I have long been an advocate of true, effective deregulation of the electricity industry. Of course, when typically uttered in the context of the power sector, the word “deregulation” conjures up images of the California experience of the 1998-2002 era — which was an abomination involving government intervention against market forces at many levels, and thus should not be termed “deregulation” by any thoughtful observer.

Instead, there are several examples of much more workable approaches to electricity deregulation — such as Texas and PJM — that should be examined when weighing the possibility of competition in the power sector. The consulting firm CERA has just recently issued a report assessing the U.S. deregulation experience, and generally concludes that the pros outweigh the cons.

CERA Press Release on Deregulation Study

As CERA’s Lawrence Makovich pointed out in announcing the report: “The expectation embodied in the conventional wisdom — that for deregulatino to be considered a success, power prices in nominal terms should have decreased continuously over the period under consideration — is inappropriate. Power prices needed to fluctuate in order to convey the appropriate signal for economic efficiency.”

Not only do I wholeheartedly agree with this statement, I contend that when considered more broadly, it has significant implications for those of us with environmental interests. Power prices need to fluctuate by time in order to provide clear price signals that enable consumers to capture the true economic value offered by on-peak renewables (most notably, solar) and demand-altering measures. When true economics are masked by regulation or badly-botched deregulation, many environmentally-beneficial energy technologies are hobbled.

Of course, competitive forces in electricity would also work better if subsidies on conventional energy were eliminated (as argued in a previous posting), and if externality costs imposed by energy production/use (most notably, CO2 emissions) were fully and appropriately captured into energy prices. But, one step at a time. Let’s get energy market structures and rules right first, and we can tackle those issues subsequently.

The realization that America’s electricity infrastructure is shakier than a palm tree during a hurricane hits us every few years, when some blackout or rolling brownout reminds us of our electro-vulnerability.

But to truly understand what we’re up against, it’s important to step back for a moment to see just how vast — and how vulnerable — our electricity infrastructure is:

The North American electric power industry comprises more than 3,000 electric utilities, 2,000 independent power producers, and hundreds of related organizations. Together, they serve 120 million residential customers, 16 million commercial customers, and 700,000 industrial customers. With about $275 billion in annual sales, the industry is one of the continent’s largest – 30% larger than the automobile industry and 100% larger than telecommunications.

North American utilities own assets with a book value of nearly $1 trillion, roughly 70% in power plants and 30% in the grid. The continent has 700,000 miles of high-voltage transmission lines, owned by about 200 different organizations and valued at more than $160 billion. It has about 5 million miles of medium-voltage distribution lines and 22,000 substations, owned by more than 3,200 organizations and valued at $140 billion. The North American electric power industry will purchase more than $20 billion in grid infrastructure equipment in 2005, nearly one quarter of the worldwide total of $81 billion.

That analysis comes from a report released today: “The Emerging Smart Grid” (Download – PDF), produced by the Redmond, Wash.-based Center for Smart Energy. According to the report, as much as $45 billion is up for grabs by new advanced technologies for modernizing the electric power infrastructure.

The idea of the smart grid is to make the existing grid work more efficiently — so much more, in fact, that it could reduce the need for additional power plants, or for costly redundant systems designed to work “just in case” of peak demand. That’s the vision of a growing corps of researchers and companies working on grid optimization, a term that describes a wide range of information technologies that better understand and analyze exactly what’s going on in a complex energy system on a minute-by-minute basis, then optimize the system in a way that’s cost-effective.

This isn’t entirely news. Wired magazine published a seminal piece on The Energy Web in 2001. My company, Clean Edge, suggested in its Clean Energy Trends 2003 report that “optimizing the grid” would soon propel both investors and innovators to grab onto a multi-billion-dollar opportunity. But the CSE report takes that view to a much deeper level. For starters, it offers the seven key characteristics of a modern, optimized grid: