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[Episode #3] – Limits on the Grid – Part 2

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How energy markets need to change to level the playing field for renewables, how renewables should be valued, and whether wind and solar must "eat their own lunch" by virtue of having a free marginal cost, or whether markets can be adjusted to prevent that. And in the news segment: Shell gives up on the Arctic; the new premier of Alberta does an about-face on fossil fuels; and solar is even cheaper than most energy analysts think (because the data is old).

Guest: Bentham Paulos, Principal of Paulos Analysis and Director of the Power Markets Project

On Twitter: @benpaulos
On the Web: www.paulosanalysis.com  | www.powermarkets.org

Recording date: August 20, 2015

Air date: October 7, 2015

Geek rating: 7

Chris Nelder: Welcome Ben to the Energy Transition Show.

Bentham Paulos: Thanks for having me.

Chris Nelder: So we clearly have two distinct questions here about how solar and wind generators can get paid. How can they do it in the short term and how might the market design to change to accommodate a large share of the generation long term?

Bentham Paulos: Yeah, I think in the short term, that is when wind and solar are in relatively small amounts, that they can operate just fine in a traditional power market. I think as long as the merit order effect is not very big and the clearing prices in the market are set by other conventional generators that the price impacts on wholesale prices will be fairly small most of the time. I'd say that most wind and solar don't actually play in the spot market anyway at this point. They get paid through bilateral contracts like power purchase agreements or feed-in-tariffs in Europe and elsewhere. And that's true even if they are required to run their power through the market just for bidding purposes. But when they start to get bigger when wind and solar are a bigger share there will be more often more incidences when they actually set the clearing price and the prices will be low or even negative. They don't have to provide all the power in the market at those times, really just enough to run up against other inflexible resources, you know plants that don't get out of the way. Now that's most often I think nuclear plant, that inflexibility is a result of either technical reasons like they don't ramp up and down very well.

Chris Nelder: Just the design of the plant, right.

Bentham Paulos: But it can also be for grid support reasons when you need a plant in a certain location to provide support voltage and frequency support like reliability must run plant RMR plant. And then for financial reasons which I'd love to find out more about this actually but I suspect some plants simply have it in their contracts that they don't have to turn down that they don't have to respond to orders but I'm not really sure about that.

Chris Nelder: OK so in the long term, how might we expect markets to be redesigned so that they can accommodate a large proportion of renewables as prices get lower and lower and lower, I mean to the point where under the way that they're currently getting paid as spot market participants even wind and solar wouldn't be able to make money. So as we go forward what's the latest thinking on how markets might need to be redesigned in order to make sure that everybody gets paid as renewables get up to 60, 70, 80 percent?

Bentham Paulos: I think there hasn't been that much real world application of that problem because it hasn't really been an issue in many places. I think Germany is the closest to that and they're in the middle of a reform now to their markets. The Ministry of Economy, the Commerce Department essentially in Germany, has put out a white paper that lays out their proposals for legislation on how to reform the market. In Germany they have a very strong commitment to competition in the power sector which really only Texas I think is analogous to it in the U.S. where they really firmly believe in competition come what may. So there was a lot of discussion in Germany about adopting a capacity market where generators get paid just for being available in future years.

Chris Nelder: Even when they're not generating power.

Bentham Paulos: Right. Just simply to be available. And that's the system that we have in PJM, New York, New England. And which we do not have in Texas. Texas rejected that as an anti-competitive policy which was the result in Germany now too. The conventional generators we're pushing very strongly for a capacity payment of course. And it was rejected by the Merkel government in favor of a reform that basically has three elements which are quite a bit like Germany in some ways. The first is to eliminate price caps. There would be no price caps so that in those periods of extreme demand and that prices can go wherever they want.

Chris Nelder: Right. So if we suddenly go from $55 a megawatt hour to $2000 a megawatt hour so be it.

Bentham Paulos: So be it. And if you're producing, ka-ching you know, you're good. We've seen some of that in Texas this week with record power demand and prices shot up.

Chris Nelder: How far did they get up in Texas do you know?

Bentham Paulos: You know I need to look that up. I saw I think high hundreds maybe over a thousand dollars per megawatt hour.

Chris Nelder: Which is actually not unlike what happened in the northeast during the winter this year where you know we had spot power prices suddenly spike into $1500 per megawatt territory.

Bentham Paulos: Yeah exactly. Yeah. And the problem that comes out of that is that generators don't trust the politicians to allow that spike to happen. That if prices suddenly shoot up that it's going to be reflected on people's bills and people will get upset. And that's exactly what happened that winter. You know all of these customers in Pennsylvania and elsewhere had these market bills which they loved when prices were low and then suddenly they get a bill in this winter polar vortex, and the bill is suddenly five times what it was before. And of course they all screamed bloody murder and get off of those market exposed prices.

Chris Nelder: Yeah, but that's kind of the high end of the free market outcome right is when prices suddenly spike. But I think of more interest here is what happens when prices are so low because of all the renewables that nobody effectively is getting sufficiently paid.

Bentham Paulos: So the reform in Germany was really intended to address that. What happens when you don't make enough money when the wind blows and the sun shines. And part of it was point one to eliminate the price caps was to say that well you will get paid on these other periods, you might get paid a lot, and maybe you'll make up the revenues there. The second reform they've put out is to expose customers more clearly to market prices. They want smart meters on everybody's houses which they don't have now. They want real time pricing for large customers. They want much more demand response which they have very, very little demand response in Germany. And these will all be ways that the demand side can respond to market prices either low or high and participate in the process more.

Chris Nelder: So the idea being that if customers have the information to know that wind and solar cranking right now power prices are super low they would presumably increase their demand, shift their demand over to those low price periods and prevent essentially prices from falling too low.

Bentham Paulos: Exactly. And conversely they would respond to really high prices and prevent them from getting too high. So that's a very fundamental market mechanism that has been fairly lacking in Germany and really is lacking in a lot of markets really only the largest customers tend to play in that space. And small customers generally, they're not exposed to those prices. There's a debate in California now about exposing residential customers to time-of-use prices which aren't the same as real time, real time means actually what's happening right now in the market. Time of use prices means there are certain times of the day in the year that are tend to be higher demand therefore you will be charged more.

Chris Nelder: And they have established price bands at those different times of the day rather than being a variable on demand sort of price.

Bentham Paulos: That's right. So it's a simplified version of real time pricing because you know homeowners aren't going to sit around deciding whether to turn the TV on based on the power. But still the the movement in California now is to put everybody on time of use prices so that we will have more of a response. I think both to high solar production as well as to high price periods. So that's the reform in Germany is to really push more of that. The third element is to continue what they have, this thing they have called the capacity reserve which is about 5 percent of capacity will be set aside and actually given a capacity payment to be available in case they're called upon in emergencies and the emergency is high prices. So for political reasons they're putting about three gigawatts of lignite plants in that capacity reserve which is an odd choice you'd think for an emergency reply. Because you've got to fire up the boilers and everything and they're dirty as heck.

Chris Nelder: Well, lignite is pretty much the worst available fuel.

Bentham Paulos: Yeah, it's dirt that burns as they say but they did that for political reasons because the carbon emissions are too high in Germany. They wanted to shut them all down. But lignite is a domestic resource. And the politicians from the lignite fields had enough clout to prevent them from simply being shut off. So anyway those are the three elements they're looking at. What I haven't said is that they are also reforming payments to renewables. They've passed legislation last year to reform the feed-in-tariff program and introduce more competitive elements to it but that doesn't by any means involve simply exposing them to the market prices. The feed-in-tariff becomes essentially a target price. So for the renewable generators that sell into the market if they don't get paid enough they get a what's called a market premium to make it up back to their feet in tarriff price. It's I guess what you'd call a contract for difference in the UK they use that system. So it's essentially a variable subsidy.

Chris Nelder: But a variable subsidy with basically a floor.

Bentham Paulos: Yeah. It might be a ceiling too they might actually have to pay back money if they get paid too much in the market. Not sure about that. But the other competitive element that they're trying is to set the feed-in-tariff price through a competitive process in the first place. They have been setting it so far based on a sort of administrative ruling. They figure out how much a wind farm should cost and then they calculate the price and that's the price you get paid. Now they're planning more of a reverse auction approach which California has been using where the potential new generators would bid in to the feed-in-tariff market essentially and the least cost bidders would get awarded feed-in-tariff prices.

Chris Nelder: Well, OK so what about these other kind of newer proposals for essentially unbundling, I guess that's the term of art, all the different elements of providing power to the grid and allowing all different sorts of generators to get paid for those things independently. So there's the actual energy supply, and then there's the voltage regulation, frequency regulation, reliability all that kind of stuff. All of those things now become separate elements that generators can get paid for because it seemed to me that renewables can really benefit from that kind of provision because they're distributed right rather than centralised so what are your thoughts on how that unbundling concept might play into a future market design?

Bentham Paulos: Yeah, there are a lot of ways that prices can be unbundled. Certainly valuing it by location, that happens now through what are called locational marginal prices where you'll have within that region you'll have a bunch of nodes which will all have different prices based on supply and demand in that node. So there might be you know 30 or 50 sub-regions within a larger region all with slightly different prices and that's intended to reflect congestion.

Chris Nelder: It is now.

Bentham Paulos: It is now right.

Chris Nelder: Yeah, but I'm talking like 20-30 years from now. You know when we might even have 60, 70, 80 percent of renewable power on the grid wouldn't those kinds of payments potentially make sure that essentially there is a floor to the generation provided by renewables such that they're always going to be able to get paid for something?

Bentham Paulos: You know locational pricing, I think that's actually a tricky one for a wind or solar generator because it always reflects congestion. I think you would argue that putting a solar plant in a congested area you know a load pocket is a way to give it greater value because it reduces congestion but it only does that of course when the sun shines. You may still have congestion when the sun is not shining. So I'm not so sure about locational value. I think one big reform from an overall system perspective is to incentivize flexible dispatchable generation, incentivize flexibility. Right now the three primary products there's an energy payment which is the bulk of the money, there's a capacity payment in some places that we've talked about, and then there's the bundle of other things called ancillary services like frequency response and so on. There is no actual payment for flexibility. There are in a few places, California for example has a I think they call it a flexi-ramp where they offer greater payments to generators or load resources that can ramp quickly up or down. So that's an explicit payment for flexibility from resources that can offer flexibility. So the idea is that as you have more wind and solar on your system you may have greater ramp periods. Ramping means the change in net demand. So this is the famous duck curve issue in California where you get this very large early evening ramp as the sun starts to go down and demand goes up because everybody comes home and turns on their air conditioner so that California's summertime peak tends to be at like seven o'clock in the evening as the sun is starting to go down and solar power is reducing. So the net impact is that you have this very large ramp on some days from say 3 p.m. to 7:00 p.m.. So if you have an extra incentive for plants that can make that ramp and provide that ramping service that's a way to increase the flexibility of the system.

Chris Nelder: Interesting, so its almost an analog then of dispatchability isn't it, like if you're a conventional generator you can get paid for being able to dispatch at those times of suddenly rising demand. And this would sort of be an analog where you're getting paid for not necessarily dispatchability but for being able to respond.

Bentham Paulos: Yeah. So it's not just capacity, it's quick capacity, or the right kind of capacity. The right kind of dispatchability. You know that really needs to apply across the board, not just to power plants but also to demand response, to storage. Everything on the demand side should be able to play in that same market.

Chris Nelder: Well, I mean ideally you'd want the market structured however services are bundled or unbundled to be able to apply sort of equally to all sorts of generators right if you want a good competitive market.

Bentham Paulos: Yeah exactly.

Chris Nelder: So I mean how will we know that it's time to transition from the current sort of short-term compensation structures that renewables have to more of a long term market design.

Bentham Paulos: Yeah, I think the short answer is that when there's sufficient pain from the..

Chris Nelder: The obvious answer, maybe kind of a dumb question.

Bentham Paulos: From both the conventional and the renewable generators, when there is sufficient disruption you know like what we're seeing in Germany with the big four utilities there the combination of overcapacity in the European power market and these unique impacts of wind and solar are just destroying their revenues their generation revenues. So that was clearly a sign that things need to change.

Chris Nelder: Right. You know going back to this Hirth paper that seems to have kind of been the genesis, or at least in the recent chatter of a lot of these concerns about wind and solar kind of eating their own launch. There were several things, and I don't know if you dug into his model at all but there were several things about it that seemed really odd or even objectionable to me. The first being that it assumes a closed system which you pointed out in your article. So no electricity trade with other countries or systems is possible. Two, it only allows pumped hydro for storage so no battery or other storage systems are allowed. Three it assumed a deregulated energy only market so it forecloses on the payment structures like power purchase agreements which is as you pointed out how most of the generators for wind and solar are getting paid today, that it forecloses on that, and on any possibility that the storage or renewable energy systems might get paid for maintaining capacity or these ancillary services we discussed. So that's off the table. Four it assumes that when the generation of wind and solar is high that they'll be curtailed, just throw the power out rather than storing it with any kind of non-hydro devices or rather than allowing spot prices to go negative, which is an important market signal right and, five, only thermal generators, only the conventional fossil fuel and nuclear plants are given a full set of market valuations for their power so the very structure of Hirth's model seem designed to me to limit what renewables can do in the most restrictive possible way. And so the key finding that renewables will be a victim of their own success I thought was highly suspect, I mean did you have any of those same objections.

Bentham Paulos: You know I just got introduced to that research through the MIT Future of Solar paper and the subsequent stuff so I have not read his papers yet. I think there was a fundamental point of my article that, and maybe I just gleaned this through the MIT paper reflecting Hirth's work. The fundamental point of my essay was that the conventional market design where you have energy bidder's stacked up and the clearing price is awarded to them really is designed for dispatchable generation that responds to market prices. And it's such a fundamental part of the market that people don't even question it anymore, it's like questioning that the sun shines. But wind and solar are not dispatchable and they do not respond to market prices in real time. They produce generation when the sun shines and when the wind blows so they are absolutely square pegs in the round hole of a typical market design. And if you analyze their value based on a traditional market framework then they simply doesn't add up. It does not compute. And you get all of these perverse effects and that was the whole premise of my article that wind and solar need to be essentially taken out of that conventional market and whatever's leftover needs to be designed to facilitate wind and solar.

Chris Nelder: Either that or you just simply redesign the entire market so that everything works in a better fashion. Right.

Bentham Paulos: This is a very complicated question and I don't have the answer to this yet. But in general I think there should be two markets, the wind and solar market, which is where you use competitive forces to decide which projects to get built and where they should be built. And then there's the everything else market, the residual market, where dispatchable generation, demand response and storage and customer response all essentially compete to meet the residual load, the net demand market. I got to meet Reiner Baake last year and a couple of years ago, he was the founder of Agora Energiewende which is a Berlin think-tank, one of the leading analytical groups in Berlin, and he's now the deputy minister for the Merkel administration on energy. He's essentially the Energiewende secretary. And Agora put out a report a few years ago basically very simply describing what the findings of the Energiewende are, or what they looked like they were heading toward. And one clear finding was that wind and solar are the winners, that they're clean they're affordable and they're scalable and that really wasn't true with biopower, bioenergy they have very little hydro, fossil fuel with carbon sequestration is not really competitive. So fuel cells et cetera, it's really wind and solar that are the winners and the catch is that they are as I said they're dispatched by nature. They are not dispatched by prices. So what do you do? If you want a low carbon power system of the future you will need lots of wind and solar, and if you need lots of wind and solar you need to redesign your system to make sure that they succeed. I think what a lot of people are coming from, you know the criticism I've gotten for the article has been well but you have to respect the market forces and economic efficiency and blah blah blah. You know the Jesse Jenkins at MIT told me that I was confusing the means with the ends that the end is a low carbon energy system. Right. And the means that I'm saying are, oh its all about wind and solar. So what we want is a low carbon energy system. And what we should have therefore is a market design that would deliver low carbon at the least cost. But you know I think that doesn't respect the fundamental problem that wind and solar which are obviously big parts of the solution are simply not well-served by normal markets. You know markets are designed to deliver certain outcomes. Obviously a price responsive merit order dispatch market is designed for dispatchable power that responds to prices.

Chris Nelder: Well exactly. I think a lot of these complaints, or protestations about respecting the market basically means, don't you dare touch the way that the current market is structured. We must make everything else fit within that instead of saying maybe we need to redesign the market given the new supply that we know that we want. I've likened it to trying to bolt a new Lamborghini engine on the chassis of a Model T. It's is just kind of a dumb thing to do, you know I mean you could do it if you really had to. But if you want a high performance race car you actually design the chassis to fit the engine. It's kind of an obvious thing. But of course incumbents who benefit from the way that the markets are currently structured and who have built their entire businesses around them and are totally dependent on those businesses remaining with the existing business models of course don't want anybody monkeying with the design of the market. So a lot of this I think is sort of coded messaging.

Bentham Paulos: Yeah, I think it can be. I mean I wouldn't put you know Jesse Jenkins in that camp of trying to protect the incumbents I think, I think instead it's like I said it's such a basic fundamental way of thinking that economic markets are efficient and therefore the best way to accommodate carbon is to put a price on carbon in conventional market. And that's true up to a point. But I think with this problem that we have generators that don't respond to prices it doesn't really matter how much carbon you put on the price you know.

Chris Nelder: It doesn't matter what the price is either.

Bentham Paulos: It doesn't matter what the price is. I mean it does matter in terms of the investment decision. Certainly investors will need to anticipate future revenues before they put down their millions on a solar plant or a wind plant. But in terms of the operation the day to day operation of the grid it really doesn't matter what the price of carbon is. So that's what I mean it's such a square peg in a world of round holes.

Chris Nelder: Yeah, well of course the other half of this question is as we get into a higher renewables future what do we do with the essentially the stranded assets of the legacy conventional generators. How do we try to prevent undue losses for their owners as their units are squeezed out of the grid? What's the latest thinking on that question?

Bentham Paulos: Yes, stranded assets. That takes me back to the days of restructuring in the 90s when that was such a critical part of all of the political deals that were cut around moving to deregulated markets. There was just an enormous buy off, the conventional generators got bought off essentially to support the transition because rate payers paid for their plants in advance. We're seeing it again around the Clean Power Plan. Some utilities in recent years invested heavily in scrubbers and other pollution control devices on their old coal plants. Now that it's carbon that's being regulated. Some of those plants are under pressure to reduce carbon emissions, or you know their plant owners are, And they've just invested hundreds of millions of dollars in these conventional pollution control devices and they want to depreciate that investment over many years to come. So if you just put a billion dollars into scrubbers you want to run that plant for another 20 years right. And you run into this carbon problem from the Clean Power Plan. So you know I was just looking at Colorado and Wisconsin and Kansas are good examples here. In Colorado, Governor Ritter struck a deal five, eight years ago or so to shut down some Denver area coal plants and replace them with gas, efficiency and renewables. And it was a legislative deal. The result was, as it turned out that instead of investing in scrubbers for those plants, to clean up the you know the famous brown cloud in Denver. Instead of investing in scrubbers they invested in transitioning away from coal. Right. So meanwhile you switch to Kansas and Wisconsin. Those utilities made massive investments in scrubbers. Hundreds of millions of dollars...

Chris Nelder: Remain totally committed to coal.

Bentham Paulos: Totally committed to coal. Huge rate increases now to pay for those improvements. And guess what, now they're on the hook for carbon which those scrubbers didn't do anything about.

Chris Nelder: Yeah, because those scrubbers were designed to handle things like sulfur and excess NOx emissions and so on, the scrubbers aren't a solution to carbon emissions right. I mean you have to go to carbon capture and sequestration, and so far no one has figured out how to make that work commercially on a regular coal power plant. The only CCS projects I know of that are actually functioning are actually being able to sell that CO2 to some sort of secondary market usually for enhanced oil recovery. But you can't just put that on any old power plant anywhere and expect to be able to make the thing pay. It just doesn't work commercially.

Bentham Paulos: Yeah, well especially if you don't have a price on carbon, then your product is worth nothing. Yeah so the stranded investment, I mean most American coal plants are so old anyway it's hard to argue that they're stranded at this point. I think the average age is over 40 years old.

Chris Nelder: Yeah. I mean apart from these recent investments in scrubbers and so on, you would think that the plant would have been fully amortized by now.

Bentham Paulos: Yeah. So it would be interesting to see a calculation of how much has been invested in scrubbers and whether that scrubber investment is stranded. And frankly I bet some of these scrubbers cost as much as the plant did in the first place.

Chris Nelder: Probably. So I guess the question of how to make the investors in these conventional plants whole sort of remains to be answered.

Bentham Paulos: Yeah, I think one benefit of the move to more competitive markets is that it's really hard for a competitive power marketer to argue that their investment has been stranded because the whole point of deregulation was to put the risk of investment on the investor. So to me that implies that there is no regulatory compact that says an investor has to get paid for stranded assets.

Chris Nelder: No I think that's true. I mean hey that's capitalism. You know, you win you lose. But in kind of a broader context you would have to think that there's got to be some way to OK maybe investors in these conventional plants have to take some sort of a haircut. But you can't just try to wash them all out completely have all those investments go to zero because if that's the proposal from a policy standpoint you're going to have so much political resistance from the people that stand to lose all that money that you're basically not going to be able to get anywhere with your policy. So as a practical matter, yes it's capitalism. Yes. You pays your money you takes your chances and maybe some of the investors in those conventional plants do have to lose their money. But as a practical matter of policy formulation I think there ought to be some path to let them get paid a little something or at least limit their losses.

Bentham Paulos: Yeah. I don't know. I think it's not going to be nearly as much an issue as it was around restructuring in the 90s and 2000s.

Chris Nelder: Why is that? Well because like I said, the coal plants are old they're very old. They don't really warrant stranded asset payments except maybe for their scrubbers, and so many of the markets there have been so many investments in competitive generation that like I said have a hard time making the case for the stranded asset payment. You know frankly I don't think the transition to renewables is going to be so fast that people are going to get stuck with prematurely obsolete investments. It's certainly a steady transition but it's not going to be so shockingly fast that people are going to get stuck with relatively new plants. You know there are certainly exceptions. One big issue in Germany has been that the gas plants, the new high efficiency combined cycle gas plants are some of the least competitive plants on the market.

Chris Nelder: Because the price of gas over there is so much higher than here.

Bentham Paulos: Yeah the price of gas is high and the price of carbon credits is low. So you get these old stinky lignite plants that are doing just fine and beating the pants off of these new gas plants. So you know you could argue that the new gas plants are the stranded asset but it's not a stranded asset from any regulatory sense it's just that it turned out to be a bad investment so far.

Chris Nelder: Once again pointing to the need for market reforms that help you get where you're trying to go. I mean if where you're trying to go is let's get rid of the filthiest lowest grade of coal and go with cleaner burning gas and your market doesn't support that, then you probably need to change the way the market works.

Bentham Paulos: Yeah, exactly and they need to come up with a mechanism to create a higher carbon price. And that's very complicated because they're part of the European Union trading scheme and the EU doesn't like to have individual members messing around with the market. They want a free market across the continent that everyone competes fairly.

Chris Nelder: And even though the EU carbon market has been broken for years and people have constantly been talking about how to fix it. Far as I know there hasn't been any real action to make that work yet.

Bentham Paulos: Yeah. They need action on it that's for sure. I know there has been some talk about accelerating, I think it was intended to accelerate the ramp down on the cap but I don't know enough about it.

Chris Nelder: Now that's a whole, that's a whole complicated topic unto itself. We don't need to get into that today. So so far we've kind of discussed the economic limits of wind and solar as generation increases but there's also technical limits in terms of transmission capacity. How grid operators will keep the power flowing with larger amounts of variable generation on the grid, on-demand power from conventional generators, storage capacity and so on. I mean that's a kind of a whole another deep subject that we actually got into the last episode with McKay Miller but I just kind of wondered if you could share a few brief thoughts about technical limits in general, like how much can today's technical limits on renewable generation tell us about the share of generation that they might have 20 or 30 years from now?

Bentham Paulos: Yeah, I think the whole point of the power markets project was to look at the financial issues around integrating renewables especially wind and solar. The technical issues around integration I think are really fascinating. My sense is that they're much more well in hand, that grid operators are finding that it's really not that hard, that there are plenty of technical solutions, and that the technical solutions are cost effective and tend to increase reliability and lower costs. So a big example is in the Western U.S. which has something like 40 different balancing areas which is a relic of the old old days when every utility balanced their own system. There is a movement toward balancing markets, the energy imbalance market where utilities sort of share the balancing function. That's great for wind and solar because it helps integrate them in a much larger pool of demand but is also great for saving money because you don't need as many balancing plants, you don't need your own reserves, you just share reserves with your neighbor and you save a huge amount of money. It increases reliability because you have more through the power of statistics essentially you have a smoother demand curve essentially. So that kind of thing just makes a lot of sense from an operational perspective. And it also happens to be good for wind and solar.

Chris Nelder: And it basically creates a more efficient system.

Bentham Paulos: Yeah exactly. So you know we've seen the rest of the country has already moved toward bigger systems, our regional transmission organizations, RTOs. And you know I wouldn't be at all surprised to see some day that MISO in the upper Midwest would merge with the Southwest Power Pool in the lower Midwest. Because they're both integrating really huge amounts of wind power and that number is not going to slow down in the least bit because the wind resource is so good, the prices are so low and the economic development benefits are so profound. So we're going to see a huge amount of wind across the wind belt. I think the Lawrence Berkeley Lab put out the numbers about wind power costs recently and the recent costs have been like less than two and a half cents a kilowatt hour right.

Chris Nelder: Which is lower than coal.

Bentham Paulos: It's just shockingly low. It's lower than most existing plants. Already built plants, you know 40 year old plants.

Chris Nelder: 40 year old plants without any special equipment and all that stuff you know.

Bentham Paulos: So of course that includes the PTC. Production tax credit which may or may not be coming back. It looks like it might. There's been some movement recently. Anyway in the long run, wind is a cheap resource and we're going to see a lot of it. Solar is getting to be a very cheap resource and we're going to see a lot of it. But I think the integration tools that grid operators have at their disposal are sufficient to the task for many years to come, not only bigger balancing areas but also all of the demand side flexibility that's largely untapped at this point. More flexible generation as we retire coal plants and move to gas plants. Gas tends to be more flexible than coal. And frankly even nuclear retirements in some places are going to make for a more flexible power system.

Chris Nelder: And really all of that to me again is ultimately creating a more efficient system right. I mean you're essentially eliminating a huge excess of capacity that's just waiting around by making sure that your system is more finely tuned so that supply equals demand more closely and you're taking advantage of the lowest cost resource. Well I've said for a long time that there's really no technical reason why we can't have a very large percentage of renewables on the grid. It's really a question of human arrangements. It's a question of what we're willing to do as we design a 21st-century grid, get rid of a lot of old outmoded equipment and build something that's more appropriate as we move toward cleaner sources as we move to new market designs. Those are all human arrangements. There is no technology reason why it can't be done. Yeah. Well Ben it's been a fascinating conversation. I always enjoy talking to you you're so smart about this stuff and I really appreciate you taking the time to do it.

Bentham Paulos: Yeah. Frankly I feel like I'm learning on the job.

Chris Nelder: Aren't we all. I mean you know one of my main objectives here is to explore the questions that don't have obvious answers because this is a process, it's not clear defined path and we all kind of have to figure it out as we go. So always a pleasure to talk to somebody who's up to speed on stuff.

Bentham Paulos: Well thanks for having me on your show.

Chris Nelder: All right. Thank you Ben.