The electrical grid is changing. While at one time those interwoven lines and poles carrying power from electricity generators to you only flowed in one direction, that isn’t always the case anymore. Traditionally someone—usually far outside of your city — ran coal-powered power plants that sent electricity into cities. Today, we have a variety of technologies powering the grid and products consumers use to understand their energy use.
There’s a major unanswered question, however: Will utilities be ready for these changes in how electricity is being produced, distributed, and consumed? Current policies aren’t well-suited for the new grid. After all, those policies were designed for a fundamentally different world. This changing world demands an update to both policies and ways of thinking about the way electricity is delivered to our homes and businesses.There’s a major unanswered question, however: Will utilities be ready for these changes in how electricity is being produced, distributed, and consumed? Current policies aren’t well-suited for the new grid. After all, those policies were designed for a fundamentally different world. This changing world demands an update to both policies and ways of thinking about the way electricity is delivered to our homes and businesses.
Let’s start with the emergence of rooftop solar. A once one-way system now moves power in two directions. Consumers who invest in their own solar panels play both roles as producers and consumers. In the best cases, this means that utilities don’t have to invest in upgrading transmission lines because rooftop solar alleviates bottlenecks where transmission lines can’t otherwise move enough electricity to consumers.
Consumers also know much more about their electrical systems and use than before. With smart thermostats and monitoring systems, people can better control their heat and cooling systems. For example, the Nest Learning Thermostat lauds itself as being able to both program itself and pay for itself. It first gleans from your habits when to turn the temperature up and down because you’re sleeping or gone away to work, and then you collect savings from lower energy use. It even tracks your energy usage over time so that you can cut consumption. Other new technologies, like Sense, allow consumers to see what is on at any time in their homes and identify how much those appliances or lights are using. That means consumers can decide to replace appliances or lights that are energy-hogs for less costly versions.
The power sources behind the grid are also changing. And they’re predicted to keep changing. Consider this graphic from the US Energy Information Administration’s (EIA) 2019 Annual Energy Outlook. Coal has plummeted and been replaced with natural gas.
That’s a good thing for not just the environment immediately, as natural gas is cleaner than coal, but in the long-run as well. Because natural gas is much better at cycling to meet the needs of variable energy sources, it may be an effective bridge fuel to larger variable renewable energy integration. The EIA’s graphic shows that story playing out as natural gas and renewables rise in their projections.
The same story of natural gas backing a grid with more variable renewables is also obvious from the planned installation patterns of additional electricity generators. Where there are more variable and non-dispatchable energy sources, like wind and solar, there’s also likely to be more installations of natural gas as a backup and standby in case the wind stops or clouds blot out the sun. Several years ago researchers documented this relationship between natural gas and variable renewables at an international level, so this isn’t a change specific to the United States.
The rising share of renewables like wind and solar presents some technical challenges for running the electrical grid. That’s because they’re intermittent sources. Wind and solar can’t be turned up and down as needed. They stand in contrast to natural gas, coal, and other sources that can be ramped up and down as needed to meet changes in demand. Wind and solar also differ in that they are dependent on the weather. Plants that can respond easily to changes in demand are called dispatchable. Grid operators can ask those generators to begin generating (dispatching) additional energy onto the grid depending on the demands the grid sees at that time.
This difference between solar and wind resources and dispatchable sources matters for how utilities operate. Grid operators have to balance energy supply with energy demand. Failing to do so results in outages and unhappy customers.
The commonly suggested solution to this intermittence is battery storage. Economical battery storage may be on the way, or it may not be. In either case, it’s not here in a cost-effective form now so these are real challenges for today’s grid operators.
But there’s a better solution, one that will allow the entrance of batteries into the market once they arrive, and that lies in updating electricity rate design.
Although the electrical grid is made up of wires, it’s often more informative to think about them as pipes like those that move water and sewage. After all, the wires above us are doing the same thing as the pipes below us in carrying something to and from our homes. It’s important because, just like water systems can get backed up during heavy rain or flood, the electrical lines also have a certain capacity. They can only move so much electricity at a time before they fail.
Just as you walk by a clogged drain on the side of the street, some of the electrical lines are “clogged” as well. In some areas, there’s a lot of demand for electricity and not enough capacity in the line to move it. That can make electricity in some areas harder to deliver, which makes it more difficult and more costly for utilities to serve customers on the other side of that line.
In the past, utilities would have to update and replace the transmission line or build more generating facilities to resolve these problems. But today, people are installing rooftop solar which can alleviate some of that clog. It does that in two ways. First, it decreases the demand for energy by the consumer who installs solar panels. They’re now generating their own power and so the electricity that they would have consumed can go to other homes. Second, in some cases, rooftop solar also feeds power onto the grid meaning it can bypass the congested transmission lines and provide power to neighbors or others along those otherwise congested lines.
This potential to ease congestion drives much of the interest in rooftop solar and other distributed generation technologies. Yet that potential is not the same everywhere or at all times. Go back to the water system analogy. If the north side of a street has flood water rising out of the gutter because of a clog at the end of the street, expanding the south side’s gutters won’t do anything to fix the problem.
Unfortunately, public policies for rooftop solar have too often done the equivalent of expanding services on the wrong side of the street. Public funds have been spent on rooftop solar installations regardless of their actual environmental effects or their actual potential to reduce strain on the existing electrical grid.
A 2018 working paper by four energy economists finds exactly this phenomena. Because incentives are given to applicants regardless of the environmental effects they have, the current policy actually overpays many installations that do the equivalent of clearing the gutter on the already uncluttered side of the street. The inverse is also true, today’s policies underpay installations that would effectively clear congestion or clean up the environment.
The authors of the paper come to a gloomy conclusion that, “Subsidy levels are essentially uncorrelated with environmental benefits contributing to installed capacity that sacrifices approximately $1 billion per year in environmental benefits.” These findings aren’t terribly uncommon. A published paper from 2017 found similar results that 90% of the investments in rooftop solar had not been worthwhile in providing environmental benefits that exceeded the public cost to support their installations.
Though giving up a billion dollars worth of environmental benefits is certainly depressing, policies were designed that way for simplicity and because of technological constraints. How can policymakers ever know where and what the value of each solar installation is going to be? It’s a hard question demanding a rigorous answer that doesn’t just vary by season, but by day and even by the hour.
Despite the complexity of the problem, there’s actually a relatively easy solution. Update electricity rates. The way you likely pay for electricity is probably based on how much you use along with a small fixed fee. That is, you likely pay a constant per kilowatt-hour charge, one that doesn’t change regardless of whether the transmission lines are congested or wide open. In the past, this was largely a technical necessity. Meters that could record hour-by-hour consumption and not just tick up to the total used are newly emerging into wider use, as are smart thermometers.
So what should utilities and policymakers do to encourage the adoption of rooftop solar in places that will provide a benefit to the system as a whole? They should create a rate system that charges people based on the time they’re using electricity and the strain that it’s creating on the wider grid.
The value of electricity consumers use fluctuates by the hour and place. That means updating rate design must grapple with exactly those two factors.
Updating rates to reflect the actual cost for the utility to serve that consumer should be the first step for policymakers. Some places have already begun incorporating time-of-use policies. For example, in 2018, Fort Collins, Colorado moved to time-of-use plans that vary the cost of electricity based on the time of day when a consumer uses electricity. There are times of the day where electricity costs much more, called “peak demand” because more consumers need and use electricity at those times.
The next step should be incorporating the locational value and cost of each kilowatt. Research by Stanford’s energy economist Frank Wolak looks at this kind of locational pricing. His paper is aptly titled, “Efficient Pricing: The Key to Unlocking Radical Innovation in the Electricity Sector”. Dr. Wolak’s point is that current rate design policies provide no incentive for consumers and prospective rooftop solar customers to determine if they are on the clogged side of the street or the unclogged side of the street. Yet this is vitally important for whether or not public support for rooftop solar installations actually boosts public welfare by ameliorating the strain from the electrical system.
Grid operators often already know where those congested lines are located in their systems. For example, during 2015 in the PJM Interconnection, an organization operating the electrical grid in the Eastern United States, some locations had marginal costs as much as 10 times that of the average area. In PJM’s case, that meant that although the average cost per megawatt-hour for most electricity was between $21 and $40, a subset of locations paid more than $100 per megawatt-hour. Consumers wouldn’t know that electricity generation prices vary, however, as all of that is hidden behind a screen of regulated prices and happens in the wholesale electricity markets. Opening up that information to consumers creates opportunities to conserve energy for both environmental and financial reasons.
Fundamentally, Dr. Wolak’s point is that getting the prices right is important for incentivizing innovation to bring the costs of the entire system down. In fact, the entire point of updating rate design is about getting prices right. In doing so, the costs of electrical service will fall and greater environmental benefits can be captured. It will also prepare the wider grid for more innovative ideas to cut costs and revolutionize the energy system.
CGO scholars and fellows frequently comment on a variety of topics for the popular press. The views expressed therein are those of the authors and do not necessarily reflect the views of the Center for Growth and Opportunity or the views of Utah State University.