Electricity Pricing Paradigm Shift
As many of you have already heard me say, we are trying to remake an energy industry in ~ 15 years that had taken nearly 150 years to build in the first place.? With this rapid transition, history no longer accurately guides future energy decisions. Mark and Patti Case taught me early in my career not to use blended rates to evaluate capital energy investments.? They regularly give an poor picture of actual dollar savings.? ??
I now say that you probably shouldn’t use current rates (even unbundled) when evaluating future investments.? I don’t believe that utility companies have rate structures that currently reflect the cost to deliver electricity now.? The vast majority definitely don’t have rate structures that reflect the mix of power that customers will see in 5 to 10 years.
California Recent Changes
Let’s use California over the last 4 years as an example. I have randomly grabbed data for CAISO (definitions at end of article) from a random September day in 2020 and 2024. BTW – the source of this data is a really cool website GridStatus.io (https://www.gridstatus.io/live). This data is available in real time and gives an amazing depiction of how electricity is delivered in multiple locations like in CAISO, ERCOT, PJM, and other ISO's.
These first 2 graphs show the dramatic increase in solar and wind from 2020 to 2024. The 2024 graph also shows batteries delivering 20% of the grid's power in the evening vs negligible amounts in 2020.
For the same days, let’s look at the renewable power as a percentage of load. This goes from ~ 45% during peak hours in 2020 to over 100% in 2024. During the night, this jumps from 20% in 2020 to 35%.
Finally, let’s look at the impact on the prices. The real time prices in 2024 remain < $20/MWH (2 cents/kWH) from around 8 am to 6 pm and actually have times that go negative where a customer will actually get paid to use electricity. In 2020, the prices from 8 am to 6 pm were always $20 to $40/MWH. In 2024, the highest prices occur at night.
Current Electric Rate Realities
Now let’s look at current utility pricing. I grabbed electric rates for a Western Utility company. The rate structure below is indicative of rate structures that I have worked with for the last 20 years throughout the West. As you can see, this pricing doesn’t come close to reflecting the hourly pricing seen above for California. Utilities charge significantly more during the peak solar hours.
Why The Difference?
So what are the drivers behind the discrepancy between historical prices and future prices?
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Is California an Anomaly or the Canary?
I believe California is the canary. They used regulations to mandate renewables. These mandates accelerated California renewable adoptions. Economics are driving the rest of the country. Market drivers have Texas with more installed renewables than California and Texas is expected to surpass California in installed battery capacity in 2025. Solar is clearly the cheapest source of electricity and will just continue to get cheaper. Expect significantly more solar to get installed throughout the country.
Future Pricing Concepts
Let me now walk through a scenario to demonstrate how future electricity prices may look. This scenario is greatly simplified in that it only considers solar power and short duration batteries vs including on and off-shore wind, long duration storage, geothermal power, nuclear power, etc and long duration storage. It also ignore transmission and distribution. The following are the highlights behind these assumptions:
Conclusion
The graph above shows that current rate structures deviate dramatically from future expectations. Renewable power creates great opportunities and risks. Electric users that can adapt to intermittent power sources can significantly reduce their electric rates. However, if they fail to plan appropriately, their costs could increase dramatically.
Electricity users need to focus on flexibility for the future. When and where you purchase electricity will become the driving factor on controlling your energy costs. I covered “when” above by showing that using electricity when the sun is shining will be much cheaper than today’s electricity prices. "Where" comes into play in a couple of manners.
Definitions
Commercial Account Manager, Energy Efficiency
4 个月Great article, Glen! Customers are programmed to think about HOW MUCH energy they use (which is important with most procurement decisions), we need to help them realize the opportunities that exist when they consider WHEN they use energy.
Automation at CCI Mechanical Inc.
4 个月Loved the article Glen. Thank you!
Project Manager Logic - Bernhard
4 个月I think your idea about flexible operations type businesses taking advantage of location benefits is very interesting. This could drive decisions on major construction projects which in turn could incentivize local governments to build additional renewable resources.
Electrifying process and space heating; decarbonizing everything
4 个月No surprise, but we're very aligned in thinking. I'd note a couple things though -- 1) that tariff is nowhere near what CA rates are currently (>40 cents/kWh), reflecting of all the other things that get included in the actual rates paid by consumers. 2) Specifically, CAISO wholesale rates do not include transmission, resource adequacy, transmission, distribution, tree trimming, overhead, rate of return, etc. These costs dwarf the wholesale rates and mute the signals from the wholesale market. Understanding how each of these components is allocated in each ISO/utility is important to understanding the eventual tariff $/kWh (and probably something worth advocating for -- should these be applied evenly per kWh or should they be recovered on peak kWh to make better use of our generation and T&D systems -- my thoughts somewhat implied there). 3) These prices ignore wind, which is generally a better generator in the evenings/winter. We are horribly behind where we need to be on wind generation and there is a lot less of it in the queue than solar. Build more wind! This decreases the need battery storage, though as prices keep dropping, this may be less of an issue than anticipated. Ending novella now, appreciate the content Glen!
Vice President, Business Development at Dalkia Energy Solutions
4 个月Great stuff Glen - retrofit decisions MUST heavily consider a given measures' ability to shift load into favorable pricing windows. Grid interactive buildings in 2025 and beyond without a doubt. This will also help to support further proliferation of MORE solar and so easy given today's connected building environment.