Today’s electricity markets were developed in the preceding decades using prices set by the marginal cost of generation. These markets are not determined by physical laws, but by human constructs and economic principles. As such, we need to question established orthodoxies and design more effective market alternatives by embracing the proactive, innovative nature of programs like the Public Utilities Commission of Ohio’s (PUCO) PowerForward initiative. Market principles have a continuing role to play in these alternative regimes through large-scale procurement of competitive output from renewable energy plants, as well as through energy efficiency, demand-side management, and energy storage. The PJM Interconnection, Ohio’s regional transmission organization, has shown national leadership in this direction, but we need to ensure proper and accurate price signals—that provide the ability to finance and access capital—are part of the alternative delivery package.
A new market model is needed because the current system is flawed. Our current system does not guarantee sufficient price signals to maintain the high availability and capacity required for reliable electric service that we historically have been provided in PJM. It also does not achieve the deep levels of decarbonization required to sustain existing operations, nor maintain competitive market positions in public health, safety and welfare in Ohio. The default position has been the utility rate base choice, but that must change for the state to compete, attract business and foreign investment, maintain its talent base, and participate in the industries of the future.
New market frameworks are central to support projected customer demands and changes from advances in manufacturing, internet technologies, transportation, sales, etc. New markets with stronger and more accurate carbon price signals will incentivize clean energy investment rather than continuing subsidies that promote polluting historical fuels and dated equipment. New market models will also require spending to enhance and digitalize electricity networks to manage localized, multidirectional power flows and ensure resilient, reliable and stable electricity supplies. Electric utilities have generally ignored this opportunity for over a decade. Thus, transmission and distribution (T&D) modernization in Ohio will require increased investment by third parties, better capital access, and joint ventures and alliances with electric utilities to complete the necessary market reforms. While some utilities are selectively adapting operations, regulators must also increase the pace of modernization and provide more room for pilots and demonstration projects that foster third-party innovation.
Escalating shadow costs such as the cost of coal externalities, nuclear plant decommissioning, water and other public health impacts, are not calculated for continued fossil fuel use. Other shadow costs that remain unaddressed in Ohio’s policy discussions include renewables intensity, coal health impacts (air emissions and waste toxics), methane releases, energy-water uses, and nuclear O&M and decommissioning expenses. Moreover, costs of providing system backup power storage are not reflected in the wind and solar levelized cost of energy or in their ultimate market price. There is no free ride ahead and not accounting for shadow costs does the system and the consumer a disservice.
Energy policies are increasingly geared towards expanding renewable energy as an end in itself. Yet the research literature indicates a low-carbon grid with a manageable level of costs will require the blending of nuclear, natural gas with carbon capture, combined heat and power (CHP), or other zero-carbon on-demand sources integrated with more energy storage. Redesigning markets solely to facilitate a very large uptake of renewable energy for its own sake will increasingly become economically challenging and requires more balance to succeed. These efforts could be strengthened by coupling them with goals in carbon reduction, resiliency, system modernization and maintenance of reliability. A stronger system benefits the state’s citizenry and the customers served by its utilities.
The term “smart grid” itself refers to a range of electric grid modernization efforts over the past several years. End-users and vendors seem to focus strongly on issues related to customer choice while electric utilities highlight increased reliability and resilience based upon new transmission investments. The development of a smart grid was established as a national energy policy more than a decade ago by the U.S. Congress in Title XIII of the Energy Independence and Security Act of 2007. State smart grid initiatives must utilize this federal framework that establishes several key criteria:
Increased use of digital information and control technology
- Dynamic optimization of grid operations and resources with “cyber security”
- Deployment and integration of distributed generation, including renewables
- Demand response, demand-side resources, and energy efficiency deployment
- Deployment of smarter technologies for metering, communications and distribution automation based on two-way interactions through technologies
- Integration of smart appliances with consumer devices
- Use and integration of advanced electricity storage, peak shaving technologies including plug-in electric hybrid vehicles and thermal storage air-conditioning
- Timely information and control options to consumers
- Standards for communication, interoperability of appliances and equipment connected to the electricity grid, and
- Identification and reduction of unreasonable and unnecessary barriers to the adoption of smart grid technologies, practices and services.
The federal mandate to the states is clear, but has often been ignored over the past decade. Clearly, Congress has demanded an electric grid future that is more resilient, secure, efficient and reliable to foster new and desirable services through technologies. The corresponding state guidance should focus on removing barriers and impediments to fully achieve these Congressional goals. Any contrary state actions, or inactions, may risk preemption under existing law. Subsequent guidance on standardization has been developed from Engineering Laboratory at the Department of Commerce’s National Institute of Standards and Technology (NIST). NIST seeks a solid framework and roadmap for smart grid interoperability standards and additional R&D support. The Federal Energy Regulatory Commission (FERC) has also provided guidance on such issues as interconnection policies, integration of renewables, demand-side management and energy storage. States ignoring this clear-cut guidance to date operate at continuing peril and are not necessarily regulating in the public interest consistent with existing federal law.
The State of New York has attempted to offer leadership by allowing utilities to earn returns for their shareholders by advancing clean energy solutions rather than only by investing increased capital in the expansion of the greatest T&D capacity. This renders the utility more neutral and a more competitive and balanced player in the marketplace to improve the energy and financial efficiency of the state energy grid. By using more transparent price signals in retail energy markets, utilities will be able to deploy more renewable generation, demand-side management and energy-efficiency projects where they can address grid congestion in high-use areas. All users will benefit as the utility shifts to providing customers with the electric services and characteristics they seek to achieve instead of superimposing what regulators and utilities think they should want. The ratepayers will no longer be merely price takers, but increasingly drive the markets and quality of service through customer choice. Similar regulatory programs are being pursued in Hawaii, California, Massachusetts, Maryland, Texas and Connecticut. New reviews are being launched in Colorado and Illinois.
Ohio also needs an increased focus on measures to prevent blackouts, clear rules on cyber security and improved smart power grids. The role of providers and innovation is indispensable for enabling active consumers and providing them with a new slate of high technology options and increased levels of customer service. This will open up the market to move beyond the inherent limitations of a utility monopoly and the regulatory protections of those monopoly franchises set for markets in the 1930s. Already, generation has been deregulated, stranded costs have been paid, and non-bypassable charges should be deemed anticompetitive. Similar deregulated results have been achieved for independent third-party services by unregulated entities, distribution is increasingly facing deregulation because of the advent of technology choice, and the only vestige of continual need for monopoly services appears at the transmission level within the state.
In conclusion, this market transformation will be alleged to foster a death spiral and reduce profitability. However, such scare tactics are often advanced as a foil to maintain the status quo. Increased choices, diversification and fuel supply focused on the long-term goals of decarbonization offer an opportunity for new business services based on energy solutions: energy storage, electric vehicles and service, energy customer services, steam capture and waste heat service, demand-side management, on-bill cost recovery, new loan financing, water services, enhanced broadband, and more centralized energy management of customer services, equipment and energy controls. Rural solutions will require flexibility to accommodate differences and scale from their urban counterparts.
With such a transformation, communities will be empowered to more closely manage their energy needs, provide better customer service for their citizens, and move to more benign energy choices. Demonstrative pilot program can show the opportunities of the future for enhanced quality of life. Consumption and profits will rise based upon better suites of service choices and smarter operations in an increasingly digitalized world. Energy can become the tool driving urban and rural economic development for all customers.
The competitive future of Ohio, its manufacturing base in the clean tech industry, robust supply chain, retention of its STEM student talents, and human resource attraction hang in the balance for better future energy jobs. A 19th-century fuel orientation will not satisfy the market requirements of the 21st century. Only a smarter grid which fosters the new industry sectors for product design and energy solutions grounded in sustainability will secure our competitive advantage in energy.
CE3 Blog by Michael J. Zimmer, Executive in Residence, Ohio University Voinovich School of Leadership and Public Affairs & Russ College of Engineering and Technology. Edited by Elissa Welch, CE3 Project Manager, Ohio University. May 2017.