Power utilities should be optimistic about their future despite market forces and a seemingly endless stream of media regarding “death spirals”, utility business models and customer disintermediation. US Grid Company lists these reasons to cheer:
Multiple studies, including research from Accenture’s “The new energy consumer: Architecting for the future”, show the utility is still the most trusted provider of energy information.
The cost of renewable generation is going down across the board making it cheaper to meet policy goals. Bloomberg New Energy Finance’s “Levelised Cost of Electricity Update” for the second half of 2015, based on thousands of data points related to individual deals and projects around the world, shows that onshore wind and crystalline silicon photovoltaics – the two most widespread renewable technologies – have both reduced costs.
Regulators are indicating the potential for expanded avenues of income generation as demonstrated in New York State’s Renewing the Energy Vision (REV).
That said, it is becoming increasingly challenging for utilities to balance reliability and infrastructure replacement needs through large, capital intensive assets. The total amount of money needed for power plants, transmission lines and needed distribution upgrades is being consumed and counterbalanced by distributed energy resources as they get cheaper, faster and more popular with customers.
Having observed these global trends in the US and abroad, I posit that integrated, intelligent microgrids offer a long term path to deliver clean energy for communities while maintaining reliability and the critical role of the utility. In order to realize the smart city visions of cities around the world we must deal with the following issues in a deliberate and collective manner:
Designing regulation of markets to address the speed of technology and customer choice
Enabling a legal pathway for energy to exhibit multiple levels of value, quality and service
Making it easy for new products and services to “plug and play” into the system
It is tempting to think that resolving just one of these challenges will enable the modern vision of developers, utilities, and energy service companies while protecting the most vulnerable parts of the population from rising energy costs. This is an illusion; massive capital has already been spent on building an amazing machine called the grid and we cannot simply replace it with an entirely new system overnight. The reality of sunk investment versus new investment is why the holistic market reforms, such as the REV proceeding underway in New York, are important. In the Empire State, the regulator is asking both the incumbent energy providers and third party companies to come to the table with capital and a willingness to share the risk of new business models. It is an incredibly challenging exercise undertaken in one of the most important and influential urban centres in the world.
Transforming power markets is not easy; you cannot put the system on “pause” while everyone collectively re-arranges the parts. Below are three key developments which must move forward in an orchestrated, deliberate manner in order to “fix the plane while flying” and meet national, state and city policy goals for clean, abundant and affordable energy.
Regulation needs to reward utility performance
There is a lot of buzz about “performance based regulation” and this is great news for our industry. Performance based regulation creates a longer investment ramp (5-8 years) with metrics to measure success (safety, interconnection rate, policy compliance). This creates the conditions for a utility to develop new technologies with partners, gain product adoption, and share financial gains with customers, third parties and developers.
Right now, our industry is moving forward with a procurement driven cycle for individual technologies like community solar, energy storage, EV chargers, etc. This traditional means of developing resources leads to piecemeal, technology driven innovation, not holistic energy transformation. Without significant reform to cost of service regulation, we will not see a new financial construct that enables risk sharing between utilities and developers. Cities wanting to move forward with ambitious smart city projects, utilities wanting to experiment with dynamic pricing, and developers wanting to create “instant load” will slowly disengage if it takes years to set compensation through repeated, adversarial rate cases. New studies, like the report, “Performance-Based Regulation in a High Distributed Energy Resources Future” written by Lawrence Berkeley National Laboratory, offer a path forward.
Reliability has to become a shared responsibility
Identifying a new legal arrangement for reliability will determine the speed and scale of microgrids, smart cities and other projects, creating new transactional relationships between customers and providers. Current statutes are clear in this case; responsibility for keeping the lights on lays within the hands of system operators at “bulk” level and local utilities at the customer “retail” level. If a community wants to build for higher reliability, cleaner energy or some other goal they must work within the bounds of a thicket of complex interconnection rules and legal tariffs that ensure reliability for the greater system. These rules are there for a reason, to maintain reliable service for all customers, regardless of technology, political goals, or short term economic gain by one party.
The answer to this problem resides in developing rules around an integrated microgrid architecture.
Rather than building highly localized distributed energy projects for dense urban environments, there may be a way for adjacent cities and utilities to collaborate on problems using integrated systems thinking. In developing integrated microgrids, the economic value of demand response, energy capacity, renewable energy credits and flexible resources are aggregated across the distributed utility footprint to serve the needs of the system and the local community. This means that the utility could call upon substantial load shed in one location while ramping up generation in another location based on the development of interconnected and adjacent microgrid developments.
Of course, this is a radical departure from existing contractual arrangements and regulatory statutes for system reliability. With an integrated microgrid architecture, reliability requirements would become a shared responsibility between different parts of the network which “own” the financial and operational risk of the system should one part of the system go down. The interconnected nature of adjacent microgrids would enable immediate rerouting of power and load but the penalty of downtime and outages would be applied to a smaller node of the network, rather than entirely at the feet of the utility.
Risk must be reduced through increased network participation
We are enduring an elevated threat to energy infrastructure. The non-standard application of sensors, communications and automation in the distribution system is actually expanding potential access points for bad actors. However, while seemingly counterintuitive, increasing the total usage in the network from these access points will actually improve security and flexibility for utilities, city planners, developers and the like. A flexible, dynamic and interconnected set of microgrids can reduce the risk of blackouts and energy shortages from physical and virtual attacks. This is true because the basic laws of networking can be applied to the energy system with modern control systems and contracts that secure supply and demand at critical moments for the utility. Simply put, it’s harder to take out hospitals, data centres and a dense urban housing centre if customer’s demand and energy supply can be quickly routed across the existing utility network.
The challenge in building a cheaper, more resilient and distributed energy system lies in the regulatory and financial rules around reliability, utility franchises, and the ability for state regulators to provide flexibility for utilities to partner in new ways that maintains their crucial role as the operator in a competitive environment. With flat growth and a lack of real time visibility to changes happening in the network we need to reset the relationship between traditional energy providers and customers, including individuals and businesses that want to participate in generation and supply.
By reforming regulation, spreading risk and expanding the definition of reliability we can slowly begin to develop a more integrated, intelligent and participatory energy network.
Blog originally written for Meeting of the Minds