The rebuilding of the electricity system, a process that appears to be underway already, will be both inspiring and exasperating. Large amounts of money and ingenuity will be deployed to ensure energy continues to be delivered, while struggling to stay on top of innovation as the physical economy becomes increasingly integrated with the information economy. This is a future where few boundaries exist between energy, communication, transportation, and other services. Risks are rising.
In all likelihood much of this new investment will support creative advances scarcely imagined until recently, while other investments will be left in the dustbin of history. This apparent waste is not necessarily a problem in a period of rapid change. “Move fast and break things” is how Mark Zuckerberg and other innovators have put it. Even though large amounts of money went into their development before they were outmoded, simplistic cell phones had to be financed and developed before smart phones could be mass produced. The parallels in energy go up and down the system from production to consumption and from large volume to retail. We are looking at the potential recapitalization and expansion of the most capital-intensive part of the economy. Billions and billions of dollars. Every innovation deployed locally has global implications and vice versa. The stakes are high and a certain amount of unsuccessful experimentation comes with the territory.
Disruption is evident
The signs are everywhere that system re-building is already underway. An urban manufacturer is installing Combined Heat and Power at its own expense to hedge the risk of power quality interruptions, even though its local utility meets all the normal reliability requirements. Electricity distributors have volunteered to become mini network operators. Start-ups have quickly rolled out apps that offer consumers new kinds of control over their energy usage. Regulators are testing new fast-track approval processes to accommodate the breadth of innovations expected to come forward. System planners worry about how to make sure the infrastructure will support growth in electric vehicles. Students at technical colleges are continually coming up with new ideas for making the grid cleaner and more efficient. New investments that could reduce energy costs are announced almost weekly.
The planning models of the past are too static to take all this into account. Although it’s always necessary to predict future need and compare options for meeting it, in today’s environment there are more moving parts than simple supply and demand. Wholesale demand could decline even as total volume grows. The established players could start performing functions traditionally provided by others. (For example, consumers could start hosting storage, generators can provide more types of reliability, distributors can play a more active role in balancing the system, and new entrants could act as intermediaries between the grid and end consumers.) It may confound the traditional planners, but in this new world, anyone can do anything. Regional and local planning could move more quickly than planning at a system operator level, begging questions about what will drive future planning processes. The planning framework, like the rest of the system, will be carefully re-examined.
We have a historic opportunity to set new terms
The primary challenge for government will be figuring out to ride this wave, simultaneously taking advantage of the new technology, while making sure the costs of adaptation and integration are properly managed. Stakeholders and the public need to weigh in.
Decisions made today will determine which advances take the lead, what kinds of benefits are generated, and how the costs are shared. Setting the terms for this new development will be one of the most critical jobs for leaders in both government and industry. The public and private sectors will need to be more co-ordinated. Moreover, they will need to truly understand the perspective of the consumer, without which no form of restructuring will be stable.
The principles that govern new investment in the electricity sector inevitably result from a melding of considerations drawn from three areas: Current technology, realistic financial opportunities, and the over-riding public policy drivers.
Innovation is unruly. Insight on how to oversee such a raucous party will come from unexpected places. Fortunately, the electricity sector is populated with experts steeped in the disciplines of identifying long term trends and devising forms of investment likely to withstand successive batterings. Together with the IT minds who are becoming part of the corporate structure, companies are trying out new processes for setting directions and priorities in the face of change. As discussed in a previous article, “Raising the next generation of energy leaders,” (Power magazine and IPPSO FACTO, August 2018) energy companies and government are already contending with the very real possibility that a major investment project could be outdated before it goes into operation. This requires different styles of work where participants are constantly scanning for better options and devising strategies that mitigate risk for projects once they are committed.
Governance principles
Without presuming to know the conclusions, one can safely project that the governance principles in such a tempestuous environment will include establishing much higher capacities for ongoing situation awareness, continual reassessment, communication with peers, and risk management. No one would advocate throwing out the traditional methods of sober data collection, needs identification and cost benefit analysis. However, these will likely be little more than building blocks in the more dynamic forms of planning and oversight ahead.
APPrO has highlighted five key principles to guide the governance processes in the future. These represent the outcome of in-depth discussions with government and stakeholders struggling to deal with these challenges. They include:
a) Commit to the enhancement and maintenance of a stable governance framework designed to achieve high standards of transparency, accountability and predictability, suited to the volatile market conditions ahead, as a central objective
b) Rely on competition wherever possible to determine which investments and commercial decisions are made
c) Establish a rigorous, transparent long term planning process
d) Utilize the technical and financial know-how available in the sector right now to find creative, commercially sensible ways to manage costs, and
e) Ensure an orderly, investible climate that will provide the most efficient, reliable and best-cost electricity system today and for the future.
As APPrO President Dave Butters has noted, “A predictable, stable business climate coupled with wise use of assets, transparent, evidence-based planning and reliance on market forces will deliver the best results for all Ontarians.”A recent report from the Canadian Electricity Association reinforced these recommendations, recommending the following as its top priority:
“Greater regulatory certainty and predictability on key issues, including energy policy, climate change, and broader environmental issues”.
(State of the Canadian Electricity Industry 2019, the Canadian Electricity Association.)
APPrO is a founding member of the Ontario Electricity Stakeholder Alliance (OESA), which advocates energy policies and planning that follow these principles:
• Transparency: A plan to build confidence in an open, accountable system with an engaged Legislature and rules that respect the public’s right to be informed;
• Competition: A commitment to competitive processes, wherever feasible, that help support lower costs for electricity consumers;
• Objectivity: A commitment to smart electricity decisions informed by rigorous cost-benefit analysis, and objective and transparent planning and procurement criteria that ensure Ontario ratepayers are getting the best value; and
• Independence: A process where independent agencies like the IESO, OEB and Ontario Electricity Safety Authority are appropriately resourced to make independent decisions and be held accountable by the provincial Legislature.
The OESA statements demonstrate the breadth of consensus on key priorities that exists across the industry, from consumers to producers, including established players and new entrants. It’s a unique opportunity to build a path forward based on common principles.
Rarely has an industry presented so much risk and so much opportunity for decision makers at the same time. Despite the rapid pace of technological innovation, decision makers have a window of opportunity at this point to redefine the terms of development, to put in place a framework for governance that will take advantage of the new technologies, and ensure that the costs and benefits are managed for the benefit of the economy and the citizenry as a whole.
– Jake Brooks, Editor
An updated version of this editorial is available on LinkedIn at this location.