Five Principles for Tomorrow’s Electricity Sector
Jenny Hu works as an analyst for business development at Clean Power Finance. Shayle Kann is senior vice president for research at Greentech Media. James Tong is vice president for strategy and government affairs at Clean Power Finance. Jon Wellinghoff practices law in San Francisco with Stoel Rives, LLP, and served previously as chairman of the U.S. Federal Energy Regulatory Commission.
The electricity sector faces the most dramatic transformation in its history. The entire system, from infrastructure to regulation, was designed to support predictable, unidirectional power flows from centralized generators through transmission and distribution systems to passive customers. But the emergence of distributed energy resources (DERs), combined with increased availability of granular data and communications, presents an unparalleled opportunity to enhance and in some cases reinvent one of the most important systems in our society. This potential for transformation carries enormous promise. Tomorrow's grid will be a platform interconnecting millions of devices - power plants, DERs, consumers, aggregators and more - to the ultimate benefit of all electricity consumers.
Achieving this aim will prove no small task. To match the promise of the next-generation grid, we will need updated infrastructure, regulation, business models, technologies, and markets. And all these changes must occur without sacrificing the reliability and affordability that is available to customers today.
To date, most attempts at such transformation have come as a piecemeal response to short-term trends, such as the growth of behind-the-meter electricity generation, or as hasty effort to upgrade technology without any strategic plan for effective utilization. This shortcoming has led to widespread disappointment among the rate-paying public with the 50 million smart meters already deployed in the U.S.1 A few jurisdictions have adopted a broader approach. Yet the need remains for a set of guiding principles that can apply to all discussions that will emerge over the coming years.
In this paper, we offer a set of foundational principles that can scale with the evolving grid and inform policy and business decisions about its design and operations. These principles or tenets of "grid neutrality" relate to the more familiar recent discussions regarding net neutrality.
Just as net neutrality seeks to maintain a fair and open Internet, the concept of grid neutrality emphasizes a fair and open electricity network. Like the Internet, the modern electricity grid serves as the backbone upon which a generation of technologies, services, and economies will be built.
Unlike the political, business and technological interests influencing grid-design debates today, grid neutrality is based upon an inherent structural property of the grid itself - namely, that electricity grids are not mere conduits but rather are some of the largest, most dynamic networks in the world. We urge stakeholders to streamline decision-making in ongoing and future grid-design debates by benchmarking against the tenets that we propose here.
This transition promises a wealth of innovation, but we won't live to see it unless we as a nation provide for, as well as safeguard, the grid's neutrality.
A Changing Landscape
Historically, the power industry has had little or no need to ensure the neutrality of the grid, especially the distribution grid. The industry developed in an era when the public agenda was primarily focused on electrification, and constructing centrally located infrastructure was indisputably the most cost-effective means to achieve this end. To take advantage of the enormous economies of scale associated with this grid architecture, governments granted exclusive franchises to monopoly providers. That ensured a mostly uniform product for captive ratepayers, with patterns of electricity usage that remained largely homogenous.
Nevertheless, this one-size-fits-all model no longer serves as a viable option for the 21st century, for three reasons. First, needs have changed. The focus is no longer on building more infrastructure to achieve universal access, but rather on optimizing what has already been built. Providing safe, reliable and affordable electricity is no longer enough. The public today demands cleaner energy, more resiliency, and greater customization and control.
Second, technology has changed. Increasingly we find today that distributed generation, energy storage, efficiency upgrades, and electric vehicles can meet evolving needs more effectively than can centralized generation systems. Because of their smaller scale and modularity, DERs can deliver better targeted and faster-responding solutions - sometimes at lower cost.
Finally, the customer also has changed. New needs and new technologies have created classes of electricity customers that have become increasingly sophisticated. Many have distinct energy-usage profiles, ever-changing end-use devices and even generating capabilities. Consumers no longer behave as mere takers from the grid. Rather, they are, becoming "prosumers," supplying the grid with energy, capacity, and ancillary services.
As a ready metaphor for this transition, consider the Internet.
The power industry today is transitioning to a multidirectional and horizontally structured value chain - much like the Internet. And it is easy to forget that for much of the 20th century, the telecom industry, like today's power industry, also operated through a top-down, vertically integrated architecture. To connect a customer to the phone network, the telephone company had to alter its network configurations on a case-by-case basis. Beginning in the 1960s, the FCC fielded complaints that AT&T was not allowing end users to connect customer-premise equipment to the Bell System (such as a new low-cost device called a "modem") because AT&T claimed that doing so would compromise "network integrity."2
"The Internet wouldn't have emerged as it did...if the FCC hadn't mandated open access for network equipment in the late 1960s," writes Tom Wheeler, the current chairman of the FCC.3
Today's electricity regulators face an array of similarly thorny challenges. The regulatory model must contend with diverse and often conflicting interests, as represented by wholesale power producers, T&D asset owners, distributed energy resources and countless other parties across the energy value chain. The model then must reconcile these interests with the needs of the grid and of millions of customers - all of which can vary by time and by location.
How will regulation align, in real time, the private interests of suppliers, consumers and prosumers with the public interest? How will it help guide decisions about deploying and dispatching supply-side resources versus demand-side resources? Who will get to deploy, own and operate these resources, and how will they be paid? How will regulators make decisions in a fair and transparent manner that doesn't confuse public and private interests?
Escalating debates around red herring issues like utility death spirals and grid defection reveal the limitations of prevailing regulatory models in addressing these questions. Rather, we need a set of guiding principles that can scale with evolving customer needs and provide objective benchmarks to evaluate future regulatory and grid design options.
A Set of Benchmarks
Grid neutrality is a set of principles that define and safeguard a network's underlying communal infrastructure, "the commons." Interactive networks, by definition, comprise independent actors; these actors cannot interact autonomously unless the platform upon which they operate is as neutral as possible. By defending the neutrality of the grid's network, grid neutrality provides a foundation by which to benchmark all current and future developments pertaining to the grid.
We propose five key tenets of grid neutrality, as listed here and defined further in Figure 1:
- Empower the consumer while maintaining universal access to safe, reliable electricity at reasonable cost.
- Demarcate and protect the "commons."
- Align risks and rewards across the industry.
- Create a transparent, level playing field.
- Foster open access to the grid.
We offer these tenets of grid neutrality as a proactive, rather than reactive, set of principles - standards for dealing with challenges in an increasingly dynamic and critical energy landscape.
Grid neutrality as we define it here remains consistent with the Bonbright Principles, which have long guided utility ratemaking, and does not diminish any energy services currently offered to consumers.4 Its central mandate is identical to that of the current grid: providing universal access to a safe, reliable energy service at reasonable cost. However, instead of achieving this by simply safeguarding the grid's physical infrastructure, grid neutrality ensures universal access to electricity by also safeguarding the neutrality of the grid's infrastructure.
Grid neutrality frees the power industry to pursue actions that may or may not be tied to its legacy infrastructure assets. Grid neutrality's first tenet introduces a dual mandate for the grid, highlighting consumer empowerment as a fundamental element of being able to maintain universal access to electricity in a dynamic network. The second and third tenets protect the "commons" as a neutral, vital resource. The fourth and fifth tenets expand upon neutrality by fostering the neutral conditions necessary for a dynamic network to thrive.
The goal is not to dictate particular designs or operation of the grid, but rather to future-proof the grid with the flexibility, resilience and scalability to meet future needs. Neutrality is a fundamental, indisputable property of the network that underpins the electricity grid. As such, the tenets of grid neutrality provide a powerful means to cut through political, technological and interest-driven grid design discussions by evaluating them against immutable principles for the future electricity grid.
A Path Forward
The prevailing paradigm that we know today as cost of service regulation (COSR) will prove insufficient to usher in the era of the networked grid.5
One reason is that COSR sets prices based on past costs, not on future potential.6 As a result, COSR lacks the frameworks needed to price the vast potential benefits that DERs offer - which ran the gamut from targeted grid solutions to DC-wired smart homes to Uber-style peer-to-peer models.7,8,9,10 Moreover, COSR is naturally biased in favor of minimizing harm rather than maximizing customer value. Under COSR, value is mostly a binary proposition: either you have access to electricity or you do not. And once you have access, COSR is mostly concerned with minimizing costs, outages, accidents, complaints, and inequality.
Given these parameters, COSR alone is unable to maximize the value that DERs can offer to customers and the grid. It is relatively simple to define harm, as COSR does today. But value is influenced by individual needs and preferences, and so cannot be defined objectively or universally for all customers. In other words, while existing regulatory criteria can safely determine what customers are willing to tolerate, they cannot determine what customers will pay for value.
Current rate design methods thus are unlikely to yield a satisfactory price for distributed energy resources. The mere act of setting rates for all suppliers and consumers requires regulators to subject all grid users to a single interpretation of value. But such a static evaluation won't likely succeed in the future, because value and cost will change constantly in response to locational and real-time constraints of supply and demand. Setting prices through slow, periodic rate cases cannot keep pace with such a dynamic grid. When regulation cannot keep up, policies and pricing will favor certain stakeholders over others.
The problem of lagging regulation becomes most evident in disputes over the value of distributed solar and demand response. On the surface, the issue is the appropriate level of compensation for DERs. However, the real problem is that pricing mechanisms are too blunt and rigid; prevailing regulation cannot dynamically balance the benefits of distributed resources to the grid and grid users.11,12
We can create a value of solar, but will we create a value of storage? A value of second-generation smart thermostats? A value of combinations of DERs (solar-plus-storage, solar-plus-load control, storage-plus-load control, etc.)? Where does it stop?
Integrating grid neutrality with existing regulatory principles can mitigate disputes over the value of distributed resources. It removes the perception of regulation as being overly partial or subject to political persuasion. And it can prevent customers from using DERs to bypass regulatory policies deemed unfair or too restrictive.13 As it is, some homeowners in Hawaii have started to go off the grid or interconnect their rooftop solar systems without approval.14,15 Large companies such as Amazon, Yahoo and Walmart are increasingly sourcing energy services through non-utility suppliers.16 Last year, Microsoft opened a new data center in Wyoming that is completely off the grid.17 Recently, a group of large gaming companies and the world's largest data center, Switch, have initiated moves to defect from their utility monopoly supplier.18
Grid neutrality not only prevents this type of grid balkanization, but it can also help develop an integrated, self-healing energy network.
The Power of Networks
That neutrality should mark the cornerstone of the modern smart grid can be seen via another simple but fundamental reason: tomorrow's dynamic, intelligent grid no longer serves simply as a conduit for electrons but as a platform - an energy network.
Every node within an energy network is both a source and a sink. Hyper-efficient, resilient and dynamic, an energy network leverages the combined capabilities of billions of nodes - consumers, devices, DERs, power plants, storage (literally anything that is plugged in) - to enable universal access to electricity. Ideally, this energy network should be able to auto-island, self-heal and coordinate an ever-changing number of nodes. Eventually, it may be able even to decide autonomously between calling on EVs parked nearby or on a more distant peaking plant to support an AC load spike.
Today, over $600 billion worth of controllable devices - laptops, coffeepots, electric cars, building HVAC systems - is plugged into the grid at any one time. By 2020, this number will have grown to $1.7 trillion.19 As the Edison Eletric Institute has written, "The grid increasingly is becoming a multi-directional network interconnecting millions of consuming devices, flexible distributed energy resources including DG [distributed generation], and backup generation."20
The electricity grid is poised to surpass the Internet as the largest connected platform in the nation. It is time for the power industry to operate the grid as the neutral, networked platform it should be.
An Example from New York
The grid neutrality principles are not intended to be theoretical. Rather, they provide a framework for real decision-making. Each principle upholds a structural component of the grid's underlying nature. By reviewing which and how many of the five core tenets are well served, policymakers have access to a ready framework for decision.
As an initial example, we apply the grid neutrality framework proposed here to the New York Public Service Commission's December 2014 decision to approve Con Edison's Brooklyn/Queens Demand Management Program.
Con Edison faced a situation common to many utilities. Electricity demand growth in Brooklyn and Queens had increased significantly, threatening by the year 2018 to overload the capabilities of feeders serving two substations (Brownsville 1 & 2) by 69 MW (see Figs. 2 & 3). Historically, utilities in Con Edison's position met similar grid needs by constructing new substations, feeders and switching stations, which in this case would result in an aggregate cost of over $1 billion.21 But this time, in July 2014, Con Edison solicited offers to fill this need not only in the traditional way, but also by non-traditional resources.
In December 2014, Con Edison proposed to fill its infrastructure needs by deploying 17 MW of traditional utility infrastructure investment and 52 MW of non-traditional solutions on both the utility and customer sides of the meter. (The non-traditional solutions constituted the Brooklyn/Queens Demand Management program, or BQDM.) The total cost of the proposed initiatives was just over $200 million.
We can now evaluate the Con Ed plan using our five tenets of grid neutrality. How does it stack up?
1. Consumer Empowerment. The New York Public Service Commission (PSC) and Con Edison had the option of meeting the projected demand growth by deploying either traditional or non-traditional technologies, or a combination of both. Deploying only traditional, centralized infrastructure such as substations would ensure the integrity of the grid. But it would also entail the risk of building more infrastructure than needed. Furthermore, centralized technologies require large capital expenditures; these sunk costs would likely strain the PSC's and Con Edison's ability to address other grid needs for years to come. In addition, the traditional top-down approach would largely ignore the capabilities of consumers. Thus, deploying only traditional, centralized resources would not uphold the first tenet of grid neutrality to empower and respect consumer choice.
By contrast, a non-traditional alternative that relied completely on demand-side resources would empower the consumer, but at the risk of relying heavily upon consumer choice to maintain system integrity. And building in enough redundancy to increase the reliability of demand-side resources could end up being too expensive and complex.
In this case, however, Con Edison's decision to deploy both centralized and customer-side solutions such as demand management and energy efficiency upholds the dual mandate of grid neutrality. It maintains grid reliability while maintaining the grid's position as a platform via which customers are incentivized to reduce costs for all grid users.
2. Demarcating the Commons. While the majority of the investment in this program will be non-traditional and on the customer side, both Con Edison and the PSC demarcate the minority portion of the investment that does require traditional infrastructure investment. This portion includes 6 MW of capacitor banks and 11 MW of load transfers from the Brownsville substation area to other networks.
In this case, Con Edison and the PSC recognized and adjusted for the operational differences of traditional and non-traditional resources. For example, Con Edison owned and controlled the monopoly infrastructure, but allocated the ownership of a majority of the distributed solutions to its customers and/or third parties. Apart from grid-based storage, Con Edison would own only those DERs needed to backstop a potential market failure and/or fill a grid need that consumer choice could not address. Thus, the PSC established clear boundaries for monopoly and market activities.
3. Risk and Reward. In return for bearing the responsibility for the program's utility-side solutions, Con Edison received both its regulated rate of return plus an added incentive of 100 basis points for its support of customer-side programs. The PSC, however, rejected Con Edison's proposal to retain benefits from a 50-percent share of the customer savings associated with the BQDM program. Instead, in order to make the monopoly utility indifferent to the type of solutions procured, the PSC allocated the full share of savings due to customer and third-party-owned equipment to the customers themselves. The utility that operated non-competitive, centralized equipment would earn a regulated rate of return. The risks and rewards of the projects were thus divided among various willing and able participants.
4. Transparency. The PSC also emphasized the importance of transparency in Con Edison's request for proposal (RFP) and request for information (RFI) processes. It ordered Con Edison to retain an independent third party to oversee the processes and report publicly to the PSC itself. In addition, the RFP process was transparent about the specific grid needs and ability of various DERs to meet them. Upon implementation, Con Edison will be responsible for quarterly public reports on all program expenditures and activities. Solicitations and decisions conducted transparently reinforce grid neutrality.
5. Open Access. In this example Con Edison will be selecting the non-traditional solutions via an open RFP process that began with an RFI that elicited 78 responses from a variety of players. Final decisions will be made based on merit and are intended to include a mix of energy efficiency, demand management, distributed generation and other customer-side solutions. Allowing different technologies and stakeholders to prove their merit ensures an open playing field and upholds grid neutrality.
This analysis, presenting in the preceding paragraphs, shows how the New York PSC and Con Edison eventually settled on a program marked not only by an innovative structure, but commendable as well in the way that it clearly supports some degree of all five tenets of grid neutrality.
The program clearly empowers the consumer. It also seeks a balance between the needs of the consumer and those of the grid and ultimately leverages a larger, more diverse stack of resources to maintain grid integrity. Furthermore, the program aligns risks and rewards of both non-traditional and traditional resources and does its best to clearly delineate resource ownership so as to shield monopoly and competitively sourced resources from conflicts of interest.
Let this PSC decision stand as an early example of the grid operating as an open, transparent platform. We urge industry stakeholders to apply the grid neutrality framework themselves to this and other programs currently under discussion and arrive at their own conclusions.
4. The principles had four main objectives: 1) protect customers from rate volatility, 2) ensure adequate utility revenues, 3) minimize cross subsidizations and 4) promote economic efficiency. James C. Bonbright, Principles of Public Utility Rates, 1st ed., 1961