Editorial:
Get ready for a more electricity-intensive future. Despite the expectations of many conservationists, some policy makers, and many planners, the per capita consumption of electricity is likely to rise in the next decade. Perhaps more significant, society’s infrastructure is evolving to make it easier to use electricity for more purposes than in the past. Electricity is proving to be cleaner, less expensive, and more flexible than many earlier forecasts anticipated, upsetting a wide range of plans and models at the same time as it opens new opportunities for electricity-based businesses that were previously inconceivable.
The long march from fuel-burning to using electricity slowed to a crawl in the 1990’s primarily because inexpensive natural gas entered the market and power generation capital costs rose. But those factors are fading in importance and the outlook for a renewed mass migration toward electrification is stronger than ever. In fact it’s starting to look like the dawn of a new era. Some of the driving factors are outlined below.
The change in outlook has been slow-moving and rife with uncertainties, which may explain why so few people have noticed. In short, usage charges for electricity have generally become more competitive and continue to fall. Capital cost structures are changing as well, often in ways that will make capital costs less of an impediment for consumers considering electrification. Although the forces underlying capital investment are more complex, it appears that key difficulties accessing capital, common impediments to increased electrification, may be largely alleviated by natural economic processes.
Lightning speed for capital-intensive infrastructure
No one should expect the energy system to change overnight. Most parts of the power grid are capital intensive and slow moving. In particular it’s highly unlikely that the peak demand for space heating in cold climates can be economically met with electricity in the near future. But change is occurring, and possibly accelerating, and few people expect that the system of 2030 will operate in the same way as the system today. While much of the physical infrastructure is likely to remain, the drivers determining new development at that time could be new breeds entirely. One of the key issues for energy system investors and planners is deciding how to cope with the transition from 20 and 40 year economic lifespans for planning purposes in most cases, to an unruly mix of timeframes and configurations for new development.
To an ordinary consumer grown used to replacing her smart phone every 3 years, it may seem glacial to watch power system planners working with 40 year assets. But the transition to new thinking now underway in the power industry is a positive whirlwind by traditional engineering and financing standards. The system has undergone massive change before, and although it may seem resistant to outsiders, it’s increasingly ready to deal with further change.
Ken Costello, the principal researcher for energy and environment at the National Regulatory Research Institute, recently wrote in Public Utility Fortnightly that, “technological advancements are moving in a direction that favors electrification, with its emphasis on digitization and clean energy.” He warns against ill-considered subsidies and recommends “identifying any undue obstacles to socially-beneficial electrification. This simple step would seem to easily pass any cost-benefit test.”
The factors driving electrification
Although technology change moves in unpredictable ways, some definite trends are visible, with long term implications.
To understand this historic re-orientation in expectations, one has to separate capacity and energy costs. In the past, low-emission baseload power generation enjoyed relatively low fuel costs, but had relatively high capital costs, compared to the fossil fuel based parts of the electricity system. Gas-fired power has often been the least expensive option for building new capacity. Although costs for both new capacity and energy may be declining in some areas, the value of various types of flexibility services appears to be rising. Over time, flexibility could become a third fundamental component of electricity cost and revenue structures. (See also “Shaking up grid management and market design.”) This could allow for a transition to more economic pricing systems, and impact the way new generation is selected and built. Net effect: electricity pricing and compensation systems are being refined, often reducing unit costs for consumers and thereby making electrification more attractive.
Today, and likely increasingly in the future, the most affordable new energy will probably come from more sources, including advanced renewables supplemented with market-based shaping services. The perennial obstacle for renewables, relatively high capital costs, is lessening because of fundamental changes in renewable generation technology, and because the system has more ways of accommodating variable generation than in the past. Significantly, this means that less capital may be required for variable renewable generation to serve a given segment of the market. For example, it’s entirely possible that distributed energy resources (DERs) will be offering market-based services to compensate for variable output on a competitive basis. Electricity storage is becoming economic in more locations and gas-fired power generation and demand response are increasingly effective at shaving peaks. Regulators and system planners will likely devise more impactful incentives for customers to reduce peak demand usage. The net effect is that it will likely be easier to compensate for variable generation. It’s becoming increasingly economic to purchase energy supplied by renewables and other DERs, not just because their operating costs are low, but also because their all-in capital costs are becoming less of an impediment to new development. Again, one of the high level effects is to improve the relative appeal of electrification, both from a capital and energy perspective. At the same time, the cost of using fossil fuel based components of the energy system is expected to rise as climate and other environmental costs are gradually recognized and factored in.
Whenever new generation is being considered, avoided cost of existing generation is a concern. Adding more fuel to the fire so to speak, it appears that the relative cost of new generation capacity has flipped from positive to negative in many situations. Since 1970 or thereabouts, the general rule has been that each new unit of generation capacity would cost more to build than similar capacity in the past. However, in many situations today, and possibly more in the future, units of energy from new capacity may be less expensive than units of energy from capacity built in the past. While this creates risk of stranded debt, it’s difficult to prevent customers and developers from moving to take advantage of opportunities to build and use capacity that produces less expensive energy. Electrification may be driven by independent efforts to save money.
Amongst the many implications of these shifting cost structures is the likelihood that there will be plenty of interest in making new investments in the capacity of various parts of the electrical system. Although raising capital is never a slam-dunk, as stated above the primary obstacle to increased electrification may be largely alleviated by natural forces.
Here is an overview of ongoing conditions likely to reinforce the drive to electrification:
1. Energy prices in general will rise because of climate concerns. Electricity prices as a whole are not expected to rise as fast, making electricity increasingly attractive as a means of delivering energy to the consumer.
2. Based on recent trends, electricity costs will increasingly be capacity-based, related to the cost of infrastructure, and less related to volumes used or drawn. This will tend to increase total volumes as customers will generally be insensitive to variations in usage outside of peak hours. In response to these kinds of economic signals, growth in peak demand may slow, but overall reliance on electricity will increase. Although the application of demand-based charges for electricity is likely to increase, they will probably tend to be designed as inescapable charges which have limited effect on consumer behavior.
3. Technology advances will enhance the appeal of DERs compared to grid power, increasing the degree of many consumers’ independence from transmission and distribution systems, but making more electricity-based options available to more consumers, while incidentally increasing the problem with defeasement of legacy investments.
4. Transmission and distribution assets will be underused in some areas and over stressed in other areas. This will encourage technical innovations to alleviate congestion, including micro-grids, while creating pressure to keep rates low for use of network assets.
5. Long term cost recovery requirements create pressures to support electrification. In Ontario, where the delayed impact of the Fair Hydro Plan is almost certain to appear on consumer bills starting in 2022, there will be increased pressure for consumers to prepare to self-generate, shave peaks, and generally reduce the use of grid power in time for that deadline. To discourage this kind of avoidance behavior, policy makers and regulators will likely resolve to ensure that staying connected to the grid remains economically attractive in Ontario. Conditions that encourage consumers to use more electricity naturally follow. Outside Ontario similar forces are at work, although without the firm 2022 deadline created by the Fair Hydro Plan.
6. The inherent consumer appeal of being able to use software to automate more aspects of their energy usage will cause consumers to choose electrical applications because they are more easily automated from top to bottom.
The Palo Alto, Calif.-based research giant Electric Power Research Institute is examining the benefits of electrification for consumers and society through extensive multi-level assessments and R&D. EPRI is looking at air and water quality impacts, and the potential of enabling technologies---such as indoor agriculture, electric transportation, induction melting, new industrial processes, and next-generation heat pumps, as part of its Efficient Electrification Initiative. EPRI plans to issue its national assessment on efficient electrification in the first quarter of 2018. For more information readers may wish visit www.epri.com .
Where is this going
Most consumers will not follow such details closely. The high level trends will attract more attention. In all likelihood, a powerful coincidence of factors will combine to create subtle pressure to use more electricity, and to build more of the infrastructure to support electricity use.
To summarize, here are some of the factors suggesting that the pace of electrification will accelerate:
* The per-unit cost of each kilowatt-hour of electricity is likely to decline in comparison to the alternatives. The actual cost of electricity may decline as well but the decline in per-unit charges for usage will have more definite short term impact.
* Electricity is likely to be seen as cleaner and more environmentally responsible than other forms of energy, on the whole.
* Technological improvements in DERs, micro-grids and smart energy controls will be seen as smarter, more current, more supportive of consumer choice, and drive greater interest in electrification.
* Climate policies will tend to view fixed costs for electricity T&D infrastructure as worthy investments in long term emission reduction, creating pressure to facilitate their financing.
* As electricity storage becomes economic in more situations, the opportunities to use electricity economically widen, and the opportunities to make more efficient use of transmission and distribution infrastructure will increase.
It might be said that the electricity system’s greatest burden is also its source of strength. The fact that it is fundamentally subject to the needs and preferences of the public through policy and regulation is the same reason it is likely to be relied upon to meet more and more purposes required by society.
The outlook for electrification is strong. For technical, financial and policy reasons, it’s reasonable to anticipate considerable further electrification of the energy system.
— Jake Brooks, Editor
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