Future of Electric Models

The past lessons have gotten us to this point. We know that the electric utility market is in a state of flux, and with this comes some pretty significant challenges, as well as opportunities. For the past 100 years, electric utilities have balanced safety, reliability, and affordability to provide service to their customers. The Regulatory Compact provides oversight, and in return, utilities are able to earn a return on the electric grade assets in which they invest. Some of the biggest changes include the influx of distributed energy resources, whose adaption is encouraged by tax credits, net metering, and other incentives.

The incorporation and integration of massive amounts of data and more active involvement from customers and third parties, including a potential competition to utilities, is also reshaping this market. At the same time, there is no room for error or slippage when it comes to providing electricity that is safe, reliable and affordable. The electric grid continues to be a major backbone in ensuring these three things. Right now, even as you're watching this, regulators are trying to figure out how to compensate utilities in the future for the value of the grid in a changing world.

We live in a wonderful time because there are so much technology and so many advancements being made. But at the same time, there are some that are affordable and effective that can be adopted early, and then there's others that the costs are high. But the technology keeps going on, and as greater production happens, the costs go down. So we live in a really exciting time. Technology is not free. And so it's a matter of which technologies to deploy, which one's are cost effective, and safe and reliable. 

There's been a lot of discussion by regulators, and utilities, about how an industry, that was
founded on a centralized approach, can accommodate or transform to include more decentralization. As you've seen, thinking about the complexities of how this industry works is really important. Preserving the electricity we have become so dependent upon. There are a number of business models already in place right now. Some electric utilities own generation, transmission, and distribution. That's a very traditional vertically integrated approach. Others manage only the transmission and distribution systems. And in Texas, independent power producers market electricity to users.

Many electric industry executives see value-added opportunities around distributed energy resources. But there is no clear path forward for a business model that makes the most sense. In the state of the electric utility study, utility executives were asked which model they thought would be the best for the utility sector moving forward. 28% said that they thought the vertically integrated utility model made the most sense. This means utility, again, on generation, transmission, and distribution and monitors reliability. 

Future of Electric Models

In this model, there is a regional transmission organization, OTO, or independent system operator ISO, of the transmission system. And that means there could be no preferential treatment given to the utility versus competitive generators. In fact, if you ever visit a utility that is vertically integrated, the transmission group is always kept physically separated from the other operations areas, as in, behind locked doors. Now, 24% of the executives picked the model that was specified in the New York plan. This means like the vertically integrated utility model, including a transmission that I described, and the utilities act as a platform provider for the distributed resources over the distribution system. Now the same proportion, 24%, picked an RTO/ISO model, and that means a regulated utility owns

the transmission and distribution. But unregulated companies provide generation. And then there is an RTO/ISO that operates the transmission grid. Fewer, 13% pick the retail
electricity market model.

This is the same as the RTO/ISO model I described. And then there are unregulated companies that provide electricity retailing services. Now 11% pick the IDSO model and that means the RTO/ISO model plus an independent distribution system operator. And they operate the distribution grid and
monitor reliability. Now in the same study utility executives were asked about what they thought was the best way for utilities to manage lost load from both distributed energy resources or from customers buying it from a third party. 38% recommended that the industry change rate structures to better recover those fixed costs. In other words, to reflect the value of the assets that are used. That's no small feat because you know how capital intensive this business is.

Some of the things they specifically gravitated towards were rates that varied in accordance with the time of use, meaning charging more during peak hours. Some also thought increasing the fixed charge would be the best approach. 27% said they thought it would make sense for utilities to offer customers renewable energy services, for example, community solar and green pricing programs. Coming in close behind, 26% said utility should petition regulators to change the traditional utility revenue model altogether. Electric utilities worry whether the ambitious approaches will be able to truly balance distributed energy choice with affordability, safety, and reliability.

Crystal ball, what's the future of the utility in the next, some people say 10 years, I think that's a shorter frame, as fast as technology is moving today, it could be three to five years what does it look like And at least for me, I'm already starting to see it with some of the projects that we're doing, and the small solar on the rooftops of a lot of our members. The grid used to be a one way grid. Power would come from the power plants, from out in the middle of nowhere, come into our substation, and
then flow down to the customer. And now we have little generators all over our service territory. So number one, our grid's got to be able to accommodate two-way flow of electrons, which it didn't need to before.

The other thing is we need to probably implement more of a storage. When we're making lots
of solar energy at noon, what we need to do is be able to store that energy, shift it six hours. So that when everybody comes home and they're watching television and cooking dinners, I can take that
energy that was made at noon and delivered to our consumers at six. It really is the key for renewables to turning it into gold. It's my opinion that movement of energy from one time period to another. I think the utility of the future is going to have to have that.

Basically, we're just a grid and I see us as being kind of the middleman with a bunch of people using
energy on our grid and a bunch of people producing energy on our grid. And we're the ones they're linking everybody up with everybody else. And that's a more sophisticated grid than what we have today. And we talk about infrastructure in this country, this is one of the infrastructures that
I think really needs to be focused on. It's also going to be a benefit to the solar industry because until I get this more sophisticated grid, I will have limits as to the amount of solar that I can bring into the system. At any particular location. So I would encourage that the solar industry actually helps the utility industry lobby government to support the infrastructure of the grid, improving it. Because at the end of the day, our improved grid means more solar can be deployed, which is helpful for
the solar industry at the end.

I think what we see in our society a lot are folks that are unhappy with the pace of change, and
folks want to change overnight. Typically though, decisions that happen overnight are rarely good and you look at the net outcome of where we're at, and utility space. We have the cleanest, most reliable, most economical, affordable and agile products and services in the electric utility space in the world. I think we're getting it right for both parts and we can continue to have some vigorous
debate on the margins about what on to change and where we need to head in the future. But, when you look at the end results, we're sitting here in the well-lit space right now. Students watching this, whether watching it home or watching it in a classroom. They're watching with dependable power
making it all happen at relatively affordable rates, depending on where they're sitting and that's a good thing.

To meet the utility of the future question, one of the things Xcel Energy has done here in the Colorado jurisdiction is, is we're broadly talking about what we're calling the R energy future initiative And we have three components of the Our Energy Future Initiative. And we sat back, and we looked at what do we think our utilities should be. What service should we be providing
to our customers five years from now, ten years from now. We came back and said there are three
things we really need to focus on. The first thing we need to focus on is customer choice. Being able to give our customers a little bit more control and little more choice about what they're looking at, how they're looking to consume their energy.

Giving them more information about it so they know more about how they're driving the costs of energy. Secondly, we need to be embracing the technology that's developing in our areas. So in our industry, we've had a lot of technological innovation in the past several years, and it's going to continue on into the future. How do we bring that into the fold in a way that makes sense for our customers and really embraces? And then finally, we want to provide those choices and we want to embrace that technology, but you've gotta balance that with economic development. We need to make sure that we're empowering our states to have strong and robust economic development to attract businesses so that our citizens can be employed by those businesses. And to attract people that can come and work in those businesses, and they want to live in our areas. So it's a balance of the three that we're really looking at and is really important to us. The utility of the future is going to
have more choices for its customers. It's going to be a little bit more adept and nimble at adopting those technologies and presenting those options to its customers in a way that makes sense.

The fact is that the cheapest integration solutions, the cheapest way of solving the intermittency problem if you want to see it as a problem, are obviously going to be found if you've got an entity that can look across the entire system, look at all of the resources available in the system. And integrate the different operating characteristics of all those resources, you need an orchestra conductor, which is I think the best way to understand one of the most important functions that utilities have. If you don't have an orchestra conductor, you end up with the absurd situation where the individual solar and wind developers are called upon to provide their own energy storage on their own sites. And in some parts of the world and in some parts of the country, that's actually happened. But it greatly increases the cost of the resource. And what on earth would be the reason for thinking that the onsight solution would be less costly than the whole cluster of solutions that are available to an orchestra conductor that can look out over a much bigger system?

So the future of renewability, as they say, is very bright. And we are really looking forward to continued deployment. It has been, if you look at the recent history, we've doubled the capacity of deployment every year and investment as well. So that I believe will continue and the technologies will continue to get cheaper, and more efficient, and more optimal. But I think one of the really interesting things about renewables is they become a greater and greater part of the energy mix is that we're really going to start seeing more decentralization and what some people have called the democratization of energy. So just as the internet has brought changes to the music industry and the transportation industry, it's bringing changes to the energy industry. And we're going to see
more distributive energy, people with solar panels in their homes, small wind turbines, utility building utilities scale power plants in different areas and communities.

Depending on the resources, we'll see geothermal, we'll see small hydro that takes energy from pipes and conduits in different ways from decentralized energy and we're going to see more and more of this become more of a community industry based mix. And people will really be able to understand how the energy is generated, they will be interconnected with how they use energy and then how it's actually generated themselves. So we going to see the utilities and the energy industry really
become much more dynamic, much more integrated, much more customer driven and customer focused. As the renewables and other types of energy become more and more part of our lives.

To sum it up, technology improvements and cost reductions, and distributed solar and energy storage, mean the likelihood of their increased integration into the existing grid. Electric utilities are looking at these and developing products and programs to benefit customers. At the same time, they know the importance of regulation to handle these changes in a way that protects reliability and affordability. The fact remains, we as customers demand all of this.

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Clean Electrical Power Planning For the Future

One of the things to watch, because it will hold a significant impact on the future of this industry and
its model, is the Clean Power Plan. This plan was a cornerstone of the Obama administration's focus, on mitigating climate change. It has also has been a lightning rod. As you may recall from a previous lesson where we touched on it, the plan called for cutting carbon dioxide emissions from coal-fired electric plants by 32 below 2005 levels. And states needed to meet this goal by 2030. A really critical part of the plan is that the EPA plans to regulate power plant emissions under this act. Each state has its own specific goals to meet under the Clean Power Plan. Almost half of the states
in the US are using. And the case against the Clean Power Plan is compromised of 38 separate cases. I know you're thinking that math doesn't add up, but the states aren't the only ones suing. Utilities and
coal companies have also issued lawsuits.

The states believe this plan is illegal and even unconstitutional, and feel that it is a way to
reorganize the US electric grid. They also believe it's an all-out attack on the coal industry that will drive electricity costs, sky high. The EPA fired back saying, the plan will lead to lower residential bills. Remember how earlier we talked about the fact, that states had jurisdiction over electricity generation and distribution? Well, this gets to the very heart of the controversy. The states are protecting their authority, to regulate carbon emission for their states. New Jersey Environmental Protection commissioner, sums up many of their concerns in three words, unprecedented regulatory overreach.

With the EPA, they're clearly looking at increasing and more restrictive standards, specifically on coal fire generation. But not just coal. When you look at where regulation is in the extractive industries, well that impacts any sort of baseload power we have in this country. And it drives cost. One of the frustrations I think the industry has with the EPA right now, is sort of the laundry
list of regulations.

Before one is finalized, you are met with an additional regulation. And there's no harmony between them. And the cross counting of benefits, counting the benefits of one regulation under the requirements of another. And really, that is an area where I think our country is really ripe for some reforms and just some common sense rethinking. That you can accomplish the same goals and achieve the same ends, without as being disruptive to industry and business as we are right now. because frankly, a lot of companies when they're looking at making long-term resource decision, their hands are tied. Because you just don't know what the regulatory future looks like in this country, because of the volume and diversity of regulations coming at US EPA right now.

The EPA defends its position saying, carbon emissions from coal fire plants represent a huge threat to the health and welfare of the US citizens, because of the impact on climate change. They support their right to do this because they have regulated other forms of air pollution from power plants, and other sources for decades. Now, on the other hand, some states, cities, and scientists support the plan. And they say that since pollution and emissions don't respect state borders, that the EPA's plan will help ensure emissions are truly reduced across the US. In February of 2016, the US Supreme Court
issued a stay of the Clean Power Plan. A legal stay means that a judicial proceeding is temporarily stopped. They can either be temporary or indefinite.

This means that the Environmental Protection Agency is not allowed to enforce any of the requirements of the rule until all of the lawsuits against it have been resolved. The outcome of this controversy will have considerable impacts on all of us. Meeting the standards would mean more renewables, greater promotion of energy efficiency and a greater reliance on natural gas. Of course, you know that natural gas is not without its own controversy, namely fracking. There's no magic bullet and the sound bites that come out of the media and social media, just don't do this issue justice. It's one that bears a closer look by all of us since the impact will be so significant.

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NET METERING - Future of Electricity

We talked in an earlier article about distributed generation. As a reminder, this is when electricity is generated near the location where it's being used. We also talked about the fact that with some energy sources being used for generation being more intermittent, for example, the sun doesn't shine all the time and the wind doesn't blow at the optimal speed all the time, you know that a connection to the grid is still needed. Otherwise, these customers would not have electricity 24/7. Another reason the grid is still needed is that many users sell energy back to the utility. And for this, you need a good connection.

They benefit in two ways, one is when their generation is not operating, obviously the greatest providing them power. But the grid also supplies them the capacity for their storage. Essentially, they're storing energy in the system and then using it when they have loaded and their generation is no longer on. So, there are two benefits there for customers with solar generation. 

Back in the 70s, there was a push by the government to increase penetration of rooftop solar. This is the genesis of net metering which is an approach to charging customers with rooftop solar. This approach was designed to encourage adoption and so it served to make rooftop solar more affordable through subsidies. Fast forward to today and solar rooftop penetration is going strong. So the question is being asked, does it still need government subsidies to grow, or could and should this market be able to stand on its own? At the center of the debate is the fact that those who don't have solar are subsidizing those who do. Let's dig into this in more detail.

So for a residential customer that has some solar generation, the watt outer meter runs forwards and backward, depending on whether or not the customer's using more load than the solar is producing or when the sun isn't shining. Or it runs backward when the load at the house is not enough for, is too much for, not enough for the solar capacity that's coming into the system. So the meter runs both ways. So, when the meter runs backward, there are negative kilowatt hours, and then when it runs forward there are positive kilowatt hours. So, according to the commission rules, customers can install a system up to about 120% of their annual kilowatt hours. So, if a customer has one these systems where it's designed and it actually produces 120% of their annual kilowatt hours, then the meter in large terms, ran backward 120% of the time. And so, what happens then is utility didn't get paid any money for the system that's being connected and then has to pay the customer for the energy that was produced in the system.

NET METERING

Net metering is approached a little differently in every state. Usually, here's how it works. Customers with rooftop solar or other distributed generation get credit for the extra electricity they sell back to the grid. Utilities are generally required to buy this electricity at the full retail rate. Now if that same utility were buying power on the open market from other utilities, they would pay wholesale rates. But net metering specifies that the utilities must buy the power at a retail rate or a premium rate

from net metering customers. The net, it's more expensive. Also, all of the fixed costs of the poles,
wires, meters, advanced technologies, and other infrastructure still has to get covered somewhere. So the bottom line is that the net metering customer doesn't pay for this stuff, but they use it. So, who pays for it? Customers without distributed generation or rooftop solar.

So when you take a look at the bill and it says a service charge, it's all over the place. Well, what's included in that service charge? And then we start talking about residential customers as it relates around to the energy rate. And this is where we get into a lot of these conversations about net metering, what's the cost-effectiveness? Who's paying for what? Are they paying their full share or not?

Right now there's a pretty heated discussion going on about the need to relook at net metering. At the heart of the discussion is how to ensure fair compensation for solar companies as well as utilities.

Then you turn the corner, evolution of technology, you come to the solar industry. You have the rooftop installations. They're using what is known as net metering. Net metering is you measure the amount of energy that's coming out of the home, you measure the amount of the energy that's being consumed by the home, and you get to net the two together. The problem is, is that the infrastructure
that's still behind that, that's based on them, how much is everybody using at the same time, is still needed, is still being utilized, but because of that netting, it isn't necessarily being paid for. And so that's, once again, back to that debate that's raging across the country right now on how do you really balance these factors and the benefits that come from the installations? What's going to happen? And we have, I think, still a number of years before we really know what the outcome of that debate is.

So the industry is changing. That puts pressure on the regulatory side. For the last 100 years, most of utility fixed costs have been recovered in variable rates because it worked. And because there was either consistent load or increasing load. With the distributed generation that turns it upside down and the variable amount of usage or sales is declining for many utilities which puts pressure on them to recover their fixed costs in different ways, and then that creates some backlash. 

The cost of producing solar power has gone down since net metering was first rolled out. The original purpose was to incent market growth. With that in mind, state legislatures and utility regulatory commissions are looking at outdated net metering policies. The solar industry has countered saying
that the subsidies aren't material and that the prevalence of rooftop solar helps to alleviate the strain on electric grids during summer days when demand soars. What we do know is that increased penetration of distributed energy technologies, particularly solar, is creating a fundamental shift in the US electricity system, and public policy must respond to this. Policy over the previous one way
street approach no longer suits this complex market.

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Future Electric Vehicles Technology

Let's talk about another hot topic, electric vehicles. The US electric industry has significantly
focused on electric transportation. This includes electric vehicles and charging stations to modeling the way by changing out some of their own fossil fuel power utility fleet vehicles for those that require electricity to run. There are some plug-in hybrids that have an electrical motor powerful enough to produce electricity beyond just for use in that vehicle. That means the power can be exported, so there you have it, storage, PG&E in California has done some amazing work with their own plea incorporating vehicles that can service generators to power their worker's tools and potentially even an entire neighborhood. Right now utilities use generators in areas that are down and connect these generators to grid sections to bring neighborhoods online one at a time. And they're looking at the plugin hybrids to fill this role. While this is extremely exciting news, we do need to keep in mind that at this point, it's more for isolated applications.

Most people that are really earnest about climate change will say that the first step is to decarbonize
the electric sector. In other words, have a larger percentage of renewable resources so that the carbon footprint is fairly small. And we're already there in the northwest. The step two that they will usually
point to is electrifying transportation. If you really want to make an impact on the carbon footprint of our society, you need to go after transportation and electric utilities want to be part of the solution. And I think electrification of transportation is a worthwhile effort. There are a lot of institutional barriers though, that keep utilities from participating. There are, in some cases, laws or regulations that prohibit utilities from encouraging electrification. In some cases, there are regulatory tests of cost-effectiveness. Just how far you can go to try to promote electrification of transportation, so it's not an easy thing. But that's a realistic second step for making a significant impact on climate change efforts. 

National Renewable Energy Labs is doing some extensive research on EVs. I was able to take a look at one of these projects in their lab. 

So this vehicle in this lab is being used to understand how vehicles interact with a residential system. So when you're plugging your electric vehicle in, how does it interact with the grid? How does it interact with the home and a building? And so, that's why we have this little vehicle here in this lab. We do a wide variety of research on electric vehicles, everything from developing the battery systems, the drive trains, the overall system of the vehicle itself and to prove its efficiency. And then also how to improve the different types of charging operations as well.

We're working on building energy codes in our states and cities. We're working on transportation
policy to increase support for mass transit systems to increase support for electric vehicles which is
an energy efficient and clean vehicle technology that's just emerging in the marketplace. We're quite, Bullish on the future for electric vehicles. Moving off of petroleum fuels, on to electricity for our cars and trucks.  There's no doubt the future is getting more exciting when it comes to EVs. This is one for us to keep an eye on.

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Future of Electric Storage

The concept of storing electricity is clearly not new. Since the 1930s pumped hydroelectric power has played an important role providing electricity here in the US and around the world.

The Energy Storage Association, which is a national trade association, identifies that storage falls into four main buckets. Those are number one, mechanical which is where pumped hydroelectric falls. Number two is thermal and ice is probably the most common in that area. Number three is electrical which is superconducting magnetic energy storage and capacitors. Try and say that four times fast. And number four is chemical which is basically batteries. 

We're going to talk about battery storage specifically since it's getting a lot of attention lately. With the influx of interment renewable energy sources, the possibilities associated with it are considered key to customer and utility cost savings. In fact, industry experts believe that the combination of energy storage solutions, smart grid, and renewable energy are key for our future. You already know that large-scale wind can be very challenging to integrate into the grid because of its intermittent nature. The wind tends to blow at night when demand for electricity just isn't as high. The hope is that storage can help smooth out the variability.

It becomes an issue of how you store the energy to make work, storing daylights power for night time usage is one thing. Storing summer power for winter usage is quite a different thing. So I think the pace of change will be different in different parts of the country.

You also know, probably even from looking around your own neighborhood, that people are using more rooftop solar as a way to lower their bills. You also know that these customers still rely on the grid. Otherwise, they'd be sitting in the dark come nightfall. At this point, there is no energy solution
storage that has been proven to work with solar that provides an affordable and reliable option.

 Electricity is this crazy on-demand resource. We don't have a place where we can just pump it and use it later, with the exception of pump storage hydro. And when you have for example say the wind picks up, the power has to go somewhere, so somebody else on the system has to back down. And that's typically again where you see the natural gas sort of in that intermediate role. Coming off the system and allowing those resources to come on to the grid.

The good news is that technology is evolving. It's getting better. You can do more ins and outs and in fact, we're experimenting with batteries here in Colorado as well. We have a project that we're doing for Microgrid where we're combining a battery and solar array. And then we have smaller projects where we're actually working with homeowners that have rooftop solar to install batteries and test how they can help with managing the system so that we can install even more distributed energy resources. We've got a few ways to go but it's good to learn the technology so that you can take advantage of it when it's cost effective.

While a lot of private companies, national labs, and electric utilities themselves continue to work on storage solutions that are reliable and affordable as well as scalable, it's still very much a technology that is evolving.

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