The Grid

I really enjoyed Gretchen Bakke’s The Grid: The Fraying Wires Between Americans and Our Energy Future. The book examines the technological, economic, and regulatory forces that gave us the grid we have today, and provides some ideas on the future, in particular on the debate around centralised vs distributed energy. A few things I learned:

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1. The electric era started off with lots of small private grids, with many commercial organisations and rich individuals all having their own electricity grid. This was partly due to technology (DC limited the size of the grid) and partly due to economics (electricity was a premium product). The outcome was that electricity was only accessible to the wealthy. ??
2. We should thank Nikola Tesla and Samuel Insull for giving us the modern grid. Tesla’s AC made it possible to transmit electricity at high voltage across long distances. Insull established the business model for electric utilities. By aggregating demand from users who consumed electricity at different times of the day, he was able to operate his power plants at a higher utilisation. This lowered costs and made electricity more affordable. In the first twenty years of the twentieth century, Insull reduced the cost of electricity in Chicago by 90% and grew Chicago Edison’s customer base from 5,000 to 200,000. ??
3. The 1930s - 1970s were the golden age of utilities. Insull’s strategy created natural monopolies and the utilities asked regulators to be treated as regulated monopolies. In exchange for protection from competition, utilities agreed to avoid price gouging and kept tariffs reasonable. With regulations in place, utilities benefited from the enormous growth in electricity demand. More households joined the grid and each household bought more appliances to lighten their daily chores. All that utilities had to do was build more power plants and put up wires, and they were guaranteed a decent return on their investment. ??
4. The golden age came to an abrupt end in the 1970s. Almost everyone was on the grid and the demand for appliances began to saturate. The energy crisis also increased the emphasis on energy efficiency. Suddenly, the growth in electricity demand started to slow. At the same time, regulations began to change. The National Energy Act stripped utilities of their monopsony right as electricity buyers and the Energy Policy Act mandated absolute competition in the wholesale power market, with some states going further and stipulating utilities to divest almost all their generation assets. Previously, utilities made money from generating and distributing electricity. Now, they had to buy electricity at market price and only made money on distribution. This created pressure on their profits. ??
5. Utilities responded to the pressure by cutting investment, such as reducing the frequency of tree trimming next to the transmission lines. While this might sound trivial, during hot summer days, it increased the risk of drooping wires causing blackouts and wildfires. Along with vandalism and extreme weather events, America’s grid became increasingly fragile. The number of significant outages in the US climbed from 15 events in 2001 to 307 in 2011. The US had 6 hours of outage per year, compared to 51 minutes in Italy, 16 minutes in South Korea, and 15 minutes in Germany. ??
6. The fragility of the grid pushed users who needed greater reliability, such as hospitals, data centres and the military, to search for alternatives. They invested in microgrids that provided them with backup power in case the main grid went down. For residential customers, cheaper rooftop solar and battery storage enabled more people to produce their own electricity. Many states introduced net metering, which allowed customers to lower their electricity bills by offsetting their electricity consumption with their production. People with rooftop solar still needed the grid, but they ended up with lower bills. This meant that the bills for those without rooftop solar went up, making the economics of rooftop solar even more attractive. Ultimately, the cost of remaining on the grid might become so high that people will buy more storage and go completely off the grid. This could lead to a utility death spiral. ??
7. If that happens, we will return to the old days of electricity where the wealthy have their own private grids, and the less well-offs have to rely on an expensive, unreliable grid or have no electricity whatsoever. To prevent this from happening, we need an economic incentive for distributed assets to remain on the central grid. One option is a virtual power plant (VPP). VPP uses software to stitch together lots of distributed assets (rooftop solar, storage, EVs, demand response) and control them as a single large generator. This large generator, consisting of lots of distributed assets, can bid into the grid to provide flexibility and capacity, allowing the owners to monetise their assets. VPP creates a financial incentive for those with rooftop solar and EVs to remain on the central grid because they can earn money. ??
8. To enable VPP, we need a change in consumer mindset about energy. For a long time, consumers wanted full control of their energy usage. If the weather was cold, they wanted to be able to turn on the heater. If a game was on, they wanted to be able to turn on the TV. They didn't want others to dictate how and when they could use their energy. However, to enable VPP, consumers need to give up some control. For example, they need to give utilities a say on when to charge their EVs. Consumers need to trust their utilities, and this is where most incumbents fail. For ages, utilities paid little regard to customer service because they were the only game in town. And they didn't make sufficient investments in IT and data, which are needed to harness flexibility. This is the Innovator’s Dilemma that incumbent utilities face, and an opportunity for disruption. ??