Sioshansi F.P. Smart Grid: Integrating Renewable, Distributed & Efficient Energy
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suppliers as well as the grid operator need much more
robust means of communication to send price signals and
receive feedback from consumers in real time if there is
any hope of influencing demand.
As further described below, the metering limitations placed
severe restrictions on how electricity could be
priced—resulting in flat rates, undifferentiated by time or
location of use, application, or anything else. Moreover,
limitations on communications meant that revenue collection
could be nothing but primitive. Until recently, most consumer
bills were calculated based on only one piece of data—a
monthly or quarterly kWh consumption figure—and in many
cases even that could not be achieved, resulting in an
estimate.
5
Even today, the vast majority of consumers,
including many in developed countries, are billed on a flat
multiplier—the cents/kWh—multiplied by the volumetric
consumption for the period.
5
Customers in many parts of the world are billed quarterly, in some cases
based on a single annual reading that attempts to reconcile the estimated
bills with the actual reading.
These technological limitations plus the low and falling
per-unit costs of generation meant that consumers would be
billed on simple tariffs that remained flat for all hours of the
day, week, month, and year and only infrequently adjusted.
Moreover, customers were charged postage stamp rates that
did not vary across wide geographic areas.
Viewed in this context, it is probably a small exaggeration to
say that for much of its history, the electric power industry
did its best to literally disengage customers from the upstream
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side of the meter simply because the technology did not allow
anything else (Box 1).
How Would the Smart Grid Reengage the
Disengaged Customers?
6
6Excerpted from EEnergy Informer, Feb. 2011.
It was probably not deliberate but for much of its
history, the electric power sector paid scant attention
to what consumers did to electricity once it reached
their meter. Beyond the meter was not only beyond
the industry's technical reach, but figuratively and
literally beyond its control, influence, or interest. In
the process, customers were virtually disengaged
from the upstream side of the business.
This was accomplished through massive investment
in an extensive and ubiquitous distribution network,
the so-called poles and wires, which connected
virtually every consumer in developed parts of the
world to the grid. Within their premises, customers
are never more than a few feet away from a switch or
a plug—and for all practical matters, that is all they
need.
Consumers can turn on the switch or plug in any
device at anytime, anywhere, and draw as much as
they want, for as long as they want it. The industry
has made it easy and simple for them.
The switches and the plugs, of course, are connected
to a transformer, which is connected to a distribution
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network, which is connected to high-voltage
transmission lines, which are connected to a network
of central power plants somewhere. And power
plants, in turn, are fed by primary energy sources that
go even further upstream of the plug or the switch.
But the average consumer need not know anything
about any of this. For all practical purposes, any plug
or any switch anywhere is connected to an infinite
supply of energy.
Making matters even more convenient for consumers,
over the years, utilities invested massive amounts in
ever larger and more efficient power plants. For much
of the 20th century, the unit cost of electricity
declined in real terms. For most consumers,
electricity bills were a negligible and diminishing
percentage of their disposable income. Some utilities
even encouraged their consumers to use more by
offering declining block tariffs, where unit costs fall
with increased consumption. Even today, electricity
prices in many parts of the world are a relative
bargain as exemplified in the following map of
current average retail electricity rates in the United
States.
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Starting in the mid-1970s—the date varies in different
parts of the world—the industry's miracle of
economies of scale and declining per-unit costs came
to an end. Building new capacity gradually became
more expensive relative to the average cost of the
existing capital stock. Adding new capacity began to
increase, rather than decrease, the average generation
costs. For example, nuclear power, once promised to
be too cheap to meter, turned out to be a rather
expensive proposition as a generation of new units
entered service in the 1970s and 1980s.
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Starting in the 1970s, fuel prices also began to rise, to
varying degrees in different parts of the world. Oil,
the universal benchmark for energy costs, jumped to
$25 a barrel during the first oil crisis in 1973, is now
hovering around $100, and is projected to become
more expensive over time.
In the 1980s, new concerns about security of supplies,
fuel diversity, and price volatility were added to the
list of woes. In the 1990s and 2000s, additional issues
including fears about the scarcity of finite supplies of
fossil fuels,
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effect of anthropogenic greenhouse gas
emissions on climate, and sustainability became
pronounced. Gradually but surely, the industry's
single-minded focus on the supply side has given way
to a new appreciation of customer demand and
increased efficiency of energy utilization, including
new ways of balancing supply and demand in real
time.
7
The subject of scarcity and price of fossil fuels, of course, is
controversial. As prices rise, more reserves become
economically feasible or “recoverable,” in industry parlance.
Moreover, improved technology, such as horizontal drilling for
non-conventional shale gas, has the potential to vastly increase
what can be considered recoverable.
Many within and outside the industry are now
convinced that the cheapest kWh is the one we do not
consume. Energy efficiency—once given mostly lip
service—is now considered a major energy resource,
and a cost-effective option.
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These same visionaries are now in favor of turning
things around by reengaging the disengaged
consumers. Even though these initiatives are in early
stages of their evolution, they are nevertheless
moving in the direction of making consumers more
active in the market of supply and demand.
Among the most stunning examples of this paradigm
change is the evolution of thinking at the Federal
Energy Regulatory Commission (FERC), the closest
thing in the US to a federal energy regulator. In a
recent interview with the New York Times,
8
current
FERC chairman Mr. Jon Wellinghoff said, “The
energy future of the US looks radically different from
its past,” partly because consumers will become, “…
active parts of the grid, providing energy via their
own solar panels or wind turbines, a system called
distributed generation; stabilizing the grid by
adjusting demand through intelligent appliances or
behavior modification, known as demand response;
and storing energy for various grid tasks.” Mr.
Wellinghoff is not only supportive of such schemes
but believes that “consumers should get paid to
provide these services.”
8
Making the consumer an active participant in the grid, New
York Times, 29 Nov 2010.
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Wellinghoff's Quotable
Quotes—Excerpted from New York
Times Article November 29, 2010
• “I believe that for markets to be
competitive, we need to have as many
different types of resources in those
markets as possible.”
• “We're doing what we can to the extent
that we have jurisdiction to ensure that
there are no barriers to distributed
generation becoming part of wholesale
markets.”
• “To the extent that you can put demand
response in the system—that is, have
consumers control their loads at times
when the system is stressed—you can
reduce substantially the amount of fossil
fuel generators that are needed to relieve
that stress.”
• “If a battery or a dishwasher or a water
heater or an aluminum pot or a compressor
in a Wal-Mart can respond on a
microsecond basis, and it takes the
generator a minute to respond, that faster
response should be rewarded a higher
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payment because, in fact, it's providing a
better service.”
• “We're reviewing the economic benefits
of storage and how storage should be
compensated for the various services it can
provide to the grid.”
While such ideas are not necessarily new or novel,
coming from FERC's chairman, they get noticed (see
quotes from the NYT article above). Moreover,
FERC has taken the unusual step of actively
promoting these ideas, not just through interviews
and public pronouncements, but through published
reports, studies, and surveys as well as a number of
orders, which in no uncertain terms oblige the
Regional Transmission Organizations (RTOs) and
Independent System Operators (ISOs) to implement
the concepts.
9
9
Chapter 17 provides further elaboration of a number of
pertinent FERC orders.
In the past couple of years alone, FERC has published
several seminal studies documenting the substantial
potential for demand response (DR) in the United
States (see the accompanying graph) and has issued a
number of orders that are prompting fundamental
changes in organized U.S. electricity markets.
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As a result of FERC's incessant prodding in the past
several years, most organized wholesale market
operators in the US have now developed various
forms of DR programs, have incorporated
demand-side bidding into their predominantly
supply-focused auctions, and are broadly—although
not always effectively or successfully—supportive of
the growing significance of the demand side of the
market.
It sounds simple and trivial today—but the idea of
getting consumers to become active participants in
the market is still novel to many in the industry and
even more so to the average consumer who has been
successfully trained to be a passive user.
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One of the two most obvious examples of this
paradigm shift is the effort to make price signals more
transparent and visible to consumers, including the
rising interest in dynamic pricing.
10
10
Chapter 3 expands on the concept of dynamic pricing. Chapter
12 provides evidence on how large commercial and industrial
customers have responded to dynamic pricing in California.
The second is the growing interest in demand
response (DR) programs, broadly defined as anything
that influences consumers to reduce load during peak
demand periods and/or shift load to off-peak periods,
usually in response to incentives or price signals.
11
11
Several chapters in this volume cover demand response in more
detail.
Dynamic pricing, at its core, is nothing more than
alerting customers that a kWh consumed at 2 PM on a
hot summer afternoon is not the same as a kWh
consumed at 2 AM. The former costs a lot more to
generate and deliver. Under a flat tariff regime, a
kWh is a kWh, no matter when and where it is
consumed.
Getting consumers to accept and digest this simple
and rather obvious message is going to take a lot of
effort. The utility industry only has itself to blame for
not making this obvious point sooner, say, starting 30
years ago when the industry's peak demand period
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