It’s often assumed that consumers and producers are natural adversaries. What’s good for one is bad for the other, and vice versa. Likewise with storage and generation: competition is continuous and one’s gain in market share is the other’s loss. However, the electricity market is changing. Assessing the direction and nature of the change has become a central priority for nearly everyone in the industry. One of the key issues for market participants and consumers alike is figuring out who will be competing against whom, and where the strategic alliances are likely to be most robust and durable.
No doubt the expectation is growing in some circles that generators will find themselves in more direct competition with demand response and storage– particularly for the most lucrative opportunities when the system is under stress, when demand is peaking and/or deliverability is constrained. That may be a new baseline for competitive rivalries, but it is only part of the picture: The interests of consumers, generators, and owners of distributed energy resources like storage are converging in important ways.
Discerning the new baselines
As new options for power generation, control and usage spread through the economy, there’s no doubt some very productive interaction will be taking place between businesses, at conferences and in the academic community. Some of the discussion will be how to cost-effectively scale down carbon emissions. Another critical area of discussion will concentrate on how best to manage the conditions that cause congestion and constraints on the system. As new systems replace old ones, these two questions could be where most of the money is, or will be. But change does not always get implemented in a logical sequence. Despite whatever conclusions come out of the discussions, technology-based solutions, pushed ahead by economic drivers, are likely to move much more quickly than any rule changes, administrative systems, or standards of practice that emerge from the discussions amongst experts.
To be sure, assessing the nature of pending change is dealing with probabilities, and requires a fair bit of hypothesis. But in a sector that needs to prepare for change, you have to look outside the realm of the known and the certain.
Here are some baseline assumptions for dealing with change:
1. Competition in the energy sector will form along different lines than before: The age-old tension between supply and demand management services will be offset by newer considerations. Consumers will likely be offered a choice to buy their power services bundled with housing, bundled with storage, bundled with solar PV, bundled with demand response, bundled with other smart grid services, or unbundled. Initially the new options will be designed for larger consumers, but eventually all consumers will have to ask themselves: Should I be a plain consumer, a prosumer, a micro-grid customer, or buy into sharing services to create some kind of hybrid?
2. When consumers choose amongst options, they will not be betting on generation to the exclusion of demand response, or on demand response to the exclusion of storage. They will be choosing amongst packages that extract the advantages of every option available. The attractiveness of the alternative packages will be driven not so much by the underlying cost of generation as by the inevitable fees for infrastructure, backup, balancing and delivery costs, set largely through regulation, considering the likely impacts that evolving consumer behavior will have on whether infrastructure is over-stressed or underused. Although the regulatory system will likely prevent egregious abuse, for much of the time ahead, economic opportunities to use the new technical capabilities will crop up more quickly than the regulatory system will be able to implement new rules to fully account for them. Yet the factor most likely to affect future consumer energy choices will be the fee structure regulators put in place to charge for infrastructure. It will determine not just which packages consumers buy, but which long term options are best able to attract investment. Although much will be left to the market, the role and importance of regulators is as great as it’s ever been.
3. The cost of maintaining an adequate, safe and reliable grid will likely rise in relative terms, compared to the cost of kilowatt-hours being distributed through the system. This will probably mean relatively high fixed monthly fees for grid access and relatively low rates or usage fees. As consumers struggle to reconcile their expanding options, and become more engaged, they will naturally spend more time assessing the decisions of regulators. Energy efficiency will be important, and integrated into product choices as a basic pre-requisite. Unless per-unit energy costs rise significantly, conservation may not be top of mind as consumers will focus more on what energy services can do for them, rather than on how to use less energy.
Urban challenges
Seeing the facts on the ground, consumers will assess the latest package deals and figure out ways to make the most of the new circumstances. Between consumer tendencies to use more and more electrically-powered equipment, and public policies designed to convert fossil-fueled equipment to electrical power, the per-person use of electricity will likely rise faster than the rate of population growth. (Even if Ontario’s new Climate Change Action Plan only gets part way to its goal, there will be major increases in power consumption.) Combine that with the increasing densification of urban cores in most large cities, and you come to one inevitable conclusion: there will be significant difficulties getting enough power to consumers in urban centres, particularly during peak hours, unless the amount of urban DER (Distributed Energy Resources) rises. Even if you could build new transmission lines into major urban centres, costs would be high, and the time required to get approvals to run new high voltage delivery infrastructure into congested areas would be problematic.
Considering the real world conditions in dense urban centres, it is quite likely that incremental demand will be met through a combination of DERs such as:
a) Distributed generation
b) Distributed storage, demand response and energy management control systems
c) Micro-grid type control systems to optimize the use of local grid infrastructure and to arbitrage between alternative sources of power.
Even while retaining most of the existing bulk generation and transmission, the case can be made that such DER-based systems will be more reliable and cost effective than the bulk system for many consumers, and will in the end lighten the burden on upstream infrastructure, mitigating costs for everyone. Even if that were not the case, there will likely be many situations where you just can’t meet incremental peak load in a congested area in a timely way without additional local resources.
The clear and present need for a common standard of measure in carbon reduction
Ontario and many other jurisdictions are committed to major investments in GHG emission reduction. At the same time, infrastructure costs are rising, and consumers have the ability to quickly analyze competing alternatives and switch. As a result, people will notice if one carbon reduction initiative isn’t as effective as another. If inflexible rules oblige consumers to pay for carbon reduction measures that cost more and achieve less than easily available alternatives, they will find ways to disinvest in them, trade out of them, and/or oppose them as a matter of public policy. And they will be right, because the whole point of a cap-and-trade system was to ensure consumers benefit from emission reductions in the most economic way.
Ontario’s cap-and-trade program is ambitious and faces challenges: A lot has been bet on it succeeding. It hasn’t been tested. Similar systems in other jurisdictions are under-performing in certain cases. Some consumers will likely ask for the Climate Change Action Plan to be scaled back. It should not have to accept the added risk that a simple calculation of dollars per tonne can be used to show that major investments are below par. Conversely, the Plan needs the confidence that can only be built on the establishment of professionally-tested transparent bodies of information demonstrating the relative efficacy of alternative choices.
What is needed is very simple: A common standard of measure for all initiatives required or qualifying for funding under Ontario’s Climate Change Action Plan. Each initiative would need to present two critical figures: Total cost over an appropriate period of time, and total carbon emission reductions over the same period of time. Do the math and you get dollars per tonne, a common standard of measure, and a way to compare all initiatives, large and small, on the same basis. In addition, stranded cost risks must be assessed in a transparent way. No doubt there will be qualitative factors and uncertainty factors to consider. However, those can be worked in, assessed and better understood if you have the baseline facts established first.
A common standard of measure, transparent and available to all, would not only ensure the program is continually focused on the most appropriate initiatives. It would also ensure that the Climate Change Action Plan is stable and defensible. Its initiatives would be seen as relatively safe bets in the long run. Alleviating much of the fear about arbitrary or bureaucratic decision-making, ultimately it would build confidence and facilitate investment in the full suite of emission reducing initiatives.
And here’s the kicker: When a procurement program buys generation, demand management or storage, shouldn’t it be in a position to know with reasonable certainty how much carbon reduction it’s getting for each dollar invested, and how that compares with alternatives? In fact, considering some of the dynamics such as the tendency for renewable output to increase as storage capacity is added to the system, isn’t it in effect the duty of any central purchaser to assemble this kind of data before making procurement choices? It’s hard to imagine an outcome of Ontario’s Climate Action Plan that’s more on point than ensuring each procurement decision systematically accounts for carbon reductions and costs before being finalized.
Similarly, when a consumer compares two packages of energy services in the future, containing a mix of generation, demand response, storage, and automation tools, shouldn’t he or she be able to assess on a reasonably sound basis which one produces the greater carbon reduction per unit of investment?
On this question, owners, developers and investors in generation, storage and demand management have a very strong common interest: A common, stable, transparent and robust system for assessing carbon reduction impacts of energy sector initiatives.
Assembling the right coalitions
Here is the big danger: key stakeholders like generators, consumers, suppliers of energy management services, and utilities, will retreat into entrenched camps, refusing to play ball until the regulator guarantees each of them a protected place in the market as the new technologies are rolled out. That would be a recipe for stifled creativity and stalled solutions.
Much better would be if all players keep an open mind and look closely at the possibilities created by new technology. It may mean buying different packages of services. It may mean buying from different kinds of suppliers and buying in new ways. It could mean different owners for shared-use infrastructure. Conceptually it’s not very different from what happened to telephone, cable and internet services. Bear in mind that in 1985 no one thought you’d be buying voice, video, and data services from a cute gadget that looks like a fashion accessory in your pocket. The best resolutions will emerge when each type of player in the power market looks closely at what they can offer and keeps an open mind in assessing what they would value in a new service arrangement.
Yes there will be some tussles between the different kinds of players. Some players will push for higher standards of reliability, whereas others will say more reliability should be optional. There will be battles between transparency and simplicity. Of course, consumers and their representatives will always be looking for cost savings in all parts of the system. Their ability to walk away from a vendor will keep everyone on their toes.
Fortunately, there will be significant new business opportunities for players who make the right alliances.
Opportunities for economic collaboration
Against this volatile backdrop something interesting is happening – Opportunities for collaboration are emerging, Collaboration that can lead to systemic efficiencies and cost savings.
The first kind of opportunity falls under the general category of firming up offers. In any wholesale power market there will be times when a generator, storage facility or DR supplier has a short term difficulty meeting its planned level of service. To hedge against costs related to those situations, the provider can purchase a physical or financial commitment from another service. Renewable generators often install batteries to ensure continuous output in the event of an interruption in the flow of sunlight or wind. Major consumers often have generation and Demand Response available on call to ensure continuous availability. There’s no reason that generators can’t contract with loads for a type of DR that would allow the generator to “firm up” its offers to the grid, and create opportunities for additional types of ancillary revenue. Storage operators could play a multi-purpose arbitrage role to just about any combination of players, the more the better. The possibilities are plentiful.
The second type of opportunity lies in helping to reduce the capital costs of the power system as a whole. This is a relatively complex issue, but one that can’t be ignored during a period when sensitivity to infrastructure costs is high. Consumers, generators and storage operators can organize their installations and operations to reduce the costs of building and maintaining the grid, both their local grid and the broader grid. The question is not whether they should do so, but how to ensure the right signals are in place to encourage them do so. Absent such signals, it’s a safe bet that some will off-load costs to other parts of the system, almost randomly imposing obligations on other customers. Because many or most of these DERs will be renewable or efficiency-based, it may be difficult to turn them away. Transition costs could be higher than necessary.
Proper accounting of costs and benefits
Public policy requires accelerated deployment of carbon-reducing generation. But much of that generation entails significant grid integration costs. There is a win-win solution. It’s not a new idea. New installations, be they generation, storage or efficiency, should receive credit for the benefits they create, including upstream savings on infrastructure costs. APPrO proposed a cost benefit methodology of this type during the OEB’s Renewed Regulatory Framework for Electricity proceeding in 2012.
If large volumes of new renewables are to be connected to the grid, they should systematically receive credit for reducing atmospheric pollution, but by the same token, they should also be responsible for any incremental costs of infrastructure they create.
In fact, the case can be made, on a purely economic basis, that unless both the costs and benefits are properly assessed, no jurisdiction can expect to be efficient or effective in its selection of new resources, renewable or otherwise. A regulatory tool can be applied to assess anticipated costs of future infrastructure upgrades, and use those figures to help assess the benefits associated with DERs.
In a very real sense, recognizing the external benefits of generation and storage would be much more economic than a program stimulating the expansion of renewable energy alone. And perhaps serendipitously, the same mechanism (routinely recognizing the system benefits of DERs) would also economically facilitate the expansion of renewables. Energy Storage Ontario stresses that storage procurement is most effective if separated from generation procurement, as the value of storage is highest when it’s available for flexible deployment by the grid operator.
In developing a system-wide approach to recognizing costs and benefits, the interests of consumers would be served, while also clearing the path for relatively stable development of wires, generation, storage and other services.
Proponents of storage have suggested that in the long term, gas peaking plants will lose market share to storage. They make this case, even though storage capacity is currently more expensive than peaking generation, because:
• Storage enables price stability by its very nature
• Most of the new storage technologies are capable of quicker response times, which has greater value to the system
• Peaking generation will experience more challenges operationally and in maintaining its emission profile as short term responsiveness becomes a larger part of its duty cycle.
Proponents of peaking generation are likely to challenge this, saying market prices will ultimately tell the story, especially when carbon costs are properly factored in. Physical hedges will likely be an increasing part of portfolios in several areas.
While there will likely always be natural competition between alternative options– a positive feature of healthy markets– when the sector is being restructured, sometimes the interests of competitors converge and impact how certain changes need to play out.
In summary the time has never been better for regulators and policy makers to systematize recognition of external costs and benefits. Considering the massive costs entailed in the province’s Climate Change Action Plan, it would arguably be like flying blind, if not wasteful, to proceed without a means of assessing the long term costs of major climate-related investments. Timing is clearly an issue.
The good news is that any such system would stimulate the spread of renewables, reinforce the Climate Action Plan, and benefit from the natural convergences of interests between consumers, generators and storage.
— Jake Brooks, editor