A New Era Is Beginning for the Grid Edge. Is the Utility Industry Ready?

As the 2020s progress, flexible energy portfolios will grow significantly as resources on either side of the meter proliferate in the U.S., Europe, Asia and beyond.

The degree to which this wave of new flexible resources can be tapped for grid balancing will depend on four key areas, according to a new research insight from Wood Mackenzie. These areas are regulatory reform, the evolution of market models, the scale of grid edge investment around electrification, and de-risking grid edge investment.

More and more DERs

Today, the U.S. power system has more than 50 gigawatts of behind-the-meter flexible resources at its disposal, consisting of distributed energy resources (DERs) already enrolled in demand response programs.

As electrification progresses, the next decade will see more flexible load and aggregated DER portfolios come into play. Both electric vehicles and electric heat are expected to see record growth in the 2020s. In some markets, residential energy storage — often paired with solar — will proliferate.

Wood Mackenzie expects that North America could have nearly 650 gigawatt-hours of EV battery capacity by 2030, up from 97.5 gigawatt-hours today. Heating electrification is picking up steam in Europe and parts of Asia as decarbonization and pollution-reduction efforts are tipping the scales. The U.S. is starting to see traction at a city level in California and Massachusetts as natural-gas bans go into effect.

Regulatory reform and market design evolution

As DER penetration grows, regulation and market constructs are evolving to accommodate these resources at scale. The U.S., Europe, Australia and Japan are now on the cusp of the next phase for the grid edge: a fully flexible grid.

Until now, regulations governing how DERs are compensated for capacity and energy services in the U.S. and Europe have mostly revolved around simple, fixed, time-agnostic rates. Over the last decade, regulation around DERs was heavy on net energy metering and volumetric charges.

In contrast, grid edge markets in the 2020s will increasingly be defined by regulation that allows power markets and distribution level markets to dynamically determine the value of energy, capacity and ancillary services.

These regulatory trends are evident in the U.S. as the Federal Energy Regulatory Commission mandates that operators assess the value of individual resources and DER aggregation. They are also evident in the United Kingdom as distribution network operators are also beginning to leverage DER flexibility to improve network reliability and efficiency.

As regulation begins to shift, utilities have embarked on dozens of technology and market-design demonstration projects to lay the groundwork for the flexible grid. In the 2020s, the utility industry’s focus is shifting from mitigating the operation of assets at the grid edge to monetizing them.

Utilities and grid operators are taking note and investing in ways to address the generation-demand mismatch and leverage demand-side flexibility to follow renewables production as a means to lower system costs.

Over the next decade, utilities and market operators will develop solutions that not only enable DERs to participate in markets competitively but also allow markets to assess the value of that participation in terms of the health of both the bulk power grid and the distribution system.

De-risking grid edge investment

Companies such as Centrica, EDF, Enel, Engie, Shell and Southern Company have set themselves up to execute on customers’ evolving energy demands through an aggressive series of mergers and acquisitions during the last decade. Many are pursuing a strategy of vertically integrated business units focused on DERs and leveraging the flexibility of these assets for wholesale-market portfolio balancing.

However, none of them have yet succeeded in proving they can scale a DER offering that relies on acquiring customers and tailoring offers across highly fragmented regulatory and policy environments.

Interconnection requirements, policies and codes across utility territories, standards bodies and governments are a limiting factor that delays standardization.

Better alignment would help to de-risk the market for vendors looking to the grid edge as the market matures in this decade.

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A free research insight on the grid edge market in the 2020s is available here.

Elta Kolo is a senior grid edge analyst and research manager at Wood Mackenzie.