Investing in the Grid – Different Priorities Could Still Lead to Similar Results

In the developed world, we take for granted the infrastructure fundamentals that give us the good life.  Healthy drinking water?  Naturally.  Reliable electricity?  Of course.  But in the developing world, this infrastructure is out of reach for at least 1 billion people.  Last week the Center for Science, Technology, and Society at Santa Clara University in Santa Clara, California hosted an event that featured entrepreneurs who are making positive impacts in the lives of people in Africa and India.  For people living in energy poverty, electricity is as game-changing a technology as it is for us.  The hierarchy of needs around electricity has interesting parallels to how we might define the prioritization of a limited amount of electricity – particularly if we do not engineer grid resiliency in our buildouts of Smart Grids.

In developing countries, electricity is first allocated to light.  Lighting extends hours of productive work or study, and it provides safety.  The second priority is for charging mobile phones.  Developing economies are highly reliant on mobile communications, and mobile banking, which allows small businesses to flourish without requiring a financial services infrastructure complete with branch banks in remote villages.  Providing the power to keep mobile devices running helps keep their virtual finance systems running.  After these two needs are met, electricity is then used for entertainment – powering radios and TVs.  And finally, electricity is allocated to power agricultural equipment – running pumps for irrigation.

The entrepreneurs who spoke at this event are stimulating incremental changes that add up to economic, social, and political empowerment – not just in providing electricity, but providing new livelihoods and career options for underserved regions and populations.  What is happening would not fit the classic definition of a Smart Grid, but it is slowly building a grid, and doing it in very smart ways.  Contrast that to the level of activities to upgrade today’s grid, the greatest machine of the 20th century into a Smart Grid.  In our developed economy, our focus is much more on financial and regulatory innovation as opposed to technology and business model innovations for developing economies.   And while developing economies would be happy with reliable electricity, their highly distributed, small scale electrical generation deployments deliver inherent resiliency that our grid is lacking.  This is where our Smart Grid investments need to be focused.

The financial innovations are ongoing.  The Master Limited Partnerships Parity Act was re-introduced for consideration this year in the US Congress on April 24, with bipartisan support from Democratic and Republican senators and house representatives.  As noted in last week’s article, Master Limited Partnerships or MLPs are traded on public stock exchanges, offering cheaper access to capital than bank loans.  Making this financial mechanism available to renewable energy and energy storage projects would be a wonderful market-based stimulus for these types of projects, and accelerate deployment of distributed energy resources (DERs) into the grid.

Last week Solar Mosaic announced its latest investment opportunity for California-based investors.  As this and other models of crowd-funding proliferate, utilities will have to more rapidly adapt their own operations to support integration of these DERs into the grid.

It’s the evolution of regulations to allow for grids to become more resilient as well as reliable that is the area of greatest need in developed economies.  The real challenges are in creating regulatory roadmaps that allow for a graceful evolution of utilities from managers of assets that deliver electricity to managers of services that oversee electricity delivery and much more.  This will be one of the topics of discussion at this week’s webinar hosted by The Energy Collective on May 1.  Get more information about the event and register to attend by clicking here.  We need ongoing discussions about how to change our existing business models to accommodate DER.  Without an evolution of business models, we could be left contemplating which devices in our homes and businesses get highest priority for electricity delivered from a grid that lacks resiliency and results in reduced reliability.

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Grid Resiliency As a Social Benefit

When it comes to grid modernization, understanding some history can help us map the best path forward – particularly in ensuring that the Smart Grid is both reliable and resilient for everyone.

For instance, the transformations that occurred in the telecommunications sector within the past 25 years offer cautionary and instructive lessons.  In the past, everyone received universal service or phone dialtone from a monopoly called American Telephone and Telegraph (AT&T).  You leased your phone and phone number from them.  Then Private Branch Exchanges (PBXs) became commercially available and created dialtone for their owners.  Businesses could buy their own equipment.  Calls that occurred within their four walls never left the premises and never used the AT&T phone system, reducing their revenues.   Calls that occurred to the outside world used AT&T’s system.

AT&T’s monopolistic business model was disrupted and disintermediated by new technologies and entities that enabled consumers become prosumers.  This term, invented by Alvin Toffler in his 1970 book Future Shock, defined a new dynamic relationship for producers and consumers*.

But while you could be a dialtone prosumer within a building, it wasn’t feasible to sell excess dialtone back to the phone company.   That’s not the case with electricity.  It is feasible to sell excess electricity back to a local utility when regulations such as Feed-in Tariffs (FiTs) create the mechanism for it.  Grid modernization offers tempting prosumer opportunities for commercial and residential consumers to enable at least some degree of self-sufficiency and reduce their payments to local electric utilities.

The electric grid could evolve to be a patchwork of areas with privately owned distributed energy resources (DER) and local distribution grids upgraded to allow a two-way or bidirectional flow of electricity.  Under existing cost recovery mechanisms, all ratepayers would have helped to pay for the upgrades to these parts of the grid.  But would all ratepayers benefit?

We need to ensure that the sum total of ratepayers enjoy shared benefits for grid upgrades through business models that support grid resiliency. How can this be done?   Here is one suggestion.  Utilities could be allowed to manage privately-owned DER assets with agreements that identify emergency scenarios where DER-originated electricity would flow back to the grid rather than remain onsite.  DER asset owners would not pay fees to tie their equipment to the grid, and would enjoy all the monetary benefits of a transactive energy market on blue-sky days.  But when an emergency occurs, be it natural or human-caused, those assets would be managed to benefit the greatest number of beneficiaries.  Scenario definitions should be modeled on the coordinated inter-agency planning activities that identify disaster events and responses by utilities, police, fire, and other emergency services.  The utility becomes the arbiter of a social DER compact that leverages grid resiliency to deliver energy and economic security for all.

But this can’t happen under current investor-owned utility (IOU) operations, organized to satisfy dual stakeholders – regulators and Wall Street.  State regulatory commissions would do well to ask utilities to design distribution grid upgrades for shared benefits of resiliency in addition to reliability.   Regulators would also serve their constituents best by thinking how utilities should be re-organized to continue to deliver the broadest service coverage for customers.  Otherwise, we might end up with a grid patchwork that resembles nationwide wireless networks or broadband service coverage that doesn’t come close to the universal service ideal.

*  The Smart Grid Dictionary definition  of a prosumer is:  A term coined by Alvin Toffler to describe a producing consumer.  From a Smart Grid perspective, it would apply to distributed energy resource situations in which the owner of electricity production or storage assets may also have a consumer relationship with a utility, aggregator, or other energy services provider.

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The Value of Service – Quantifying the Real Costs of Outages

The oft-enunciated primary goals for regulated electric utilities are to keep electricity safe, reliable, and inexpensive.  An unintended consequence of these objectives have meant that US investor-owned utilities (IOUs) have underinvested in everything from distribution grid upgrades to the latest in information and communications technologies (ICT) to avoid adding costs to electricity rates.  But are we stepping over dollars to pick up dimes?

We now live in an economy that can’t function without electricity – there are no substitutes for it.  Our lifestyles depend on electricity to power the devices that keep us comfortable and productive on a 24 x 7 basis.  So it’s time for a new approach to measuring and evaluating the economic and societal costs of disruptions in electricity and justifying the most beneficially effective investment decisions.  As noted in my previous articles, engineering the grid on reliability alone is inadequate.  We need to build a resilient grid too.  In his 2013 State of the Union speech, President Obama mentioned the need for a self-healing grid.  This is what grid resiliency is all about – the fast recovery with continued operations from any type of disruption.

Do today’s models for cost recovery factor in the explicit and implicit financial benefits of resiliency?  No.  Cost recovery considers financial impacts of an investment to the cost of electricity for ratepayers by various residential, commercial, industrial, and agricultural categories.  Cost recovery does attempt to factor in reliability, but there is growing evidence that the costs of outages and the benefits of avoidance are miscalculated and often underestimated.  Some studies have been done on what is called the Value of Service (VOS) to true up the real costs of electricity service interruptions to customers.   This study from Lawrence Berkeley National Lab in particular is important reading understand why utility and regulatory approaches to Smart Grid investment decisions should include VOS considerations.  First, the study examines methodologies for developing outage costs and identifies problems and the best approach.  Second, it concludes that a reduction in the frequency of outages has higher value than the reduction in durations of outages.   That is an important attribute of distributed energy resources (DER) advocated by transactive grid proponents – DER reduces the number of outages that impact customers because it builds grid resiliency.

Obtaining an accurate assessment of the costs of outages helps guide Smart Grid investments.  Understanding the costs of frequency versus duration of outages will help utilities appreciate the economic and societal benefits of grid resiliency.  That in turn opens up new possibilities for not only determining the prioritization of investments, but how to assess the costs of distribution grid upgrades across customers.  Perhaps we’ll see future tariffs that offer what we call Quality of Service (QoS) in telecommunications – and customers may opt to pay a premium for guaranteed electricity uptime, thereby defraying the investment costs of building grid resiliency in their immediate distribution configurations.   For instance, a residential customer with a serious wine cellar may opt to pay a monthly premium for no downtime in electricity service rather than risk cooking their collection in an outage.  It would be an interesting market-based and probably cleaner alternative to that customer purchasing a diesel generator to preserve their wine cellar.  It could open up new scenarios for utilities and third parties to lease renewable generation and energy storage installations to customers who then get exclusive use of that electricity if the distribution grid experiences outages.

The Smart Grid can be built to be a reliable and resilient grid.  We need to include VOS calculations in Smart Grid investment assessments and how VOS factors into recognition of the quantifiable benefits of grid resiliency, transactive grids, and new paradigms for electricity QOS valuations.  Perhaps a more realistic understanding of the true costs of outages will reorient our evaluations of the most bang for the buck in Smart Grid investments.

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Regulatory Policy Will Dictate Smart Grid Directions

The Smart Grid will modernize and transform our energy infrastructures to incorporate more renewables and reduce use of fossil fuels for electricity and transportation.  But energy surety or autarchy requires more than a transformation of energy sources to supply electricity.  True energy surety requires the right grid provisioning – how our electricity grid is architected and managed; how our electricity markets are organized; and how our regulatory policies support these actions.  There are two very different directions the Smart Grid could take.  Given the critical social-economic importance of electricity, we must give serious attention to the policies our elected and appointed representatives make in support of one direction over the other.

One path continues the current “command and control” model of centralized, remote, and large-scale generation that is transmitted at high voltage for eventual distribution to consumers. These consumers are mostly allowed to participate in the electricity market through curtailment programs like demand response (DR) that offer some monetary incentive to reduce electricity use (create negawatts) at specific times.  The other direction is a decentralized grid of distributed energy resources (DER) that produce and store electricity close to points of consumption.  Consumers can become producing consumers (prosumers) and participate in generation of kilowatts or negawatts.  In short, it is the choice between a “business as usual” model with utilities as electricity suppliers or a new business model where utilities or other entities become DER managers.

When faced with that choice, the smart questions are, which path offers the optimal grid reliability and resiliency?  Which choice makes consumers less vulnerable to service disruptions and reduces the grid brittleness experienced after severe weather events (or potentially future cyber attacks)?  A growing number of industry experts and organizations are advocating that a decentralized grid based on a transactive energy model  is the best answer to these questions.

Intrepid nations like Germany are pioneers in moving along the decentralized path. Two books offer excellent information about Germany’s Energiewende or Energy Transformation.  The Decentralized Energy Revolution by Christoph Burger and Jens Weinmann describes the early lessons learned through indepth interviews with a number of stakeholders in the evolving energy supply chain.  The second is an ebook from Osha Gray Davidson titled, Clean Break.  Both publications deliver thought-provoking information about Germany’s plans, players, progress, challenges, and potentials, and how we can apply their learnings to our advantage.

Germany is transforming its energy infrastructure to achieve energy autarchy – self-sufficiency in energy production and independence from fossil fuel.  The identified drivers of this transformation are technologies, regulations, and empowerment, which includes ideas like “Think global, act local” and consumer activism, particularly around nuclear energy and climate change.  In the USA, the drivers for our energy transformation are technologies, regulations, and finance mechanisms.

For example, today’s regulations are structured to support business-as-usual in which utilities function as electricity suppliers.  A transition to energy surety or autarchy will require regulatory revisions to support utility transitions to DER managers, and create market conditions that encourage new participants delivering kilowatts or negawatts.

Defaulting to the business-as-usual model for the Smart Grid may seem like less work upfront, but it essentially guarantees a grid that continues to break every time the wind blows with concomitant billions of dollars of lost economic value to regional and national economies.  Creating energy surety through technology, regulations, and financial mechanisms to provision a decentralized grid needs serious discussion in the USA.

On February 28, I’ll moderate a panel session at the Distribution Automation conference in Raleigh, NC that will explore regulatory challenges in the USA to provision a decentralized grid with extensive DER deployments.

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What Does Japan’s Top ICT Company Think (and do) About Smart Energy?

Japan’s national energy strategy experienced a 9.0 quake of its own in 2011 as a result of the twin incidents of the March 11 tsunami and subsequent Fukishima nuclear accident.  It rattled many assumptions about energy sources and electrical grid configurations for its major corporations too.  A recent Silicon Valley Technology Forum hosted by Fujitsu served as an excellent opportunity to hear how these large-scale events have shaped thinking and R&D in the leading information and communications (ICT) company in Japan, which also happens to be the third largest ICT company in the world.   Their thoughts and R&D can help contribute to North American ideas and directions to improve our energy surety as well as grid reliability and resiliency that the Smart Grid’s modernization activities must deliver.

Fujitsu’s Smart Energy vision focuses on three trends:

  1. local generation and consumption
  2. increased sensing and remote control in transmission and distribution grids
  3. increased demand response (DR) technologies and distribution grid-sited storage.

Local generation and consumption has a fair number of terms associated with it such as decentralized generation of renewable energy, in wide use in Germany as part of their Energiewende vision.  The phrase distributed energy resources (DER) enjoys more use here in North America, and covers more technologies like energy storage and DR programs rather than have a focus solely on generation sources.  While there are subtle differences in these terms, the end goals are the same, to use technology disrupters like solar panels (disrupted by virtue of technology, policy, and finance innovations) to redefine existing models of how electricity is distributed and managed.

Increased sensing and remote controls rely on technology innovations that are delivering a supply of cheap, low-powered, long-lasting wired and wireless sensors for a growing range of machine to machine (M2M) applications.  Smart meters and phasor measurement units (PMUs) are two of the first applications within the energy sector, but there are emerging applications in smart cities, transportation, and personal health too.  There will certainly be disruptive services as a result of M2M technologies.  Smart meters enable proactive outage reporting – obviating the need for customers to call in to notify utilities of service interruptions.  But other sensors attached to other equipment used in generation, transmission, distribution, and consumption of electricity will help us move from unrestricted consumption to sustainable consumption.

This transformation of consumption models is where DR and energy storage come into play.  Consumption changes from a passive state to an active state and enables market participation in generation of negawatts or kilowatts.  While negawatt generation is typically focused on DR programs, energy efficiency (EE) activities arguably could also be included in consumption.  Manufacturers like Fujitsu are developing new circuits that reduce energy consumption by reusing energy stored in specific transistors.  These circuits could show up in the power supply units of servers by 2014.  Fujitsu demonstrated their OpenADR 2.0 server software which could send messages on a wide scale to devices enabled to receive signals and reduce energy usage in reaction to those signals.  Ability to communicate at a scale of thousands to millions of devices, as opposed to today’s hundreds, will be crucial for residential or commercial DR programs to be fully effective in the future.

Fujitsu researchers described a very interesting variation of the typical DR program.  In this scenario, specialized plug loads that have their own battery resources (ie laptops) are controlled in an office building to “disconnect” from the grid and run on battery power.  When aggregated over a sufficient number of devices, building loads decrease.  It’s a creative alternative to the usual reductions in lighting or HVAC loads for organizations that want to participate in DR programs that reduce energy use at peak times and save money for building occupants (reduced energy bills or increased DR payments) and ratepayers (avoidance of investment in new generation assets).

The Smart Energy trends discussed by Fujitsu during their Forum illustrate significant synergies.  If we have intelligence in the grid and the associated communications networks to build situational awareness of devices, regardless of their status as generating, storing, transmitting, or consuming electricity, we can create completely different grid that co-locates generation (or storage) with consumption.  Reducing reliance on geographically remote generation reliant on vulnerable transmission and distribution wires does deliver energy surety as well as grid reliability and resiliency.

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