Sioshansi F.P. Smart Grid: Integrating Renewable, Distributed & Efficient Energy
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became pronounced with the increased penetration of
air conditioning load in most summer-peaking
utilities.
Flat rates are flat wrong because they give the wrong
signal to consumers that it is okay to use as much as
they want, any time they want it. The result is
needle-sharp peak loads experienced by
summer-peaking utilities, such as those in California
(see graph below).
The growing interest in rising block rates is another
manifestation of this concern. Under a rising block
rate tariff, such as those in effect in California (see
the table below), consumers pay progressively higher
per-unit prices as they consume larger volumes of
electricity. The subtle—or perhaps not so
subtle—message conveyed by rising block tariffs is to
punish those consumers with prodigious energy
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consumption while rewarding the frugal ones. Most
consumers are barely aware of their total bills—most
pay little attention to the details.
Anecdotal observations and discussions with friends
and neighbors suggest that most residential
consumers are totally unaware of the existence of the
rising block tariffs even when they vehemently
complain about their high utility bills. The simple
message that the more you consume, the higher the
prices, does not appear to have been communicated to
the average consumer in California despite the fact
that these tariffs have been in place for some time.
This, by the way, appears to be a universal problem.
Most consumers in liberalized European markets do
not appear to understand their electric bills either.
The More You Use, the Higher the Price
Example of the 5-tier price scheme for residential
customers in SCE service area,* in effect Oct 09
Tier Price Cents/kWh
1
Baseline Allowance
2
Tier 1 11.808 0–100%
Tier 2 13.741 101–130%
Tier 3 23.334 131–200%
Tier 4 26.833 201–300%
Tier 5 30.334 >300%
*Baseline allowance is determined by applicable climate zone; higher
allowances apply to high temperature zones, lower for mild coastal
zones.
1
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For low-income customers, applicable prices for the first three tiers
are 8.533, 10.668, and 18.051 cent/kWh, respectively, with the tier 3
rate applied to all usage above 130% of baseline allowance.
2
Link to SCE's Baseline Allocation table:http://www.sce.com/
CustomerService/billing/tiered-rates/baseline-chart-map.htm
Source: Southern California Edison Company.
Which brings us to the growing emphasis being
placed on demand response (DR). Huge amounts of
resources and effort are going into conveying another
simple message that any 3
rd
grader intuitively
understands. Cut back all but your most essential
usage during periods when electricity is scarce and
expensive to generate and deliver—namely during
peak demand periods—or else be prepared to pay a
premium.
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What makes this simple message complicated is also
historical. For over a century, consumers were
encouraged to use as much as they wanted, whenever
they wanted it, and with flat tariffs that told them all
kWh are the same. Now, we are trying to tell them,
“Forget about what we told you before and why we
did not charge you differentiated rates. Starting
tomorrow, we are going to charge you more when it
costs us more to generate and deliver the juice.” It
may be a simple message, but try explaining it to the
average consumer and see how far it goes.
Yet, the time has finally arrived to deliver the
message—the bitter medicine—that all kWh are not
the same. As the earlier graph from a recent FERC
survey suggests, the industry's peak demand is not a
given. It can be managed, modified, and reduced by
aggressive implementation of dynamic pricing with a
host of enabling technologies that are now being tried
in a variety of smart grid implementation projects
around the world.
12
It may sound fantastic and
futuristic, but it is no longer a theory or a pipe dream.
12
Part IV of the book provides a number of examples of efforts to
better manage peak demand using the smart grid, smart meters,
smart prices, and smart devices.
Aside from the limitations in metering and communications,
the systematic disengagement of customers described in Box
1 can be traced to another important characteristic of the
industry, which no longer applies.
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For much of its history, the electric power industry was
blessed with enormous economies of scale. As the industry
grew and expanded, electricity could be generated and
supplied to consumers at falling real costs. The industry,
dominated by engineers, was preoccupied with rapid
expansion necessitated by a rapid rise in demand, which the
falling prices further encouraged. The industry, it could be
said, was supply-focused. Under prevailing rate of return
regulations, still in effect in many parts of the world, suppliers
benefited from more investments on which they could earn a
regulated rate of return. And the same regulation gave them
every financial incentive to encourage more
consumption—not less.
Under such circumstances, why would a supplier bother with
promoting energy efficiency or fuss with managing demand?
In fact, consumers were encouraged to use more, in some
cases with falling block tariffs, which meant the more they
used the lower the per-unit cost. With the introduction of
commercial nuclear power there was even talk that electricity
would simply be “too cheap to meter,”
13
with the implication
that consumers may simply be billed a flat and low monthly
fee—forget about metering altogether.
13
The now famous quote is attributed to the chairman of the Atomic
Energy Commission during President Eisenhower's administration.
In the beginning, none of this much mattered since consumers
used little and meter reading, billing, and revenue collection
were considered a necessary nuisance, with the best and
brightest industry people concentrating on building bigger
power plants and more transmission and distribution lines.
But in recent years, as consumer loads, especially in the
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commercial and residential sectors, have grown, flat
undifferentiated tariffs have turned into something of a curse.
With the phenomenal growth of air conditioning globally over
the past 3 decades, flat undifferentiated tariffs have resulted in
highly pronounced spiky peaks such as those exhibited in
California (see Box 1). The air conditioning load, driven by
hot summer temperatures, has become a noticeable nuisance,
sometimes referred to as “the load from hell,” due to its spiky
and highly unpredictable nature. Serving this load requires
significant investment in peaking generation, results in price
spikes in the market, and has generated interest in ways of
managing it.
A number of chapters of this book are focused on solutions to
address the peak load problem and the inherent inefficiencies
and inequities associated with flat rates in networks where
costs of service are highly dependent on time of use and, to a
lesser extent, its location.
14
14
Brunekreeft et al. discuss the implications of the prevailing tariffs that do
not vary by location, giving inefficient price signals to both load and
generation.
There are, of course, a number of other reasons suggesting
that our existing grid is out of line with our current needs and,
more important, future requirements. Among the most
compelling reasons is the increasing significance of
renewable energy resources. While some of these, such as
geothermal, may operate as base-load or can be controlled,
such as hydro, others, particularly wind and solar energy, are
intermittent by nature and largely non-dispatchable.
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Our existing grid is ill equipped to deal with these types of
renewable resources.
15
First, system operators who manage
generation and transmission networks dislike
non-dispatchable resources that are not under their direct
command and control. Second, the intermittency and
variability play havoc with their traditional means of
balancing supply and demand, which is based on scheduling
generation to meet variable but highly predictable load. This
philosophy does not bode well going forward in many parts of
the globe where intermittent renewables are projected to make
up a third or more of the resource base within a decade, if not
earlier. As shown in Figure 2, more than 30 states in the US
now have mandatory targets for renewable energy resources
going forward.
15
Chapter 6 describes the challenges faced by California's grid operator as
the state is marching toward a 33% renewable target by 2020.
Figure 2
US RPS mandates.
Source: Supporting Solar Power in RPS Standards: Experience from the US, Lawrence Berkeley
National Laboratory (LBL), Oct 2010, available at http://eetd.lbl.gov/ea/ems/reports/
lbnl-3984e-ppt.pdf
In the European Union, there is a target to meet 20% of the
energy requirements by 2020 from renewable resources.
Germany, following the Fukushima accident in Japan in
March 2011, is considering a total phase-out of its existing
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nuclear fleet, mostly to be replaced by renewable energy—as
much as 80% of the generation needs by 2050.
Another major phenomenon affecting the electric power
sector is the emergence of distributed generation (DG).
16
With rapid technological development and an equally rapid
drop in prices, many DG technologies already are or will soon
become commercially viable. Many industrial, commercial,
and even residential customers can, or will soon be able to,
generate a growing percentage of their internal needs from
localized or on-site DG resources. Rooftop-mounted solar
photovoltaics (PVs), solar hot-water collectors, ground-source
geothermal heat pumps, fuel cells, and a number of other
emerging technologies mean that consumers can become
self-sufficient or, in some cases, be in a position to sell their
excess generation back into the grid.
17
16
See Chapter 7.
17
California Governor Jerry Brown has set a target of 12 GW of DG,
although it is not clear how and when this goal may be reached. If
achieved, that would be roughly equivalent to building ten nuclear power
plants, giving new meaning to DG.
This has created not only technical challenges for utilities,
long used to selling to consumers, but has also raised a
number of thorny issues such as how much they should pay
for the juice when it is fed into the grid.
18
Moreover, the fact
that an increasing number of customers may conceivably
become net producers over time poses challenges to utilities
and network operators who, after all, must maintain the
network even in the face of flat or falling net volumetric
consumption.
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18
In many jurisdictions, utilities and suppliers are allowed to charge a
higher tariff when feeding customers and a lower one when excess
electricity is fed into the grid. There are also restrictions on how much
can be fed into the grid depending on the local retail regulations.
Making matters more complicated is the growing interest in
energy efficiency, promoted in a number of jurisdictions.
Since in many cases the cheapest kWh may be those not
consumed, utilities with high and rising rates may be facing
something totally unprecedented: demand elasticity. As they
raise retail rates, consumers may find it attractive to cut back
consumption, either through investing in energy efficiency
and/or self-generation.
19
Utilities can no longer assume that
consumers will consume what they always have. This is as
much a surprise to suppliers as it is to newly empowered
consumers.
19
In areas with existing high retail rates such as in Hawaii, many
distributed generation options are already cost effective. In states with
rates in multiple tiers such as California, consumers in top tiers are
facing marginal rates in the 40–50 cents/kWh, which makes PVs at 16 a
relative bargain.
The skeptics should take a look at regulatory and policy
developments in a number of bellwether jurisdictions
including California and within the European Union where
the concept of zero net energy (ZNE) or passive homes has
been proposed or is under serious consideration.
20
At its
core, ZNE requirements will result in dramatic declines in
per-customer volumetric consumption as an increasing
number of households meet the new standards over time.
21
20
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In California, all residential homes built after 2020 are to meet the ZNE
standard, which will apply to new commercial establishments starting in
2030. The definition of ZNE is that it must generate as much energy as it
consumes.
21
ZNE requirements are typically imposed on new construction, sparing
existing premises. For this reason, their impact will take time to become
noticeable.
Since an average home or office cannot generate a lot of
power, the only conceivable way to meet the ZNE
requirement is to dramatically cut back on consumption
through increasing the efficiency of energy use. This means
higher efficiency appliances, improved lighting, better shell
insulation, and more judicious and sparing use of energy.
Moreover, because on-site power generation is unlikely to be
correlated with on-site consumption, the average consumer
will be feeding its excess generation into the grid part of the
time, while taking power off the grid at other times. The grid
of the future will therefore be required to work much harder
than today, while net volumetric consumption per customer
declines over time due to ZNE-type requirements. This has
important implications on tariffs, which must not only be
dynamic, but reflect the two-way nature of transactions.
One interesting result of ZNE-type mandates is that in a not
too distant future, a portion of customers will approach little
or zero net volumetric consumption levels. Traditional tariffs
that are based on a multiplier times volumetric consumption
will no longer apply in this environment.
A similar phenomenon has already occurred in the mobile
telephone industry. As more consumers use mobile devices to
send and receive text messages, share files and photos, watch
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