MeanGene Rants 22
April 2002
In honor of
Earth Day, we offer insight into one new gadget, and a few follow ups to
previous stories.
http://www.internalcommand.com/commander.html
Faithful
reader Matt Galla has donated a few copies of The Battery Man magazine (yes,
that's a real magazine) and the most interesting article has to be about
"tinkerer" Bud Nelson who has developed a generator that produces
electricity whenever the water flows in your house.
Here's
how it works. Take water coming in from the city's water line at 65 psi. Then
flush the toilet, or turn on the sink, shower or washing machine. The water
flows through the system generating 550 Watts of electricity at 15 volts, and
comes out at 20 psi. It may take longer to fill your washing machine, and your
lawn sprinklers may not shoot as far, but otherwise, says, Bud Nelson, you
probably won't miss the extra pressure.
The
electricity can be stored for when it is needed using a battery. The inventor
claims it could provide enough electricity for basic lighting, TV and computer
use for a small family. The company website is only claiming a 10% reduction in
your electricity bill. But they do claim that the generated electricity is
free.
Is it
really free? If you don't mind the water pressure drop, it does appear to be
free. Cities and states do expend a lot of energy pumping water up to towers,
reservoirs or across entire states in the case of California. But using a
device like "System III" from Internal Command International (does
this sound like a space ship or a water system?) does not require the water
utility to increase its pressure.
For many
people, home water pressure is too high. The pressure is mostly determined by
the height of the local water tower, which is chosen for fire hydrants, the
tallest buildings in the city, or in the case of reservoirs, the height is
chosen by geological considerations. So given that the water is already sitting
at a certain height, if it is coming into your house at a higher pressure than
you need, then it seems like this lunch is already paid for, if not
"free".
(On a
personal note, ever since I replaced the old galvanized plumbing that was
nearly corroded shut with new copper pipes, my water pressure at home is
insanely too high. I can't turn the sink on all the way or I get water all over
the kitchen. On the other hand, the pressure in my garden hose is high enough
that I can strip the paint off the house if need be. Now that's handy. :)
On the
subject of Wind Power, one reader writes "when I think about wind energy,
I think about how many square miles of really ugly wind turbines I will
see."
These
studies gets to the heart of the Not In My Back Yard debate for existing wind
power systems. Wind power has the highest level of acceptance of all energy
production forms, but also the highest level of "NIMBY" rejection. http://www.windpower.dk/articles/surveys.htm
http://rotor.fb12.tu-berlin.de/design.html
This
article shows how a group in Cape Code is trying to get their proposed offshore
wind farm accepted. http://www.nytimes.com/2002/04/16/science/earth/16WIND.html
And Mean
Gene adds this thought. If I own a piece of land and erect a giant billboard
that will be visible by thousands of people everyday, aesthetically speaking,
how is that different than if I own a piece of land and erect giant windmills
that will be visible by thousands of people everyday? And which would you
rather look at?
On the
subject of California's electrical markets, an economist with intimate
knowledge of some of the legal proceedings between CA and various energy
companies explains that power markets are pretty complicated. If you trade
financial options, this will be write up your alley.
"Most
discussions about the price of power in California focus on real-time or
spot-market prices. In fact, most power is bought well before production and at
prices that are much less volatile than those in real-time. However, for
reasons only clear to those who made the rules, companies that delivered power
to California consumers were forced to buy much of it in spot markets.
Spot
markets for power take place hours and days ahead of production, with parties
bidding in supply and demand curves for delivery in time frames as small as ten
minute intervals. Furthermore, spot sales of power come in many forms, based
upon engineering realities related to maintaining a steady flow of power that
react to real-time fluctuations in consumption.
Power
bids are region specific, with three primary delivery regions in California.
Congestion on the power grid in real-time results in ex-post charges and
credits to market participants resulting from the cost of additional generation
needed to balance the grid when congestion occurs. In short, there is no one
price of power -- either across time intervals as small as a few minutes or
even in an instant. These markets are complicated and really only meant to
balance supply and demand in the face of fluctuating consumption.
The cost
of power in the spot markets is only important to the extent that buyers and
sellers participate in these markets. Unfortunately for California, power
delivery companies were buying huge amounts of power in spot markets due to
restrictions on forward contracting. This meant that parties were selling large
amounts of power into spot markets in order to meet demand. Interestingly, many
of these parties didn't produce power at all, but rather held long positions acquired
through forward trades with power producers (who, prudently, did not sell all
of their production in spot markets, but had hedged their positions years into
the future). In fact, power generators often are net *buyers* in spot markets,
as they cover hedged positions, and even as they actually run their plants in
real-time. To buy massive quantities in spot markets is and was a gross error
that ignored limitations of these markets and could only inject price
volatility.
Gas-turbine
power generation determined most of the prices in spot markets in California
during the problematic May to December 2000 period. In fact, these gas plants
are generally the plants that determine marginal prices for power as they are
the most expensive (and most flexible) source of power. Nonetheless, owners of
gas plants transact heavily in forward markets where power is bought and sold
several years ahead of production. By practical and economic necessity, nuclear
and hydro production are not sold in real-time.
Gas
plants, as the name implies, burn natural gas in order to heat water and
produce steam which spins turbines. As a result, the cost of natural gas is the
primary driver of marginal cost for a gas plant. But, other important factors
remain. Owning a gas plant is like owning a forward put option - you can sell
power in the future at the then-determined price, with a strike price equal to
the cost of gas plus other incremental costs. Maintenance and environmental
limitations effectively limit the extent to which the owner can choose to
exercise the option.
With gas
plants filling in the gaps as demand for power rises, it is easy to see that it
doesn't take a large increase in demand to result in large increases in price.
Naturally, the most efficient gas plants come into play first, and then less
efficient plants spin up as demand rises. At some point, however, the marginal
plant gets extremely expensive. First, the marginal plant may be very
inefficient (imagine a jet-fuel powered plant that is 30 years old and cranking
out huge amounts of pollution - yes these things exist and were running in the
summer of 2000).
Second,
recall the option value of a power plant and think about the economic cost of
running it when doing so means more maintenance in the future and consumption
of scarce polluting rights. In short, to run today means foregoing the option
to run some time in the future. With high volatility in prices, the loss of the
option to produce in the future could be a very large loss indeed. All of this
means that the supply curve for power in real time is basically flat, to a
point, then it drifts upward and then very suddenly turns almost vertical. In
short, there are levels of demand for power such that a very small increase in
demand can result in very large increases in price, and all for good economic
reasons.
Add to
all of this one more point: buyers of power stopped paying their bills in late
2000 and early 2001 and this was not unexpected. So, for sellers, factor in a
price increase that offsets the probability of not getting paid, understanding
that this probability is increasing with your (and everyone else's) increased
prices."