RMI: Here's how the economics of grid defection will pay off
<p>Here's why your business must pay attention to "postcards from the future" and start looking beyond the old-school utility model.</p>
The speed of disruptive innovation in the electricity sector has been outpacing regulatory and utility business model reform, which is why they now sometimes feel in conflict. That disruptive innovation is only accelerating.
Our recent report, "The Economics of Grid Defection: When and where distributed solar generation plus storage competes with traditional utility service," sets a timeline for utilities, regulators and others to get ahead of the curve and shift from reactive to proactive approaches. Becoming proactive and deliberate about the electricity system's transformation, and doing so ahead of any fundamental shifts in customer economics, would enable us to optimize the grid and make distributed technologies the integral and valuable piece we believe they can and should be.
When we at the Rocky Mountain Institute issued "The Economics of Grid Defection" three weeks ago, our intent was to stretch the conversation among electricity system stakeholders by looking out far enough in the future to discern a point where the rules of the system change in a fundamental way. We used the best available facts to explore when and where fully off-grid solar-plus-battery systems could become cheaper than grid-purchased electricity in the United States, thus challenging the way the current electricity system operates. Those systems, in fact, don’t even need to go fully off grid. The much less extreme but perhaps far more likely scenario would be grid-connected systems, which could be just as or even more challenging for electricity system operation and utility business models.
The takeaway is this: even under the fully off-grid scenarios we modeled, we have about 10 years — give or take a few — to really solve our electricity business model issues here in the continental U.S. before they begin compounding dramatically. The analysis also suggests we carefully should read the “postcards from the future” being sent from Hawaii today, and take much more interest in how that situation plays out as a harbinger of things to come.
As an institute with a mission to think ahead in the interest of society, consider this a public service message that these issues will crescendo to a point of consequence requiring dramatic and widespread changes well within current planning horizons. For those who are serious about finding solutions, this is also a call to action and a commitment to partnership.
At RMI, much as we pioneered the concepts of the “negawatt,” the “deep retrofit” and the “hypercar,” we also have defined what it means to be a “think-and-do tank.” It is not enough to do smart analysis. The solutions we champion must be practically tested, broken, fixed, refined, iterated and ultimately adopted at scale for us to feel satisfied with our work. Partnering with leading companies and institutions is how we prove an alternative path is possible to a world that is clean, prosperous and secure.
The highly distributed electrical system of the future
The "transform" scenario of our "Reinventing Fire" analysis, the most preferable outcome of the electricity futures we have examined, described a future for the U.S. electricity system in which 80 percent of electricity is supplied from renewable sources by 2050, with about half of that renewable supply coming from distributed resources. Given the current grid is only a few percent distributed and less than 13 percent renewable (counting a generous allotment of hydropower), we have quite a ways to go.
Achieving that end state requires many changes. Some of those changes already have momentum and likely won’t require intervention, but others will need a kick start or some other form of “strategic acupuncture” encouragement. At RMI, we certainly would prefer that a transition of this scale be orderly and proactive, because having disruption rock the boat of the current system unprepared undoubtedly would leave some combination of shareholders, ratepayers and taxpayers smarting.
As we look at the future electricity system — the one we need to be building today — we see five critical differences from the present system. Redesigning our regulatory and market models should reflect these emergent needs.
- The future electricity system will be highly transactive. Increasingly, the grid will become a market for making many-to-many connections between suppliers and consumers, with those roles being redefined daily as self-balancing systems decide whether to take from or supply to the grid at any given time.
- Correspondingly, asset and service value will be differentiated by location and timing of availability, and perhaps even by carbon intensity or other socially demanded attributes. In a system that requires instantaneous load matching at the distribution level, and where virtual and real storage are distributed throughout the system, resource coordination will require transparent markets (with increasing automation) that provide the ability to balance autonomously using value signals. A system historically governed by averages instead will migrate to specific, dynamically varying values.
- Innovative energy solutions will proliferate. As a consequence of market forces already unlocked, we are assured to see a regular stream of distributed resource innovations that better meet customer needs at costs comparable to existing utility retail prices. These could be market-based aggregation plays (such as demand response) or personal technologies (a home “power plant” such as solar plus storage or a gas microturbine).
- A consequence of these first three points is that the rules governing the network must be adaptive to constantly shifting asset configurations, operations and other factors. For example, charging EVs may make more sense at night or during the day, depending on the penetration of renewables relative to base needs. There will be lots of inflection points on how and when to encourage the development of different types of assets to reach efficient and stable outcomes.
- Finally, the customer will be increasingly empowered. The services of the grid must de-commoditize to deliver against exact customer needs for reliability, “green-ness” and other attributes. Failure to do so will result in customers finding higher-value alternatives.
This future still prominently features a robust wires network; defection from the grid would be suboptimal for a number of reasons. We assert that everyone is better off if we create a future network that is easier to opt in to, rather than opt out of via the risk of defection.
Moreover, distributed resources — the same ones that could but needn’t threaten defection — have the potential to become a primary tool in the planning and management of grid-based distribution systems. Already, we are working with utilities and regulators in several parts of the country in exploring new ways to incentivize electricity distribution companies to take full advantage of distributed resources to reduce distribution system costs, increase resilience and meet specialized customer needs. Good regulation will reveal value and facilitate transactions that tap that value, thereby increasing the benefit of distributed resources for all.
Forging solutions: Our work on the emerging system
Our programs at RMI are designed to honor and accelerate progress toward an electricity system that harnesses these distributed investments. Hence, we have parallel and interactive efforts to accelerate the progress of economic, distributed and low-carbon disruptive technologies (because we believe they have an important and positive role to play in the electricity system of the future), even as we work with utilities, regulators and other key stakeholders to migrate to new business models that deploy and integrate these resources in ways that maximize the benefits to society as a whole. We think these dual efforts place “creative tension” in the system from which progress manifests.
Our work on disruptive technologies is focused on driving down the economic costs of deploying these systems by stimulating direct cost reductions, improving risk management and access to capital, and building new business models that are either behind the meter or aggregations across meters. To do this, we work specifically to help drive down solar “balance of system costs” through understanding cost reduction opportunities and then working to implement them, through identifying pathways to more market capital and then working with consortia such as truSolar and Solar Access to Public Capital to unlock, and through working on issues like microgrids or researching the prospects for alternative asset models with a wide range of partners.
These insights into disruptive models directly inform our dialogue with utilities, regulators, technology providers and other stakeholders around ways to migrate existing business models. Our most ambitious effort at transformation is the Electricity Innovation Lab (e-Lab), a multi-year, multi-stakeholder initiative focused on rapid prototyping and fast feedback on solutions for the future energy system. This network has issued seminal thought pieces on future business models, surveys of the costs and benefits of solar and worked directly with stakeholders such as the City of Fort Collins and the U.S. Navy to develop perspectives on pieces of future solutions for all. Beyond that, we work directly with utilities such as PG&E and states such as Minnesota (PDF) on one-off engagements to test different ideas together in a way that provides important experience for the “think-and-do” cycle that epitomizes our approach.
We at RMI are committed to expanding and accelerating the capacity to transform the electricity industry to one epitomized by innovation and customer service above all else, in a way that meets environmental, social and economic demands. Toward this end, we are convening 13 cross-disciplinary teams from across the country in two weeks for our first e-Lab Accelerator, designed specifically to workshop some of the toughest issues facing the industry in the transition to the next electricity system. This is just one of the broader set of commitments that we have made to not just thinking about solutions, but putting them immediately to the test.