Designing the electric grid for the 21st century is one of today’s most important and exciting societal challenges. Regulators, legislators, utilities, and private industry are evaluating ways to both modernize the aging grid and decarbonize our electricity supply, while also enabling customer choice, increasing resiliency and reliability, and improving public safety, all at an affordable cost.
Grid Investments are increasing
Grid infrastructure planners are responsible for some of the most significant infrastructure investments in the United States. As of 2011, U.S. utilities had almost half a trillion dollars of undepreciated transmission, distribution and generation assets on their balance sheets, growing at a rate of 6 to 8% per year. As depicted in the adjacent figure, the Edison Electric Institute forecasts that another $879 billion dollars in distribution and transmission investments alone will occur in the twenty year period of 2010 through 2030 – about $44 billion dollars per year – significantly larger than investments seen in the previous 20 year period. Grid investments have a significant and increasing impact on the total electricity costs faced by U.S. consumers.
In light of this huge level of grid investment occurring over the next few decades, an imperative exists to ensure that these investments are deployed to maximize ratepayer benefits. There has been relatively little focus to date on how to effectively focus and reduce these infrastructure costs, particularly in the areas of transmission and distribution planning, despite the fact that they often make up half of the average residential customer’s bill. This level of investment calls for a reexamination of the technological solutions available to meet the grid’s needs and an overhaul of the planning process that deploys these solutions. States like California and New York have begun this process, primarily spurred by a focus on how distribution planning and operations may evolve in a future with high penetration of distributed resources. While these nascent discussions and rulemakings are positive first steps, the planning framework for grid modernization must change considerably to avoid costing ratepayers billions in unnecessary, underutilized investments.
Current Utility Regulatory Model Incents a Build More to Profit More Approach
The current utility regulatory model, which was designed around a monopoly utility managing all aspects of grid design and operation, is outdated and unsuited for today’s reality of consumers installing DERs that can benefit the grid. Therefore, industry fundamentals need to be reexamined, and the utility incentive model is a key place to start.
Electric utilities are generally regulated under a “cost plus” model, which compensates utilities with an authorized rate of return on prudent capital investments made to provide electricity services. While this model makes sense when faced with a regulated firm operating in a natural monopoly, it is well known to result in a number of economic inefficiencies, as perhaps best analyzed by Jean Tirole in his Nobel Prize winning work on market power and regulation.
One fundamental problem resulting from the “cost plus” utility regulatory model is that utilities are generally discouraged from utilizing infrastructure resources that are not owned by the utility, even if competitive alternatives could deliver improved levels of service at a lower cost to ratepayers. Beyond regulatory oversight, this model contains no inherent downward economic pressure on the size of the utility rate base, or the cumulative amount of assets upon which the utility earns a rate of return. As such, utility rate bases have consistently and steadily grown over time. For example, the following chart depicts the size and recent growth of the electricity rate base for California investor-owned utilities, which continues to significantly grow even in the presence of flat electricity consumption. In short, the fundamental incentive utilities have to build more utility-owned infrastructure in order to profit more conflicts with the public interest as the grid becomes more customer-centric and distributed.
Traditional Grid Planning Focuses on Traditional Assets
Grid planning for infrastructure investments has historically focused on installing expensive, large assets that provide service over a wide geographic region. This structure naturally evolved from the technology and market characteristics of the original electricity industry, including a natural monopoly, centralized generation, long infrastructure lead times, high capital costs with significant economies of scale, and a concentration of technical know-how within the utility.
Many of these barriers have been eliminated with the technological advancement in physical infrastructure options – such as DER portfolios that can meet grid needs – and increased sophistication of grid design and operational tools. However, grid planning remains focused on utilizing traditional infrastructure to the detriment of harnessing the increasing availability of DERs. Utilizing DER solutions will require a shift in grid planning approaches, as well as increased access to the underlying planning and operational data needed to enable DERs to operate most effectively in concert with the grid.
Distributed Energy Resources Offer Increased Grid Flexibility
Distributed energy resources include assets such as rooftop PV, smart inverters, controllable loads, permanent load shifting, combined heat and power generators, electric vehicles, and energy efficiency resources. These resources provide a host of benefits to the customer, utility, and transmission operator as identified by numerous research organizations including EPRI and the Rocky Mountain Institute (RMI). As depicted in the RMI figure to the right, diverse portfolios of DERs offer a wide range of grid services at the distribution, transmission, and customer levels.
Distributed energy resources can offer deferral and avoidance of planned grid investments, improved grid resiliency, and increased customer choice. DERs, if deployed effectively and placed on equal footing in the planning process with traditional grid investments, can ultimately lead to increased net benefits for ratepayers.
Source: SolarCity Grid Engineering