- Email: [email protected]
Or
Electricity Currents Centralized or Distributed? It’s Not Necessarily Either/Or The debate about the future of the power industry is heating up. One side says the dreaded utility death spiral is here, or near, and the industry is heading into a fatal stall from which there is no escape. According to Accenture, annual revenues of U.S. utilities are likely to be some $48 billion lower than they would have been otherwise by 2025 due to the rapid growth of distributed generation and gains in energy efficiency, with demand on the grid falling by as much as 15 percent. The other side says this too will pass, as with the dreaded Y2K disaster – remember? The Moody’s credit rating agency, for example, says utilities will look different, and need to make a number of adjustments to survive, but it does not write them off, yet. A more sensible debate, however, is on the future evolution of the centralized vs. decentralized utility paradigm. Nearly everyone agrees that the model of centralized generation, transmission and distribution is seriously challenged by an emerging decentralized
Continued on page 6
April 2015, Vol. 28, Issue 3
In Electricity Currents This Month: Centralized or Distributed? It’s Not Necessarily Either/Or . . . . . . . . . . . . . . . . . . 1 Flaming Rhetoric Aside, Is NRG CEO Crane Onto Something? . . . . . . . . . . . . . . . . . . . . . 1 Who Should Invest in Electric Vehicles’ Charging Infrastructure? . . . . . . . . . . . . . . . . 3
Electricity Currents is compiled from the monthly newsletter EEnergy Informer published by Fereidoon P. Sioshansi, President of Menlo Energy Economics, a consultancy based in San Francisco. He can be reached at [email protected].
Flaming Rhetoric Aside, Is NRG CEO Crane Onto Something? The search for the ‘‘utility’’ of the future, like the search for Shangri-La, is frustrating, mostly because no one truly knows what it is or where to find it. NRG, the biggest U.S. independent power producer (IPP), may be a good place to start. The company has emerged following an unpleasant bankruptcy experience as a powerhouse growing on multiple fronts. Its maverick CEO, David Crane, goes out of his way not only to challenge ‘‘traditional’’ utility CEOs for their lack of vision, initiative, and drive but to offend them whenever he gets a chance. 1
figure out who they want to actually buy their electricity from.’’ As the preceding shows, the road to wide acceptance of EVs is fraught with multiple technical, regulatory, and policy hurdles. Yet, there are hopeful signs that California’s
ambitious targets will eventually prevail – forcing necessary compromises needed to invest in the much-needed EV charging infrastructure, one way or another.& http://dx.doi.org/10.1016/j.tej.2015.03.013
Centralized or Distributed? It’s Not Necessarily Either/Or Continued from page 1 version in which prosumers exercise increased control over how much power is locally produced, consumed, stored, or exchanged with other prosumers using the network that connects them. But even here, there are fundamental disagreements about how the future grid will enable consumers and prosumers to remain connected and – more important – who will pay for the critical services provided by the grid. One side argues that the grid is a social good, and should be paid for as such. These people would typically propose that, since the costs of maintaining and upgrading the grid are mostly fixed, everyone who is connected should pay a fixed monthly fee for its upkeep. Such arguments quickly boil down – or disintegrate – into debates about what portion of a typical customer’s monthly bill should be fixed vs. variable. David Owen, executive vice president of the Edison Electric Institute, the lobbying arm of U.S. investor-owned utilities, was quoted in February in an article in The Wall Street Journal pointing out that, ‘‘it costs most utilities $40 to $60 a month to serve a home.’’ He added, ‘‘So customers who use (he meant to say buy) little power shift costs to others.’’ (As Electricity Journal readers will know, there is an important distinction between ‘‘use’’ and ‘‘buy.’’) Customers, of course, might ‘‘buy’’ little power either because they have invested in efficiency and/or in distributed self-generation, most commonly rooftop solar PVs. The combination of
6
the two is referred to as distributed energy resources (DERs). By this line of reasoning, consumers who buy little power from the grid are somehow evil and should be penalized for their antisocial behavior. Not surprisingly, many utilities are fond of big fixed fees, sometimes called minimum monthly fees – specifically targeting those evil prosumers, that is, those who consume little and produce a lot. The Wall Street Journal article describes the uproar occasioned by a radical proposal submitted to regulators in the state of Wisconsin last May: ‘‘Madison Gas & Electric Co. asked state utility regulators to let it charge residential customers $68 a month by 2017 as a fixed monthly fee for electricity service, covering 77 percent of the utility’s fixed costs, versus the existing $10.50 fee, which covered 12 percent. In return, the utility agreed to cut the price of electricity in half, to 7 cents a kilowatt-hour. The proposal created such uproar that the utility withdrew the request. Instead, it got approval to begin charging about $20 a month, enough to cover 23 percent of its fixed costs, and to slightly reduce its electricity price.’’ So why an uproar? Because, broadly speaking, customers dislike large fixed fees. Many believe that electricity is like gasoline or groceries: if you don’t buy much, you shouldn’t pay much. If you don’t buy any, you shouldn’t pay any. Advocates for low-income consumers, energy efficiency, and solar PV do not like large fixed The Electricity Journal
charges or minimum fees either because they are unfair to low-income, energy-frugal, and PVinvested consumers. Despite the uproar and the objections, fixed fees and minimum charges appear to be on the rise in a number of states, generally favored by incumbent utilities who are concerned about the gradual erosion of revenues due to the rise of DERs. In early February 2015, the Houston Chronicle reported that some utility customers in Texas have been surprised to find they are charged a fee for using less than a specified amount of electricity – the minimum charge level. This is even more ironic since many of the same utilities are actively promoting energy efficiency, usually prompted by regulators. The Houston Chronicle examined rate plans of 49 retailers in the Houston area – a total of more than 300 plans – and found that more than 200 included a minimum-use fee. In some cases, the plan offered a discount to customers who used more than a specified amount of power. Retailing is competitive in Texas, which means retailers can offer any plan they think will appeal to customers. The Chronicle reported that, ‘‘While the fees varied, they averaged $10.67 and most were triggered if customers used less than 1,000 kilowatt-hours of power.’’ Average residential consumption in Texas is about 1,200 kWh per month. Most retailers defend the practice, saying the minimum fees are needed to pay for fixed costs that occur regardless of whether customers use a lot of electricity or very little. Jake Dyer, a consumer advocate with the Texas Coalition for Affordable Power, disagrees. He was quoted in the Chronicle saying, ‘‘You don’t pay a minimum-use fee when you step into a grocery store. You don’t pay a minimum-use fee when you shop for any other product. Most businesses price their product in a way that the people who
April 2015, Vol. 28, Issue 3
actually buy it will pay for their fixed-cost infrastructure.’’ As the preceding explains, the debate about fixed vs. variable fees is controversial, as are the arguments about solar vs. non-solar customers. If solar customers are assessed a penalty or fixed fee because they are buying less from the grid, then consumers with super-efficient appliances, zero net energy (ZNE) homes, or consumers without central air conditioners, or big appliances, or electric vehicles (EVs) should also pay a penalty. One can imagine a utility executive screaming at a frugal prosumer: ‘‘How dare you not use lots of kWhrs when we have invested in this entire expensive infrastructure to serve you?’’ What is a rational way out? Clearly, very few prosumers would wish to go completely off-grid since the costs of enjoying the same level of reliability and service provided by the existing grid is rather high – and do not believe anyone who says otherwise. Until the cost of storage and micro-generation declines to make such options truly affordable, we must find a compromise that allows the centralized and decentralized models not only to co-exist, but to complement each other. Mauricio Gutierrez, COO of NRG Energy, the largest U.S. independent power producer (IPP) and a major player in distributed generation, was quoted in Power Engineering magazine in January saying, ‘‘I think there is a way competitive energy companies and the utility space can work collaboratively,’’ adding, ‘‘I don’t think it’s an either/or.’’ It is of course self-serving for NRG – which has relatively little to lose and a lot to gain from the growth of distributed generation – to say this, yet this editor agrees with its basic premise. The challenge will be getting to that complementary realm.& http://dx.doi.org/10.1016/j.tej.2015.03.011
7
Continued on page 6
April 2015, Vol. 28, Issue 3
In Electricity Currents This Month: Centralized or Distributed? It’s Not Necessarily Either/Or . . . . . . . . . . . . . . . . . . 1 Flaming Rhetoric Aside, Is NRG CEO Crane Onto Something? . . . . . . . . . . . . . . . . . . . . . 1 Who Should Invest in Electric Vehicles’ Charging Infrastructure? . . . . . . . . . . . . . . . . 3
Electricity Currents is compiled from the monthly newsletter EEnergy Informer published by Fereidoon P. Sioshansi, President of Menlo Energy Economics, a consultancy based in San Francisco. He can be reached at [email protected].
Flaming Rhetoric Aside, Is NRG CEO Crane Onto Something? The search for the ‘‘utility’’ of the future, like the search for Shangri-La, is frustrating, mostly because no one truly knows what it is or where to find it. NRG, the biggest U.S. independent power producer (IPP), may be a good place to start. The company has emerged following an unpleasant bankruptcy experience as a powerhouse growing on multiple fronts. Its maverick CEO, David Crane, goes out of his way not only to challenge ‘‘traditional’’ utility CEOs for their lack of vision, initiative, and drive but to offend them whenever he gets a chance. 1
figure out who they want to actually buy their electricity from.’’ As the preceding shows, the road to wide acceptance of EVs is fraught with multiple technical, regulatory, and policy hurdles. Yet, there are hopeful signs that California’s
ambitious targets will eventually prevail – forcing necessary compromises needed to invest in the much-needed EV charging infrastructure, one way or another.& http://dx.doi.org/10.1016/j.tej.2015.03.013
Centralized or Distributed? It’s Not Necessarily Either/Or Continued from page 1 version in which prosumers exercise increased control over how much power is locally produced, consumed, stored, or exchanged with other prosumers using the network that connects them. But even here, there are fundamental disagreements about how the future grid will enable consumers and prosumers to remain connected and – more important – who will pay for the critical services provided by the grid. One side argues that the grid is a social good, and should be paid for as such. These people would typically propose that, since the costs of maintaining and upgrading the grid are mostly fixed, everyone who is connected should pay a fixed monthly fee for its upkeep. Such arguments quickly boil down – or disintegrate – into debates about what portion of a typical customer’s monthly bill should be fixed vs. variable. David Owen, executive vice president of the Edison Electric Institute, the lobbying arm of U.S. investor-owned utilities, was quoted in February in an article in The Wall Street Journal pointing out that, ‘‘it costs most utilities $40 to $60 a month to serve a home.’’ He added, ‘‘So customers who use (he meant to say buy) little power shift costs to others.’’ (As Electricity Journal readers will know, there is an important distinction between ‘‘use’’ and ‘‘buy.’’) Customers, of course, might ‘‘buy’’ little power either because they have invested in efficiency and/or in distributed self-generation, most commonly rooftop solar PVs. The combination of
6
the two is referred to as distributed energy resources (DERs). By this line of reasoning, consumers who buy little power from the grid are somehow evil and should be penalized for their antisocial behavior. Not surprisingly, many utilities are fond of big fixed fees, sometimes called minimum monthly fees – specifically targeting those evil prosumers, that is, those who consume little and produce a lot. The Wall Street Journal article describes the uproar occasioned by a radical proposal submitted to regulators in the state of Wisconsin last May: ‘‘Madison Gas & Electric Co. asked state utility regulators to let it charge residential customers $68 a month by 2017 as a fixed monthly fee for electricity service, covering 77 percent of the utility’s fixed costs, versus the existing $10.50 fee, which covered 12 percent. In return, the utility agreed to cut the price of electricity in half, to 7 cents a kilowatt-hour. The proposal created such uproar that the utility withdrew the request. Instead, it got approval to begin charging about $20 a month, enough to cover 23 percent of its fixed costs, and to slightly reduce its electricity price.’’ So why an uproar? Because, broadly speaking, customers dislike large fixed fees. Many believe that electricity is like gasoline or groceries: if you don’t buy much, you shouldn’t pay much. If you don’t buy any, you shouldn’t pay any. Advocates for low-income consumers, energy efficiency, and solar PV do not like large fixed The Electricity Journal
charges or minimum fees either because they are unfair to low-income, energy-frugal, and PVinvested consumers. Despite the uproar and the objections, fixed fees and minimum charges appear to be on the rise in a number of states, generally favored by incumbent utilities who are concerned about the gradual erosion of revenues due to the rise of DERs. In early February 2015, the Houston Chronicle reported that some utility customers in Texas have been surprised to find they are charged a fee for using less than a specified amount of electricity – the minimum charge level. This is even more ironic since many of the same utilities are actively promoting energy efficiency, usually prompted by regulators. The Houston Chronicle examined rate plans of 49 retailers in the Houston area – a total of more than 300 plans – and found that more than 200 included a minimum-use fee. In some cases, the plan offered a discount to customers who used more than a specified amount of power. Retailing is competitive in Texas, which means retailers can offer any plan they think will appeal to customers. The Chronicle reported that, ‘‘While the fees varied, they averaged $10.67 and most were triggered if customers used less than 1,000 kilowatt-hours of power.’’ Average residential consumption in Texas is about 1,200 kWh per month. Most retailers defend the practice, saying the minimum fees are needed to pay for fixed costs that occur regardless of whether customers use a lot of electricity or very little. Jake Dyer, a consumer advocate with the Texas Coalition for Affordable Power, disagrees. He was quoted in the Chronicle saying, ‘‘You don’t pay a minimum-use fee when you step into a grocery store. You don’t pay a minimum-use fee when you shop for any other product. Most businesses price their product in a way that the people who
April 2015, Vol. 28, Issue 3
actually buy it will pay for their fixed-cost infrastructure.’’ As the preceding explains, the debate about fixed vs. variable fees is controversial, as are the arguments about solar vs. non-solar customers. If solar customers are assessed a penalty or fixed fee because they are buying less from the grid, then consumers with super-efficient appliances, zero net energy (ZNE) homes, or consumers without central air conditioners, or big appliances, or electric vehicles (EVs) should also pay a penalty. One can imagine a utility executive screaming at a frugal prosumer: ‘‘How dare you not use lots of kWhrs when we have invested in this entire expensive infrastructure to serve you?’’ What is a rational way out? Clearly, very few prosumers would wish to go completely off-grid since the costs of enjoying the same level of reliability and service provided by the existing grid is rather high – and do not believe anyone who says otherwise. Until the cost of storage and micro-generation declines to make such options truly affordable, we must find a compromise that allows the centralized and decentralized models not only to co-exist, but to complement each other. Mauricio Gutierrez, COO of NRG Energy, the largest U.S. independent power producer (IPP) and a major player in distributed generation, was quoted in Power Engineering magazine in January saying, ‘‘I think there is a way competitive energy companies and the utility space can work collaboratively,’’ adding, ‘‘I don’t think it’s an either/or.’’ It is of course self-serving for NRG – which has relatively little to lose and a lot to gain from the growth of distributed generation – to say this, yet this editor agrees with its basic premise. The challenge will be getting to that complementary realm.& http://dx.doi.org/10.1016/j.tej.2015.03.011
7