Commentary: Paradigm shift—from ‘big iron’ to the distribution end of the value chain
Writing about the future of electricity grid operations under a new presidential administration and Congress may be fraught with foolishness. However, several broad trends are likely to continue regardless of what our new leaders decide, how angry the losing half of the electorate is, or how the new opposition party plays its losing hand.
First, the de-carbonization of the generating fleet is continuing. This is a no-brainer. It’s been happening for over one hundred years, though in fits and starts. Coal units are being shuttered and the capacity is being replaced with variable renewable generation and gas-fired units. It would be better if less of that de-carbonization lately wasn’t at the expense of economic growth.
Second, with the exception of EPA’s Clean Power Plan, now before a Supreme Court minus one justice, and the agency’s legacy Clean Air Act Amendments, energy policy is largely being driven at the state level. Reliably “blue” states are pushing de-carbonization harder than reliably red states.
The third trend is perhaps the most critical. Grid operations are becoming more dynamic and less certain. Use whatever buzzy phrases you like—smart grid, transactional grid, “grid-edge” technologies, distributed energy resources (DER), resilient grid, microgrids, customer-centric grid, demand side management, flexible energy resources, variable energy resources—they all add up to something far less predictable in real time than the “big iron” centralized approach to grid buildout and operations under a regulated monopoly.
After spending a day attending my new local utility’s Integrated Resource Plan (IRP) stakeholder meeting, I decided to amuse myself by reviewing the IRPs or long-range asset plans for every utility in every other place I’ve lived. It’s a geographically diverse set of plans. I added a few others for good measure.
The common threads are pitifully low demand growth, displacement of coal assets by renewable and gas-fired facilities, need to maintain reserve margins, threats of nuclear-unit and baseload-plant closures, and reducing carbon intensity.
I was more struck by the anemic aggregate attitude towards the three things that arguably will change the future of grid operations the most—DER, energy storage, and electric- vehicle infrastructure. The reason is obvious, I suppose: Utilities live and die by the regulatory compact and all three of these growth drivers and areas for potential returns on investment are fraught with regulatory uncertainty.
At a Technology and Transportation Summit a few weeks ago, I proclaimed, “If the state commission would allow electric utilities an 8% to 12% regulated rate of return on investments in electric-vehicle infrastructure, you’d see EVs and charging stations everywhere!” The same holds true of storage and DER.
Grid-scale and behind-the-meter storage is the one asset class across the production and delivery value chain which can manage the dynamics of the future grid, accelerate de-carbonization, advance DER, and improve resilience. Large-scale storage makes electricity like every other commodity and the grid less like a huge just-in-time inventory machine. Storage, in fact, is an asset class on the cusp of a commercial frenzy.
So what’s the problem with the regulators when it comes to these exciting growth drivers? Why the “disconnects” among the commercial interests who want to sell DER, storage, and EVs, and the utilities who keenly desire new investible assets?
It’s all about the playing field and the players allowed on it.
Most businesses communicate directly with their customers. Utilities are unique in that they largely have to communicate to customers and stakeholders through the regulatory process. Despite efforts to make this communication transparent, commissioners are either elected or appointed by elected officials. This makes the regulatory process politically charged. Communication through a political body is rarely expedient.
Politics is, in one sense, all about redistribution of money and opportunity. While the goal may be to “lift all boats,” inevitably some sink. At this point, what’s holding DER, storage, and EVs back is not technological but political. It’s about who gets to “control the ball” and who gets to play. The regulated utility business model worked well for fifty years to electrify the nation and was the backbone of the “big iron” buildout we have today. But plenty of stakeholders are not interested in deploying that model for the future.
The new regulatory playing field is being established. When it’s reasonably “certain,” we’re likely to see a feeding frenzy on the order of the merchant generation boom of 1997-2004. We’re also likely to see many more new entrants on the field since the barriers to entry on the customer side are lower than on the transmission side.
Then we’ll see the inevitable famine afterwards and the demise of companies that grossly oversell their future to inflate their stock prices. Enron did this a decade and a half ago and while they took down much of the merchant business with them, arguably the company, which ultimately proved a fraud, catalyzed the entire merchant sector.
In the meantime, owner/operators of existing plants have to meet more dynamic and unpredictable operating schedules, usually with fewer resources than were available last year. Our entire industry has been re-ordered over the last twenty years because customers and elected officials focused on what’s coming out the stack, the byproduct, not the convenient and affordable product their lives and lifestyles depend on.
Now it’s being re-ordered because new stakeholders are capturing the “mindshare” at the customer end of the business. Make no mistake. Few, outside of those who conduct self-serving surveys, are actually asking ratepayers what they really want. Merchant generation and competitive retail supply didn’t get started because a majority of ratepayers wanted either. It got started because a group of the nation’s largest industrial consumers of electricity wanted to lower their energy costs.
By the same token, DER is advancing not because throngs of ratepayers are petitioning the PUC to have control over their electricity infrastructure. Instead, new entrants with DER, energy efficiency, storage, rooftop solar, and EV products are seeking to disrupt the old order.
As all this rolls forward, the utility obligation to serve at lowest cost hasn’t gone away. But as the regulatory frameworks and business models shift downstream to the distribution end of the value chain, “big iron” has to become far more malleable to make sure the lights stay on.
President, Pearl Street
Chairman, Editorial Advisory Board