The Carbon-Smart Grid

Deck: 

Network intelligence yields green returns.

Fortnightly Magazine - October 2008

Mounting political pressure to reduce greenhouse gas (GHG) emissions is prompting legislative bodies at the state and federal level to act, including 23 states that are moving forward with GHG legislation. These and other forces are driving America’s electricity infrastructure toward greater efficiency and reliability, and the integration of a diverse mix of energy resources, including renewables.

Smart-grid systems that now are being developed and deployed will play a fundamental role in addressing the country’s energy challenges over the coming years. Smart-grid technology can lead to both carbon reduction and a more sophisticated delivery network—presenting utilities with new opportunities to create value for themselves and their customers.

Creating Carbon Value

“Carbon value” can be defined as minimizing future financial liabilities associated with carbon emissions, combined with maximizing opportunities associated with renewable energy generation and other low-carbon products and services.

The fundamental drivers of carbon value are future regulations that assign a cost to carbon emissions, along with other state, regional, and federal policies dealing with renewable energy explicitly (e.g., renewable portfolio standards or RPS). The timing, scope, stringency, and likely interaction of these policies are uncertain, which makes quantification of carbon values challenging. But a necessary prerequisite is a breakdown of the task into its constituent components.

Three areas have the potential to enhance carbon value through a smarter electric transmission grid: zero- or low-emissions generation; T&D efficiency; and innovative market strategies (see Figure 1).

Often, electricity produced from renewable energy resources such as wind, solar, and to an extent hydro, is not dispatchable due to the nature of the resource. Moreover, the output from these resources can vary greatly over relatively short periods of time, making it difficult to regulate power flow and voltage on transmission and distribution. The smart grid will help integrate renewable energy resources with the rest of the electric system.

Renewable energy resources with variable output (e.g., wind and solar) have the potential to be combined with energy storage and demand response, reducing apparent variability. The operation of multiple energy resources in an area might be coordinated using advanced control algorithms and a smart-grid communication network, thus firming the load or generating capacity and making it more predictable and reliable.

In cases where the penetration of renewable energy is high, particularly on distribution feeders, the smart grid ideally will help regulate voltage by coordinating the output of inverters. And sensor networks will provide grid operators with a better view of intermittent renewable energy and insolation conditions, allowing for better anticipation and planning of output from renewable energy resources. The net effect would be to increase the potential for more and more renewable energy to be installed and operated in the transmission and distribution network without the performance problems associated with renewable energy source intermittency.

Clearly, the more renewable energy is integrated into the energy supply chain, the greater the carbon value created for the financially interested parties. In other words, if the smart grid enables or facilitates an incremental amount of renewable generation, the associated carbon value can be attributed directly to the utility that deployed it. In states with RPS mandates, that same carbon value also is linked to more cost-effective renewable power to meet the increasingly stringent RPS targets. At this writing, RPS laws were in effect in 29 states and the District of Columbia.

Carbon value also can be realized as avoided carbon costs across a portfolio of generation assets. For example, a cost assigned to carbon emissions will increase the value of zero-carbon generation assets, such as wind and solar, relative to conventional fossil-based sources. A higher proportion of zero-emitting assets across a portfolio improves the competitive position of a utility vis-á-vis future carbon compliance obligations.

T&D Efficiency

In the midst of mounting discussions about energy efficiency, the electric transmission and distribution system itself poses great potential for improvement. According to a recent estimate by the DOE’s Office of Electricity Delivery and Energy Reliability, U.S. transmission and distribution networks lose nearly 10 percent of the energy fed into them.

Historically, many utilities have taken these energy losses into consideration when planning and operating their systems. Minimization of losses was not the primary driver. Calculating losses and configuring T&D systems to minimize these losses always has been challenging due to a lack of information and modeling sophistication in the distribution system. Sensor networks, increased system-communication capabilities and more efficient operating capabilities afforded by the smart grid would allow utilities to optimize the electricity delivery system, not only for energy efficiency, but for reliability and capacity as well.

Indeed, utilities at the forefront of the smart grid recognize this, and are currently using distribution-management systems and distribution-automation technologies to determine more energy-efficient distribution configurations, and position their distribution networks accordingly. By collecting operating information from multiple points throughout the network, analytical tools can be used to determine the control settings that result in the lowest possible energy loss while maintaining service quality. Distribution devices such as capacitors, voltage regulators and switches then can be positioned automatically to configure the system quickly—without the need for manual operation by field crews.

To the extent a utility actively can manage its delivery system to increase efficiency, it reduces its potential liability associated with the system’s carbon-emission contributions. Simply stated, increased delivery efficiency translates into less carbon-emitting fuel required for the same amount of electrical output. By increasing delivery efficiency, electricity’s carbon intensity is reduced as less carbon-emitting fuels are required to serve a given load—assuming energy savings displaces fossil generation.

For a utility also owning generation, the overall carbon intensity of applying that resource to customer load is reduced. The result in both cases is lower carbon-compliance costs.

In many regions of the country, electricity delivery has been unbundled from generation. In such cases, delivery losses effectively become an adder to generation costs passed on to electricity customers, and there may be little, if any, incentive for delivery companies to reduce these losses. However, delivery efficiency might be encouraged through ratemaking, much as reliability has been in some states.

Carbon-Market Innovation

Carbon costs almost certainty will increase the retail price of electricity, although the magnitude of that increase isn’t yet clear.

The degree to which wholesale and retail electricity rates reflect the cost of carbon emissions ultimately depends on political decisions, market reaction, and subsequent commercial electricity rates. Electric rates depend on regional differences in the generation mix, as well as regional load growth, and delivered prices for fossil fuels. The price of carbon emissions will be affected by many factors, including: market demand for allowances, determined by underlying emissions; market supply, determined by the overall cap, allowance allocation, amount of offsets allowed, and links to other trading systems; regulatory uncertainty; transferability—i.e., the ability of companies either to bank or borrow allowances for future compliance periods; and liquidity drivers such as the degree to which hedge funds and speculators enter the market.

The smart grid will add value for electricity customers by increasing both the amount and quality of information they receive about their energy usage. One potential outcome is the evolution of energy end-users from “ratepayers” to active energy consumers with smart appliances, energy-management systems and distributed generation. New energy service bundles and customized service levels will be designed to enhance the customer experience, encourage more active participation in customers’ energy-use decisions, drive higher customer satisfaction, and ultimately create a more favorable regulatory climate and higher returns for utilities.

In addition to helping their customers better manage and reduce their electricity usage, electric utilities are positioned to further increase overall energy efficiency and capture new markets by shifting usage to less carbon-intensive technologies and expanding into markets not currently using electricity to its full potential. One prominent example of this is the market for plug-in electric vehicles. While capturing increased electrical sales from powering these devices does not technically reduce a utility’s carbon liability (and might actually increase this liability if the added electricity is generated from fossil fuels), the extent to which new products and services can be based on a common energy currency of electricity, the greater the leverage and impact of the smart grid will be—and the greater the potential for utilities to capture this value.

One key question for utilities is this: How can the smart grid create competitive advantages for electricity in a world where higher energy prices stimulate demand for more efficient and less carbon-intensive end-use technologies? Understanding the answer can open the door to a more sophisticated interaction with customers involving new, higher margin products and service offerings above and beyond the delivery of electricity.

To the extent the smart grid makes electricity relatively less expensive and improves the customer experience, it helps expand overall energy market share. The energy management and renewable energy integration capabilities that the smart grid has the potential to support also might position electricity more firmly in the overall energy value chain. And, this is very possibly just the first step, with the future presenting additional opportunities for creating richer and more valuable energy products and services beyond delivery of electricity.

Transition Opportunities

Notwithstanding the atmospheric benefits of lower GHG emissions stemming from a more efficient T&D network, it’s clear that the smart grid, through the three mechanisms outlined above, holds the potential to create real, tangible carbon value for utilities. Less clear is the magnitude of this value, as it’s inherently tied to the constantly evolving policies that assign a cost to carbon emissions. Despite uncertainty, experience suggests that early action and prudent investments will yield greater benefits and mitigate more risk than delayed action or inaction.

Moreover, the continued focus on higher energy costs and concerns associated with climate change fundamentally will change the way utilities interact with their customers, as demand increases for lower energy consuming products and services. The competitive landscape in the energy industry will be reshaped—creating new opportunities and risks for the incumbent utilities. The utility-customer interface will continue to evolve beyond simply delivering electricity and sending customers a bill, as utilities seek to enhance their relationship with customers by improving the efficiency of electricity consumption. Capturing value in these new and emerging markets involves creating a richer, smarter customer experience, which smart-grid technologies can facilitate. Entirely new market opportunities will be realized around products that are transitioning away from other sources of energy, but this requires innovation and conception of new business models capable of unlocking the value these new markets hold.