It’s possible that a series of technical revolutions are coming down the road, almost simultaneously, in generation, transmission, distribution, grid control, and related technologies, some of which are yet to be clearly defined. This raises important questions not just about what technologies are chosen, but about how the critical decisions on shared grid technology investments will be made and the related costs controlled.
Much debate has occurred in recent months about the relative roles of government, regulators and the private sector in encouraging and managing the major investments in new infrastructure, investments that nearly everyone expects will be needed in the electricity system over the coming decade or so. Resolution of these questions has been hindered by the simple fact that technology and business drivers are changing so quickly that long term planning often needs to focus on maintaining flexibility, and on who will do what, rather than on identifying and targeting more specific objectives.
Why focus on the relative roles of energy agencies when the driving issues are essentially technology-change? Considering that the grid is a single integrated system, it’s become difficult if not impossible to resolve infrastructure options realistically without also addressing key questions about the system of oversight that will govern the shared investment aspects of those infrastructure options. For example, when encouraging deployment of the latest technology, there won’t be much uptake if it’s not clear who will pay for what. Similarly, there’s not much point in designing and building ever-smarter and more granular remote control capabilities if you don’t know how the related control responsibilities will be used and shared amongst the various potential actors. In short, if you want a system of market-driven players to be responsive and flexible, it will be important for each of them to know what each party will be responsible for specifically, and who will be able to collect revenue for what.
Considering that people need to know where their money will come from, the development and adoption of promising new technology will proceed only as quickly as society and its policy makers lay down a few laws and rules governing money and control. A few things are clear about the roles of key parties in making rules: Government is best at setting general directions and broad objectives. Regulators are best equipped to design and implement the rules and systems in which the private sector operates, while keeping everyone attuned to the economic and reliability imperatives that underpin the system. The private sector, including LDCs and consortia that may include public bodies, is best at designing and deploying technical solutions that meet the needs of everyone for an advanced, cost-effective, responsive and evolving system. Planning, which operates to varying degrees in all these processes, may be the focus of discussion in Ontario during the next six months or so as the LTEP is resolved in time for early 2017. Ironically the planning framework is less clear in Ontario than it was last year, and as a result it’s likely that more time and attention will be paid to redefining the roles and responsibilities of the various players in the system, as part of determining the approach to encouraging innovation.
How US legislators and utilities are responding
In some cases elected representatives place energy system integrity and the encouragement of innovation amongst their primary responsibilities. "Legislators ... are as responsible for electricity affordability, reliability, resiliency, and enhanced customer options as are the utilities," says Kansas Representative Tom Sloan, a leading member of the Council of State Governments’ energy and environment committee.
And more to the point, he suggests that regulators or policy makers who want to ensure affordability in the future will need to be working on adapting to, if not actively encouraging, technology change. "From a policy-maker's perspective, it is important that we permit utilities to become more efficient and develop alternative revenue streams to offset customer losses, flat growth, and increasing O&M demands."
Representative Sloan is one of a growing number of energy analysts who see the future of the grid as very likely moving to a model based on a “transactive energy system.”
The transactive energy system of the future
It is possible that key design principles for the grid may be changing. In order to respond properly to the unpredictable kinds of changes in technology and business structures that seem likely, in some parts of the grid, central control may not need to be as universal and absolute as it once was. The concept of a transactive energy system is based on “a network environment for distributed energy nodes as opposed to the traditional hierarchical grid structure. The network structure allows for communication such that all levels of energy generation and consumption are able to interact with one another, a concept that is also known as interoperability. In transactive energy, interoperability refers to the ability of involved systems to connect and exchange energy information while maintaining workflow and utility constraints.”[1]
Representative Sloan stresses that with transactive energy, “utilities and customers interact as equals in buying/selling energy, demand side management, frequency and voltage regulation, and other ancillary services. Transactive energy systems are predicated on both parties receiving the true value for the products and services they provide the other. Such a system is dependent on monetizing each party's contributions, time of contributions, and contributions to system reliability and resiliency.”
Rep. Sloan and others are talking about monetizing services in new ways that haven’t been fully defined yet. But he’s pretty confident they will be significant parts of future industry revenue streams. No doubt many people are thinking, “Yes, but whose revenue streams?” That’s a key reason why policy makers and regulators need to get into the act, to help clarify who will be doing what, and for which revenue streams. He notes that properly developed monetization opportunities will mean that traditional customers with generation, demand management, or ancillary service capabilities will be able to capture “the real and intrinsic value of those services.” Similarly, utilities should be able to capture appropriate levels of value for being the provider of last resort to customers who self-generate, and for other kinds of services to assist customers managing generation or demand.
He explains that, “The development of transactive energy system capabilities, as distributed generation and instantaneous communications between utilities and customers and between customers improve, are providing new monetization opportunities for both parties, as well as challenges to system reliability and ‘affordability’ threats to lower income customers. There are other issues, but these provide both a framework and a sense of urgency to our discussion.”
Moving ahead with eyes open
Sloan stresses that, “While no technology or combination of technologies can solve everyone's concerns about cost, view sheds, energy efficiency, environmental protection, etc., the intelligent discussion of what technologies are available and how each can address a segment of a policy objective is where policy-makers, regulators, utilities, and the other stakeholders should be trying to meet.”
He notes that, “The key is for all of the above parties to understand how technological innovations can positively impact actual and perceived costs, reliability, and all of the other factors. For example, Volt Var Optimization reduces energy demand and customer bills by approximately three percent, and eliminates air emissions associated with the foregone energy production. Compact transmission infrastructure (e.g., BOLD technology) provides 40-60 percent more capacity in the same right-of-way, reduces electromagnetic fields, reduces transmission lines losses by up to 50 percent, reduces view shed impairments, and delivers energy at up to 30 percent less cost per MWh.”
Evolution in the roles of regulators and public officials
The one thing that is certain about this kind of change is that you need to think carefully about what’s coming and prepare for it. Regulators have traditionally played a very limited role, circumscribed by mandates, tradition and law. We don’t usually think of regulators as leaders in the encouragement of innovation.
But that too may be changing. It’s possible that one of the more subtle and important impacts of the overwhelming need to adapt and respond to technology change will be the need to redefine the role of the regulator(s) in encouraging, guiding and even prompting technology change and the industry response to it. Certainly I have never heard a regulator in Ontario suggest that his or her responsibilities be extended to include the encouragement of innovation. That might be considered improper. However it is entirely proper for public policy discussions to consider regulators as potential participants in a policy framework for dealing with change, indeed participants with valuable insight to lend.
Rep. Sloan says that public officials have a shared responsibility that "extends beyond the establishment of societal goals that require actions by utilities (e.g., renewable energy and/or energy efficiency requirements) – it extends to establishing how utilities and customers can monetize the opportunities created by technological innovations and customer preferences."
He goes further of course, saying that, “[A]s distributed generation technologies become more efficient and cost-effective, and telecommunications devices and the applications on them become more ubiquitous and easier to operate, policy-makers and regulators need to help both consumers and utilities/third parties monetize their advantages, while protecting the grid system and the consumers unable or unwilling to participate in the new marketplace.”
There are limits to what regulators can do effectively of course. One should not expect regulators to either set public policy (the role of government) or to make actual investment decisions (the role of market participants). In fact, a key reason to have regulators involved in the policy and process of technology change is that it would enable private sector capital and analytical tools to be more fully engaged. At the same time it might prove to be an excellent opportunity to more clearly define the role of government in leading and responding to technology change.
Like many others around the world, the Ontario energy system is facing major challenges. With this in mind, it can be argued that one of the best ways to prepare for change is to delegate responsibility for designing and implementing a market-based framework for encouraging investment in technical innovation to the Ontario Energy Board, with certain related responsibilities identified for the IESO. It can be argued that, unless utilities and others know that they will be able to recover costs, they will be unable to properly finance the infrastructure necessary to meet the upcoming challenges. And only with high quality oversight are there reasonable prospects that business conditions will facilitate market-based investments, and that the rate-based investments will be prudent in the long term. In fact, without a well-defined role for the regulator in this area, one that is engaged enough to provide support for entire categories of shared investment, customers will almost certainly be deprived of otherwise viable opportunities to benefit from new technology.
While the OEB is likely not in a position to evaluate alternative technology choices, it is quite accomplished in terms of managing oversight processes. If tasked with a responsibility for encouraging market-based innovation, the OEB would likely focus on establishing systems to ensure conscientious and consistent work is done by the regulated utilities in assessing technical alternatives and preparing prudently to accommodate new technology. The IESO could avail itself of the expertise assembled in its Smart Grid Forum and assist the OEB in defining benchmarks, standards and targets as part of the broader regulatory initiative led by the OEB. The OEB could also enhance its contribution to the government’s Long Term Energy Plan (LTEP) by designing the innovation encouragement framework to operate as a component of the LTEP. Although the government may have removed the OEB’s authority to review and approve the LTEP itself, there are significant benefits of having the OEB develop the framework for one of the most complex and expensive parts of the plan.
One of the reasons for regulatory involvement in innovation is to draw clear lines between what kinds of investments are appropriate to be backed by ratepayers and what are not. There is no need to rate-base most of the investment in innovation of course – it will be privately owned and privately financed. However, because of the integrated nature of the grid, significant investments in common assets, often related to beefed-up communication and control capabilities, are needed to facilitate privately financed innovation investments. Regulators have gone down this path already and have well developed principles for distinguishing between common assets and private assets.
The steps ahead
Society has to walk a fine line: On the one hand, it needs to decide how to encourage utilities and energy companies to take advantage of the marvelous technological innovation becoming available for the benefit of consumers, while on the other hand, not encouraging wasteful flights of fancy into the unknown, potentially at the expense of the ratepayer, at least in part. Unfortunately, it is not an option to wait until the dust settles and choose new technology options later, when it’s clearer what options will prevail. Aging infrastructure and reliability requirements dictate that at least some investment decisions must be made in the near term, without full knowledge of what the future energy system will look like. Society has to make choices soon, without complete information. The quality of our decision-making in that uncertain context will determine not only how satisfied our children will be with the energy infrastructure we build today, but also how satisfied they will be with our prudence in assessing the financial risk of today’s infrastructure choices.
A poignant example, perhaps a particularly provocative one, is the question of how regulators and policy makers should assess proposals for major new bulk transmission facilities. On the one hand, there are risks to consumers and the economy if the facilities are not built and electricity has to be delivered through more expensive, inefficient and less reliable facilities. On the other hand, there are risks to the same consumers if the facilities are built, only to become redundant contributions to stranded assets in a few years, as flat demand, distributed generation, storage, micro-grids and other technologies undercut the requirement for bulk transmission. Reasonable people can disagree about how likely each of the two scenarios are, but hardly anyone can afford to ignore the risk that the techniques for choosing amongst infrastructure options in the past will not likely be adequate for the future.
Representative Sloan stresses that, “Change is inevitable as customer-owned generation, ancillary service capabilities and communications technologies increasingly enable transactive energy system and process developments. … Policy-makers, regulators, utility executives, and consumers must anticipate technological innovations at the grid and individual customer levels, and collaboratively become policy engineers to place appropriate policies and regulations in effect so that both utilities and customers can achieve monetary savings and system efficiencies. The new grid will be a technologically driven re-engineering of customer-utility and customer-customer relations, in which customer and utility opportunities and options will be driven by such monetization opportunities.”
It seems that engineering the monetization of distributed grid services will need to be an interactive and likely iterative process. If government provides the mandate, and regulators set the rules of the road, there’s little doubt that the industry will rise to the challenge and come up with ever more innovative solutions, many of which are not even on the drawing board today.
— Jake Brooks, Editor
Tom Sloan is serving his eleventh term in the Kansas House of Representatives. He earned a doctorate in political science from the University of North Carolina at Chapel Hill and served on the Department of Energy’s Electricity Advisory Committee and the GridWise Architecture Council. He is a leading member of the National Conference of State Legislatures’ and Council of State Governments’ energy and environment committees. He also serves on the Federal Communications Commission’s Intergovernmental Affairs Committee. Many of the comments attributed to him in this editorial first appeared in Public Utilities Fortnightly.