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A Requiem for Today’s Grid

People speak reverentially about the electricity grid, and rightly so. The U.S.’ electricity grid is an awesome technical, operational, and public policy accomplishment. Who can deny the matchless service it delivers, occasional weather-related breakdowns notwithstanding? In fact, acts of Mother Nature — Hurricane Sandy, say — only highlight its otherwise stellar reliability. And rural electrification, like rural telephony, is a triumph of public policy with foresight.

The AT&T system and Bell Labs once evoked similar awe. The reliability was wondrous. From any phone in any corner of the U.S., one could reach any other corner of the U.S. Who could quarrel with the perfection that was the Public Switched Telephone Network (PSTN)?

But then the industrial order changed. The Bell Labs of yesterday barely exists today, and the telephone network has metamorphosed in amazing ways during the last twenty years. In July 2014, the new incarnation of AT&T installed their U verse high-speed Internet service at our home, and upgraded the network to Voice over Internet Protocol (VoIP). The Class 5 switch, payphones, and pagers are history.

The electricity grid as we know it today, shall also pass, and a new one will take its place. How do we manage the transition to Electricity 2.0?

As Telephone So Electricity

NY State’s Public Services Commission, in their April 2014 Reforming the Energy Vision (REV) document proposes one new approach. It envisages a new mission for utilities, that of Distributed Services Platform Providers (DSPP). “The DSPP will identify, plan, design, construct, operate, and maintain the needed modifications to existing distribution facilities to allow wide deployment of distributed energy resources.

From grid-based electricity we are moving toward personal electricity, or home-based electricity. From one-way flow, we are moving toward two-way, transactive electricity flows on mesh networks. Electricians are now service providers of personal solar power plants. The natural monopoly is giving way to numerous electricity providers. In economics terms, the barriers to entry in electricity production have fallen. 

Off-grid solar homeowners enter the electricity business and compete with the utility. Such market entry undermines the natural monopoly principle at the heart of the industry structure. The REV document notes, “The introduction of widespread distributed resources can be perceived as challenging the natural monopoly model of utilities.” With the end of natural monopoly, “rate of return” regulations and geographical franchises begin to crumble.

Ease of market entry notwithstanding, the REV proposal continues to value monopoly elements in the interest of reliability. To quote, “The REV vision does not eliminate the natural monopoly of the distribution system operator; rather the locus of the natural monopoly is shifted from sheer physical delivery to management of a complex system of inputs and outputs while maintaining reliability [emphasis added].”

The New Public Interest

With technological advance and easy market entry, what constitutes the new public interest? It doubtless includes:

  • affordable and equitable electricity access;
  • sustainability – distributed and grid-tied renewable resources;
  • reliability of the grid (see Microgrids – A Regulatory Perspective);
  • resiliency of supply in the face of storms or cyber attacks; and therefore it
  • fosters new market entry, thereby competition – in renewable generation, in value-added services, and in new business models.

The public interest, however, no longer lies in regulating monopoly investments to support low electricity prices; solar affordably price competes with grid power in many markets.

People want green electricity – renewables – in the generation mix. Reliability has to be a given, no matter what the technology, or the topology, or the size of an operation. Microgrids – between off grid homes and the macrogrid – are expected to be more resilient during hurricanes.

Daniel Esty, Connecticut’s Department of Environment and Energy Services states, “our microgrid strategy aims at providing a mechanism at facilities like hospitals, sewage treatment plants and prisons where the power must stay on” and  “… keep police and fire stations, a place to charge cellphones, perhaps a school as a warming center, a grocery store, a gas station, a bank and a pharmacy … supported by distributed generation … while the grid is down.”

Microgrids, however, are a work-in-progress. And microgrid-based services are constrained by archaic laws, such as not being able to offer service to customers across a public right of way. Such laws, inconsistent with technological possibilities, are no longer in the public interest.

Laws changed in telecom in response to new business realities. For instance, Competitive Local Exchange Carriers (CLEC) were hosted at telephone company facilities; they used the unbundled “loop,” hitherto exclusive to the Bell system operators, to offer competitive and new services. Could microgrid operators be similarly co-located at a utility’s sub-station, and offer competitive electricity services to a neighborhood?

#rewpage#

Beyond green generation, reliability, and resiliency, and given the state of energy technologies, the new public interest preponderantly consists in encouraging new business formation, for innovative start-ups to arise in the energy space; sometimes in association with, occasionally competing with, or at times independent of the existing grid.

Demand Decline, An Existential Crisis

With lowered prices, telephone minutes of use increased; demand was price elastic. The electric utilities, in contrast, face a loss of demand. Energy efficiency programs, demand response, and superior appliances from LED lights to LCD TVs create benefits with lower consumption, and therefore potentially lower utility revenues. Only if electric car charging takes off will there be a temporary reprieve.

If revenues drop, will stock prices and market valuations drop too, as has occurred in Europe? Will solar substitution accelerate if revenues are maintained with price rise? Will analyst recommendations for investor owned utilities change from “Buy” to “Hold” or “Sell”?

The revenue erosion will be slow, say, over fifteen years, given the size of the utilities and their market dominance. Regardless, unless the utilities embrace the new energy paradigm – Distributed Generation (DG), microgrids, and value-added services – they may not maintain revenue levels. The regulators may not support rate increases; the public interest has shifted in favor of competitive new market entry. 

New York State’s DSPP Vision: Bold Yet Insufficient

The REV document acknowledges the public interest in incorporating DER — Distributed Energy Resources — into the grid. It states,  “DER … include Energy Efficiency (EE), Demand Response (DR), and Distributed Generation (DG).” However, it does not explicitly advocate new market entry as being in the larger public interest. Rather, it appears to hand over the management control of the DER and microgrids to the existing public utility, in the name of practicality, reliability, prior experience, expediency, and so forth.

On the topic of new entrants, a Hoover Institution study says, “entrants to the electricity sector provide a variety of services, sometimes in competition with utilities, but no sustainable roadmap has been developed for their role. The lack of … competitive services framework is slowing private investment…”

To quote the REV, “The question of who should serve as the DSPP is theoretically open to a choice between the incumbent utility and an independent entity.” Yet this option for an independent operator is not discussed in much depth or with seriousness.

Rather than explore novel organizational forms, the REV states, “… when the actual functioning of a DSPP is considered in a practical context, it is clear that incumbent distribution utilities should serve as DSPPs” [emphasis added, p. 24]. And further, “… even if the sources of power are distributed, the need for a single entity to be responsible for reliability of the overall system remains [emphasis added].” The proposal thus ends up augmenting the existing monopoly structure with broadened responsibilities.

A corollary is that the proposal discounts the competitive market’s role in coordinating resources, for reliability, resiliency, and more, among DER, macrogrid, and microgrids.

More Options Needed

The industry trend is for the grid to fracture, to break up into microgrids, or vertical and focused businesses, with distinct new topologies. Yes, centralized generation and the transmission network will remain, in a diminished role. Market forces, aided by light-touch regulations, may accomplish any needed coordination among resources without compromising the public interest. 

The grid as we know it is unraveling. To complement NY State’s lead, will public utility commissions from other states, or some investor owned utilities, propose alternate, future-friendly solutions in the public interest that will engender multiple stakeholder support?

Interested in microgrids? Sign up for our Microgrid Executive MBA Training Course with author and professor Mahesh Bhave. In this course, you will learn to evaluate project economics of microgrid projects in a variety of markets using case studies, financial models, and templates. Find more information here.

Lead image: Transmission lines via Shutterstock

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Mahesh Bhave is a Visiting Professor of Strategy at Indian Institute of Management, Kozhikode, India since Fall 2010. His home is San Diego. He has worked in product management, strategy, and business development positions at Hughes, Sprint, and C...

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