A short cut for Friday – I just really wanted to pass on this link, because it’s so absolutely perfect an example of what I mean when I bang on about “variety engineering”. Use it as an example in your next presentation on introductory cybernetics or something.
Basically, not so long ago supply and demand for electricity were quite easy to balance; demand was fairly predictable based on the season and temperature, while supply was a control variable – you just shovelled a bit more coal into the generator or did the equivalent. Planning was a straightforward task; “easy” in the sense of “the world’s a small place albeit I wouldn’t like to have to paint it”.
When an increasing proportion of the European grid is wind and solar, however, supply becomes quite a lot more unpredictable. And so there’s suddenly a much more challenging planning problem of making sure that the price moves by enough, quickly enough to get marginal users to either ramp up or shut down their aluminium smelters, pump storage stations, air fryers or whatever.
And so, enter the big trick which everyone was extremely impressed by when the Austrian economists came up with it in the 20s – the profit motive, and specifically the chance of making a very quick turn without doing much work through arbitrage, is a great way of ensuring that information processing power and bandwidth will be applied to a problem which needs more of it. So today, in two little university towns in Denmark (basically because Denmark was one of the first European countries to deregulate its grid and Aarhus and Aalborg have good engineering departments), there are dozens of little trading companies where very clever and slightly greedy Danes rush to grab meteorological data and feed it through high speed algorithms.
This isn’t by any means a perfect system – ask the old timers what happened when the deregulated Californian grid met the profit motive in the form of Enron. The profit motive and market trading are just one way to achieve the actual goal, of matching the variety of the problem with the variety the regulatory system. Its big advantage is neither more nor less than the fact that it will volunteer to do the job if nobody else does.
The price mechanism as introduced in the 1990s for a coal+gas system had two functions: match short-run supply and demand and provide investment signals. The problem in Oz and elsewhere was that the necessary investment was in gas peakers that would operate only occasionally, when the rest of the system was at full capacity. That could be achieved easily if enough if the price at that time was ultra-high. But no one wanted consumers to pay those high prices (it happened briefly in Texas, I think) and the cost of managing the associated price risk scared retailers. So, the price was capped and investment continued to flow into coal.
At least in Oz, the movement for the last ten years has been away from clever price signals and towards a half-baked version of planning, focusing on keeping the lights on while we close down what's left of coal.
Enron. Gawd help us. Briefly a client & never a dull moment ...