The New Business in Electricity

In the field of electricity, we know that there are three distinct businesses, generation -> transmission -> retailing (distribution). There are three prices: The wholesale price obtained by the generator, the price of transmission, and the retail price. There is now a new fourth industry: The business of energy storage.

Fossil fuel-based electricity production in India is waning. The financial system will generally no longer fund fossil-fuel plants. The mix of generation capacity is gradually moving in favour of renewables. This causes a problem because renewables production is intermittent. The sun does not shine in the evening peak, and the wind can be fickle. It is increasingly hard to make the reality of generation (that is intermittent) square with demand (which is relatively steady and peaks at an inconvenient time).

The standard solution of many traditional thinkers to this problem is a production unit which bundles storage and generation. This unit would look more like a traditional non-intermittent electricity generator. It would then fit better into the current system. But it is expensive.

Vimba Ply GIF

At heart is the role of prices. The insight that India needs to deploy in the area of electricity is the idea that prices fluctuate to clear the gap between supply and demand.

In the evening peak demand would drive up the price. This would create incentives for users of electricity to buy less. It is easy to have mobile apps that show the current price of electricity for each buyer. This will encourage buyers to switch off air conditioners when prices are high. In smart homes, ACs will switch off automatically when the price goes above a user-set level, or there will be a rule based on temperature and price that is chosen by each user. High evening prices will encourage firms to reorganise their shifts to align with the sun and have automated systems where production takes place when electricity is cheap.

With a modest pace of renewables investment, and the low pace of fossil-fuel investment, there will be major problems in the electricity system under conditions of strong economic growth.

Nobody knows the precise configuration of demand-side initiatives, storage, and renewables that will be the Indian energy system of the future. The price system knows how to discover the efficient answer.

Natural Natural