumer.

Also important is the informational architecture of the market, as generators respond to instantaneous price signals for energy and voltage support, and customers likewise respond to changing market conditions. With the correct information structure, high technology products -- for example, the next-generation Internet for computing and communication, and fuel cells and flywheels for distributed generation and storage -- will find valuable uses in the power industry of the future.

MIT is well positioned to assist industry in both these economic and technological transformations, but perhaps the most important challenge for the MIT community is to develop the highly interdisciplinary curriculum needed to synthesize these combined engineering and economic issues. Right now, the US electric industry and the companies that supply it with technologies and software systems are clamoring for graduates with a fundamental understanding of both the engineering and market-based issues surrounding such a technologically and economically dynamic industry.

INDUSTRY ECONOMICS

Traditionally, economics has looked at market and organizational structures as they pertain to economic efficiency. Traditional power systems analysis treats regional grids as complex large-scale networks with policy-dependent constraints and topologies. However, in the new competitive structure of the industry, technical and economic performance will both depend strongly on real-time computing, control and communications. Power systems may remain highly coordinated at the wholesale level, or they may become decentralized, driven by dynamic market agents and highly responsive localized technologies.

Developing robust solutions to the fundamental issues of competitive energy infrastructure design requires close collaboration between economists, power systems engineers, information technologists and organizational experts. MIT's extensive experience in interdisciplinary research and systems engineering positions it well for dealing with the basic issues of this complex topic.

Nevertheless, we will have to work deliberately and diligently to produce useful research solutions as well as to provide knowledgeableand experienced graduates. Indeed, the ultimate success or failure of Question 4 for all electricity users may depend on how well we prepare ourselves and our students. With the foresight of MIT's academic community, MIT should continue to lead.

Dr. Ilic, senior researcher in EECS, and Mr. Connors, former director of the Energy Laboratory's Electric Utility Program, are leaders of an industry-sponsored Energy Lab consortium, "New Concepts and Software for Competitive Power Systems." Dr. Ilic is also co-editor with Francisco Galiana (McGill University) and Lester Fink (KEMA-ECC Inc.) of the 1998 Kluwer book, Power Systems Restructuring: Engineering and Economics.

A version of this article appeared in MIT Tech Talk on November 18, 1998.


Topics: Economics, Energy, Environment, Environment and energy

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