Cheaper, more reliable, more efficient: It’s time to consider a bottom-up clean energy transition

At times in the past, there has a debate about large versus small, with many preferring the latter, as in “small is beautiful.”

Many are now asking the same when it comes to the form and function of the electricity infrastructure, sometimes referred to as the bulk power system. It evolved as a heavily centralised system and for over a century bigger was believed to be better, cheaper, more efficient, more reliable and more dependable.

Engineers, who traditionally dominated the power sector, preferred bigger power plants to smaller ones, more high voltage transmission lines and expanding distribution networks – all connected to centralised command and control systems in the head office.

Over time, regulation emerged to prevent the big monopoly behemoths from abusing their excessive market power and protect hapless customers from being overcharged while maintaining some level of service quality – not always successfully.

But new technologies to generate, store and consume electricity from localized and distributed resources such as rooftop solar panels, offers today’s customers new options that did not exist in the past.

This, in turn, has brought the issue of centralisation, scale, efficiency, resilience, affordability, carbon emissions/environmental side-effects and equity into sharp focus.

Unsurprisingly, the incumbents especially the private or investor-owned utilities (IOUs) – which still prevail in many countries, the US included – prefer to cling for as long as they can to whatever remains of the status quo such as cost-of-service regulation that allows them to collect sufficient revenues from customers to cover their prudent costs plus a reasonable profit for their shareholders.

The terms sufficient, prudent and reasonable being highly subjective. The regulators, who tend to be risk averse, prefer the devil they know to the one they don’t – i.e., unfamiliar alternatives – which may lead to unintended and surprising outcomes.

Yet there is little that either can do to maintain the status quo as customers take advantage of the new opportunities and as innovative entrepreneurs emerge to meet their new energy service needs.

The most noteworthy among the new opportunities are distributed energy resources (DERs) – the topic of much attention these days. In some countries where the prevailing conditions are ripe, a sub-set of customers with basic technical savvy and adequate financial resources can generate enough electricity from their rooftop solar panels to meet most of their needs, most of the time.

If retail electricity rates are high, as they are in some places, the resulting bill savings could recoup the initial investment in a few years – the payback period varies depending on the specifics.

But that is not the end of it. Customers with adequate resources can also invest in batteries, which allow them to store the excess generation for use after the sun goes down, enhancing the economics of the paired investment.

Many are replacing their petrol cars with electric vehicles (EVs) which increasingly come with bi-directional charging capabilities offering even more options such as potentially discharging the excess stored energy back to the house or the grid when and if it is profitable to do so.

When electricity prices are high more customers are incentivized to invest in efficient appliances, lighting and better insulation – usually taking advantage of available subsidies or incentives. Heat pumps, for example, are increasingly replacing far less efficient air conditioning system and furnaces when they fail.

Several retailers in California are offering cash incentives to contractors who install efficient heat pumps – on top of other incentives available from the state and federal government.

As the sheer number of customers with DERs increases, it is no longer the dog that is wagging the tail but the other way around.

California, for example, already has over 47 GW of rooftop solar systems on nearly 2 million homes, many with batteries, plus almost 2 million EVs. These numbers are expected to grow as the cost comes down and technology improves.

While EVs add, rooftop solar plus batteries reduce sales volume and revenues that can be collected from customers, which is one among many reasons for high and rising rates . Cost- conscious EV owners who don’t drive long distances may be able to charge – at least partially – their cars from their solar panels. For the IOUs in places where these things are happening it is anything but business as usual.

In this context, some industry observers such as Lorenzo Kristov, wonder what is the best way to move forward given the new realities. In a 2 Oct 2024 Blog posted on the Electricity Brain Trust (EBT), a professional social network, Kristov commented on the prevailing regulated utility business model which is increasingly challenged in some jurisdictions.

If the status quo is no longer fit for purpose, then “…what electricity service business model(s) do we want?”

Answering his own question, Kristov wrote:

“With today’s distributed technologies (DERs) it is possible for electricity service to be a locally owned and operated business.

“Such businesses could be designed for local governance, revenue retention for local wealth building, climate resilience, support for local decarbonisation and electrification projects, local workforce development, operational support and non-wires alternatives for the larger power network, etc.

“Building out distribution-connected solar and storage resources on the built environment (warehouse roofs, schools, parking lots, etc.) would be a faster cheaper way to achieve clean energy targets rather than relying entirely on the bulk power system.”

If it is agreed that this is what we want;

“This pathway would require a reformed electric distribution utility whose primary mission, incentives and governance structure would be designed to proliferate distribution-connected renewable generation and storage, local electricity supply services, and customer DER participation in local markets for energy and grid services.

“So, the fundamental utility business model reform would be to create an open-access distribution system operator (DSO), analogous in many ways to an independent system operator (ISO) but for distribution, whose incentives would elicit optimal performance of core network service functions and NOT reward capital investment.”

How would we get there from where we are today? According to Kristov;

“Initially local electricity systems may serve only a small portion of a community’s power needs, so the bulk power system and ISO/RTO markets would serve as residual supply but would gradually shrink as local capabilities develop over the years.

“It would probably also make sense to require very large new loads like data centers to connect to transmission and not impose costs on communities and residential customers who are served by local supply and do not use the transmission system. The idea is to facilitate a bottom-up clean energy transition.”

Kristov is not naïve. He acknowledges that even if we agree on the vision and the ultimate destination getting there will not be trivial nor fast.

He wrote, “I can think of many needed elements…. And it’s not a simple or quick answer, it’s a project for the next decade or two.”

In fact, the transition will be daunting because the incumbents will fight tooth and nails, throwing obstacles at every chance they get while resorting to lobbying politicians to maintain the status quo. And it is not entirely clear if the regulators will side with the customers or the incumbents.

In their defense, regulators are primarily concerned about service affordability – even though their record in California is not particularly good – and universal service. Under existing rules, DERs are primarily the domain of the affluent suburban households living in detached single-family homes with large roofs, two EVs and a battery and electric charger in the garage.

Lower income customers, apartment dwellers and those with limited financial resources or know-how are less likely to benefit from the opportunities offered by DERs. Under current regulations, the latter experience higher retail rates as the former reduce the number of kWhs purchased from the incumbents – the proverbial “cost-shift” argument.

This, of course, is mostly a consequence of the current regulation and outdated retail tariffs, which were designed for an age of large, centralized power plants and massive delivery infrastructure where bigger was indeed better, cheaper, more efficient and more reliable.

Those conditions no longer universally apply, and arguably small and decentralised is more beautiful now – cheaper, more efficient, more reliable and far more resilient. Yet the incumbents don’t want to change their ways, and regulators appear unwilling or unable to change the rules, at least not yet.

This article was originally published by EEnergyInformer. Reproduced here with permission