Will California’s Energy Policy Become the World’s Energy Policy?

California recently was ranked by the World Bank as number eight in world economies, ahead of Russia and Italy and just behind Brazil. Jerry Brown, re-elected as governor, delivered an inaugural address that included an energy policy in the form of three energy objectives for 2030. Given this state’s ability to make markets through its imposing economic and innovation strengths, here are my projections about what this energy policy will mean for California, electric utilities, Smart Grid vendors, and the world.

Energy objective 1: Increase electricity from renewable sources to 50%.

The state was well on its way to achieving the 2020 objective of integrating a 33% mix of renewables into its electricity sources. This new goal puts increased emphasis on energy storage to firm up even more intermittent renewables, so the state market will markedly expand for both utility-scale and distributed renewable generation and storage solutions. Distributed generation, particularly in the form of rooftop solar, will also be required to meet this objective. California utilities will seek regulatory approval to rent customer rooftops and operate solar generation assets on an aggregated scale, as long as these assets count towards their expected renewable investments. Vendors with distributed grid operations management solutions have a bright future in the state.

Energy objective 2: Reduce petroleum use in transportation by 50%. Don’t bank on a focus on technologies that improve miles per gallon in internal combustion engines. California’s strong support for carbon cap and trade markets and climate change initiatives put the emphasis on clean alternative fuels. Hydrogen technologies and fuel cell cars could be part of this strategy. However, the regulated electric utilities have a new leverage point to build EV programs and create new opportunities to explore transactive energy scenarios that firm intermittent renewables. PG&E recently announced a pilot program with BMW.   Municipalities will also look at greenhouse gas reduction goals through systemic transportation transformations. Community Choice Aggregation (CCA) initiatives and municipal utilities will adopt EVs for their flexibility in smart charging.

Energy objective 3: Double the efficiency of existing buildings and make heating fuels cleaner. California enacts new building energy efficiency standards every three years that typically apply to new buildings. It’s noteworthy that this energy objective highlighted existing building stock. Building energy efficiency retrofits have multiple benefits – local jobs in communities, and accrued savings from reduced energy bills for residential and business consumers. Since California is one of eleven states that decoupled both electricity and natural gas, regulated utilities won’t see negative impacts on their bottom lines. Expect innovations in programs that encourage energy efficiency retrofits for multi-family and rental properties and more PACE-like programs that focus on energy efficiency rather than generation. With regards, to cleaner heating fuels, most California homes use natural gas, which emits those bad greenhouse gases. However, look for most policy and investment activity in commercial buildings, which can benefit from combined heat and power (CHP) and even more energy-efficient combined cycle heat and power (CCHP) technologies to heat building spaces. The solutions here are much more mature than they are for residential, although this 2030 objective offers significant impetus to future Department of Energy Funding Opportunity Announcements.

The leader of the eighth largest world economy said, “How we achieve these goals and at what pace will take great thought and imagination mixed with pragmatic caution. It will require enormous innovation, research and investment. And we will need active collaboration at every stage with our scientists, engineers, entrepreneurs, businesses and officials at all levels.” The good news is that California has all the ingredients to make it happen, and what happens in California does not stay there.

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Want Green Power? Try Community Choice Aggregation

The recent Business of Local Energy Symposium in Petaluma, California had a rare degree of fervor that isn’t typically experienced at Smart Grid industry conferences about electricity.  Community Choice Aggregation (CCA) or municipal aggregation, is defined in the Smart Grid Dictionary as an energy policy that can promote distributed and/or renewables generation through community-based contracts with electricity suppliers. The community acts as an aggregator, and residents within it are automatically part of that CCA unless they opt-out, which serve to continue the customer/supplier relationship with the regional IOU (investor-owned utilities). The IOU is still responsible for delivering power to the CCA members. This policy is available in several states, including California, New Jersey, Massachusetts, Ohio, and Rhode Island.

Two neighboring counties in Northern California – Marin and Sonoma – have CCAs operating on a county-wide basis. That’s one distinction of how a CCA is different from a municipal utility, which typically operates in conjunction with a political jurisdiction that provides other governmental services such as police, fire, and the collection of taxes to support those services. There are a couple other key distinctions.

First, the CCA essentially “rents” the wires from the utility that owns and operates the distribution grid. The CCA sources its own power, and for CCAs in California, the emphasis is on finding clean renewable sources of power. The distribution utility is still responsible for customer service, billing, service restoration, and all grid operations. In other words, the CCA becomes the default, not-for-profit provider of the sources of electricity.

Second, the CCA is hyperlocal. Common success factors identified by Sonoma Clean Power and Marin Clean Energy – the two CCAs most discussed at the conference (although other states were also included) put an emphasis on local. The power is local whenever possible. The financing to get the CCA off the ground is provided by local community banks. The jobs to develop and maintain local power remain in the community. Even the energy efficiency programs can be tailored to specific zipcodes or neighborhoods, achieving levels of granularity that often elude larger IOU-sponsored programs.

CCAs have traditionally been viewed with trepidation or outright hostility by IOUs. Certainly, the erosion of the customer base has a downside to utility revenues. However, CCAs have some intriguing possibilities – with the assistance of innovations in technology, policy, and finance – for utilities. States are the laboratories for democracy and utility business model revolutions. California is requiring their IOUs to develop Distribution Resources Plan (DRP) proposals that incorporate distributed energy resources (DER) into their plans and grid operations. New York is boldly exploring complete revisions to the existing regulated utility business model. CCAs are interesting models to consider to determine the locational value of DER assets like generation and energy storage, and develop formulas for the monetization of DER assets within distribution grids.

In the future, CCAs could function as autonomous nodes of distribution grids. The CCA acts as the manager of its own node on the distribution grid, and the utility negotiates with the CCA to meet defined performance targets. This arrangement addresses a significant challenge of embedding distributed intelligence and control in distribution grids. By leveraging the local control provided by a CCA, specifically the support of its political and community leadership, the distribution grid operator could gain more predictability about consumer behaviors and asset activity than less organized geographic territories.

CCAs could also morph into autonomous microgrids or include autonomous microgrids within their boundaries. Microgrids that contain combined heat and power (CHP) assets, energy storage, and distributed generation in the form of renewables, electric vehicles (EVs), and demand response (DR) could contribute kilowatts and negawatts to the distribution grid.

CCAs could also be leveraged by distribution grid operators for more intensive energy efficiency (EE) activities that address grid problem areas. Since CCAs have the advantage of local control, they may deliver better results than existing EE programs. New regulatory policies that reward negawatt production on the part of CCAs might encourage more activities here, including recognition (carbon credits) for reductions in CO2 emissions. After all, the cleanest watt is the watt that is never consumed.

These possibilities would require policies that allowed for entities other than existing utilities to have some level of control for selected portions of the distribution grid. CCAs, as managers of DER assets, would also benefit from revised standards that enable bi-directional electricity flows while still maintaining safe grid operations. New technologies and services are also needed. A couple of speakers noted that turnkey arrangements would definitely make it easier for more communities to consider adoption of CCA models.   And finally, the finance community has to be educated on the benefits of CCAs.

CCAs are one interesting way to add more clean renewables or green power to the grid and accelerate as well as supplement existing renewable portfolio standards in every state. Let’s see which state step up to make that happen.

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How Smart Grid Policies Create Employment Opportunities

Most Smart Grid discussions about human impacts address the demographic trends in utility workforces or the influences that Smart Grid technologies and applications have on people in residential and commercial settings. While both are very worthy topics, the subject of job creation doesn’t get the same attention. And that’s a puzzle, given today’s economy. The Smart Grid’s technology, policy, and financial disruptors have happy consequences for the labor market through increased and sustainable local employment opportunities.

Jobs can be defined as direct, indirect, and induced. Direct jobs are the positions created to perform a specific function. Indirect jobs are created in supply chains and the businesses that support those direct jobs. Induced jobs are created based on the savings generated from the results of the direct and indirect jobs.

For instance, one of the most important Smart Grid trends is the growth of distributed energy resources (DER). One important DER asset class is renewable energy such as found in solar generation solutions. The state of California has more than 47,000 people working in this sector – about one third of the nation’s total solar employment. Many of these jobs are focused on installation and maintenance of solar systems – “boots on the ground” or direct jobs that every region of the USA should encourage.

What led to solar generating energy and jobs? It’s not just the natural climate of abundant sunshine in the state. The state renewable portfolio standard of 33% that Governor Jerry Brown stated was a “floor, not a ceiling requirement”; the million solar roofs program, and other regulatory and legislative actions created the business climate, which enabled companies to put certainty to former risks, and led to the establishment or growth of scores of businesses and new direct, indirect, and induced jobs.

Other DER asset classes include energy storage, energy efficiency retrofits, and demand response programs. The California Public Utilities Commission (CPUC) mandated in 2013 that its regulated utilities must incorporate 1.325 GW of energy storage into their grids by 2020, the largest amount of storage in the world today. Energy storage and renewable generation assets go together like peanut butter and jelly – good on their own, but even better together. Like recent solar cost trends, upfront energy storage costs are expected to decrease as deployments increase and benefit from economies of scale. New market entrants with innovations in technologies, processes, and services will bend the cost curves downwards even more. These trends mean more direct jobs for skilled technicians and a labor force that remains in place to respond to maintenance and upgrade requests. Greentech Media estimates that the energy storage market will quadruple every four years, and one of the reasons is California policy, which essentially made a market for energy storage solutions at the transmission, distribution, and behind the meter (consumer and prosumer) points.

Energy efficiency is another promising homegrown employment area. Spurred by the oil embargo and economic shocks of the early 1970s, California has gradually introduced energy efficiency (EE) standards for white goods like refrigerators, electronics like TVs, and commercial and residential buildings themselves. The building standards are updated every three years. Similar policies have been adopted worldwide since then. The latest round of EE building standards will create locally-situated jobs as building owners retrofit structures or deploy the appropriate energy efficiency measures in their new construction. This American Council for an Energy-Efficiency Economy (ACEEE) paper outlines the economic impacts of EE projects in both employment and cost savings. The cost savings benefits of energy efficiency measures are sometimes overlooked too. As less money is needed to pay for energy expenditures, more capital is available to invest in business growth.

There are two centers in California designed to support job training on EE technologies and services. The newest center is a collaboration between the International Brotherhood of Electrical Workers (IBEW) and the National Electrical Contractors Association (NECA). These organizations understand the connection between smart energy policies and sustainable employment. California has often led the way in smart energy policy, although the aftermath of Superstorm Sandy has prompted some eastern states to promulgate innovative energy policies that build and enhance grid and community resiliency. Where these pioneers lead – will other states follow? They would be wise to enact similar energy policies to benefit their regional economies through job creation and reductions in energy costs for citizens and businesses.

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Smart Grid and Smart Buildings Share Same Disruptive Impacts

The annual IBcon event always delivers on thought-provoking discussions and fresh insights about the intersections of technologies, policies, and financial drivers in the commercial real estate sector. The Smart Grid itself is the convergence of IT and OT (operating technologies).  Smart commercial buildings – both office and multi-family residential – are experiencing a similar convergence of facilities management (the building analog to utility OT) and IT solutions.  Not surprisingly, convergence means disruptions for the status quo.

As noted in my previous blogs, buildings use 40% of all energy in the USA.  The National Academy of Sciences reported that if buildings fully deployed available energy efficiency (EE) technologies and programs, we could avoid construction of new electricity-generating plants in the USA until 2030. The good news is that the building sector is paying attention to the potential benefits of EE, demand response (DR), and distributed energy resources (DER).

Building owners and facilities managers care about top line and bottom line numbers to create a healthy NOI or net operating income. NOI is the income of a property after operating expenses, which include energy costs. A quick glance around the IBcon exhibit floor confirmed that heating, ventilation and air conditioning (HVAC) remains the biggest energy consumer in a building. It’s the low-hanging fruit with regards to energy management companies with solutions that can pinpoint when, how, and where HVAC is operating.   It’s a major revelation and operating expense reduction when a facilities manager learns that an errant command starts the HVAC system in an office building at 1AM instead of 7AM.   A simple adjustment can have a meaningful impact to this property’s NOI.

But like the grid itself, buildings are relatively dumb. The evolutionary and revolutionary drivers that are impacting the transition from today’s grid to tomorrow’s Smart Grid parallel the transformations from today’s structures to tomorrow’s smart buildings.

The same sensors and mostly wireless technologies that are the basis of numerous grid upgrades are disrupting buildings in similar ways. Building evolutions go well beyond M2M applications that deliver remote monitoring and control of building HVAC and lighting.   Leveraging policies that encourage DR and harnessing initiatives like OpenADR allow more buildings to participate as prosumers by automating DR transactions. More capital for EE upgrades is now available in the form of green banks and other innovative financing mechanisms for property owners and managers.

The revolutionary impacts to the building sector occur in DER. For instance, the Shanghai Tower incorporates wind turbines in its roof to generate enough power to provision the building’s exterior lighting.   The second tallest building in the world also deploys its own co-generation system to operate a number of building systems. That gives it some important resiliency from any service interruptions from the power grid. It’s the early days for fully integrated DER in buildings, and over time we’ll see more solutions that make them net zero or capable of sending electricity back to the grid.

There are other interesting parallels or similarities between the electric and commercial building sectors. For instance, both share these characteristics:

  • Fragmented markets in the USA. For the electric sector, there are over 3000 utilities and 50 state regulatory agencies plus federal agencies that have jurisdiction over utilities. However, building codes and permitting processes reflect “local control” distinctions down to the municipal and county level. If there’s one sector that would benefit from some reductions in process friction via standardization, it is the building sector.
  • Conservative and protective of the status quo. The building industry has not changed substantially in over 80 years. Construction techniques haven’t changed much for centuries with most buildings fabricated onsite. Utilities haven’t changed much since Thomas Edison.
  • Asset designs and configurations are built for the long term but disconnected from consumers. Utilities built grids with inherent limitations and fragilities that get in the way of consumer expectations and prosumer transformations. Building construction doesn’t always reflect usage, requiring expensive upgrades and changes to accommodate end user needs.
  • Data changes the way business is done.  Data volume, variety, velocity and veracity are disrupting traditional business processes and creating significant challenges in reskilling people to these changes.

Of course, there is one important distinction between these two sectors. That is that the commercial building sector is extremely competitive, not organized as a monopoly. Building occupants have choices for office and residential space, and base their decisions on multiple factors including cost. The fear of declining occupancy and losing tenants keeps property managers awake at night.   However, given the increased abilities for buildings to reduce energy requirements and generate their own electricity, the fear of declining customer bases and revenues may keep utility executives awake at night too.

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How On-Bill Finance Innovates Energy Efficiency Investments

We need big and bold thinking at our national level to address climate change and grid resiliency.  Transactive energy is one example of that type of thinking.  Big and bold thinking also has to apply to financial innovations to build a Smart Grid.  One big idea is utility-based finance programs.  These programs could have significant impacts on reducing energy bills or carbon footprints and increasing dwelling comfort. Since utilities have relationships with almost all energy consumers, the costs of participation are lower than they would be for third party businesses.  And since buildings consume 36 percent of total energy use and 65 percent of electricity consumption, there’s sufficient motivation on the part of consumers, utilities, and governments to encourage creation of energy efficiency finance programs that can impact the greatest range of buildings.

On-bill financing (OBF) programs create opportunities for investor-owned, municipal, and coop utilities to offer financial assistance and help consumers reduce overall energy use.  OBF is a loan that is paid off in installments on a borrower’s utility bill.   It is usually tied to funding investments in new building insulation, windows, or other “big ticket” building retrofit activities that improve the building’s overall energy efficiency.

What motivates a utility to create an OBF program?  For the municipal utility based in Fort Collins, Colorado, reasons range from avoiding peak energy investments to achieving objectives in climate action plans for electricity and/or gas use reductions.  The utility also realized that OBF could augment existing building retrofit programs for residential customers.  And community interest turned out to be a powerful impetus to accelerate their OBF program from vision to reality.

John Phelan, Energy Manager for the City of Fort Collins utility shared some of his experiences in creating that OBF program.  As he described the history and the process, he emphasized that the biggest factor for success is the organizational will to succeed. That will to succeed is critical to overcome inertia (in the best of circumstances), or active resistance to change (in the worst of circumstances).  These forms of resistance can be found within utilities as well as external communities of stakeholders.  I’ll echo that based on my consulting experiences.  Change management – intelligently managing change by/of/and for the people – is the most important aspect of any project.

John noted, “OBF programs can’t happen without the active support of finance, legal, and billing departments.  Creating a ‘finance as a service’ mindset is a big lift for any utility, which traditionally doesn’t see itself in that light.”   Copy that.  But at one point in time, GM made cars.  Now it also makes loans for cars. As utilities transform their business models, some may consider that financial services offering could be one way to address declining electricity sales revenues.  This was not the motivation for the City of Fort Collins, but each utility could have a different approach.

An OBF program structure has some variability in terms of number of partners, and funding sources.  In the case of Fort Collins, the program looks like a mortgage application process, something that is familiar to homeowners.  The funding pool is the utility’s reserve funds so no outside capital is used.  Applicants are vetted through a third party partnership with a community financial organization serving as the process owner.  Loans are recorded in the county and appear as liens on the properties benefiting from the program.

The benefit of this approach is that the homeowner enjoys the immediate reduction in energy costs for heating and cooling, while the costs of upgrades are spread out over time.  Homeowners assume the OBF obligation while enjoying more comfortable residences, lowering energy bills, and reducing carbon footprints.  The default rates on OBF programs are low because people typically make utility bill payments a high priority – everyone likes to keep the lights on in their homes.

OBF is a creative way to give utility customers more choices in how they can reduce energy use, eliminates or postpones utility investments in additional generation, and improves building energy efficiencies.  That’s good for all of us.

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