Wednesday, November 7, 2012

Smart Grids and Utilities of the Future

Since we've written before about investing in our electric power distribution and transmission infrastructure as a potentially superior choice for government stimulus funds, we try to keep up with industry discussions by advisory firms such as KPMG's Global Energy Institute. A recent webcast talked about a number of issues relating to the Electric Utility of the Future.  

Investment is certainly needed simply to maintain reliability, as one speaker noted: approximately one-third of the national grid's equipment is at or beyond its economic life.  About $12 billion per year is required to maintain the grid for anticipated future demand.  Significant upgrades to new technologies for better performance, efficiency or other goals would require additional investment beyond this maintenance capital spending level.  

The electric utility of today is a heavily regulated enterprise, and the utility of tomorrow, in my opinion, won't be much different, especially in light of the twin-headed hydra of government mandates and regulation.  

Energy Secretary Steven Chu took up his position with a strong technical and academic background, and he has ridden his hobby horse of renewable energy hard.  Electric utilities were given mandates, often by their states in response to federal guidelines, to generate a minimum percentages of their electricity generation from a renewable portfolio, primarily wind and solar.  Xcel Energy, our local utility, is mandated to produce 30% of its energy for Minnesota customers from renewable sources by 2020.  

The utility of the future would be one in which distributed power would be a significant part of the mix of power on the grid. For example, the KPMG speakers noted, there was a federal goal of having 1 million plug-in electric vehicles (PEV) in operation by 2015.  Clearly, we're going to miss this goal by a mile. The current estimates are for between 200,000-700,000 PEV nationwide, with the upper end almost certainly unattainable.

A national fleet of PEV were regarded, in the federal government's grand vision, as distributed users of electrical power for recharging, and as "load balancing" factors. Trying to imagine how the load balancing would work is laughable: Two pm on a hot summer's day in Fresno.  The power company is approaching peak load.  Gmail messages are sent via smart phone to all local Nissan Leaf owners to drive to a recharging station and to all plug into the grid, to have their batteries drained to shave the peak load.  Seriously!

The electric utilities themselves note that were PEV to achieve a 10% penetration into the nation's auto fleet, concentrated episodes of recharging could affect local substations, leading to larger system shutdowns. 

A more significant example of distributed power are the large corporate data centers of companies like Google and ATT.  The companies reap benefits, in that they do not pay transportation and distribution charges like other customers, for power that they use or supply to the grid.  

However, utilities are caught in this conundrum.  Investing in a smart grid, in which there is distributed power, means significant dollars for the additional, improved infrastructure. Sales to a Google data center, for example, will mean lower revenue for the utility than would the same amount of power sold to traditional retail or corporate customers.  

Lower revenue, because of their enormous high fixed costs, is Code Red for the utility of today, and it will continue to be so for the utility of tomorrow.  

Xcel Energy has filed with the PUCO for a $285 million rate increase, about 11 percent, for 2013, which will amount to $9 per month, on average, per customer. This is in an environment of slow growth, job loss, and declining customer usage of electricity.  Here's what Xcel has to say about the effects of lower customer usage,
"Finally, Xcel is asking ratepayers for $75 million, or about 26 percent of the increase, to account for lower electricity usage. The utility has projected that customer usage will be 4 percent less in 2013 than this year..."

Customers react to their economic circumstances by reducing their usage, but paradoxically, they have to pay more because of the nature of the regulated utility.  

Xcel is also using about twenty percent of the proposed rate increase to" pay for upgrades to its electrical grid, including both high-voltage transmission and lower voltage distribution lines typically found in cities.
Some of that money will be used to pay for the high-voltage CapX2020 transmission lines approved by Minnesota and Wisconsin regulators."

The utility of the future will be subject to the same efficiency and equity issues as the utility of today:

  • The requirement to comply with arbitrary and costly mandates about portfolio mix in its power generation;
  • Investments to make their grids compliant with new power sources and demands;
  • The inability to maintain debt service and cash flow without significant counter-cyclical rate increases;
  • The need to make smaller retail customers pay increases which are substantially above economic or income growth rates at a time in which their reduced demand is the rational economic response.
None of this sounds very smart. 

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