TODAY’S STUDY: TOWARD A 21ST CENTURY ELECTRICITY SYSTEM IN CALIFORNIA

Toward A 21st Century Electricity System In California; A Joint Utility and Advanced Energy Industry Working Group Position Paper

Executive Summary

On February 25, 2015, Advanced Energy Economy Institute (AEEI) hosted a meeting of senior executives from advanced energy companies and California’s investor-owned utilities (IOUs). This California 21st Century Electricity System CEO Forum was an opportunity for energy industry leaders to come together to develop a common inventory of the drivers of industry change and to start to examine utility business models and regulatory concepts that can adapt to and thrive in the emerging energy market environment.

Out of that meeting came a desire by the participants to advance the ideas and concepts discussed at the CEO Forum. This document summarizes that effort. It presents a broad vision of how stakeholders in California can move forward together in a more integrated fashion to achieve the state’s ambitious and important energy and environmental policy objectives.

California’s portfolio of policies, statutes and regulatory actions, whether existing or proposed, has set the state on a path to significant de-carbonization of its energy sector. When coupled with broader industry and societal trends, a transformation of the grid is underway at both the wholesale and retail levels.

click to enlarge

A Vision of the Grid in 2030

The Working Group developed a collective vision for the grid in 2030 to guide its work. In this vision, California continues to be a world leader in the use of clean energy resources and the adoption of innovative technologies. The legislature, governor, principal regulatory agencies, utilities, generators, technology and service providers and other key stakeholders are aligned in working to meet the State’s overarching policy objectives in a cost-effective and efficient way while maintaining core values of reliability, safety, affordability and universal access. The roles and functions of the grid have changed, driven by changes in customer expectations, environmental and other policy objectives and the rapid advancement and deployment of enabling technologies. The utility business model has also evolved to accommodate these changes to enable a more integrated, “plug-and-play” electricity system.

Achieving the Vision

To achieve the vision, the Working Group identified three areas that must be pursued in parallel in order for an effective transition to occur:

1. Innovation in product and service delivery

2. System design and technology

3. Regulatory framework, incentives and revenue mechanisms

Innovation in Product and Service Delivery

While customers have historically had some tools to help them manage their electricity consumption, the options that have become available within the past several years have begun to change the role of customers from consumers to, in a growing number of cases, generators (including exporters of power at certain times). Customers now have more options to manage their energy costs and where their electricity comes from. These options include energy efficiency, demand response, distributed generation, electric vehicles, on-site batteries, control technology for air-conditioning or lighting, programmable controllable thermostats, and building energy management systems. In fact, many customers are employing multiple forms of these technologies. Enabled by these technologies, customers, on their own or working through their energy service provider(s), can also provide services to the grid in response to several types of grid conditions, so that supply and demand are more interactive than was previously possible and management of customer load becomes an asset for grid reliability and affordability.

In short, the information age has arrived in the energy sector and customers have an increasingly important role to play. With the expectation of policies for higher renewable energy and energy efficiency, and deeper greenhouse gas reductions, customer engagement will be critical for achieving these goals. Third-party companies, utilities and customers are expending significant capital to develop, provide and use products and services in this new age of energy information. Many third-party providers of various on-site generation and storage services have already been successful in developing novel ownership and financing models to expand their markets and are competing to offer innovative products and services both to utilities and their customers.

As a result of the changing role of the customer and the information that is now available, the relationship between central planning, utility planning and Distributed Energy Resources (DER)2 deployment is an area of active investigation. As part of this effort, utilities will need analytical constructs to determine the locational value (benefit-cost) of DER and customers will need innovative products and services to realize their ability to provide grid services. In addition, data, data access, privacy and security are becoming increasingly important.

click to enlarge

System Design and Technology

Meeting California’s energy and environmental policy goals requires an evolution in electricity system design and operation using advanced technology and software analytics. The 21st century grid includes significant amounts of utility-scale renewables, more holistic integration of DER with the grid, and increasing third-party solutions that together help to maximize value to customers. The grid must be designed to accommodate rapid evolution in available technologies as well as emerging technologies.

The grid architecture must consider the physical assets of the distribution grid including poles, wires, sensors, and customer devices as well as the communications, forecasting, control and other advanced algorithms that enable the collection of devices to work together. Utilities will need to increase investment in hardware and analytics, as well as to develop tools that optimize the contribution of customer-side resources.3 Regulators will need to facilitate this change by designing policies that support the necessary infrastructure investments, allow experimentation, and require the development of standards and open protocols to ensure interoperability and integration, while addressing cyber security. In addition, utilities and regulators need to recognize that certain types of grid equipment and infrastructure can no longer be amortized over 20-30 years due to the shorter technology lifecycle.

The growth of new DER interactions at the “grid edge” creates a much more complex operating environment for the distribution grid including two-way power flow, power production controlled by the customer, in addition to the utility, and unexpected variations in power quality. These conditions drive the need for greater visibility, digital intelligence (monitoring as well as predictive maintenance) and control as well as the ability to measure and manage power flow and power quality. Ideally, the very DER that is changing the grid environment can be utilized to optimize the grid. In essence, DER can serve the dual purpose of providing greater customer choice and control, and grid power quality and reliability benefiting both customers and utilities, provided that the necessary enabling technologies and adaptive regulatory frameworks are implemented.

click to enlarge

This environment is already being recognized on specific circuits and areas within California. Utilities and grid operators are in the process of adapting to it, with investments in grid modernization and modifications to traditional distribution planning processes.

A portfolio of enabling technologies will be necessary to support the envisioned products and services. The emerging capabilities of the 21st century electricity system include real-time granular system monitoring and visualization, failure prevention through predictive diagnostics, robust communications, advanced software applications such as outage management systems, advanced control systems such as advanced distribution management systems, advanced grid infrastructure such as distribution automation and advanced forecasting tools incorporating the capability of DER assets.

Regulatory Framework, Incentives, and Revenue Mechanisms

The current regulatory construct will be challenged to keep pace with changes that support the principles of universal service and how to equitably cover and share the costs of essential grid services, while also supporting individual customer-level options and the achievement of state policy objectives. There are several possible pathways, models and options that could be reviewed and evaluated for how they could be applied in California, covering utility organizational models, market operations/pricing models and potential future revenue models.

The California Public Utilities Commissions (CPUC) has already embarked on several parallel paths, via individual proceedings, to address a range of issues emerging from the changes taking place in the electricity sector. This has set the State of California on the path to achieving important state policy objectives and has also set the stage for the industry to evolve to a new structure. As the changes become more profound, it will become necessary to consider more fundamental changes, in particular on restructuring/aligning incentives to achieve the desired outcomes while maintaining the long-term viability of the utility. This should be done via an open and transparent process to consider all the options available. This would include:

• Identification of the regulatory issues that currently impede – or could enable – evolution from existing business models to new ones.

• An assessment of what is most appropriate for the regulated market versus the competitive market, and how the two would interact as the market evolves.

• A focus on regulatory process, in particular an assessment of how to best integrate/coordinate the various regulatory proceedings that are each addressing some aspects of the evolving industry structure into a comprehensive framework. This could help reduce the effort and time required to run all these proceedings and also lead to better results by considering issues more holistically.

The companies engaged in this effort encourage the CPUC as well as the California Energy Commission (CEC) to consider the above as they work to accelerate the transition to a high-performing electricity system in California for the 21st Century.

click to enlarge

Conclusions

California has been, and continues to be, a national and global leader in advancing energy efficiency, renewable resource development, greenhouse gas reduction, grid modernization, and new technology adoption. The continued deployment of low-carbon distributed energy resources, technological and financing innovation and rapidly changing customer needs and expectations support the need for a 21st century electricity system, and by starting with these ten recommendations, the State can continue to blaze a trail forward. Even as the state is set to achieve its 2020 goals, even more aggressive policy goals are being set for 2030 and beyond. These policies are changing not only the way that energy is delivered to customers, but also the way customers make decisions to consume or generate electricity with the attendant impacts on the grid. Electrification of transport using electric vehicles extends the implications of the changes taking place on the grid into the transportation sector that has traditionally been dominated by petroleum-based fuels.

A key enabler to achieving 21st century electricity system goals for the State of California is a set of policies that spur technological and market innovation along with a modern regulatory framework that recognizes the potential for new business models (at a company and industry level) to better align the incentives and opportunities for all actors to more effectively contribute to the achievement of these goals. At the same time, utilities will need to maintain safety, reliability, universal access and reasonable cost of service.

The transition to a more agile and flexible platform that supports high levels of DER, bi-directional services and differentiated customer options will impact all areas of the electricity system. Such a 21st century electricity system must accommodate a higher rate of technological change and incorporate that technology into existing, legacy systems. New market entrants have the potential to address new customer needs and develop products and services that also support the role of the utility. Utilities should be encouraged to participate in research and innovation and to partner with new market entrants.

Underlying the technical capabilities of the 21st Century electricity system are business process and workforce changes needed to ensure integrated planning and operations across generation, transmission and distribution. This will require a well-defined process and workforce strategy that accommodates shifts in resource availability/ planning, transformation of existing roles and creation of new system planning and operational roles, as well as field workforce transformation.

click to enlarge

To summarize, the Working Group offers these 10 key recommendations to help the State of California achieve a 21st Century Electricity System:

1. Develop a comprehensive framework that integrates/coordinates the existing regulatory proceedings

2. Restructure/align/create new incentives to achieve the desired outcomes while maintaining the long-term viability of the utility and recognizing the value of the grid

3. Develop new market structures that enable two-way market signals to allow customer participation

4. Encourage data exchange and circuit-level coordination of available grid and customer resources

5. Utilize standards and protocols, ideally drawing from National standards, to ensure interoperability of devices located on the utility side of the meter and on customer premises

6. Assess what is appropriate for the regulated vs. competitive market and how the two would interact as the market evolves

7. Encourage training of the workforce that will develop the skills needed for the 21st Century Electricity System

8. Accelerate the pace of regulatory review and allow utilities to take reasonable risks to encourage innovation and entrepreneurship and accelerate commercialization of new products and services

9. Examine the role of rate design in helping to achieve the long-run financial integrity of the grid as a platform

10. Examine the functionality and enabling technologies that will be integral to the distribution grid of the 21st century

Tweet