"Competition is Good!"
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Terms and Definitions
Any discussion of the electricity system likely involves words or acronymns that need to be defined, such as these.
(Links that are NOT underlined go to another definition on this page; underlined links go to a different page.)
- Co-op (Cooperative) – One of the 4 groupings of electricity consumers, the others being investor-owned utilities, municipal utilities, and public power providers. Co-ops are non-profit organizations that provide electricity to their member-owners, generally in rural areas. They are self-governed, and usually buy power under long-term or very-long-term "all-requirements contracts". Colorado has 22 electricity co-ops that are served by Tri-State Generation and Transmission (which is itself a "G&T co-op" of generation and transmission owners).
[Intro to co-ops]
- Community Choice Aggregation (CCA) – Some states have authorized communities (or other jurisdictions) to choose an alternative electricity supplier and use their combined purchasing power to negotiate lower rates and/or cleaner energy sources on behalf of the residents and businesses in the jurisdiction. The electricity is still received through their local distribution utility. CCA programs exist in some but not all restructured states with retail choice, although technically CCA could be implemented in vertically-integrated monopoly states like Colorado (but would certainly be opposed by the monopoly IOUs). Not all restructured states allow CCAs, and CCA program design differs between states. [State CCA programs] [Our Illinois writeup] [CCA in California] [CCA in New York]
- Curtailment – Refers to preventing certain electricity generation from being put onto the grid when too much electricity is being produced (supply exceeds demand). Usually it is renewable energy (wind or solar) that is curtailed (wasted) because it is more difficult and expensive to "turn down" inflexible fossil fuel or nuclear power plants. Excess generation can also lead to negative pricing events. Alternatives ("fixes") for curtailed renewable energy include: 1) expand wholesale markets so more customers have access to local excess production (example), which may require new transmission to be built; 2) absorb excess generation using energy storage to "time-shift" the energy to when it is needed; or 3) utilize demand response to make use of the extra energy when it's available. Curtailment is not all bad, as it drives economic solutions to use that energy more efficiently, plus it is normal on the grid to have excess capacity on standby in case a power plant or transmission line trips off suddenly.
- Decoupling –
- Demand response –
- Deregulation – Deregulation of the traditional electricity sector operated by vertically-integrated monopolies began with the Energy Policy Act of 1992, to eliminate obstacles to wholesale electricity competition and open the door to retail-level competition. However, there are big differences between deregulation of the electricity sector and deregulation of other sectors like airlines or banking, as reliability of the critical electrical system can't be left entirely to market forces. The preferred term by experts is "restructuring", which refers more specifically to the breakup of monopoly utilities and introduction of competitive retail electricity markets that offer a choice of electricity provider, with robust and transparent market rules and proper oversight and enforcement.
- Distributed Energy Resources (DERs) –
- Distribution system – The low-voltage portion of the electrical system where customers ("loads") are located (cities, residences, businesses). Traditionally, electricity generation occurs in large power plants often far from loads, and is delivered to the distribution network over high-voltage transmission wires. [See the Electricity Grid figure.]
- Distribution System Operator (DSO) –
- Energy storage –
- Generation – Refers to the production of electricity, which has traditionally occurred at large, remote, centralized power plants whose electricity is delivered to customers located within the distribution system via high-voltage transmission wires. [See the Electricity Grid figure.]
- IOU (Investor Owned Utility) – A for-profit utility company that operates to maximize profits for shareholders. Most are "vertically-integrated monopolies". Colorado examples: Xcel Energy, Black Hills Energy.
- ISO (Independent System Operator) – An independent non-profit operator of a regional high-voltage transmission grid, formed by agreement among numerous utilities and other transmission owners to pool their transmission systems for greater efficiency, lower cost, and to provide open access to transmission resources by electricity generators and by retail electricity sellers. Often ISO is used as a synonymn for RTO (Regional Transmission Organization). ISOs and RTOs also operate competitive wholesale electricity markets of one flavor or another, in many of which (like "day ahead" markets) generators bid their electricity into the market and the low bids win. This is a core concept for Energy Freedom – see our "Primer on ISOs and RTOs". Colorado does not belong to an ISO, and we need one here in the West.
- Municipal utility ("muni") – Many cities own their distribution network ("poles and wires") and provide for their own electricity provision. The city government enters into agreements with electricity providers, but maintains responsibility for system maintenance, billing, etc. There are 29 munis in Colorado, the largest being Colorado Springs Utilities. The City of Boulder has been working toward breaking from the IOU Xcel Energy, meaning buying out their distribution system and taking control of their own electricity provision, but it has proven to be a contentious, litigious process (summary).
- Non-Wires Alternatives (NWA) –
- Perverse incentive – The utility business model incentivizes utility choices that are profitable for shareholders above choices that are more in the public (ratepayers') interests. Monopoly IOUs will choose expensive infrastructure solutions every time because they are guaranteed 10-15% profit on all investments, even if there are more sensible alternatives or if the infrastructure is destined to become a stranded asset, as the costs will be borne by ratepayers. If instead competing proposals were sought to meet grid needs, innovative new solutions that save ratepayers money could be considered. For example, rather than alleviating transmission congestion with hugely expensive new transmission lines and substations, innovative companies could instead propose cheaper projects that address congestion by either adding local renewable generation at the distribution level, reducing peak demand with a demand response program, or implementing a battery storage project. It's hard to see how perverse incentives can be eliminated without having retail-level competition, which implies the "unbundling" of vertically-integrated monopolies.
- Restructuring – In the late 1990s and early 2000s, many states "restructured" their electricity systems by ending utility monopolies (sole providers for a territory), and introducing competition into the retail sale of electricity. Vertically-integrated utilities – where a single utility controls the generation, transmission, and distribution of electricity – divested most of their power plants and allowed customers to buy electricity from competing third party electricity suppliers (independent generators, or power marketers). The intent of restructuring is to use competition to enhance customer choice and reduce costs. Under restructuring, some states like Texas allow individuals to choose their electicity provider, while many states implemented choice at the community level, called "Community Choice Aggregation (CCA)". Generally speaking, states are either "vertically integrated" or "restructured," and the difference is whether or not they have some sort of retail-level competition and consumer choice. Almost all restructured states (plus some others) belong to a "Regional Transmission Organization (RTO)" with competitive wholesale markets.
Restructuring is often referred to as "deregulation", but 'restructuring' is the more accurate term preferred by experts. Deregulation implies more of a free-for-all with minimal regulation (like deregulation of the airline industry), whereas 'restructuring' implies competitive markets with rules and proper oversight and enforcement, which is essential to prevent market fraud and manipulation of the type conducted by Enron in the early 2000s that brought restructuring to a grinding halt for years. Nonetheless, one often hears the term 'deregulation' such as in this map of deregulated states that was valid as of April 2014.
- Retail choice –
- RTO (Regional Transmission Organization) – An independent non-profit operator of a regional high-voltage transmission grid, formed by agreement among numerous utilities and other transmission owners to pool their transmission systems for greater efficiency, lower cost, and to provide open access to transmission resources by electricity generators and by retail electricity sellers. Often RTO is used as a synonymn for ISO (Independent System Operator). ISOs and RTOs also operate competitive wholesale electricity markets of one flavor or another, in many of which (like "day ahead" markets) generators bid their electricity into the market and the low bids win. This is a core concept for Energy Freedom – see our "Primer on ISOs and RTOs". Colorado does not belong to an RTO, and we need one here in the West.
- Stranded asset – This is a utility asset like a power plant that becomes uncompetitive and is taken offline before it is paid off. In a monopoly IOU's territory, ratepayers (customers) usually get stuck with the bill, even if it resulted from a bad business decision where one would think that shareholders should take the hit (a testament to monopoly power!). For example, Xcel built one of the last new coal plants in the country (Comanche #3 in Pueblo) for $1.1 Billion, where they are guaranteed 10-15% profit (see "perverse incentive"), even though the plant would already be uncompetitive if we had competition in Colorado. It will certainly become a stranded asset long before its planned 2070 end-of-life is reached.
- Transmission system– The network of high-voltage power lines that connect traditional large centralized power generators to customers located within the lower-voltage distribution network. In states with an RTO or ISO, the transmission assets of multiple member utilities and other transmission owners are pooled for greater efficiency, and charge a common tariff (rate) for use of the system. [See the Electricity Grid figure.]
- Transmission congestion –
- Unbundle –
- Vertically-integrated monopoly – This is an IOU that owns all 3 components of electricity provision (generation, transmission, distribution), and has government-granted monopoly status to serve all customers in their territory in exchange for having their retail rates and planning regulated by the Public Utilities Commission (PUC). This business model can lead to "perverse incentives". Colorado examples: Xcel Energy, Black Hills Energy.
- Wholesale market –