Community Utility Managers

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Shaking Up the Franchise

We may not all know it yet, but life on the grid has changed forever. It may seem to resemble the network we’ve always known, partly because it does, with its wires and substations and big power plants. But a subtle, yet tectonic, shift has occurred.

We are rapidly moving toward a future where the highly centralized and heavily engineered network of the past is devolving toward collective rather than centralized intelligence and resources. This new incarnation will exchange scale in generation - the 1,000-megawatt cathedrals of the past - for scale in manufacturing tied to the solar, storage, and yet-to-be-determined gigafactories of the future. A

little further out, we can see IT-enabled markets supplemented by algorithmic controls that turn a passive network of modest intelligence into a vibrant marketplace where demand and supply are both optimized on the fly without sacrificing reliability.

With the right injection of innovation and know-how, this grid of the coming future should be at least and potentially even more cost-effective than the continued investment that simply maintains today’s grid, while better meeting the social and environmental preferences of customers. Rocky Mountain Institute’s recent “Economics of Grid Defection” report detailed the prospects for solar-plus-storage systems to unseat the status quo, but the attacks on the castle are far more numerous and systemic. Democratization of energy choice is afoot.

Sure, there are naysayers and incrementalists. But as visionary Roy Amara wisely observed, “We tend to overestimate the effect of technology in the short run and underestimate the effect in the long run.”

As we look at this future electricity system — the one we need to be building today — we see four critical differences from the present system. Redesigning our regulatory and market models should reflect these emergent needs.  

For one thing, the future electricity system will be highly transactive. Increasingly, the grid will become a market for making many-to-many connections between suppliers and consumers, including customers whose load profiles and behind-the-meter distributed energy resources for the first time make them both suppliers and consumers. The balance of those roles will dynamically change hour by hour and day by day as self-balancing systems decide whether to take from or supply to the grid at any given time.

As a second, corresponding matter, asset and service value will be differentiated by location and timing of availability, and perhaps even by carbon intensity or other socially demanded attributes.  In a system that requires instantaneous load-matching at the distribution level and where virtual and real storage are distributed throughout the system, resource coordination will require transparent markets that provide the ability to balance autonomously using value signals.  A system historically governed by averages will instead migrate to specific, dynamically varying values.  The rules governing this system must therefore be adaptive to these dynamics.

Third, innovative energy solutions will proliferate. As a consequence of market forces already unlocked, we are assured to see a regular stream of distributed resource innovations that better meet customer needs at costs comparable to existing utility retail prices. These could be market-based aggregation plays such as the use of distributed electric vehicles to stabilize the grid or personal technologies such as a home power plant with solar plus storage or a gas microturbine.

And fourth, the customer will be increasingly empowered.  The services of the grid must de-commoditize to deliver against exact customer needs for reliability, “greenness” and other attributes.  Failure to do so will result in customer finding higher-value alternative or alternatives that simply better match their lives.

To be clear, this future still prominently features a robust wires network and some central generation; defection from the grid with stand-alone distributed energy resources would be suboptimal. But to avoid customers opting out of the grid, we need to reform our markets today. This will require dramatic changes in the engagement cycles for regulatory reform, which are mismatched to the emerging pace of technological disruption in the industry. Two important examples illustrate the challenge and our options ahead.

Hawaii’s historical dependence upon diesel as a generating fuel has created the highest-priced electricity market in the country, with customers currently paying roughly 40 cents per kilowatt-hour. With rooftop solar able to be installed at roughly half that cost, it has experienced a boom in customer adoption, saturating some feeders and forcing the islands’ utilities to stop additional interconnection. To deal in part with this load loss, rate increases in Hawaii have been among the highest in the country. The utility-proposed integrated resource plans for the islands were recently scrapped by the commission because they inadequately addressed this dynamic, leaving the utilities, customers, solar advocates and regulators at an impasse. With ongoing cost reductions in distributed technologies and escalating electricity prices in the continental United States, this is a postcard from the future of things yet to come for the rest of us.  How Hawaii solves this dilemma will serve as the touchstone for either how to or how not to address the conflict represented by a hybrid centralized-distributed grid structure.

Meanwhile, where Hawaii is dealing with the issue out of necessity, the state of New York is instead acting out of anticipation. To be sure, the vivid memories of Hurricane Sandy have fueled a rethink, so the commission there is leading its Reforming Energy Vision process with an eye toward creating market-based structures that incentivize deployment of distributed resources as grid assets. In the process, the coordinated development of these resources should provide more value to customers while improving the integrity of the network. Its move is valiant, and it defies a century of cost-recovery-based distribution system regulation. If successful, it should offer a practical means to resolve the conflict between legacy and opportunity.

These two examples are far from conclusive, but they both represent real attempts to grapple with the collision of technology, culture and regulatory precedent in today’s electricity markets. We must attack these issues now with an eye toward capturing the emerging and real value creation opportunities distributed resources represent. Their future place in the grid is more certain than we may be ready to believe. Let’s start believing and make ready for a highly distributed future today.

Jon Creyts is managing director of the Rocky Mountain Institute. 


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