Performance Issues for a Changing Electric Power Industry

Home > Electricity > Electricity Publications > Performance Issues for a Changing Electric Power Industry

Performance Issues for a Changing Electric Power Industry

Available Formats

PDF (575 k)

Executive Summary

One of the compelling topics currently facing the electric power industry is the prospect of substantial change in its structure and organization resulting from more competition, similar to the dramatic changes which have taken place in the telecommunications and natural gas industries. Furthermore, while not related to changes in industry structure or organization, the January 1994 cold wave that resulted in the implementation of emergency actions, involving rotating consumer blackouts in the eastern United States, increased the awareness of electricity reliability issues. Together these two topics raise the question: Will the changing structure of the electric power industry affect reliability?

The U.S. electric power system is one of the most reliable systems in the world. Most disturbances that affect consumers are caused by adverse weather conditions affecting the electric distribution system. The cost of avoiding distribution system outages is very high. Greater reliability in the electric power system almost always comes at a cost. This report addresses the reliability of the bulk power electric system, which consists of electric generating plants and the transmission network.

Reliability Factors in a Changing Structure

Reliability for an electric system is, most simply, the extent to which consumers can obtain electricity from the system in the amount they want. In order to provide electricity to consumers in a reliable manner, organizations that generate and transmit electricity must ensure that the generating and transmission line capacities are adequate to meet demand. They must also ensure that the proper operating procedures for the bulk power system are followed. This report focuses primarily on the adequacy of the generating capacity for the bulk power system, particularly in view of the changing structure of the electricity industry.

One of the most commonly used measures in planning for adequate generating capacity reliability is capacity margins. Capacity margins indicate “the amount of generating capacity available to provide for scheduled maintenance, emergency outages, system operating requirements, and unforeseen electricity demand.” They offer one of the simplest indications of how much generating capacity would be available above the projected peak demand if all capacity were on-line.

The aggregate U.S. capacity margin (including both utilities and the grid-serving portion of nonutilities) has shown a declining trend since 1982, from 33 percent to 21 percent in 1993. Although this drop seems dramatic, the decline must be viewed in its historical context. In the 1970’s, the forecasted peak demand was much larger than the peak demand that actually occurred. Therefore, utilities had planned and built more capacity than was actually needed by the time the capacity was completed. This caused quite high capacity margins. Because of these higher margins, utilities were able to minimize the use of higher fuel cost generating units. However, these high margins were not necessary for the level of reliability deemed acceptable and in recent years have been declining towards more efficient levels.

As the industry evolves, the decision of what constitutes adequate reliability for a consumer may increasingly be made by the customers instead of the utilities. This may occur as customers are allowed to choose among suppliers, referred to as retail wheeling, and decide if they are willing to pay for backup capacity or have their service interrupted if their supplier is not able to provide sufficient electric power to the transmission network at any given time. As many as nine States are already considering retail wheeling legislation.

Some decisions about the planned level of reliability are already being ceded to the customer as the industry evolves. Utilities have long had programs that allow a small number of their customers to affect the level of reliability of their own electric power service. These programs all allow the customer to choose a set of conditions under which his electricity service may be interrupted. In recent years, particularly with the advent of demand-side management and cheaper metering costs, these programs have become more popular and have been extended to more customers. With the introduction of competition into the industry, the option of purchasing a desired level of reliability could be even more accessible to customers. It should be noted, however, that the responsibility for operation of the bulk power system needs to remain with some singular institution for the system to operate reliably (control areas now perform this function).

Along with more choices for the customer, other new factors will be introduced that influence the adequacy of supply and reliable operation of the system, including open access to the transmission grid, new markets for wholesale power, regional transmission groups to coordinate wholesale power transactions, and new technologies to meter electricity usage and communicate between utilities and their customers. Many of these factors are just taking shape, and their eventual form, as well as their effects on the industry, are not certain. With mandatory wholesale wheeling, the operation of the bulk power system has already become more complex.

Seminal Laws

These latest changes to the industry began with energy legislation passed in the late 1970’s. The Public Utility Regulatory Policies Act of 1978 (PURPA, Public Law 95- 617), which in part was intended to decrease the intensity of energy use in the United States, encouraged generation by nonutility suppliers. One of the effects of this law was first visible in the mid-1980’s when the nonutility share of total electricity generation began to grow rapidly. Subsequently, the Energy Policy Act of 1992 (EPACT, Public Law 102-486) was passed, with two major provisions that directly affect the structure of the industry: (1) the creation of a new class of electric power producers, termed exempt wholesale generators (EWGs), and (2) the broadening of the authority of the Federal Energy Regulatory Commission (FERC) to order the provision of electricity transmission services.Together these two provisions open up the industry so that virtually any business could generate electricity and sell it at wholesale. The business would be guaranteed an opportunity for transmission access since FERC can now order a transmitting utility to provide transmission service, including the building of facilities needed to provide transmission, at the request of any electric utility, Federal power marketing agency, or business generating electricity for sale at wholesale. No specific levels of reliability are required by EPACT, although it does direct FERC to adhere to industry guidelines.

Summary

The reliability of service to individual customers under retail wheeling will vary based on the reliability of their supplier and the conditions of their contract. To assure the reliable operation of the bulk power system as a whole, service to some customers may be interrupted when required based on the status of their supplier and/or contract conditions.

Most State proposals for retail wheeling eliminate the requirement for electric utilities to plan for adequate generating capacity to meet demand of all consumers in their service area. Back-up service to customers of other suppliers may be based on contracts. Service to customers that want to return to the utility may be based on providing prior notification.

It appears that the reliability of the electric system can be maintained as the new structure of the industry evolves. Historically, the reliability criteria for the electric power industry have largely been determined by electric utilities and the North American Electric Reliability Council (NERC) and its member organizations. NERC and other industry organizations are committed to maintaining reliable electricity service. However, the new structure will undoubtedly make the issue of reliability more complex, particularly with a greater number and diversity of electric generating facility owners.

Contact:: Suraj Kanhouwa; suraj.kanhouwa@eia.doe.gov; Phone: 202/287-1919