Among mass deployed automobiles, the internet, and antiseptics, the grid was one of mankind’s most impactful contributions to society in recent history. The inventions of Edison’s DC Grid on Pearl St in 1882, Westinghouse’s AC grid in 1886, and Samuel Insull’s modern utility business model in 1895 gave us the large-scale grid by the turn of the 20th century. With this grid, the citizens and businesses of America could now use electricity with literally the flick of a switch – changing everything.
Although this innovative system developed relatively fast, by the early 1900s the system plateaued. The electric grid today has not changed drastically over the last 100 years – operating as a ‘centralized model’, by which energy is generated in large central sources (e.g. a natural gas plant) and distributed one way to consumers.
After facing nearly 100 years of expansion with little adaptation to the model, disruptive environmental, political, cultural, technological, and financial pressures are causing energy leaders to rethink it. These pressures present future scenarios such as the ‘utility death spiral’, pushing utilities and energy players across the country to ask themselves the question, “Are we going to adapt or die?”
To adapt, current energy leaders need to apply creative solutions to three modern problems – integrating renewables, adapting infrastructure, and securing the customer relationship.
1. Integrating renewables while still maintaining reliability
There are three different kinds of drivers pushing utilities to integrate renewables:
- Financial Drivers – The costs of generation for renewable resources have declined throughout the years as technology has improved. Lazard’s 2017 LCOE study has shown that between 2009 and 2017, solar costs dropped 81% and wind costs dropped 67%. This translates directly to new generation, as solar and wind represented approximately 2% of U.S. electric generation mix in 2009 but approximately 7% in 2016. It’s expected that this trend will continue, as Utility Dive’s 2017 ‘State of the Electric Utility’ showed between 60-80% of utility professionals expected renewable energy generation to increase moderately or significantly over the next 10 years. At the same time, between 40-80% of utility professionals expected fossil fuel generation to decrease significantly or moderately over the next 10 years.
- Regulatory Drivers – Both state and federal regulatory bodies now mandate certain proportions of generation come from renewable resources. 28 states have mandatory renewable energy portfolio standards and an additional 8 states have voluntary renewable energy targets. The FERC is actively in pursuit of “market reforms to allow all resources, including renewable energy resources, to compete in jurisdictional markets on level playing fields.”
- Customer Drivers – Utility’s customers – the core of any business, are also demanding renewables, pressuring utilities to respond to the needs of their customer base. 65% of Americans say they want more renewables on the grid (up from 47% in 2013). The C/I sector agrees as well, with 71 Fortune 100 companies having set renewable energy or sustainability targets in 2017 (up from 60 in 2015).
Despite these drivers, increasing the generation mix to 100% renewables with the centralized generation model presents multiple complications involving maintaining reliability. To do this, the consumption levels must meet generation levels at all times. While conventional fuels can be ramped up and down to meet fluctuating demand curves, generation from renewable energy sources like solar and wind varies by environmental conditions. For example, take the ‘Duck Curve’, where in California, solar production decreases at sunset, just as consumption increases when people return home from work.
In order to figure out how to integrate renewables while still maintaining reliability, utilities are experimenting with various programs and technology. One example is the use of energy storage across the grid. Through innovative ideas such as ‘solar sponging’, utilities can take excess generation during the day and store it for use later on during the evening when generation is low. Another example is utility Demand Side Management (DSM) programs. These programs use a variety of techniques (e.g. behavioral coaching, smart home optimization, smart building optimization, alternative rate structures) to provide the utility with the ability to manage consumption at the site level, reducing or shifting consumption away from peak periods and volatile curves. For instance, using a combination of alternative rates and a smart home, the home can respond automatically to the economic cues delivered by the utility to smooth load across the day, saving the customer money while meeting grid demands. Various residential DSM programs have been piloted but only some (e.g. DTE Insight) have been fully commercialized.
2. Adapting infrastructure to meet 21st-century consumption needs
In 2017, the ASCE rated the energy infrastructure in America at a D+, counting 3,571 power outages in one year. How did we get here? Much of the grid was built during a time when the population was smaller and the lifestyle quite different than our own. According to the ASCE, “most electric transmission and distribution lines were constructed in the 1950s and 1960s with a 50-year life expectancy, and more than 640k miles of high-voltage transmission lines are at full capacity.” The average age of generation facilities in America is 37 years, with a typical retirement age of 48 years. Transmission and distribution (T&D) wires are carrying electricity across larger territories, sometimes in inefficient loops creating an increasing flow of T&D loss (estimated at 5% loss annually). The peaker plants used to serve demand response events (a time in which consumption increases above forecasted levels and a secondary plant needs to be utilized to meet generation needs) are some of the oldest and least updated on the grid, costing the utilities hundreds of millions per year for just a few annual events. One report found the electric customers of NYC were spending $268M annually on sustaining peaker plants. It’s estimated that the investment gap to just repair the existing infrastructure on the grid as it exists today would cost $177B. It’s obvious this is not scalable.
In order to improve infrastructure to meet 21st century needs, utilities are starting to make substantial changes. This includes a:
- Smarter Grid – Only until recently, were meters still read by an individual walking into your backyard and looking at the dials. The rollout of AMI began in the late 2000’s and has not stopped, with over 48% of the meters in the country being replaced by AMI as of January 2017. Sensors are being integrated into substations and transmission networks to better forecast demand and load. Management systems (e.g. DRMS, DERMS, BEMS, HEMS) are being deployed to integrate the new technology systems both on the grid and behind the meter for real-time management by the utility. Demand response programs are utilizing new technologies (e.g. IoT devices such as smart thermostats, smart plugs/load controllers, and connected appliances) which can be deployed to a larger number of sites and aim to reduce the need for costly and old peaker plants.
- More Distributed Grid – A distributed grid is one in which the distance between the generation of electricity and the source of consumption is minimized. For instance, a neighborhood with 10k solar panels on roof’s instead of a single natural gas plant. This helps defer costs needed to replace or build new T&D infrastructure and is sometimes thought of as non-wire alternatives (NWAs). An additional 2k MW of rooftop PV has been installed every year since 2015. 17 States have allowed net metering, which lets homeowners sell back their excess generation (from rooftop solar) to the grid, acting as a financial incentive to offset some of the costs a homeowner or building manager would incur by paying for solar. Microgrids are also projected to grow for both residential and C/I sites, with Navigant predicting microgrids becoming a $40B annual business by 2020.
3. Securing the utility-customer relationship
Customer expectations are always changing. As each new generation gains purchasing power, their goals, morals, beliefs, and wants are reflected in their purchasing decisions. Companies across all business verticals adapt their products to meet this new market and avoid losing market share. Millennials, the current youngest generation with purchasing power, grew up in a world where they can interact with companies and products in a more personalized and digital way. Consumers are no longer okay with paying just for assets, they want the customer experience as well. Defection from the grid is becoming a larger fear as technology enabling it (e.g. storage, solar, microgrids) become proliferated. Just last year, NV Energy lost nearly 5% of its consumption base when MGM decided to defect from the grid. For now, defection is an economic reality for mainly large commercial and industrial customers, but as DERs proliferate, residential customers may drop off as well.
In order to figure out how to meet the demands of the younger generation and reduce the risk down the line of defection, utilities are experimenting with value-add services behind the meter and alternative revenue streams. Utilities are becoming more digital, more personalized, and aim to help the end user do everything from take control of their energy consumption, provide peace of mind within the home, and assist in the proliferation of IoT devices through smart home marketplaces. This all forms a closed loop back to behind the meter services, further assisting in reducing consumption and allowing for the integration of renewables.
20-30 years down the line…
The solutions and experimental technology that energy leaders roll out today as a response to these problems are what is causing the grid to transition to a new model. The grid 20-30 years from now will not be the one we recognize today and have recognized for 100 years. We will have a distributed grid, where most generation occurs at the source of consumption. We will not see large generation construction projects, but rather small-scale – mass deployable solutions. The utility’s role will change as well – acting as a supply chain manager of the grid, forecasting load by appliance and utilizing behind the meter assets to shift and smooth load to maintain a mostly renewable generation mix. Not only that, but our homes and buildings will be responsive to the electric consumption patterns of our community.
To get to this point, utilities still need to do the heavy lifting to roll out infrastructural updates that integrate distributed energy resources and capture data, develop a deeper relationship with energy consumers, and secure the ability to manage and automate appliances in residential, commercial, and industrial buildings. But to enable these new and future innovations, utilities have to start developing new business models around this technology right now.
It is through solving these challenges and adapting to the ever-changing needs that the grid will come out of the mid-21st century more intelligent, more resilient, and more adaptive to unforeseen future changes. Welcome to the new energy economy!