Changing Business Models
Utilities are faced with changing market, technology and customer conditions. Utilities are historically structured to treat electricity and gas as a commodity, produced in central power plants and delivered to consumers over long distances in a one-way transaction optimized to price and reliability of supply.
The smart grid will change the rules fundamentally. “Smart Grids” is about introducing IT at all levels of the transmission and distribution electricity network. It starts with Smart Metering, it develops with Intelligent Grids (Self healing, real time state management), it supports Smart Energy homes and it leads to active consumers.
Smart Grids include elements at all levels of the grids: generation: renewable production and grid based storage, Transmission and Distribution: Smart Substations, Smart Metering, Customer: Demand Management, Distributed Generation.
The current setup is not equipped to deal with the wave of innovation on the “distribution edge” of the grid. The distribution edge includes the point where customers interface with the grid, typically a meter, and everything on the customer side of it, “behind the meter.”
The Changing Consumer
Imagine a house built efficiently, with thick walls, good insulation, and triple-glazed windows, so it wastes very little energy.1 It is heated and cooled by a system with sensors and separate vents in each room, controlled by a smart thermometer that learns the habits of the house’s inhabitants and maximizes efficiency around them. On the house’s roof is an array of solar panels that, at the mid-afternoon peak, provides more power than the house needs. For supplemental generation, when the panels aren’t producing or grid power is unusually expensive, the house’s basement contains a small turbine running on natural gas. Excess energy from the solar panels can be stored in a fuel cell or in an appliance-sized battery pack, or in the batteries of the electric car parked in the garage. All the appliances, the hot water heater, washing machine, dishwasher, etc., are internet-connected (“smart”) and able to ramp up or down in response to price signals.
Everything — panels, batteries, heating and cooling system, appliances — is tied together by software that tracks consumption and monitors price signals from the utility. The software can ramp up generation, reduce or delay non-essential consumption, store more energy, or sell more energy to the grid, depending on which choice is more valuable at the moment. In the event of a blackout or other grid failure, the software can decouple the house from the grid by using the turbine, emptying the batteries or the fuel cell, and dialing down unnecessary consumption. It does this all more-or-less automatically. The house’s owner can specify all sorts of parameters to balance price, reliability, resilience, and cleanliness based on her values and preferences.
Now, imagine lots of such houses, along with commercial and industrial buildings with similar technology, along with a few wind and solar farms of various sizes, scattered over a broad geographic area. Imagine a power company that connects all those individual energy-management systems into one big energy-management system. Instead of one building that is able to sell its extra power to the grid when prices are high, a whole group of buildings can. Instead of one building being able to adjust its power consumption based on price signals, a whole group of buildings can.
The power company needs to aggregate all these buildings and renewable generators and operate them as a single “virtual power plant,” selling electricity and services (power smoothing, demand response, peak shaving, etc.) to the larger grid.
Now imagine a group of such buildings in a geographically contiguous area — say, a neighborhood — networked together into a “smart microgrid,” essentially a freestanding mini-grid connected to the larger grid at a single point of contact (a super-meter, if you will). The entire microgrid is behind the meter, managed by a third party that coordinates supply and demand within it. The microgrid has the advantages of a virtual power plant, with some additional security benefits. Like the individual buildings within it, the microgrid can island itself off from the larger grid in the case of blackouts or cyber attacks. It can also add some mid-sized distributed generation to the mix — a small wind or solar farm, a waste-to-energy plant, or the like — and, like the virtual power plant, sell energy or energy services to the grid operator.
A microgrid could be run by a business park, a neighborhood, or a whole community. It could be jointly owned by the participants, who agree to contract with a company to run it. The company would aggregate and sell the energy services, take a cut, and return the remaining value to the joint owners. In that way it keeps money circulating locally rather than exporting it for fuel.
Now, take a step further back and imagine an entire region’s electrical distribution system composed of smart buildings, virtual power plants, and microgrids. Energy nerds refer to this as “nodal architecture”: a whole composed of networked, semi-autonomous nodes (see: the internet). Nodal architecture brings with it all sorts of benefits: more reliable, lower prices, more control and better service.
That’s where innovation on the distribution edge is headed: toward an entirely new, more reliable and resilient distribution system.
1 – David Roberts, Grist
The technologies are just beginning to emerge, in halting, nascent form.1 Nest (the thermometer company) recently acquired MyEnergy (a home energy management software company). Tesla (the electric car company) has teamed up with SolarCity (a solar panel leasing company) to provide homeowners with a package that would include a car, solar panels, and a big ol’ battery system for home energy storage. Japanese IT company NEC just began mass production of home energy storage units. A company called MTT is making a sweet-looking unit that cogenerates heat and electricity, running on natural gas or biogas.
John Simmins at the Electric Power Research Institute says virtual power plants are going to “become ubiquitous in the next 5-10 years.” Navigant Research expects global virtual power plant capacity to grow fivefold by 2020. Meanwhile, the U.S. is leading the global microgrid market, which Navigant expects to reach $17 billion by 2017. The U.S. military, in particular, is aggressively pursuing microgrids.
Costs of these disruptive technologies fall. And costs especially fall when markets are structured to allow for competition and innovation. This distribution-edge innovation could be a threat to utilities, because all of it involves customers buying less power from utilities and using utility power lines less. Most utilities have made these long-term — 20-year, 50-year — investments. They did so with the understanding that they would recapture the costs via per-kilowatt-hour rates charged to customers. If customers begin buying fewer kWh, if they begin defecting from that system en masse, utilities face the prospect of being unable to recover their costs or offer a return to their investors.
That is what keeps utility executives up at night. And that is what innovation at the distribution edge means to them right now. Utilities therefore should redefine their role on the grid. They should become the orchestrators of the energy value chain instead of just being the supplier. They need to reposition themselves on the value chain, providing information and price signals, so that new value chain partners can enter this space and compete to provide customers with the best energy services.