Economist: Power business seeks new models

The basic model of the electricity industry always has been to send high voltages over long distances to passive customers. Power stations were big and costly, built next to coal mines, ports, oil refineries or - for hydroelectric generation - reservoirs. Many of these places were a long way from the industrial and population centers that used the power.

The companies’ main concern was to supply the juice, and particularly to meet peaks in demand. Most countries - and, in America, regions - were energy islands, with little interconnection to other systems.

That model, though simple and profitable for utilities and generators, was costly for consumers and, sometimes, taxpayers. Now, however, it is changing to “a much more colorful picture,” said Michael Weinhold of Siemens, a big German engineering company. Renewables are playing a far larger role and, thanks to new technology, demand can be tweaked to match supply, not the other way round.

As a result, the power grid is becoming far more complicated. It increasingly involves sending power at low voltages over short distances using flexible arrangements, the opposite of the traditional model. In some ways the change is akin to what has happened in computing: A 2010 report for BCG, a consultancy, drew a parallel with the switch from mainframes and terminals to cloud storage and the Internet.

Traditional power stations and grids still play a role in this world but not a dominant one. They have to compete with new entrants and with existing participants doing new things.

One example is the thriving business of trading what Amory B. Lovins of the Rocky Mountain Institute has named “negawatts”: unused electricity. The technique is known as “demand response,” adjusting consumption to meet supply, instead of the other way round.

The most expensive electricity in any power system is that consumed at peak time, so, instead of cranking up a costly and probably dirty power station, the idea is to pay consumers to switch off instead. For someone running a large cooling, heating or pumping system, for example, turning off the power for a short period will not necessarily cause any disruption. For the grid operator, though, the spare power gained is useful.

This has been tried before: In France, after a 2003 heatwave that hit the cooling systems of nuclear power stations and led to power shortages, big energy consumers agreed to cut their power consumption at peak times, in exchange for generous rebates. The Japanese have installed 200,000 home energy-management systems that do something similar on a domestic scale.

New technology takes it to another level, however, allowing numerous small power savings from a large number of consumers to be bundled together.

In South Africa, companies can sell such spare power themselves, through a company called Comverge. Elsewhere consumers earn rebates either from their own power company or from a third-party broker that manages their consumption.

In Austin, Texas, for example, 7,000 households have signed up for a plan in which they get an $85 rebate on an Internet-enabled thermostat, such as the Nest,which costs $249. This has other benefits for them, such as allowing them to control their home heating and cooling remotely, but it also means that the power company, Austin Energy, can shave 10 megawatts from its summer peak demand, typically between 3 p.m. and 7 p.m. Nest is selling such plans all over North America, and more recently in Britain too. Customers of its “Rush Hour Rewards” program can choose between being given notice a day in advance of a two-hour to four-hour “event,” meaning that their thermostat will be turned down or up automatically, or being told 10 minutes ahead of a 30-minute “event.” This can cut the peak load by as much as 55 percent. In another plan customers agree to a change of a fraction of a degree over a three-week period

At a May 2014 auction at the PJM interconnection, America’s largest wholesale-electricity market, 11 gigawatts of “negawatts” were bid and cleared, replacing capacity that would have come from conventional power stations. In other words, instead of buying in capacity from power stations that operate only to meet peak demand, companies were paying customers not to use electricity at that time. In 2013, PJM took $11.8 billion off electricity bills through demand response and related efficiency savings. The figure for 2014 is likely to be $16 billion.

NRG, America’s biggest independent power company, also is moving into the market. David Crane, its chief executive, admits that some consumers find the idea of saving power “un-American” - but he thinks that, for companies like his, the “mindless pursuit of megawatts” is a dead end. In 2013, NRG bought a demand-response provider, Energy Curtailment Specialists, which controls 2 gigawatts of “negawatts,” for an undisclosed sum.

The big question for demand-response companies is the terms on which they compete with traditional generators, which argue that markets such as PJM are starving the power system of badly needed investment. For example, First Energy, a company in Ohio, suspended modernization plans at a coal-fired plant that failed to win any megawatts in the auction for 2017-18. Such plants are viable only if utilities are paying top dollar for peak electricity, a cost that eventually is passed on to the consumer. Companies such as First Energy hope that the U.S. Supreme Court will overturn a ruling by the Federal Energy Regulatory Commission that negawatts be treated like megawatts in capacity auctions. These worries are already spooking the market. Enernoc, which bundles together small energy savings from many different customers to offer negawatts, has seen its share price fall by half since May

Sara Bell, who represents Britain’s demand-response companies, notes a market failure: The same companies that generate power also supply it. She argues that their interest is selling as much as possible at peak demand and, therefore, at peak prices, which is the opposite of what a customer should want.

In any case, the days of the vertically integrated model of energy supply are numbered, economist Dieter Helm said. Thanks to abundant solar power, he said, the energy market increasingly resembles the economics of the Internet, in which marginal costs are zero. That “undermines the very idea of wholesale electricity markets.”

The future model will be much more fragmented, he believes. Independent generators, plus new entrants, already are “revolutionizing the way electricity is sold and used.” New technologies will make the 21st-century model even more different.

“No wonder many of the energy giants of the past are already in such trouble,” Helm said.

The combination of distributed and intermittent generation, ever-cheaper storage and increasingly intelligent consumption has created a perfect storm for utilities, particularly those in Europe, said Eduard Sala de Vedruna of IHS, a consultancy. They are stuck with the costs of maintaining the grid and meeting peak demand but without the means to make customers pay for it properly. Their expensively built generating capacity is oversized. Spare capacity in Europe this winter is 100 gigawatts, or 19 percent of the constituent countries’ combined peak loads. Much of that is mothballed and may have to be written off, but at the same time new investment is urgently needed to keep the grid reliable, and especially to make sure that it can cope with new kinds of power flow from “prosumers” back to the grid, for example.

To general surprise, demand is declining as power is used more efficiently. Politicians and regulators are unsympathetic, making the utilities pay for electricity generated by other people’s assets, such as rooftop solar, to keep the greens happy.

At the same time, barriers to entry have collapsed. New energy companies do not need to own huge amounts of infrastructure. Nowadays their competitive advantage rests on algorithms, sensors, processing power and good marketing, not usually the strong points of traditional utilities. All the services offered by these new entrants demand response, supply, storage and energy efficiency eat into the utilities’ business model.

For an illustration, look at Hawaii, where solar power has made the most inroads. On a typical sunny day, the panels on consumers’ rooftops produce so much electricity that the grid does not need to buy any power from the oil-fired generators that long have supplied the state. In the morning and evening, though, those same consumers turn to the grid for extra electricity. The result is a demand profile that looks like a duck’s back, rising at the tail and neck and dipping in the middle.

The problem for the state’s electricity utilities is that they still have to provide a reliable supply when the sun is not shining - which happens, even in Hawaii. However, consumers, thanks to “net metering,” may have an electricity bill of zero. That means that the utilities’ revenues suffer and consumers without solar power, generally the less well-off, cross-subsidize those with it.

Fights about this are flaring across America. The Hawaiian Electric Power Co., the state’s biggest utility, is trying to restrict the further expansion of solar power, telling new consumers that they no longer have an automatic right to feed home-generated electricity into the grid. Many utilities are asking regulators to impose a fixed monthly charge on consumers, rather than simply letting them pay variable tariffs. Since going completely off-grid still involves buying a large amount of expensive storage, the betting is that consumers will be willing to pay a monthly fee in order to be able to fall back on the utilities when they need to.

Consumers, understandably, are resisting such efforts. In Arizona, the utilities wanted a $50 fixed monthly charge. The regulator allowed $5. In Wisconsin, they asked for $25 and got $19.

Even these more modest sums may help the utilities a bit, but the bigger threat is that larger consumers, and small ones willing to join forces, can go their own way and combine generation, storage and demand response to run their own energy systems, often called “microgrids.” They may maintain a single high-capacity gas or electricity connection to the outside world for safety’s sake, but still run everything downstream from that themselves.

Some organizations, such as military bases, may have specific reasons to want to be independent of outside suppliers, but for most of them the main motive is to save money. UC San Diego, for example, which until 2001 had a gas plant used mainly for heating, changed to a combined-heat-and-power plant, which heats and cools 450 buildings and provides hot water for the 45,000 people who use them. The system generates 92 percent of the campus’s electricity and saves $8 million a year. As well as 30 megawatts from the CHP plant, the university also has installed more than 3 megawatts in solar power and a further 3 megawatts from a gas-powered fuel cell. When demand is low, the spare electricity cools 4 million gallons of water for use in the air conditioning, the biggest load on the system, or heats it to boost the hot-water system.

Universities are ideal for such experiments. As autonomous public institutions they are exempt from meddlesome local rules and from oversight by the utilities regulator, and they are interested in new ideas.

Places like UC San Diego not only save money with their microgrids but advance research as well. A server analyzes 84,000 data streams every second. A company called ZBB Energy has installed innovative zinc-bromide batteries, and another company is trying out a 28-kilowatt supercapacitor, a storage device far faster and more powerful than any chemical battery. NRG has installed a rapid charger for electric vehicles, whose past-their-prime batteries are used to provide cheap extra storage. In addition the university recently bought 2.5 megawatts’ worth of recyclable lithium-ion iron-phosphate battery storage from BYD, the world’s largest battery manufacturer, to flatten peaks in demand and supply further.

In one sense UC San Diego is not a good customer for the local utility, San Diego Gas & Electric. The microgrid imports only 8 percent of its power from the utility. However, it can help out when demand elsewhere is tight, cutting its own consumption by turning down air conditioners and other power-thirsty devices and sending the spare electricity to the grid.

UC San Diego is one of scores of such microgrids pioneering new ways of using electricity efficiently and cheaply through better design, data-processing technology and changes in behavior. The International Energy Agency, a Paris-based non-governmental organization, reckons that this approach could cut peak demand for power in industrialized countries by as much as 20 percent.

That would be good both for consumers and for the planet.

From the Economist magazine.