The Wake-up Call

On Aug. 14, 2003, just after 4:10 p.m., large parts of the Northeastern and Midwestern U.S. and parts of Canada suffered one of the worst blackouts in history. Over 55 million people had no power. The good news was that this was a wake-up call for the sorry state of the North American transmission infrastructure, commonly referred to as the “grid,” described at the time as tantamount to running modern-day telephone communication through an operator switchboard.

The blackout gave clarity to a widely misunderstood problem. Unlike perishable goods, electric energy does not have even a limited shelf life. Electricity moving through transmission lines cannot be stored and must be used simultaneously with its generation. Although the blackout was triggered by natural causes that damaged power lines, it was the imbalance between generation and consumption (load) and the resulting transmission circuit overload that caused the blackout.

The regulatory response was to expand the powers of the Federal Energy Regulatory Commission (FERC) to formulate and enforce stricter standards of reliability in the three interconnected grids subject to FERC jurisdiction: the Northeast, Midwest and West. A parallel development has been the expansion of the multi-state grid management role and the responsibilities of regional transmission organizations (RTOs) and independent system operators (ISOs).

The bright side of the blackout was a clear message: Energy transmission, long the stepsister of more obviously profitable generation, was at least equal in the supply chain of delivered energy. In the ensuing 15 years, the complexities of matching energy generation with load through the grid have increased exponentially.

Distributed Energy: A Complicating Dynamic

A complicating dynamic for grid management is the booming development of distributed energy resources (DERs), including smaller energy generators. These smaller energy generators include non-renewable (gas turbines) or renewable resources (wind, solar and biofuels), operating on-site for local consumption and often “behind the meter” (on the other side of the grid-connected meter), microgrids, electric cars and demand-response consumer devices – collectively, DERs. Even in the face of declining federal subsidies, DERs are growing as costs decline and they approach “grid parity” (equality of cost) with conventional energy sources, such as gas-fired turbines. Solar power in particular, including residential solar, is becoming increasingly popular.

Because energy generated by DERs may be either insufficient or more than sufficient to serve local needs, the user may either require energy from or deliver energy to the grid. Thus, whereas historic energy flows were one way from the grid to the user, DERs create a two-way flow, varying from time to time according to the excesses or insufficiencies of DER generation. This two-way flow both moves the energy load off-grid and increases the complexities of grid management.

The Utility Challenge

While RTOs and ISOs have regional authority over transmission, the on-the-ground responsibility for grid maintenance, reliability and management falls to the utilities that deliver energy to rate-paying customers. With the increasing development of DERs, the combination of increased complexity of grid management and “load loss” (energy moving off-grid) caused some utilities to revolt.

Why should DERs be favored with subsidies and renewable portfolio standards that require their use when they both increase the cost of grid accommodation and reduce the utilities’ base load of ratepayers? The perceived mismatch of increased cost and reduced revenue led many to predict a DER-driven “death spiral” for utilities.

The revolt, such as it was, was short and ineffective. The momentum favoring increasingly cost-effective DER development was too great. Besides, because utilities are subject to public utility commission rate-setting, the increased cost case, if any, can be made in the context of setting rates. The real burden, if any, would be absorbed by the ratepayers, presumably with the blessing of the public utility commissions. With DERs here to stay, the focus quickly became how to make money from the changing paradigm of energy generation and distribution, including, in particular, how to exploit savings in costs.

Storage

On the plus side, the grid management paradigm, demanding constant balance between generation and load, experienced a big boost with the emergence of increasingly advanced and economically viable commercial storage capacity. Long considered the “holy grail” of intermittent renewable energy production and its subservience to the forces of nature – the sun shines during the day and wind blows at night – commercial-grade batteries offer a path to the inclusion of diverse energy resources.

Indeed, the grid stability and management potential of storage extend far beyond its ability to harness and harmonize intermittent resources. In the new paradigm of grid management, storage will become a critical component.

The Decline of Peakers

The intermittent and often unpredictable character of renewable energy has created a need for redundancy of generation capacity in the form of peakers: gas-fired power plants that stand ready to provide power in periods of peak demand. While a necessary force for grid stability, on-demand reserve capacity for energy production adds a significant cost to the drive for greater reliance on renewable power. The emergence of commercially viable storage batteries, which in many cases can supply needed power more quickly than peakers, is a growing challenge to the prevalence of peakers. Dominion Energy’s recent decision to use peakers as a reserve capacity solution instead of storage batteries may prove a bad long-term bet.  

The Smart Solution

Whatever the approach to reserve capacity, the multiplicity, variety and intermittency of DERs, their bidirectional energy flows, and their susceptibility to the changing forces of nature combine to create increasing complexity in grid management. The dynamic evolution of smart DER, smart inverters, innovative devices of demand response and energy efficiency, and a smart grid add to the complexity. Thus, both the forces of change and the vehicles of adjustment produce variables challenging an efficient and cost-effective match of energy generation and load.

An effective real-time response to such a multifaceted universe of dynamic variables would deliver grid efficiency at reduced cost. After all, DERs reduce both ratepayer load and the cost of generation. The challenge, therefore, is to design and develop a “smart solution” that at once manages the increased complexity and preserves the savings from more efficient, on-site energy generation.

Herein lies the high-tech challenge and the high-tech solution: an intelligent grid management system through which all variables – generation assets, customer load, the grid, and all of the forces and vehicles of change and adjustment – communicate and integrate their real-time response to efficiently and effectively manage load. The smart techies in Silicon Valley, Helsinki or wherever who answer this challenge and take this technology to the next level will be highly rewarded.

Roger Rosendahl is a partner in law firm Nelson Mullins’ New York and California offices, where he specializes in project finance and M&A, primarily in energy, infrastructure and natural resources. He can be reached at roger.rosendahl@nelsonmullins.com.

1 COMMENT

  1. also UNDERGROUNDING of local power distribution lines. Stop putting wires across telegraph poles. Too vulnerable, dangerous. Get it done. One & done, as opposed to fixing them again & again after every storm. Tie in to your mini-grids & micro-grids (renewables).

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