Power industry on a ‘train wreck’ path, consultant says
In an updated version of his 2010 book “Smart Power,” Fox-Penner, chairman emeritus of the Brattle Group consultancy, documents how these trends have accelerated since then. He presents the case for change as a survival issue for an industry with an indispensable product.
But today, he argues, paths toward change are strewn with political, regulatory and financial obstacles. The industry’s current outlook is “a slow-motion train wreck.”
Today, it’s not uncommon for despairing experts to conclude the grid’s policy machinery is so broken that it may take another massive power blackout to galvanize needed action. Fox-Penner doesn’t go so far. “I don’t foresee anything approaching a death spiral for the industry,” with a few possible exceptions, he writes. But he does document an industry in a historic bind.
The consumer side of the grid is governed by 50 different state commissions. Congress seems incapable of creating a national energy policy to shape the interstate grid’s future or deal with climate issues. External threats from extreme weather and physical and cyberattacks call for bigger infrastructure spending. Nimble technology companies outside the energy sector look to seize parts of the utility franchise. Customer-owned power grows, and demand growth for electricity may not reach 1 percent per year.
“What kind of industry would invest $1 trillion or $2 trillion dollars simply to sell less and less of its products as its customers took control, and made more of their own energy, and other companies grabbed a larger and larger share of the value chain?” Fox-Penner asks in the book. (The $2 trillion figure is his estimate of grid transformation costs just through 2030.)
Several industry leaders who share Fox-Penner’s view appear in the book to second his warnings. James Rogers, former chairman and chief executive of Duke Energy Corp., writes, “By 2050, nearly every single power plant in the U.S., with the exception of hydro and potentially some nuclear, will need to be replaced by new plants.” Along with that will come the replacement of much of today’s power lines and control systems.
“Technologically speaking, there is little disagreement over how this all will end,” Fox-Penner says. “Many decades from now, much more power will be made locally, within smaller-scale versions of our current grid known as microgrids,” hosting not just smart meters, but smart buildings and smarter motor vehicles.
The challenge is to get to that future, avoiding underinvestment in new transmission lines and control technologies that may be essential to ensuring reliable power supplies, while reducing the impact of fossil fuel generation on the environment, he says.
Climate imperative
The climate threat underpins Fox-Penner’s argument, as the dividing line with those who reject the threat and thus the need to phase out coal generators and eventually gas turbines.
The power sector, he says, “is the largest single source of greenhouse gases in the world. The complete decarbonization of the power industry in the next fifty years is essential if we are to avoid dangerous changes in our climate.” (Fossil fuel power plants could survive if their carbon emission can be dealt with, he says. “It is politically unrealistic to expect that U.S. climate legislation will pass without significant support for coal plants with CCS [carbon capture and storage],” Fox-Penner says.)
Fox-Penner makes a case for the survival of the utilities industry as a likely agent of grid transformation.
In his view, a utility may become a “smart integrator,” operating its piece of the power grid without owning or selling the power. This utility distributes and manages power from a range of sources — conventional power plants to two-way household solar arrays that take and contribute power to the system.
Or it could become (or remain) a regulated “energy service” supplier, owning or contracting for the power it delivers. But it may charge customers for the services rather than electrons themselves — lighting, heating, computing and machine power. A services model allows the utility to grow financially through energy efficiency and conservation, Fox-Penner says.
Rogers calls “Smart Power” “a guidebook for savvy utility CEOs.” It also is a primer on the grid’s machinery and markets for outsiders, with snapshots of how the balkanized U.S. electricity industry is writing different scripts for the future.
There is Sequim, Wash., a town of 6,000 people on the Olympic Peninsula that agreed to become a laboratory experiment in smart grid technologies. Volunteering households received free, customized computers that tracked electricity prices continuously as markets responded to the electricity supply-demand balance. They also got smart thermostats, water heaters and clothes dryers programmed to give constant updates of electricity prices and usage. When demand was high, prices shot up, creating an incentive to conserve at those times.
The local supplier, the Clallam County Public Utility District, was able to remotely shut down the heating element of the clothes dryers for one minute at a time while the dryers kept spinning, saving a significant chunk of power whenever that was needed to keep the power system in balance. The volunteers cut 10 percent off their power bills on average, with even larger reductions in peak power consumption. The reductions in power demand spared Clallam and its customers the cost of building new power lines.
Utility models
Austin, Texas, home to the Pecan Street Project, is also featured. The city’s municipal utility, Austin Energy, has created what Fox-Penner considers model regulations, laws and inducements for a future system. It offers rebates to customers who invest in energy efficiency and financing help for efficient appliances through a “pioneering” municipal energy lending program. It requires single-family homeowners to get a certified audit of their property’s energy usage before putting it up for sale, in that way demonstrating the market value of energy conservation investments.
Austin is a model of his “energy services” utility. This course is more likely to be adopted by municipal utilities where city councils have a chance to seek a local consensus on climate issues and energy responses, he says.
But he warns that despite the promise of Austin’s experiment, the pace is uneven and constrained by city budgets. “It will be years before Austin will be able to gauge the full economic feasibility and degree of customer acceptance of many parts of its vision.
“The city has to be able to raise and service the capital needed for energy services, keep the rest of its business running well, and keep costs and rates acceptable. Even in Texas, that’s a tall order.”
His example of the “smart integrator” is Northeast Utilities’ smart grid pilot project in New England.
The utility is out of the generation business and makes its money as the middleman operating smart grid power systems for suppliers and customers. Customers get to choose from a range of retail power suppliers, and Northeast Utilities operates the power market, sending signals to customers about the varying prices of the power they consume, employing an “energy orb” that changes colors as power prices rise and fall during the day.
The smart integrator typically runs an advanced energy network that can accept power from the varied sources and move it reliably to customers. It must be able to accept power from customers’ solar panels through two-way circuits that replace today’s one-way lines. These utilities must build and run complex electricity markets that determine hourly spot prices to which customers will respond, and big accounting systems to keep track of transactions.
Will utilities that choose this route get the support from state regulators to let it happen? What incentives will utilities require in order to make investments in new technologies this future requires? If utilities don’t move ahead, should they expect outsiders like Google Inc. to step in and become the technology link between the customer and the power supplier?
“This model requires a substantial retooling of grid services, pricing and regulation, and progress in these areas has been slow so far,” Fox-Penner says.
It will take consensus on new operating and market regulations for any of these new futures to succeed, he says. Instead, uncertainty is the common denominator in his scenarios, with ominous implications for an industry that must plan far ahead.
“Running out of generation has devastating consequences, and it is always necessary to have sufficient supply on hand to meet demand,” he observes. Building power plants and power lines is what utilities do. It is the primary way regulated utilities make money, he adds.
“Yet I have never seen utilities as fearful of embarking on a construction program for a major plant as they are today.”