When you walk through the doors of the museum here in Melbourne, there is a gigantic entrance hall which contains the entire skeleton of a blue whale. Walking throughout the Museum, there are dinosaurs and insects, there are gemstones of translucent purple, milky blue, and a thousand other colours. There is an entire native rainforest in a room, with actual plants and trees and a pond full of fish. There is an extraordinary kids play room, with rope ladders going up a series of tunnels to a succession of rooms which go over your head and then back down again to the ground. It takes 20 minutes for a child to crawl from one end to the other, so if you see your kids up there halfway through it, there is nothing to do but watch them and hope they don’t get stuck.
One of my favourite exhibits is the giant extinct wombat, diprotodon.
They were the size of a delivery van, and in life would have weighed over two tons. I like to think about herds of these giants, gently grazing over the western grasslands of Victoria. Imagine golden fields of grass at the end of summer, the long stems waving in the breeze, the sandstone hills of Arapiles in the background, and giant diprotodon thoughtfully chewing on the grass. Several artists have tried to draw what they might have looked like – which is basically a giant wombat, albeit with longer legs (in proportion) than modern day wombats. My favourite illustration is this one by Peter Trusler (link) for the happy smile the artist gave the diprotodon. Trusler also made a beautiful illustration of a palorchestes, another extinct Australian mammal with a long,flexible nose. Here is a interesting video where he talks about the illustration at the Museum’s website here (link).
In part 1 of this article, I wrote about the importance of demand response in the electricity industry – i.e., why power companies might choose to pay customers to use less electricity at certain times. Here, I discuss what the right price for demand response would be, and a recent US Supreme Court case over the fundamental economic principles of that price – including the question of whether reducing consumption was equivalent to generation.
When companies offer demand response programs, the offer needs to be simple, compelling and easy to understand for customers. Demand response is typically used only a few times per year, so it is not worth customers spending the time and effort to learn a complex price scheme.
You might also ask, what is the point of demand response as a separate scheme? We already have a wholesale market. If the price gets very high, then people will reduce their consumption. There is more that can be said on this, but one point of separate demand response schemes is to target customers who are not able, or not interested, to respond to wholesale market prices in real time. So demand response schemes are offered in different ways that make sense for different customers. In part 1, I described a scheme to pay people cash up front in return giving the distributor Energex the ability to remotely turn down their air conditioner at certain times. Another example will be trialled by the retailer Powershop this summer, supported by The Australian Energy Market Operator (AEMO) and Australian Renewable Energy Agency (ARENA). Powershop will use a smart phone app to tell people to reduce their demand at certain times, with the reward being a certain about of free electricity at other times.
With these indirect schemes, it is often difficult to calculate the exact price in $/MWh being offered to customers. That’s probably fine if both buyer and seller are happy with the deal. But is there are a “correct” price? Given that demand response is something of an alternative to the wholesale market, the correct price probably has to do with the wholesale market price, right?
Let us give a specific example. If a person normally pays $50/MWh for their electricity use, and prices rise to $500/MWh … how much should they be paid if they use less electricity than they normally would?
$500/MWh for each MWh of reduced demand (the current price), or
$450/MWh (the current price minus the customer’s usual retail price)?
This was argued in a 2016 Supreme court case, where the two sides disagreed on the fundamental economic theory of the question. The case was significant because this was not an example of a buyer and seller mutually agreeing on price, but an example of when the government was forcing power system operators to pay demand response providers a particular price, even if the operators did not agree with that price.
In the case, FERC (the US regulator) had created a demand response program that required energy market operators to pay the current price ($500/MWh in the above example). The EPSA (a generator industry group) was opposed to the demand response scheme, and argued that:
In the EPSA’s view, FERC did not have the legal authority to create a demand response scheme, and
That if FERC did have the authority, then the compensation should be the current price minus the normal price for the customer ($450/MWh in the above example).
What I think was amazing about the case was that all these famous economic professors then wrote submissions to the court, arguing the economic theory of what the price should be. Harvard economics professor Bill Hogan contributed a “friend of the court” brief in support of the EPSA, arguing that FERC was forcing grid operators to overpay for demand response by, in the example above, forcing them to pay $500/MWh.
Here is an extract from Hogan’s brief:
“To offer an analogy, consider a manufacturer that produces an automobile it can sell to a dealer for $20,000; the dealer has agreed to then sell the automobile to a customer at cost ($20,000), but cars are in high demand and another customer wants to buy the car for $30,000. No one would say that the first customer should be paid $30,000 for not buying the car, just because another customer wants it or cars are in short supply. If one customer has a right to buy the car at $20,000, while another is willing to pay $30,000–and lack of supply means that both cannot purchase cars–the dealer could, in theory, sell the car to the second customer and give the first customer the $10,000 difference between the market price and the price at which she has the right to purchase. That would allocate the car to the customer who values it more, while giving the first customer an incentive to allow the second customer to have it. We would never, however, say that the dealer must: (1) pay the manufacturer $30,000; (2) pay the first customer $30,000 (the car’s current value) for not buying the car; and (3) sell the car at $30,000 (again its current value) for a loss. But that is what FERC effectively has done: It provides the first customer with a windfall while requiring [grid operators] to pay twice (to the electricity producer and the non-buyer) for a unit of electricity that they may only sell once for less than the total price paid.”
However, in an earlier affidavit, Professor Kahn of Cornell University argued (and FERC agreed), that reducing demand was equivalent to increasing generation, and should receive the same compensation, meaning that the $500/MWh would be the correct price above. From Kahn’s affidavit:
“Demand response is in all essential respects economically equivalent to supply response; and that economic efficiency requires, that it should be rewarded with the same [price] that clears the market. Since DR is actually–and not merely metaphorically–equivalent to supply response, economic efficiency requires that it be regarded and rewarded, equivalently, as a resource proffered to system operators, and be treated equivalently to generation in competitive
What do you think? It is a subtle difference. In the above example, the $450/MWh case is equivalent to the customer buying electricity at their regular price of $50/MWh, and immediately selling it to the market at the market price of $500/MWh, for a profit of $450/MWh, instead of using the electricity themselves.
In the end the Supreme court did not endorse any particular price method. By a 6–2 verdict, the court decided that:
FERC did have the legal authority to run a demand response scheme, and
That FERC also had the authority to set the price in that scheme, and therefore (even though both sides had made good points) FERC’s price should be used.
What do I think? I admit that I am not an expert in these matters – nothing like the experts quoted above – but for what is worth, my view is that Hogan’s argument is correct, and that $450/MWh would be the correct price. From my perspective, demand response by a customer is equivalent to selling their right to use electricity to someone else. To do that, they need to have the right to use electricity, and if they have to pay $50/MWh to obtain that right (and hence receive $450/MWh overall), then that is what they need to do.
However, I acknowledge that there are other benefits to demand response schemes than avoiding wholesale market costs. For example, demand response schemes at times of high network demand also reduce the costs of “poles and wires”, and that the financial benefits of reducing network costs could even exceed those of wholesale costs. (Note that in the air-conditioner example above, the scheme is offered by the distributor Energex (a network operator) rather than the wholesale market operator AEMO). Network costs are recovered very inefficiently in general, mostly through simple charges. A demand response scheme with non-ideal prices could still benefit the public overall. Another submission to the court, from Charles Kolstad, an economist at Stanford University, argued in favour of FERC because the public was better off with demand response than without it, even if the non-ideal FERC method was used. Note that there were also implementation challenges with the EPSA method that I haven’t described, such as the need for the market operator to know the normal price paid the customer. (There are other details which I have omitted, and if you’re interested I recommend reading the references below).
In the electricity industry, where I work, it is important to keep supply (the energy being provided by the generators) balanced with demand (the energy being used by customers) at all times. If this is not done, the entire system will quickly collapse to and fail to what is called “system black” or “blackout”. This is different to the market for almost every other product or service. Consider, for example, what happens when Apple creates a new model of iPhone, but does not make enough so that everyone who wants to buy one on the day they are released is able to do so. What happens in this case? Well, all the iPhones that are made will be bought by someone, and those people will get to use them. Everyone else who wants to buy one will either have to wait until more phones are made, or buy another kind of phone. If the phone market were similar to the electricity market, an analogous situation would be that if even one person went to the store and could not purchase a new iPhone, then all other iPhones stopped working within a few seconds.
For electricity grid operators, this fact makes it hard to run the power system securely when electricity demand is very high (which may happen only a few times per year, typically on hot days). There is nothing to stop people from connecting additional appliances to the grid. Even though wholesale prices rise very high at these times (over 300 times the average price), most people are either unaware of such prices or any not exposed to them (i.e. the price paid by their retailer rises but the customers themselves have a fixed price). For many kinds of loads, the demand rises automatically without any person even being involved. For example, many air conditioners have a set temperature to which they try to cool a building down to. If the outside temperature increases, the air conditioners automatically start working harder (therefore using more electricity) in response.
One way that this problem is managed is called demand response, which is essentially paying customers to use less electricity at certain times than they normally would. Sometimes this is done by paying customers directly. Sometimes there is simply an appeal to customers, “Let’s all pitch in and use less power tomorrow afternoon, it will help keep the lights on, and we’ll all share the benefits and reduced costs later.”
Here is an example from 2017 in NSW (link).
When demand response is financially compensated, it is often paid for in indirect or simple ways. As with rooftop PV under the renewable energy target, demand response programs for the masses often pay the entire subsidy upfront in cash, at the time of purchase. For many customers, this is easier to understand, and more compelling, and it means that you don’t have to manage an ongoing financial relationship to pay thousands of people small amounts of money on a regular basis. For example, in Queensland, there is an interesting program called PeakSmart, which is managed by the distributor Energex. When you buy a new air conditioner at the shop, if you opt in to the PeakSmart program, you get up to $400 cash back which helps make the system cheaper. The PeakSmart system allows the distributor to remotely turn down the air conditioner to about half the output. They do this a few times per year, for an hour or so each time. From their annual report (link):
“We activated our PeakSmart airconditioner technology on 1 and 2 February 2016. On these two days South East Queensland experienced 40 degree temperatures. More than 50,000 air-conditioners were signalled to reduce their demand by approximately 25 per cent between 4.30pm and 5.30pm. More than 25,000 air-conditioners were active at the time and reduced peak demand on our network by 11.2 MW on 1 February and 16.4MW on 2 February. These load reductions are the equivalent of more than 7,200 homes on our network. Surveys completed with participants after the event indicated no impact on comfort.”
From what I can tell, this is a successful and well run demand response program, and is well designed for its target customers.
In the next post, I’ll discuss what is the optimal price to pay for demand response, which is a dispute that went all the way to the US Supreme Court in 2016, with a disagreement about the fundamental economic principles that should be used.
The other night I helped my daughter to make a cubby from the couch cushions to play in.
Earlier in the night she had got in trouble for putting leaves from the garden into my bed, and then again for messing up my son’s train set. She wasn’t going to get any TV for the next few days, and was grumpy about it.
But later in the evening, things improved. We made a cubby together, helping each other with the walls and a sheet for the roof. A box of Lego and her toy monkey went inside to play with. She wanted to play the game where I pretend to be a monster, growling and stomping around outside the cubby, whilst she is safe inside, which was fun.
After that was done, I went off to do some cleaning. Later she calls out, “Daddy, you need to be the monster again!”.
“Ok, a bit later,” I say.
“I want to play the monster game!”
“I’d rather be friendly. Are you having fun in the cubby?”
“Oh, what’s the long thing you are making with the Lego?”
At another park, upstream from our house, there are two excellent swings which the kids love to play on, one new and one very old.
The old swing has a big diamond head, with the sculpted face of a friendly clown. The whole thing spins round and round, and the chairs swing out wider and wider the faster you go. These swings used to be quite common in Victoria when I was growing up. This one has been recently painted (and possibly serviced), but I’m sure it is at least 30 years old. It is great to lie down with your chest on the swing chair and pretend to be superman, flying through the air.
The new swing is the modern version, in the sense that they are very common, I know at least 6 parks with these swings. There is a big hoop suspended by 4 cables, with netting across the hoop to lie in or sit on. The angled steel beams provide some bounce and spring. I can see why these swings are popular, they are a simple design, overall pretty safe, and a lot of fun to swing on.
Not far from where I live is a fantastic playground. There are swings, cubby houses, roundabouts, and in the center is an enormous tower with two slides down to the ground.
The slides are made from metal, not plastic, so there are no static electic shocks and they are fast. The lower slide is ok for young children who can walk and climb, but it has a slight corner and they can come out sideways if they’re not careful. The upper slide has a steep section, with a lot of acceleration, and for older kids it’s a lot of fun.
There are a few extraordinary parks near my home town. There is a children’s playground in the Melbourne Botanic Gardens with a small stream of water running through it, and kids will splash and stomp through the water and have a lovely time. Bacchus Marsh is a small country town, but across from the train station is a park with a huge wooden castle, with four towers connected by bridges with slides to the ground.
These parks make me happy, they are a tremendous public good for everyone to share. They make life a little bit better for everyone, and I’m grateful to all the people who helped to help make them.
When I was younger, I thought that learning things by heart was silly. Memorising facts, figures, names and dates, or a strict old authoritarian school teacher forcing kids to memorise the names of kings – this seemed ridiculous to me. Better to understand the patterns of political history, or the underlying physics and equations of something. You will naturally remember the basic details of a topic as you study it, and that’s enough, any effort to specifically memorise facts is wasted.
When I studied physics later on, this was a common attitude. Many physical phenomena can, in principle, be derived (i.e., mathematically worked out) from a small number of fundamental equations. Some physicists are proud that they cannot (for example) remember the wave equation for light but can derive it from Maxwell’s equations whenever needed (I probably used to be a bit like this). There is a story that the physicist Enrico Fermi once said, about all the newly discovered elementary particles, “If I could remember the names of all these particles, I would have been a botanist…”
I thought I could remember a similar quote by the physicist Richard Feynman, but when I went to look up the quote in the Feynman lectures, it seems that he is actually making fun of such attitudes. Having stated the two fundamental principles of gravity, he says: “A sufficiently talented mathematician could then deduce all the consequences of these two principles. However, since you are not assumed to be sufficiently talented yet, we shall discuss the consequences in more detail …“.
Later in my twenties I worked as a tutor once per week at Fitzroy Library’s homework club, which is a free service for local high school students. Often, students would be there on a particular afternoon because an assignment or test was due the next day. In that case, they didn’t want to understand why the quadratic equation works, or how to derive it, they just wanted to learn and memorise the steps to use as quickly as possible. The test is tomorrow!
Other students would attend every afternoon, so there was more time to explain things and the ideas behind them. I hadn’t done much teaching previously, and so I tried different ways to explain things. What I noticed, though, was that, even for students who were not trying to cram for an exam, it was often better for them to memorise the steps to solve an equation, and then to talk about the general principles behind it. Once an equation is memorised, it would be easier to understand. If you have something memorised, you can hold it all in your head at once, turn it around in your mind, consider it from different angles, as it were. You can try to do this without having memorised it, but it’s harder – you may need to look at the text book every few minutes to remind yourself of the different parts. Once you have something memorised, it is easier to think about it and understand it properly.
A few years ago, in the middle of winter, my wife and I moved from our house in inner Melbourne to Cairns in Far North Queensland. Tropical Queensland looked instantly different to southern Australia. There was rainforest in the hills behind the town, and sugar cane growing along the highway. The sun in Cairns was strong and bright, and the landscape seemed to be an intense, rich green instead of the blueish-green, straw yellow and sandy brown colours of down south.
We rented at house at Yorkeys Knob, which is one of the suburbs north of Cairns.(Annual town party: “Festival of the Knob”). It has a lovely beach, which you can’t swim in, both for crocodiles and stinging jellyfish. Across from the beach were a few holiday houses, and a melaleuca scrubland, the size of a football field, which was surrounded by a tall plywood temporary fence which was beginning to fall down. Behind all this were the houses where people lived, a few quiet shops, and the Knob itself, which is a rocky hill with views out to the Coral Sea.
Our house also backed onto the melaleuca and tea tree scrub, which was very pretty, with electric blue Ulyssues butterflies which would fly out into our back garden. However, after we lived there for a few weeks it occurred to me that during the wet season, the scrub might become a wetland or even a swamp, which in the land of crocodiles and dengue fever makes you thoughtful. Certainly, at night the scrub lively and noisy, with croaking frogs and toads and the occasional eerie shriek, noise which sounded like “whee-eer-loooo”, an almost human-like wail in the darkness. At the back of the garden, bordering onto the scrub was the compost bin and two paw paw trees. Every few days, an enormous amethyst python (Australia’s largest snake) would be lying on top of and around the bin, in the sun. It was at least five metres long, with a body as thick as my arm. You could see it lying there from the back door, and since it didn’t surprise me up close I didn’t mind too much. Tropical Queensland was exhilarating, and also a bit intimidating.
We planted a veggie garden in our backgarden, with lots of new plants we couldn’t grow easily down south: okra, snake beans, lemongrass, sweet potato, paw paw, as well as a new fruit which I only heard of for the first time at a local restaurant:
“Would you like rosella jam on the cheesecake?”
“Ah, is the jam made from … rosellas?”
“Oh, yes, certainly.”
“The … bird?”
“No, no! Oh no, the fruit.”
The fruit? I had never heard of it, but after that I had to try and grow some. The plants never really grew, though, so I still don’t know what the fruit looks like uncooked.
My wife and I had recently become interested in birdwatching, though we didn’t really know what we were doing. We had became interested a few months before, through visiting my uncle, who was working as a weather observer for the BOM on Lord Howe Island. He and his partner showed us the tropic birds, shearwaters, boobies, and the famous Lord Howe Island Woodhen. They loaned us their binoculars, and took us to see the weekly show given by Ian Hutton, a resident bird expert. We returned from the holiday, bought some binoculars, and had a great time trying, and sometimes succeeding, to identify the birds in the forests near Melbourne.
When we moved to Cairns a few months later, we were excited to see new birds up in Queensland. We saw sunbirds and bee-eaters in our garden, metallic starlings and red tailed black cockatoos at the local park, a white-bellied sea eagle at Yorkey’s Knob beach. One bird which my wife was keen to see was the Bush Stone Curlew, which she had seen in a photo in Australian Birdlife. She showed me the photo, and then I wanted to see one, too. Curlews have big eyes and gangly legs and a wonderful comic dignity. They used to be common in Victoria but were now extinct there, though they still lived up in Queensland. We looked around Cairns, but we couldn’t find one. In disappointment, one evening I took out my phone looked them up in a Australian Bird Guide app. “Let’s listen to the bird call, that might help.” My phone let out an eerie call, “whee-eer-looooo”. We looked up at each other. That was the same call we heard each night, along with the frogs and toads croaking. We had been surrounded by curlews all this time.
We saw the first curlew a few days later at the Yorkey’s Knob golf course. It moved and bobbed its head, stretching out its neck and looking up at us. It ran with a beautiful long legged gait. I read that they are related to American road runner, and they certainly looked a bit like Wily Coyote’s perpetual foe. Of course, after not seeing them for ages I then saw them everywhere: near the beach, at the park, even in the carkpark at Woolworths supermarket.
My wife and I moved back down south to Melbourne when we had our first child, to be closer to family. When our daughter was one and a half, we went on a holiday back up to Cairns. At the golf course, we saw the Bush Stone Curlews again, and there were tiny chicks with them this time, the first time I ever saw baby curlews. We had a new family, and so did they, adorable chicks, standing near their parents, near the palm trees, gangly and fluffy. The curlews watched us, and we watched them, and then we drove away and left them to their home.
If you wanted to make a beautiful iron latticework clock for someone dear to you – say for a 50th birthday gift – or colourful glazed ceramics dish, or a wood dining table, it would not be easy to do if you had never done it before. It takes a huge amount of learning, trial and error, safety training, expensive equipment and so on, to make something like iron latticework or ceramics. But it would be fun to do, and even if you were busy, you might be able to spend a whole Saturday on a special occasion gift, especially if you also did it with someone else as well – you and your daughter, and a wonderful artist make a special gift for your partners’s 50th birthday, for example. You could even make it with the person you are giving it to.
Here’s an idea for a business I’ve been thinking about: a service to connect people who want help to make a personal, thoughtful gift, from a skilled and friendly artist who knows how to do it. Call it helptomakethething.com. The business finds local artists and tradespeople who would like to take part, makes sure it can be done safely, and then the customer and the artist work together to make the thing.
Like I said, to safely and skillfully do iron welding by yourself is not easy. Even to know what kind of weld to do in a particular case and what equipment to use is not easy. But I imagine that, under supervision, you could learn to make one kind of iron weld quite well in a short time, and make 20 or 30 of those welds in an afternoon. You could work with the artist on the design, they could do a lot of the other things, mostly using materials and equipment already in their workshop. Or you could apply the glaze for a ceramic pot, or
It would a lot more expensive than simply buying something similar, even from the same artist. They are dedicating extra time, and showing you how to do a part of the process. But it might be a lot of fun, artists who often work alone might doing this five or six days per month. The artists would get extra money, which might them. Meaningful and wonderful gifts would be created.
Anyway, when I am the billionaire founder of this business, you’ll be able to tell people you heard about it before I was famous.