The Question Isn’t Can We Afford to Upgrade the Electric Grid, But Can We Afford Not To
By Glen Andersen
The century-old energy supply model, where utilities produce electricity in large, faraway power plants and deliver it over long distances, is being transformed. New industry players, new technologies and an increasing number of customers who want to produce their own electricity are driving the change.
The explosion of new technologies—from smart water heaters and thermostats to electric vehicles, rooftop solar panels, and energy storage—promise a cleaner, more efficient, and more reliable energy future. But they will require a modernized power grid, and a new regulatory approach, in order to function.
State legislators are finding that energy infrastructure—designed for a centralized grid with one-way energy flow—needs to be upgraded to accommodate two-way energy flows and the growth of an increasingly modular energy system. Massive infrastructure investments will be needed to create a 21st century grid, and finding the money won’t be easy. But that’s just part of the challenge.
State policies that currently govern the grid and the ways utilities do business with customers are being outpaced by technological advancements. Lawmakers will need to shoulder the task of updating policies and regulations that are ineffective or problematic in this rapidly changing energy market.
“The question is—what will the cost be to have a centralized 19th century electric grid in a decentralized 21st century artificial intelligence world?” says Washington Representative Jeff Morris (D).
The Cost of Inaction
The cost of modernizing the grid will be high, but the economic consequences of not doing so may be higher. According to a report by the American Society for Civil Engineers, if we continue to invest in our electricity distribution infrastructure at our current level, we will face funding gaps of up to $94 billion by 2025. And, the economic costs of failing to meet infrastructure needs are even higher, according to the report. Given the growing reliance on electricity in nearly every facet of the economy, and the rise of data-driven commerce and industry, failing to upgrade will reduce the country’s GDP by an estimated $819 billion by 2025, according to the ASCE.
As more people generate their own energy and utilities downsize their generation sources, a fundamental shift is occurring. Large, distant generation sources are being replaced by smaller, local sources located near energy consumers. Achieving a two-way energy system—in which customers are also producers, managers and market participants—requires building a more flexible, sophisticated grid and enacting supportive regulations that equitably compensate market players.
The challenge for lawmakers is crafting policies that promote investment in energy infrastructure while allowing innovative industries and new energy management approaches to flourish and compete where once only regulated monopolies could operate.
“A one-size-fits-all solution is politically and practically impossible. Understanding the different paths different utilities need to take to grid modernization is the biggest challenge,” says Morris.
As energy stakeholders and policymakers across the country try to determine what approach is best for their state, they’ll want to be knowledgeable about the many new transformational trends that are affecting electricity consumers and the energy industry. “Many state legislative members are part-time and not familiar with how the rapid pace of innovation and technology influence the growing energy market,” says Nevada Senator Pat Spearman (D).
A Smart New Energy Paradigm
Using smart meters and sensors, combined with communications technology and analytic software, utilities can monitor energy flows, identify failing components before they cause outages, and quickly locate and respond to power failures.
The existing energy grid is overbuilt to meet a few hours of peak energy demand annually, with the extra capacity going unused for most of the time. Smart-grid systems can smooth out fluctuations in energy demand, reducing the need to overbuild the grid and saving consumers money. Components of a smart system—thermostats, water heaters and air conditioners—can be programmed to use less electricity during peak energy times. And, when they are integrated with distributed energy and energy storage, they create a dynamic, resilient system.
Smart devices can also help utilities—and third-party energy suppliers—establish demand-response programs, which compensate industrial, commercial and residential participants who allow the utility to adjust their water heaters or air conditioners during peak times. Shaping electricity demand in this way can delay or eliminate the need to build costly new power plants and delay the need to upgrade transmission and distribution infrastructure.
These new devices also reduce the potential for stranded costs, which tend to be higher with big infrastructure projects like transmission lines or power plants. Stranded costs are the revenues a utility loses when an investment becomes unprofitable due to escalating costs, shifts in the market, or fluctuations in policy. If investments don’t pan out, a utility will often seek to recover those costs from customers.
An Interest in Distributed Energy
State policies that promote or allow distributed energy generation, along with newer technologies, such as natural gas microturbines, hydrogen fuel cells, photovoltaic solar panels, and energy storage systems, are fueling grid modernization efforts.
Utilities are rapidly installing many of these technologies, and consumer demand continues to grow. Large commercial and industrial electricity consumers—General Motors, Kellogg’s, Google, Walmart and Citibank, among many others—have pledged to power their operations completely with renewable power, either by generating the electricity themselves or buying it on the market.
Aside from pledges and policy, the motivation is economic. Solar is already competitive with fossil fuels in Arizona, Nevada, Texas and other sunny markets. And the International Renewable Energy Agency forecasts that solar will cost the same as or less than fossil fuel nationwide by 2020.
Nearly 95 percent of net new electricity capacity added to the U.S. grid in 2017 was renewable, according to the U.S. Energy Information Administration. That figure accounts for the retirement of older fossil fuel plants. The trend indicates that utilities are finding renewable energy resources to be easier to site, finance and build than many traditional sources.
Distributed energy is also getting a boost from low natural gas prices, which are speeding the growth of small scale natural gas electric generation, allowing customers to produce their own electricity and heat. Cheap natural gas has been instrumental to the growth of renewables, since natural gas generation is flexible and can be adjusted quickly in response to renewable generation’s fluctuations throughout the day.
States Catch Up
Lawmakers in 39 states proposed or enacted 288 grid-modernization policies in 2017, according to the North Carolina Clean Energy Technology Center. Although many focused on deployment of smart meters and energy storage, some addressed more challenging questions, like how to regulate utilities in a way that aligns their interests with those of their customers and opens competition to more players.
Nevada—which produces the most per capita solar power of any state and has many large corporate consumers that own solar generation—has been at the forefront of updating its grid through legislation.
“It was vital to identify ways for continuous improvement in the current energy statutes and to provide a legislative structure that was both concrete and responsive to ever-changing scenarios,” Spearman says. She sponsored three related bills in 2017: one to encourage energy storage; another to require electric utilities to create distributed resources plans; and a third to create annual energy efficiency goals with rewards to utilities for meeting them. All three were enacted in 2017.
In Minnesota, recently enacted legislation requires utilities to consider lower cost alternatives to meeting energy demands when proposing new high-voltage transmission lines or large power plants. Among the alternatives are increased efficiency, demand response, distributed generation and battery storage.
Statutes also require the state’s largest utility, Xcel Energy, to file biennial reports identifying investment needs that will enhance both communication with customers and the reliability of the distribution system. Such needs might include two-way meters, control technologies, energy storage and microgrids, and technologies to enable demand response.
These efforts help Minnesota’s PUC determine what to fund through rate increases. The legislation also requires Xcel to identify where in its system small-scale distributed generation is appropriate and the upgrades needed to incorporate that technology.
Illinois, which passed grid-modernization bills in 2011 and 2016, ranked second in Gridwise Alliance’s Grid Modernization Index. The Future Energy Jobs Act, passed in 2016, created incentives for utility efficiency and demand-response investment and builds on previous smart-grid efforts with modern regulatory and pricing approaches. It also removes market barriers to real-time power pricing options.
“Illinois is now a leader with New York in helping its grid move forward and evolve in the 21st Century,” says Illinois Senator Sue Rezin (R). “Illinois chose to keep its highly reliable nuclear fleet operating at full speed for the next 10 years while phasing in the energy efficiency programs.”
Along with grid updates, the new law requires the Chicago area grid to hit 21.5 percent energy efficiency reductions by 2030, while the rest of the state must meet a goal of 16 percent by 2030. “All of these goals protect energy consumers with hard price caps to prevent price spikes,” Rezin says.
One of the biggest challenges states face is revising the utility regulatory and business model, so that customers who generate their own power and a growing number of private-sector energy providers can participate. Since utilities are regulated monopolies, for which reliability is a primary goal, they can be slow and circumspect when it comes to change.
New York has taken bold steps to better align utility and customer goals. The state’s approach is to move away from traditional utility compensation schemes toward those that reward innovation, efficiency and customer service.
Characteristic of this approach is Consolidated Edison’s Brooklyn-Queens Neighborhood Program. Instead of building a new $1.2 billion substation to meet a growing electricity demand, ConEd asked outsiders for alternative proposals. It selected one that met the increased demand with distributed energy resources at a cost of $200 million. The utility was rewarded by earning as much profit as it would have received had it installed the substation.
Benefits on the Horizon
Energy storage, distributed generation, demand response, energy efficiency, grid controls—these new technologies are the components of a responsive, modern electric grid. They’re being used individually or in tandem to delay or eliminate the need for expensive new power plants, transmission and distribution lines, transformers and other equipment.
Although these solutions can be more complex and require more creative approaches, the benefits to customers, the economy and the environment can be significant. “As the internet of things moves forward,” Washington’s Morris says, “the choice of who and how intellectual property gets to compete for market share will be determined by the customer, not government or utilities.”
Glen Andersen directs NCSL’s energy program.
Sidebar: When All Else Fails
Grid advancements have already proved useful when disaster strikes. As wildfires ravaged the California countryside last fall, the microgrid at Stone Edge Farm in Sonoma operated independently for 10 days after flames knocked out power from the main grid. The microgrid includes 300 Kw of rooftop solar, a natural gas microturbine, hydrogen fuel cells, battery storage and a control system. Even after being evacuated, the owners could operate the microgrid remotely.
Microgrids also were vital in Houston during Hurricane Harvey last summer, when several grocery stores that had installed natural gas lines and microturbines could remain open during power outages, keeping food refrigerated and available to the public. Residential customers are also interested in resilient energy—some companies are now selling battery and solar packages to help homeowners keep their lights on during outages.
Sidebar: New Player: Energy Storage
As states modernize their energy systems, many are investing in batteries, which allow energy to be stored for use during peak times while providing cost-saving, reliability and efficiency benefits. Energy storage can eliminate the need to build a new power plant, enable solar or wind energy to be stored and used when needed, and deliver power during natural disasters or when the grid fails.
Although storage is a new player in the electricity sector, its prices have declined rapidly, increasing its competitiveness, even against natural gas in some cases. In February, Arizona’s biggest utility selected a 65-megawatt solar farm combined with a 50-megawatt battery system to supply electricity between 3 and 8 p.m., when demand peaks. Remarkably, the solar-plus-storage bid beat out even the proposals from power plants burning inexpensive natural gas.
Four states—California, Massachusetts, New York and Oregon—have now set legislative mandates for energy storage, and several others have enacted bills to study, fund or consider storage targets.