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New technologies and consumer demand for cleaner energy are rapidly transforming the power sector. This transformation is most evident in the advent of distributed energy resources (DER) -- a marriage of information technologies with the power grid. Call it the internet of electricity.
DER is a package of customer-side technologies including energy efficiency, demand response, distributed generation and storage (both thermal and electric), and smart electric vehicle charging. These technologies can play a critical role in increasing the efficiency and reliability of the power system, reducing costs, and integrating increasing levels of variable renewables, like wind and solar. They can benefit both consumers and grid managers.
As part of America’s Power Plan, Rocky Mountain Institute looked at the potential for DER and the barriers that are standing in their way.
(Note: Owen Smith of the Rocky Mountain Institute will be speaking at GTM's Solar Market Insight Conference on December 10th about the future of net metering and rate design.)
The growth of DER is something of a wild card in the power sector. Under the traditional system of central-station power plants and transmission lines, there is a high degree of control from regulators about how much gets developed. Even in competitive markets, independent power plant developers are keenly aware of market trends and do not risk billion-dollar investments lightly.
But demand-side technologies are driven by consumers. Their decisions are made to meet their own needs, not those of the whole system. As long as efficiency, distributed generation and smarter controls deliver value to consumers, their use will continue to grow.
How big a contribution can they make? Some examples suggest we are in the early stages of the revolution being wrought by distributed energy resources.
PJM demand response
The PJM Interconnect is the largest power market in the world, serving 60 million customers from the Mid-Atlantic to Chicago. PJM has enthusiastically embraced demand response, where customers use internet and automated controls to respond to calls for conservation and the market price of electricity in real time. Controls can automatically change the temperature of thermostats, dim lights, briefly turn off water heaters and refrigerators, and otherwise give the grid a break.
Demand response is an evolution of what utilities have done for years, called direct load control. But better information technology has enabled it to be refined to be faster, more reliable and more attractive to consumers.
Now that DR has become reliable enough to count as a utility system asset, its value has been quantified by markets and planners. An industry of DR aggregators has grown up, led by companies like EnerNOC and Comverge. These companies recruit customers and bundle the DR to make it look to the utility system like a power plant, creating “negawatts” instead of megawatts.
To harvest demand response, PJM holds annual auctions to buy new capacity three years ahead of time. Starting in 2009, PJM allowed efficiency and demand response to compete in the auctions with new power plants. This May, PJM signed up a total of 169,000 megawatts of capacity for the year 2016.
Most of this was existing power plants. But for new resources, demand response was the biggest winner, with 12,400 megawatts accepted. This was over two times as much as new power plants. PJM expects to see at least 9,000 megawatts of old coal plants retire, with no impact on reliability.
Demand response is starting to spread to other regions and sectors. Texas regulators are especially interested in it as a way to assure reliability in the face of droughts and high temperatures. Former Texas PUC and FERC Chair Pat Wood said Texas should “crank up the demand response.”
“We can reduce our peak loads in this country by 20 percent using demand response,” said Jon Wellinghoff, outgoing FERC Chair. “It’s happening and it’s coming very quickly.”
A wave of innovation
Distributed energy products are catching on for a range of customers, from homeowners to factories, office buildings and college campuses. The common thread is the application of information technologies to better track and control what’s going on with electricity use.
Big commercial and industrial customers have been the first to adopt DER technologies. Energy managers are eager to have better knowledge and control of their various appliances and systems to increase reliability and lower costs. The most vivid example is the Empire State Building.
Rocky Mountain Institute worked with Johnson Controls and others to do a deep energy retrofit of the building, cutting energy use by over 38 percent, saving $2.4 million in just the first year. Some of the biggest savings came from sensors and automated controllers for lights and HVAC.
“To me, ‘green’ is about money,” said building owner Anthony Malkin, president of Malkin Holdings. “What we’re really doing here is providing a very real model about what the economic incentive is to owners and tenants that will yield paybacks.”
Residential customers are typically less willing to spend the time to get control of their energy use, so developers are making it easier for them.
Amazon recently opened a home automation store on its website, selling energy management, home security and entertainment system technologies.
AT&T rolled out its Digital Life service in fifteen cities earlier this year, including “smart home” energy controls. Solar developer Sunrun has partnered with Nest, the maker of self-programming thermostats, to sell efficiency and renewables in a package.
To bring it all together, Ford has launched MyEnergi Lifestyle to “showcase how combining renewable energy generation with ‘time-flexible’ loads optimizes energy consumption across a plug-in vehicle and home appliances.” It is working with Georgia Tech, Eaton, Whirlpool, SunPower, and Nest to integrate the C-Max Energi electric car with smart appliances and solar, in order to achieve a 60 percent reduction in energy costs for a typical home.
Paving the way
These innovations are very exciting and no doubt represent just the beginning. But they are confronting a utility regulatory system that is not equipped to incorporate them gracefully.
The utility industry itself has identified this problem. A paper for the Edison Electric Institute, Disruptive Challenges, drew on parallels with the telecom industry to evoke a “vicious cycle” triggered by distributed energy resources that would undermine utility profits.
“The threat to the centralized utility service model is likely to come from new technologies or customer behavioral changes that reduce load,” wrote author Peter Kind. As customers use less power or produce their own, fixed utility costs fall on fewer customers, raising their rates, giving them greater incentives to use less power or produce their own. The cycle results in an economic “death spiral” for utilities.
The bottom line is that in many places, the rules penalize utilities with lost profits for every kilowatt-hour not used, for every generator put on the customer side of the meter, and for every power contract they sign with a new utility-scale renewable energy project. Our century-old legal, economic and regulatory structures are thwarting innovation.
To allow for a graceful transition to the cleaner, more efficient, more resilient and more affordable future customers are seeking with distributed energy resources, we recommend the following set of policies:
1) Better analysis: Policymakers need to better measure the costs and benefits of distributed energy resources. Consistent and comprehensive methods applied to all available resources will create transparency and provide a foundation for designing effective incentives, pricing structures, and markets.
Once these costs and benefits are measured, policymakers can analyze tradeoffs between centralized and distributed options, and integrate distributed energy resources into resource-planning processes.
2) Create a level playing field: As long as distributed technologies are playing a different game than centralized options, there will be unintended results that could undermine the quality of service, financial viability and innovation. We need to put them on the same field. Utilities need new business models for a distributed-resource future that ensure the stability and health of the grid and incentivize integration of distributed resources.
This is true at the wholesale level, as well as retail. Wholesale markets must allow distributed resources to compete fully and fairly, as PJM has done with demand response. New rules should allow all kinds of distributed resources to compete for energy and ancillary services in competitive markets.
3) New technologies and service models: Modular and intelligent technologies are allowing “microgrids” to serve industrial parks, college campuses and neighborhoods. But regulators must allow for appropriate metering and cost accounting, as well as innovative ownership and billing structures.
As hardware prices rapidly fall, “soft costs” for solar and other distributed technologies are becoming a major portion of the total cost. Permitting, financing and interconnection procedures can all be streamlined to avoid wasted money and effort.
Lastly, the advent of competitive electric vehicles is a major opportunity to add value to the power system. Smart charging of electric vehicles can reduce disruptions, lower costs and help to support the integration of high levels of renewables.
As the internet comes to the power system, the grid is rapidly getting smarter. Now it’s time for our rules and regulations to follow suit.
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America’s Power Plan is a response to the rapid changes in the power sector being driven by consumer demand for clean energy, new technologies and policy. Rather than a one-size-fits-all prescription, America’s Power Plan is a toolkit to help facilitate a discussion about how to move to a cleaner energy future.
James Newcomb is a Program Director for Rocky Mountain Institute and lead author of Policy Implications of Decentralization. Ben Paulos is the project manager of America’s Power Plan.
Below, James Newcomb describes his work at the Rocky Mountain Institute and its relationship to America's Power Plan: