Last week I discussed the transition to renewable energy sources for our electricity supply. It is difficult for some to envision a world organized around different sources of energy, but as Greg Abel, the CEO of MidAmerican Energy Holdings Company noted at a recent industry conference, renewables don’t have a lot of variable costs. That’s important. The old sources of energy like oil, coal, and gas deliver steady state energy generation, but at variable and increasing costs. And of course, there’s that matter of carbon emissions from fossil fuels. Renewable sources of energy like wind and solar are intermittent generators, but by Nature, have fixed costs. And no carbon emissions.
Smart Grid technologies, policies, and financial innovations are disrupters to the energy status quo. Disruptions are nothing new to business and society – until it happens to your chosen business sector or group. The telephone disrupted the telegraph. The automobile disrupted horse-centric services. But for every loser, there can be multiple winners. Sometimes innovations create new value where none existed before. That’s one of the overlooked aspects to the Smart Grid. The modernization and transformation of the electricity infrastructure to integrate renewables portends massive changes to utility business models.
The bottom line is that we now have technologies – renewables coupled with energy storage; inexpensive sensors coupled with wireless networks; and analytics coupled with cost-effective data storage to convert a fragile grid into an agile grid. An agile grid relies on highly distributed energy assets (generation, demand response, energy efficiency and storage) with highly distributed intelligence.
This agility represents the goal of transactive energy. This agility has to include a new electricity market model where everyone can participate as a prosumer – producing negawatts and/or kilowatts. The relationship of utility and ratepayer changes in transactive energy. There will be tensions in balancing the social compact for utilities to provide electricity for all while competing with new services, players, and financial drivers that can disconnect customers from the grid. Electric utilities will face some stark choices and wrenching changes for long-term survival, and we have to hope that forward-thinking regulators help enable these transformations.
Here are a couple of ideas:
– allow utilities to develop new lines of business such as managing privately-owned microgrids on behalf of their asset owners. Policy makers should consider how distributed energy resources (DER) can deliver self-sufficient electricity production, and how to create markets that allow competition from non-utility entities..
– allow utilities to function as electricity insurance companies to perform as backstops in case of failures in islanded microgrids or DER assets. It would maintain the social compact and ensure that all customers fairly pay for their use of the grid.
These mechanisms would help address the unsustainable situation utilities face now of increasing operating costs and infrastructure investments coupled with decreasing electricity sales revenues as a result of energy efficiency measures. A predictable insurance subscription would stabilize revenues and prevent that utility death spiral. Other sources of revenue – in competition with other service providers – would be another way to ensure their continued financial health.
This week marks the 50th anniversary of the assassination of John F. Kennedy. It’s an appropriate time to recall his stirring words about one of the most wildly impossible challenges ever undertaken – getting safely to the moon and back again. In a 1962 speech, he said, “We choose to go to the moon. We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too.” Transitioning from fossil fuels to renewables and from today’s electricity infrastructure isn’t easy. But it is doable, despite the naysayers. It is necessary, given the increasing tolls that carbon pollution places on human and planetary health. It took the USA just 7 years from that 1962 speech to the first human footsteps on the moon. We can handle any terrestrial challenge.
The Smart Grid sector has an extensive number of conferences, symposiums, and webinars featuring presenters that offer all types of advice to utilities. A good speaker should offer provocative ideas that are positioned to be relevant to the audience. A good speaker gets everyone thinking – or at least those in the audience who are listening.
I’ve been thinking about one recent keynote presentation that focused on the value of branding for utilities. Branding is important for many companies. It helps establish an identity and a set of values such as quality, leadership in a particular field such as innovation or sustainability, and other tangible and intangible characteristics.
The speaker discussed the brands for companies like Apple, Coca-Cola, and Nike. Their brands are very well established and worth millions. For instance, Apple has a cool factor that is part of its brand, and people are willing to pay a premium for their products. Nike has tied its brand to athletic champions, imparting a value of sports excellence in its products. It makes sense – these companies sell products differentiated by design, functionality and/or price. They compete on factors that range from technology innovation, customer service and distribution strategies, and of course, their brands. The presenter urged utilities to think about their brands as part of their overall business strategies. But the examples given illustrated that this is really a comparison of apples and oranges.
Electricity is a service and more importantly, today’s business models make it a commodity. Utilities have a brand, most visibly identified by a corporate logo. Some utilities have successfully established intangible values like technology leadership as part of their brand, although these values may be more well-known within the utility sector than by that utility’s customers. For most consumers, electric utilities are simply the monopolies that deliver electricity. The electrons supplied by my local utility function the same as the electrons supplied by a neighboring utility.
The regulated monopoly business model makes it difficult to differentiate, much less brand electricity service. Even in deregulated utility markets in the USA, retailers compete on price – consumers are for the most part indifferent to brands. There are some differentiators though. Some consumers may select an electricity provider based on the quality of customer service, or the source of electricity – particularly if it is from renewables. However, even in these situations, all the competing retailers are still supplied by one set of wires – hence the natural monopoly of electricity distribution grids. Retailers can’t promise that their electricity coming over the wires is more reliable than their competitors’ electricity because they all get it from the same supplier across the same distribution grid.
Smart Grid innovations in technology, policy, and finance hold the promise to transform utilities from their existing business models. New transactive energy business models may provide opportunities for utilities to build brands that communicate important values to consumers. But until utilities are allowed and encouraged to evolve into transactive business models that provide services and products above and beyond today’s simple electricity delivery, money that could be spent on branding initiatives is much better focused in building resilient, (not just reliable) grids; investing in effective consumer education, engagement, and enlightenment campaigns; and investigating new roles as one of many participants in the future grid.
Financial innovations are a key driver for transforming the traditional grid into a Smart Grid, on one that is capable of completing the vision of Transactive Energy. As described in my October 7 article, innovations in finance that encourage investments in big ticket energy efficiency improvements have real potential to help consumers and utilities save money and reduce carbon footprints. In that article, one municipal utility identified the biggest challenge to deployment of their innovative finance program as the will to succeed. That is also the conclusion by Brad Copithorne, Financial Policy Director at the Environmental Defense Fund (EDF). EDF has been very involved in promoting state-wide on-bill repayment (OBR) programs for the investor-owned utilities (IOUs) in California. Brad summarized the “will to succeed” distinctions between the states of Hawaii and California in his blog.
OBR programs differ from on-bill finance (OBF) programs in two important regards – the funding for OBR comes from private sources of capital like your friendly neighborhood bank instead of the utility’s funds, and these funders compete for borrowers – just like home mortgage financing. There are significant implications in these two distinctions. First, the source of funds for OBR programs removes objections from consumer advocacy groups about ratepayer funds used to subsidize activities that favor homeowners at the expense of renters. Second, private sources of capital are competing for market share in OBR programs, and will leverage their skills to create cost-effective, capital-efficient programs that are successfully marketed to a wide range of prospective borrowers. These are skill sets the average utility lacks.
According to the California IOUs (Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric), OBR programs are unfair to ratepayers who are not homeowners. But OBR programs are similar to Property Assessed Clean Energy (PACE) programs. PACE* programs are public/private partnerships that effectively finance energy efficiency and renewable energy investments for commercial and residential real estate. PACE loans are attached to the property tax bill. By contrast, OBR loans are attached to the meter.
Making buildings more energy efficient, which typically consume 65% of the electricity load helps utilities avoid grid investments. The aggregate benefits of energy-efficient building stock can be enjoyed by all ratepayers in the forms of reduced or avoided investment in more utility-based generation and reduced carbon emission. EDF estimates that an OBR program in California could generate $5 billion of third-party investment per year, create 37,000 jobs and reduce annual CO2 emissions by upwards of 200 million metric tons over 12 years.
There are costs for an IOU to adopt an OBR program. The IOU must ensure that their billing system can accommodate integration of the OBR line item as part of the bill. Many utility billing systems may not be up to the task, because utilities traditionally underinvest in their information and communications technologies (ICT). It’s possible that many IOUs have billing software systems that aren’t capable of flexibility to add a new line item to billing systems, or figure out proportional payments to transfer some receivables back to the OBR lenders. That’s a big red flag that those utilities aren’t ready to adopt Time of Use tariffs that distinguish electricity pricing based on time as well as total kilowatthours. But there’s hope for utilities. Phone companies (and their billing system vendors) figured out billing by time of use as well as total minutes a long time ago. You may recall a past when long distance calls made by wireline phones were cheaper after 9PM. Phone companies marketed this program to avoid congestion on networks during peak times of use. That was a new-fangled idea called Time of Use billing.
Utilities must transform their business models in order to survive. Overcoming internal resistance to change is always a challenge for any organization, but it is absolutely critical that utilities master change management in order to survive. Overcoming resistance to innovation – financial or otherwise – is another matter entirely. Policy makers and public utility commissions can help utilities do that with legislation and regulation that forces change. It may be the only way some of the Smart Grid transformations needed in the utility sector will occur.
*for more information about PACE, check out the PACEnow website.
The primary Smart Grid transformation drivers are technology, policy, and financial innovations. Of these three drivers, technology and policy are much further advanced than finance. Perhaps no country has been more aggressive in its policy innovations than Germany. The Energiewende* or Energy Transformation is a natural experiment to transition the current centralized electricity grid architecture and model to an architecture that supports decentralized and renewable sources of generation. It’s a brave new world of energy autarchy or surety that the Energiewende is crafting. But there’s a downside to this grid transformation in the form of grid resiliency. The stability of the grid is impacted by the large amount of distributed solar that exists in the grid. The intermittency of solar can create balance of system issues.
Christoph Burger, energy expert of the European School of Management and Technology, and a co-author of the book The Decentralized Energy Revolution said, “Security of supply has become a focal point of the political debate surrounding electricity market design as renewable energy creates instabilities in the grid. At the same time, new market solutions such as demand response initiatives, virtual power plants, storage parks or energy-autonomous regions are in development, being tested and implemented. Regulators and political parties currently discuss two approaches for solving the challenge: capacity markets and strategic reserve.”
There’s no question that these transformations were caused by regulatory policy, but the evolving grid requires market changes that encourage the entry of new participants delivering kilowatts or negawatts. In Christoph’s opinion, “The markets will decide on the prices paid for security of supply. It should be in the spirit of regulators and policy makers to not undermine these incentives.”
The evolving grid also requires new technologies to assist in its oversight. Enrico Amistadi, Smart Grid Industry Solution Director for Ventyx, an ABB company, emphasizes that the solutions utilities need now must support proactive rather than reactive management. As the grid integrates more distributed resources, grid managers must anticipate critical grid events before they happen. Enrico noted, “A modern grid control room has to include much more than just grid monitoring and supervising to be truly effective. Sophisticated forecasting techniques, power flow models, demand response and advanced analytics should be used all together to anticipate how the existing and new resources will impact the grid in the short term. The system should also account for the corrective actions and support and advise the user based upon the respective impact of the available operational options..”
Ventyx is working with E.ON to create the “next-generation” control center for the Smart Grid. The control center in Malmo, Sweden, is expected to be operational in early 2014. The project scope is ambitious and reflective of the scenarios confronting utilities around the globe. Today’s control centers were designed for a different set of assumptions about electricity generation and consumption. Power system environments are becoming more complex as new sources of generation are added into the distribution grid, and as Demand Response programs can scale up to include greater numbers of intelligent devices that can modulate their electricity consumption. The solution embodies what we often describe as the convergence of OT (operations technology) with IT (information technology) to deliver more granular remote monitoring and control of grid operations as well as improved power flow models that address grid congestion before it becomes a problem. In other words, there needs to be much more melding of hands-on management with planning and forecasting of generation and consumption that share the characteristic of increased variability. These are key requirements for a successful transition to grids that support Transactive Energy concepts.
Is the Energiewende paving the way for the future European business model, or will it remain uniquely German? We’ll hear more about the policy responses and the business model evolution as part of Christoph’s presentation at the Building Resiliency in the Distribution Grid session at European Utility Week on October 17. Enrico will provide more detailed information about how technology innovations for the next generation in control centers can support the transitions to more decentralized and distributed generation. These are important lessons to absorb as we transform electric grids into Transactive Energy grids.
*Note: What’s the difference between Energiewende and distributed energy resources (DER)? Energiewende is a concept focused on distributed generation. DER is popularly used in North America, and encompasses energy storage and DR programs plus generation sources. Regardless of the differences in these terms, the objectives are the same – to use technology, policy, and financial innovations to redefine existing models of how electricity is distributed and managed.
There are many Smart Grid pilots ongoing in the USA initiated courtesy of funding from the American Recovery and Reinvestment Act of 2009 (ARRA) program. But a few of them originated from utilities before the economic meltdown. These utilities realized that like many other business sectors, it’s imperative for them to reinvest in the business through R&D activities. Bonneville Power Administration (BPA) is one of those far-sighted utilities. Based in the US Pacific Northwest territory (Idaho, Oregon, Washington, western Montana) and including customers in eastern Montana, California, Nevada, Utah and Wyoming, this federal nonprofit agency self-funds its operations and R&D through sales of wholesale power and transmission services.
BPA has been an active proponent of a concept called Transactive Energy*. Terry Oliver, Chief Technology Innovation Officer for BPA provided an overview of a key pilot that enhances overall industry knowledge about Transactive Energy. BPA participates in a region-wide pilot called the Pacific Northwest Smart Grid Demonstration Project. Terry described the pilot scope as “a vertical slice of the grid because it covers generation, transmission, distribution, and consumption. What makes this pilot so integral to Transactive Energy is that it explores the interactions and coordination of variable generation and variable loads – in other words – manage these to play nicely with each other.” That’s an important aspect to Transactive Energy because it envisions a grid with a much greater percentage of intermittent renewables, and a much greater role for Demand Response and dynamic pricing to influence loads.
The pilot was launched in late October 2012, and incorporates activities among 11 utilities, including BPA. The pilot will gather data to help the regional grid deliver an abundance of wind-generated electricity (supplementing plentiful hydro power) and avoid transmission congestion, and learn how energy storage devices and smart appliances play roles in building reliability and resiliency at local and regional levels.
Transactive Energy is more than technology investments and upgrades. It also presumes that markets and business models – for utilities, consumers, and other stakeholders – will transform. Paul De Martini, Managing Director of Newport Consulting and visiting scholar at Caltech’s Resnick Sustainability Institute offered some insights into fostering these needed changes.
He noted that there are four main drivers in the USA for Transactive Energy transformations. First, there’s an evolution in customer expectations and behaviors as they transform into prosumers of electricity. Second, federal, state, and even local policies are placing greater emphasis on renewable sources of electricity generation that are impacting our local utilities’ distribution grids. Similar policy impacts on energy efficiency standards and building codes are the third reason, and finally, innovative technologies in generation and information and communications technologies offer new alternatives to existing means of managing electric grids.
There are significant challenges to completing this transformation of the electric grid. The current business model hinders much needed value creation for bi-directional transactions of electricity sales. Paul stated, “Changing this business model is essential to create opportunities for new classes of market participants. It requires transparent pricing and rules-based monetization structures. For instance, demand response programs to reduce peak demand and services to balance realtime system operations could have very different values. The right market and business models can accommodate those distinctions in value.” Enacting these changes will also require regulatory changes to eliminate barriers to technology investments, markets access, and greater consumer engagement.
Transactive Energy is a complex answer to a complicated problem. Terry and Paul are two of the presenters for a session I’m chairing titled Building Resiliency in the Distribution Grid at European Utility Week on October 17. They are part of a global list of participants sharing information and ideas on this topic representing utility, policy, and technology perspectives. Join us there!
*Here’s the Transactive Energy definition from the upcoming 5th Edition of the Smart Grid Dictionary: A software-defined grid managed via market-based incentives to ensure grid reliability and resiliency. This is done with software applications that use economic signals and operational information to coordinate and manage devices’ production and/or consumption of electricity in the grid. Transactive energy describes the convergence of technologies, policies, and financial drivers in an active prosumer market- where prosumers are buildings, EVs, microgrids, VPPs or other assets.