At one time or another, nearly everyone has been captivated by the allure of doing something new and different with technology. Virtually all of these innovations require electricity. Even governments are getting into the act of imagining new uses for electricity. As a result, one of the major social issues of our time will be whether to expand the electrical grid to accommodate ever more of these advancements, and if so, how to do so in the most productive way possible.
Through a combination of deliberate planning and a few historical accidents, the developed world in general and Ontario in particular recently began one of the biggest new projects of the modern era. The rebuilding of the continental power grid, to meet a much wider range of needs than ever before, will bring with it huge opportunities to improve life on planet earth, and considerable new risks as it disturbs the existing order and causes historic shifts in everything from where investments are located, to the tools used by policy makers.
Re-electrification of the energy system will mean building the physical capacity to supply more customers, with more kinds of demands, reflecting more volatile demand patterns, and embracing smarter technologies, while protecting the system from a wider range of threats. It will be a costly and demanding undertaking. However, to put the challenge in perspective, neither the scope nor the scale of this change are without precedent. The electric grid, being the largest machine in the world and humanity’s greatest single feat of engineering, was only possible through large scale initiatives with major public consequences. It is not surprising that the next phase of its development would be expansive in scope and require considerable attention.
The key question is to what extent the project will be approached deliberately and consciously, versus evolving organically and as a result of outside forces.
What is happening to our grid
A broad-based shift is underway to “an electricity-dominated global energy mix,” as documented in the 2016 report from the Policy Horizons group. According to this projection, a view that is shared by a growing number of experts in the field, the use of fossil fuels will continue, but they will be limited to much narrower roles for which they are uniquely suited. “Electricity’s flexibility allows it to cross energy silos and substitute for fossil fuels,” the report notes. At the same time, many of the policies and programs to reduce GHG emissions will cause further shifting to electricity-based energy services. Even if total per capita energy consumption declines, our children will likely be using much more electricity per capita than we are. This is partly a result of the efficiency with which electricity-based services can be delivered, partly a result of climate initiatives, and partly a response to consumer preferences. The inevitable conclusion is that the grid will need to be reinforced as it starts to deliver services previously provided by fossil fuels.
The need to reinforce and modernize the grid has several causes, all related to greater use of electricity, both baseload and peaking power:
• A long term trend towards electricity for heating and cooling buildings
• A multiplication in the number of devices that use electricity in virtually all aspects of human life
• Increasing use of electric vehicles, expected in the near future, partly in response to emission reduction mandates from government
• Displacement of existing gas-fired heating systems with heat pumps or geothermal heating and cooling
• A long term shift to cleaner industry, using electricity more heavily and fossil fuels more sparingly than in the past
• Technical improvements, aided by public policy, which have the cumulative effect of expanding the installed capacity of renewable power generation and electricity storage technologies connected to the system
• The likelihood that the grid will need to be modified to allow for many more active participants, including a large number of smaller generators, as customers gain both technical abilities and financial drivers to become more engaged
• Consumer expectations for up-time and reliability in the electrical system have grown as electrically powered devices have become more essential for daily life.
A critical factor affecting the pace of transition is whether the per-unit energy cost of renewable-sourced electricity will fall below the per-unit cost of natural gas including its carbon cost within the current planning horizon. Although it’s plausible that natural gas will remain the most economically attractive means of space heating for many years, even a partial transition to electrically-driven heating systems like heat pumps will have structural consequences that justify new planning assumptions, considering all the other factors that are making electricity increasingly attractive over time.
Expanding the grid to accommodate this increased reliance on electrical services will be more expensive than many expect. For one thing it will be necessary to ensure the system is capable of delivering the full range of electrical services to all customers at the same time during periods of peak demand. Even though total energy used over the course of a year may increase very little, the level of instantaneous demand on the system during critical events will likely be higher than ever, both per capita and in total. Although much of this capacity to respond during critical periods can be met with innovative new systems operating at the local level (demand response, storage, and other options) these will only serve to reduce the cost of meeting peak instantaneous demand. They will not reduce the actual level of services required “on peak.”
Michael Tingle at Ortech contends that “Electrification provides financial and operational benefits for utilities and customers alike. Beneficial electrification programs help electric utilities increase net margin, improve load factor and reduce net service-territory emissions over time. These programs also engage residential, commercial, industrial and agricultural customers in replacing outdated fossil-fuel equipment.” His post is available online: http://dive.pub/2cnOx8q.
Any way you look at, it the grid will have to be bigger, stronger and more responsive than in the past. Ironically, it can be argued that many utilities in the western world have effectively coasted on the grid systems built a generation ago. Responsibly addressing public expectations for cost containment, grid owners have generally restricted themselves to minimal add-ons to the power systems built before 1980, rather than building the kind of fundamental upgrades that would be needed to support the electricity-dominated energy mix that appears to be our future.
What are the critical issues likely to be in re-electrification?
Assessing future issues is admittedly a guessing game. However it’s a very important guessing game for everyone who will be using the energy system or paying energy bills.
If the grid has to be enlarged, reinforced and smartened up in a responsible, durable way, does it make sense to use the same regulatory and policy framework that was used to oversee much more modest incremental changes over the last 40 years? Whether the regulator receives a new mandate or not, its central challenge will be the same: How to ensure that a major increase in the scope and scale of grid investment will be prudent and well-timed. It should ensure the new level of needs can be met, without committing to more infrastructure than is likely to be needed. It should not install new capacity so fast as to cause unnecessary costs, nor so slowly as to unnecessarily delay the availability of service to customers.
The generic issues in implementing a major grid upgrade are how to set overall investment targets, how to manage actual investments to ensure prudence, and how to distribute costs amongst the various classes of customers. These may seem like routine regulatory issues but they will almost certainly be the backdrop against which a variety of public policy dramas are played out.
Assuming that Ontario’s Long Term Energy Plan, and similar initiatives in other jurisdictions, essentially answer the initial question about the appropriate overall level of investment in the grid, the critical issues are likely to involve:
a) Whether industrial, commercial and residential consumers are expected to shoulder the responsibility equally, i.e., on the basis of peak demand.
b) Whether higher demand consumers are expected to pay proportionately more (because they are causing higher costs and are benefiting more) or everyone is expected to share in the general cost of upgrading the grid. The latter is easier to understand, but actually less fair to the low volume customers.
c) The degree to which regional equalization will be pursued, in terms of providing similar access to electrical services in outlying regions and equalizing costs across the jurisdiction.
Because the grid is a public utility, it doesn’t matter if it’s privately owned, publicly owned, or a combination of the two. Its rates will be regulated and its costs of expansion and modernization will be a social responsibility in most of the important respects. This leads to another major issue of interest:
d) How to encourage the kind of innovation and risk-taking that normally comes from independent organizations and the private sector, when much of the responsibility for managing grid development is likely to fall to major incumbent utilities. New forms of collaboration between start-ups and established players will be needed if innovation is to be fully embraced.
The corporate control structure of grid owners, and the perceived quality of regulation will be more important issues than they have been in the last 40 years. The public is generally more skeptical of large established companies than was the case in the past. If consumers are being asked to pay more to capitalize infrastructure changes, they will need a high degree of confidence in the character of those companies, and in the quality of the regulation. Grid owners will be judged on how tech-savvy they are, on their relationship with communities in which development is occurring, on how well costs are controlled, on their billing practices, their employment practices, and much more. It won’t be easy for the grid owners.
For regulators the challenge may be even deeper. Ensuring reasonable levels of public understanding and awareness has always been difficult. Although they can build on widespread interest in moving towards smarter technology, and on general support for reducing carbon emissions, they are starting from a baseline with relatively poor public understanding of how expensive it will be to expand electrical infrastructure to accommodate the desired changes.
To ensure that financial resources are available, regulators will need to establish clarity on how investment mandates will be divided up between transmitters, distributors and private developers. What parts of the infrastructure expansion should be owned, built and financed independently and privately? Private capital is not likely to flow as freely as it could until the terms and investment limits applicable to competing public sector actors are precisely defined.
Regulators will also need to institute rules to reflect principles of social equity, to ensure the process isn’t hindered by the perception that it’s delivering too many of its benefits to the more well-off in society.
Just to be clear, these observations amount to a review of early indicators, not a definitive report of research findings. The objective of this work is to better inform the process of developing broad social expectations, and the assumptions needed to update the long term planning framework, before more definite forecasts are available.
The greatest overall challenge, and this is shared between government, regulators and the industry, is how to ensure there is a reasonable degree of social consensus on the need to enhance grid infrastructure, and the value of making major long term investments in it at this point in history. A subsidiary challenge will be to define the form of collaboration in which the many involved stakeholders work together to build the appropriate social consensus.
Lessons from major investment programs in the past
History does provide some parallels that serve as partial guides to the future.
In the 1920’s the grid was first laid down in an integrated fashion through massive public works. This was entirely deliberate, the result of public policy determined to electrify every town and village that could be reached. The civil engineering was actually larger and more impactful in relation to the economy of the day than the current changes are likely to be. Expansion continued rapidly in this mode for the next 70 years, with one exception: Once the depression of the 1930’s was over, political masters generally took a back seat and allowed industry to express the essential visions and lead development of the sector.
Fast forward to the early part of the 21st century: Policy makers realized the grid needed to be expanded again as the previous period of de-monopolization and other factors had led to a period of under-investment. In 2005, Ontario Energy Minister Dwight Duncan estimated that new investment in generation and transmission, costing $60 billion in Ontario, would be needed just to maintain the existing level of service. He set up the Ontario Power Authority and legal mechanisms to get that development underway. Although the flavour of this work changed a few years later as the focus of new generation moved in a green direction, in general we are still seeing the same long term investment program being played out.
In 2012 the Conference Board of Canada projected that even higher costs to upgrade aging infrastructure were in store. It upped the ante from the previous decade, saying that, over the next 20 years, some $350 billion must be invested nationally just to maintain the reliability of the system of 2012. Notably, there were few objections at the time, although that may have been partly because the implications were not well understood.
Less than a year after that, Superstorm Sandy hit the US east coast. People across North America began to realize that the need to invest in climate change adaptation, and in preventing further climate change, was very real. Although figures for the amount of investment required remained unclear for some time, in 2013 the U.S. Department of Energy estimated the cost of weather-related power outages in that country was US$25 to $70 billion per year. Rebuilding the entire grid, along with bridges, roads and other infrastructure, to reflect levels of extreme weather never before expected, pushed potential new investment requirements for North America well into the trillions of dollars.
The anticipated level of grid investment seemed to be rising dramatically with each passing year. Against this backdrop, Ontario’s expected challenges in managing the costs of implementing smart grid technology, of replacing aging infrastructure, and even its green energy program, seem like small potatoes.
Massive additional investment was called for in 2016
The pace of change has been relentless. Investment prospects morphed again less than a year after the shock of Superstorm Sandy. The ever-declining costs of renewable power generation, storage, and related technology, although falling for years, hit a pace in 2014 that suggested they could become competitive with conventional power generation and transmission within a few short years. At roughly the same time, the generally recognized potential for micro-grids to spread and operate alongside traditional wires companies changed the expected format for at least some new development. A range of studies predicted a transition towards increased use of electricity. Some, like the Policy Horizons report mentioned above, concluded that, “In combination, these drivers could lead to renewable-sourced electricity replacing fossil fuels as the dominant form of primary energy used in the global economy for most industrial, commercial and personal activity.”
In other words, in addition to shouldering the costs to maintain, bolster and green the power system, the public can expect the power system to grow to the point where it does many of the jobs previously performed by fossil fuel-based industries to heat our homes, move our vehicles, and drive our industries.
Ontario’s Climate Change Action Plan was the icing on the cake. Released in June 2016, it suggested that electricity-based geothermal heating systems would replace natural gas combustion systems in large parts of the space heating market. It envisioned the proliferation of electric vehicles, and launched a slew of GHG reducing policies and programs. Other jurisdictions have similar initiatives, or are considering them.
Even if public policy were not pushing the re-electrification agenda, electrification is occurring on its own. Builders, whether constructing single family homes or downtown condo towers, want to appeal to new customers by including state-of-the-art, high performance electrical systems in new infrastructure. Many consumers are demanding high capacity power availability to support air conditioning, more appliances, home automation, and data-driven devices. Gas fired heating systems could become less common, even if they have lower operating costs, because builders want to respond to green-minded consumers and save the cost of meeting gas-related exhaust and safety requirements. Small electric heaters strategically placed in a home can meet many of the same needs at lower capital cost. And government is offering incentives to get off fossil fuels in countless areas.
Recognizing the challenge is the first step
Few people realize at this stage what a big and cross-cutting issue re-electrification is. Firstly, its huge cost. Secondly, the many decisions that need to be made about how it’s implemented. Citizens and public bodies will have to consider the social impact it could have in countless individual communities and on society as a whole. The long term commitments entailed. The dangers if details are poorly managed. The inevitable uncertainty in the whole process resulting from being part of a sector undergoing so much change.
Will the impact of re-electrification be felt primarily within the electricity system, or will it be known more for how it affected other areas like urban planning, industrial development, income distribution, environmental policy, regulatory frameworks, or personal lifestyles? For that matter, will its impact be primarily the result of deliberate planning or will it be remembered for its unanticipated consequences?
Challenges of this nature are likely to be best understood by taking a long term perspective. If one steps back and tries to assess where the energy system and energy policy now stand in a historical sense, it is plausible to assume that this period of time will be seen as particularly troublesome because, just after taking initial steps to establish functional wholesale markets for electric power, most jurisdictions in the world also had to grapple with, almost simultaneously, four types of technical change, possibly even revolutions:
a) A shift towards renewable energy and distributed generation as power sources,
b) Re-electrification to support the demand for increasing proportions of energy services using electricity as their delivery medium,
c) The proliferation of smart grid technology,
d) Permanent increases in the fluidity and volatility of customer demand as widely available connected digital technology enables granularization of transactions and distributed arbitrage.
All of the above requires capital, either new investment or redeployed money, in a capital-intensive sector that is facing major capital costs due to aging infrastructure and the need for climate adaptation. Although political leaders may not see preparation of co-ordinated responses to the above as their responsibility, and the sector may have a tendency to work in silos, investors and developers are sure to see the range of investment options available and try to come up with business proposals that respond to many of the challenges at once, if only because it’s the most efficient way to use capital. In other words, planning will be very important but over-arching plans must leave lots of room for innovators to propose ways of meeting multiple objectives with single investments.
There is a relatively straightforward question to be addressed in the short term: Who should be the leaders in championing and co-ordinating the re-electrification effort? To the extent any sort of co-ordination is needed, should leadership come primarily from government, regulators, the grid manager, industry, or some multi-stakeholder body like the Smart Grid Advisory Panel or, thinking more broadly, the North American Electric Reliability Corporation?
Although government does not need to take the lead in any of these areas, it will be important, as a basis for moving forward, to know what role government intends to play. There are guidelines and models that work for big undertakings of this nature, and they all include having very clearly established boundaries between the functions of government, regulators, utilities and non-utility stakeholders.
One way or another, a discussion has to be opened up, basic ground rules established, and generally agreed principles defined on which new investment will be based.
We are essentially rebuilding the most critical infrastructure on which our children will depend physically, economically and environmentally. Failing to address the challenge could mean costs and lost opportunities on a historic scale. Proactively addressing the opportunity could open new doors, enabling and empowering generations to come.
— Jake Brooks
Note to the reader: This editorial was also published electronically on LinkedIn and shared as part of an invitation to suggest issues for consideration at the APPrO 2016 conference.
References:
“Shedding Light on the Economic Impact of Investing in Electricity Infrastructure,” The Conference Board of Canada, 24 pages, February 13, 2012. Report by Len Coad, Todd A. Crawford, Alicia Macdonald
www.conferenceboard.ca/e-library/abstract.aspx?DID=4673
“Canada in a Changing Global Energy Landscape,” by Policy Horizons, available online at www.horizons.gc.ca/ > Publications and Events > Publications.
www.horizons.gc.ca/eng/content/canada-changing-global-energy-landscape
“The disruptive potential of solar power ,” April 2014, McKinsey & Company.
http://www.mckinsey.com, "The Disruptive Potential Of Solar Power"
“Economic Benefits of Increasing Electric Grid Resilience to Weather Outages,” President’s Council of Economic Advisers and US Department of Energy. Retrieved from here.