If this was a game of Jeopardy! you might think the question was about the value of real estate. You’d be close, but the winning question is what is the basis for the value of distributed energy resources?
This is one of the most important questions that must be answered as more distributed energy resources (DER) are deployed. The Smart Grid Dictionary defines DER as Grid-connected or standalone generation, energy storage, or negawatt assets that are deployed in the distribution grid. DER assets can substitute for or supplement grid-supplied power. According to the Solar Energy Industries Association, the USA is deploying a new solar project every 4 minutes, and as the downward trend of solar project pricing converges with the upward trend of more and cheaper solar financing options, the numbers of solar installations will continue to grow. The rapid advances made in energy storage technologies will likely follow the same trajectories as prosumers vote with their wallets to gain some degree of energy independence.
Location is an extremely important factor for a potential asset owner or investor to consider in assessing the value of an investment in DER. It is also an important factor for any entity that functions as a distribution grid operator. In both cases, it is not the only factor. That means that one DER asset at a specific latitude and longitude may have very different value to a user, an owner, and a utility. The use(s) that asset can fulfill will be other important variables in investment decisions.
The state of New York, with its Reforming the Energy Vision initiative is the first to consider changes to the operations of regulated utilities and their business models to address the realities of multiple classes of generation ownership and new expectations for resiliency in grid operations. The state of California just announced a new proceeding with the end goal of requiring its three regulated electric utilities to create distributed resource plans that leverage distributed generation assets – the death knell for the old business model structured on total reliance on centralized generation.
For example, a rural residential customer at the end of a line that is often disrupted by fallen trees would place very high value in an investment in grid-connected solar generation coupled with storage or some sort of backup generation powered by a fossil fuel. Today, a utility treats that as a net metering arrangement. However, if the utility’s grid service to that residence is disrupted, guess what happens to the grid-connected generation? Complying with IEEE standard 1547*, it is de-energized too, robbing that home of a local renewable source of generation and forcing reliance on that backup generator, an action resulting in increased CO2 emissions. There’s a very good safety reason for doing this, but it doesn’t make sense from a resiliency perspective. There are calls within the industry to revise this standard to accommodate opportunities for building resiliency into grids, and that would certainly go a long way to achieving the resiliency goals that many states are now developing.
Location will be an exceedingly important decision criteria in the future utility distributed resource planning processes. In a new DER planning construct, encouraging self sufficiency through utility, third-party or prosumer-owned and operated assets might be an interesting play for a utility. It would ensure a continued level of service and help in prioritization of restoration services. It would also factor into resiliency plans, as would utility programs that offered the triple play of generation, storage, and EV described here. Placement of generation and energy storage at local libraries could enable these buildings to perform as critical infrastructure in disaster situations for cooling, warming, or temporary shelter. In other situations, utilities might develop DER plans that seek to avoid costly grid capacity upgrades through selective placement of cost-effective DER assets.
The bottom line is that the value of a location will sometimes have very different interpretations for different stakeholders. The proceedings from New York and California will be interesting information sources to get a good sense of how the Smart Grid will evolve to accommodate and manage vastly more DER assets.
How do you build a better oven? That’s a question Nathan Myhrvold, former CTO for Microsoft and foodie recently discussed. He pointed out that today’s electric or natural gas-powered oven is designed on the principle first put forward five thousand years ago to dry clay bricks. Kitchen technologists since then have been tinkering with that basic design – even though the objective of food preparation is often at adds with the objective of baking a clay brick, with the possible exception of holiday fruit cakes.
His exploration of how to build a better oven is a useful analogy about how we think about building a better electrical grid. We can continue to tinker around the edges, making small, incremental improvements to existing technologies, or we can start over and work with entirely new technologies. For example, we can continue to try to commercialize carbon sequestration technologies to make fossil fuels less polluting, or we can put our money in clean from the get-go renewables.
Myhrvold offers a fascinating description of the problems with existing ovens right from the moment you turn them on. Today’s ovens are inefficient. They consume too much energy for the output we get. The same is true of today’s electrical grid. We lose 6 -10% of the energy along the supply routes from those remote, centralized sources of generation to the flicks of a million switches that make lamps glow. The technologies to reduce those losses in the traditional electricity supply chain tinker with the problem. A Smart Grid reconfiguration of the grid from centralized to distributed energy resources (DER) co-located at the point of consumption is a fresh approach that simply eliminates the line loss problem.
The problems with ovens aren’t simply about wasted energy. The energy is often in the wrong areas. The oven and the food contained within are not very responsive to each other’s status. A cake may be baking too hot on one side of the oven and too cool on the other. This misapplication of energy exacerbates another shortcoming – ovens provide insufficient and often inaccurate feedback about what’s going on inside them. The only way cooks can really know what’s going on is to open the door and conduct a visual inspection. As the IEEE Spectrum article explains, that simply compounds all the energy waste issues in the modern kitchen oven.
The problems of balance and lack (or inaccuracy) of feedback apply to today’s grid too. Sure, grid operators do a good job of balancing the grid, but it requires a significant effort with an expensive outlay of capital and energy waste. Here’s where another Smart Grid technology group comes into play. Sensors deliver situational awareness of grid operations, and improve the abilities to deliver the right amounts of energy at the right places at the right time without wasting as much energy. In fact, in many scenarios, reducing demand for electricity – also known as demand response (DR) – is a better answer than increasing generation capacity. Sensors, and their companion actuator technologies are already successfully automating electricity reductions (or responses) on a facility-wide scale – such as dimming lights or bumping an air conditioner temperature up a degree.
And guess what? Sensors address the situational awareness problem in ovens, and can include communications capabilities to alert us when food has completed its cooking cycle or needs skilled human intervention. Just like the grid, sensors plus communications technologies in ovens makes them smart too. Both ovens and the electrical grid benefit from innovative thinking that put less emphasis on technology evolution and more emphasis on technology revolution. Consumers of both will be better off for it.
Common industry consensus holds that Smart Grid technologies and policies will enable utilities to deploy new products and services in the pursuit of safe, reliable, and cost-effective electricity. Aspects of utility operations will become easier – such as identifying outage locations using smart meters or preventing service disruptions with closer monitoring of equipment conditions. But as far as the customer service organization is concerned, the Smart Grid means business as usual. Utilities will adjust to include social media channels for inbound and outbound communications along with traditional voice, email, and webchat, but that will be the extent of change.
But this industry consensus lacks comprehension and vision about the revolutionary rise of the prosumer, as noted here and here. The traditional utility/customer relationship is changing as electricity consumers become electricity prosumers – producing kilowatts and/or negawatts through Smart Grid enabling technologies like distributed energy resources (DER) plays, long term energy efficiency decisions or short term demand response actions. Utility customer care organizations must change to accommodate these disruptive shifts from ratepayer relationships into interactions with consumers who have choices and new value for utilities.
What are these choices and what is the utility value? The coming changes are not limited to states that are fully deregulated and where consumers can switch retail energy providers at will. Consumers in regulated states have choices that have important consequences for utilities too. They may choose to participate or not in a demand response program or to install solar panels on their rooftops and switch to a net metering or feed-in tariff (FiT). Consumers become prosumers when they make these choices, and their decisions have value in the form of kilowatts or negawatts for utilities.
These changes are occurring as forward-thinking utilities and regulators acknowledge that the utility business model itself will change, as recently published in the New York Public Service Commission’s Reforming the Energy Vision staff report. Business model changes portend enormously important roles for contact centers as the strategic focal point for prosumer care, rather than traditional consumer care. Within the next 5 years, a growing number of utilities will be permitted to offer new services that produce new revenue streams beyond basic electricity sales. For instance, new services may allow utilities to leverage customer-side DER assets. Such services can create new lifetime consumer value for utilities that goes well beyond simple electricity sales.
The important role that prosumer care operations play in utilities is magnified as these operations transform into revenue centers rather than remain as cost centers. Prosumer care operations deliver the critical sales functions for utilities as their business models change. They help introduce new services and develop new revenue streams, and they most definitely will compete against new energy services market entrants. The utilities in the best position to transform into prosumer care operations are the ones that first plan to invest and transition into consumer-centric operations.
Consumer-centric operations can help transform utilities into the trusted advisors on energy matters for consumers. Trust builds loyalty, and helps avoid intermediation or dissolution of existing utility/consumer relationships by third parties such as Comcast, Verizon, or other new entrants in residential energy services. But a consumer focus is just part of the strategy to achieve prosumer care operations. Consumer value is redefined for utilities and has to be considered on a lifetime basis of what a consumer means to a utility. It is a sophisticated sum total of a utility’s electricity transactions (bidirectional sales and purchases) as well as investment requirements and investment postponements.
Lifetime consumer value calculations comprise a data analytics convergence of utility operational grid data with meter, CRM, and other traditionally backoffice data into the prosumer care operations center. It’s another important convergence brought about by Smart Grid technologies and policies. Unlike the typical utility IT/OT convergence that is evolutionary, this one is truly revolutionary because it enables a prosumer relationship that doesn’t exist in any other business. Among all the Smart Grid changes in the utility sector, this one will have the most direct impacts on consumers as their relationships transition into prosumer interactions. Utilities are well-advised to prepare for that.
The multifamily home market is not the only segment that is missing out on Smart Grid benefits. There’s another market segment that is also woefully absent from participation in Smart Grid-enabled programs and solutions. And just like the multifamily challenge, it is mostly caused by the absence of federal, state, and local policies. There are an estimated 14 million single family homes out of a total pool of about 130 million homes that are renter-occupied, not owner-occupied. These numbers are growing. That means in the future, more households are less likely to participate in demand response programs, energy efficiency programs, or distributed energy resource (DER) programs. Let’s look at the trends and then at the long term issues.
There are several factors cited for this growing shift to rentals from ownership of single family homes. First, for many Americans, the Great Recession turned the American Dream into an American Nightmare. They may have experienced or witnessed the struggles to pay mortgages during periods of unemployment or underemployment. The ability to move to where the jobs are without the dependency on selling a home first has significant appeal in turbulent employment periods. Second, Fannie Mae research notes that younger Americans are more likely to rent. The 35 and under crowd puts a greater emphasis on mobility over potential lockdown to one address. And here’s a fact that should give everyone food for thought – younger Americans have far more student debt than the college graduates of previous decades that often makes them ineligible to qualify for mortgages as first time home buyers, keeping them in rental situations for extended timeframes. Finally, the greatest majority of single family homes have owner-occupants that are over the age of 65. As the Baby Boom generation downsizes and/or transitions to senior-focused communities, their old owner-occupied homes may convert to rentals too.
The rental market is fragmented when you examine who is buying single family homes for conversion into rental housing. The vast majority of the housing units are owned by individual investors, along with a handful of large real estate investment trusts (REITs). These investors may not live in the communities where they have rental property, and their names may never appear on those properties’ utility bills.
Where do most utilities and vendors in the B2C energy efficiency space focus their efforts? Where do DER vendors like rooftop solar PV companies focus their marketing dollars? Where will residential energy storage vendors target their sales promotions? The answer is on owner-occupied properties, or on the names associated with utility bills. 130 million single family homes may seem like a limitless pool of prospects, but the trends point to a decrease in the numbers of owner-occupied units. These trends point to benefit gaps similar to the situation described for multifamily housing.
Renters do not own their properties, so while they would benefit from reduced electric, gas, and even water bills, they cannot participate through the usual energy efficiency actions to upgrade windows, water heaters, large appliances or HVAC units. These are not mobile assets like energy efficient light bulbs that can move with them from address to address. Without the opportunity to invest in basic remote controllable thermostat technologies, they may not participate in demand response programs. Landlords have no incentives to take these actions to increase the energy efficiency of these properties if they are not responsible for the utility bills. They would merely reduce their income while paying off these investments.
There is a great multitude of underserved ratepayers, taxpayers, and voters out there. This is a serious benefits gap with multiple downsides that should concern policy-makers as well as electric utilities. Real estate is always local, and so are grid conditions. Utilities will need to encourage greater numbers of their customers to participate in programs that range from generation of negawatts to generation of kilowatts. The right number of targeted rooftops with solar PV plus the right number of DR participants could offset the need for a significant upgrade along a specific circuit.
Municipal leaders will want their most vulnerable constituents, whether vulnerability is defined by economic perspectives (such as people and businesses located along an unreliable electric circuit) or social justice perspectives (such as a collection of low-income senior housing units) to have the same opportunities to participate in safe, clean, low-cost, revenue-generating, and reliable electricity services. They could help achieve that goal by standardizing and normalizing the crazy quilt patchwork of permitting processes and fees across communities in each utility territory.
Resolution is possible with a systems engineering approach. Policy makers and utilities should collaboratively consider how to enable programs that promote renter and landlord participation to further jurisdictional and utility goals for renewable energy and carbon emission reductions. These programs should offer financial incentives to property owners even when they do not occupy those properties that are highly desirable targets for demand response or energy efficiency programs. These programs have to consider and create the value that property locations hold for utilities in terms of potential distributed generation of kilowatts and negawatts. These are not easy challenges to overcome, but they must be addressed to realize the complete benefits of the Smart Grid.
The Smart Grid has to accomplish two objectives from an infrastructure perspective to achieve grid modernization. It has to upgrade the 20th century electrical grid infrastructure to the 21st century, and meld it with a modern, robust, and secure communications network infrastructure. The Smart Grid enables different alternatives in terms of configurations and business models to the traditional supply chain of generation/transmission/distribution of electricity.
One of those alternative supply chain configurations is the concept of distributed energy resources or DER. DER encompasses power generation and energy storage. It also includes negawatt generation – the reduction of predictable amounts of energy consumption during specific timeframes known as demand response (DR) events. DER is now evolving into a strategy for grid and community resiliency. As weather patterns include more summer derechos and polar vortexes, resiliency is an objective of planning sessions at kitchen tables, in corporate boardrooms, and between elected officials’ offices. But will resiliency plans consider all the ramifications – especially geopolitical influences – involved in different energy sources and their infrastructure needs?
For instance, GE recently released a white paper on Distributed Power. Their focus on power generation excludes energy storage and renewable energy sources. It makes sense, because GE is very interested in selling its natural gas generation products for distributed deployments as a resiliency play. But the white paper fails to give proper consideration to areas that are not served by existing natural gas pipeline infrastructure. It mentions “virtual pipelines” that can move natural gas to locations not served by gas pipelines. Virtual pipelines are roads, bridges, and tunnels. Most Americans would agree that our overall road infrastructure isn’t in great shape, and often suffers from traffic congestion and also fails in catastrophic weather scenarios. GE’s distributed power concept may be an interesting possibility for communities and corporations already served by a decent pipeline infrastructure to improve operational resiliency, but will taxpayers responsible for the upkeep and safe utilization of their roadways be happy in seeing them converted into virtual pipelines?
DER can leverage renewable sources of energy. Today, solar is proving to be an effective energy source that can deliver some, if not all of a residential home’s needs. Solar coupled with energy storage holds significant promise to deliver power even when transmission and distribution infrastructure fails. But there’s another aspect of domestic renewable sources of energy that makes it very attractive for resiliency planning.
The clear lack of geopolitical forces makes renewable energy sources attractive. Have you noticed that every report about possible political responses to the situation in the Ukraine eventually mentions the natural gas pipelines heading from Russia to Europe? European countries depend on this natural gas for 25% of their supply. Russia has a weapon of economic warfare – just the threat of gas supply disruptions is sufficient to secure the requisite responses, or lack of them. The USA may promise increased exports of natural gas to Europe or other regions to counteract another cutoff as Russia has done twice before. Natural gas is transportable and exportable via real or virtual pipelines. That means it has a price volatility that will never be experienced by solar or wind energy producers. In other words, natural gas may be extracted in the USA. That doesn’t guarantee that it will be burned in the USA – it will go to the highest bidder.
Resiliency planners need to consider a broad range of “what if “ scenarios to develop adequate actions and responses that reduce or eliminate downtime of critical operations. The assurance of supplies of natural gas to critical sites must be considered in private, civic, and corporate resiliency strategies. Relying on energy sources that have infrastructure weaknesses plus suffer the impacts of geopolitical forces isn’t a good short or long term strategy. The future still lies in energy sources that have the least price volatility and require the least transport infrastructure. DER with renewable sources of energy delivers on those requirements.