March 28, 2024

The Grid Transformation Forum: Envisioning the 21st Century Grid
Electric Utility Companies Natural Deregulation… Is it around the corner?

by Nicholas Abi-Samra, DNV GL, Senior VP, Electricity Transmission and Distribution, Energy Advisory
We are in conversation with Nicholas Abi-Samra, Senior Vice President, Electricity Transmission and Distribution, Energy Advisory for DNV GL.

EET&D : What do you see changing in the electric utility model?

Abi-Samra : For decades, the electric utility business model in the U.S., with its trillion dollar assets, has been organized on the principles of centrally controlled generation and variable consumption. It has delivered just what is needed in electricity, not less (for fear of reliability dings from regulators) and definitely not more (as there was nowhere to store it). Generation was mostly delivered from coal or nuclear plants, with its product still treated mostly like a public service rather than a consumer product.

Well, today, this model is coming increasingly under pressure from the convergence of flattening electricity demand, growth of green energy, cheap natural gas, distributed energy resources (DER) technologies, and microgrids. Microgrids came to the spotlight last year after Superstorm Sandy as key components for grid resiliency. This attractive trait came on the heels of an accelerating interest in customer-owned distributed generation for active participation in markets or enhanced reliability and dropping prices of alternative energy resources.

Pressures on the grid come from within, and result from rapidly growing requirements for infrastructure investment due to the aged infrastructure, general upkeep and, reliability upgrades, all of which are creating the need for unprecedented capital investment. Add to that the demands for hardening of the system, which came to the center stage after widespread long outages following 2011’s winter storms, the 2012’s Derecho in the metropolitan Washington DC area, and of course Superstorm Sandy. All these investments raise the price of delivery for power, which stretches the ability to recover necessary rates to support costs and shareholder returns. We just witnessed in July 2013 a credit rating downgrade of a major utility, due the large amounts of planned spending to address reliability challenges. A decrease in the credit rating would make capital more expensive for utilities to build and maintain the system, lower shareholder return, and result in higher electricity rates.

If these trends were to continue, albeit even gradually, we will be looking at the makings of a paradigm shift of the aforementioned utility business model. This could spell the era of “natural deregulation” of the present electric utility model, and the morphing into a new model based on more DER, microgrids, or virtual power plants (VPPs).

EET&D : We are hearing about an emergence of a decentralized model for the grid, what are advantages of such a model?

Abi-Samra : Well, a decentralized model, though not necessarily the panacea at least in the near future, can offer more sustainability, that is higher throughput efficiency. The centralized grid model of generation and power distribution model could have efficiencies as low as 35 to 40 percent, due to the inherent losses in the thermal cycles of conventional fossil fuel generation, and the losses in the transmission and distribution systems. On the other hand, microgrids consisting of efficient generation close the load, combine heat and power (CHP) technologies, and could be 85 percent efficient. That would also translate into a reduction of greenhouse gases (GHGs).

On the reliability front, today’s centralized grid has long been susceptible to cascading effects from sometimes relatively minor events. Microgrids can act as “firewalls” offering enhanced reliability. The extra security and independence from potential grid interruptions are important especially for critical applications, such as hospitals and military bases.

EET&D : How will the smart grid facilitate this?

Abi-Samra : The convergence of smart technologies (i.e., automation, intelligence, sustainability, demand response, and storage) occurs only in one small-scale application: the microgrid. A microgrid integrates DER, storage devices, end-use loads into a single, “mini” grid which can operate in parallel with the traditional grid or in isolation from it. These technologies are currently struggling to withstand both technological and economic pressures in the larger grid.

EET&D : What impediments do you see standing in the way of making this a reality today?

Abi-Samra : On the perceived challenges, microgrids lack the economies of scale inherent in a centralized approach. Utilities can be reluctant to endorse microgrids, except in special cases, as they erode revenue generation. They also site valid safety concerns associated with microgrids with respect to utility workers, unintentional islanding, and protection issues. Another point of concern is the lack of established comprehensive standards for microgrids.

EET&D : What does the future hold for microgrids?

Abi-Samra : Microgrid deployments are expected to increase significantly over the next five years – especially in mission-critical operations, such as in hospitals and military bases. It is also expected that the present deployments and pilots, as well as the demand in rapidly developing countries and rural communities, will increasingly push the larger-scale adoption of microgrids. This is further reinforced by the fact that the developing world will not be able to sustain its economic growth if it tries to build solely on centralized electrical systems.

Because microgrids can serve non-utility sponsors, it would appear to challenge the traditional utility interest. However, microgrids can serve both the utility and the sponsor. Utility-controlled microgrids can take advantage of the islanding features of the microgrids, which will reduce load on a stressed grid and/or defer capital investment in capacity or to meet load growth. Thus, microgrid benefits can include meeting peak load constraints and load shifting. The ability of the microgrid to defer capital investment in infrastructure acts as an alternative to more capital-intensive infrastructure projects to handle load growth, optimize the supply-load mix on specific parts of the overall grid, or provide some ancillary services (such as frequency regulation) that can be monetized.

Microgrids can also allow the utility to optimize its available resources, while maximizing the use of renewable energy, limiting GHG, and still meeting load requirements. This approach is being explored in California. It is meeting the renewables targets and the aggressive mandates to limit GHG, which are driving the European Union (EU) to see the most near-term growth in microgrids. However, this could be at risk if the EU backs off its environmental mandates for economic reasons. In New York, in contrast, the non-utility potential microgrid sponsors are looking at microgrids to boost system resiliency in the wake of storms, such as Superstorm Sandy. However, with no in-place policy drivers, the challenge for utilities is to develop a positive business case for microgrids remains real, but is not always insurmountable, especially when some factors such as those detailed earlier in this article are met.

On the other hand, the present low cost of gas has a positive effect on a number of business cases for microgrids, which have a large percentage of conventional sources, rather than renewables sources. That may also propel some other aspects of the microgrid, such as combined heat and power (CHP) natural-gas-fueled projects. Policy drivers, if they become a reality in the USA, may be fragmented given that there are over 50 state-level public utility commissions to navigate and from which to gain approvals. Developers of microgrids face some different regulations based on the state they are in as the concept and definition of a microgrid does not exist nor is recognized in many states, and thus the microgrid may fall under some regulations intended for other concepts. It may, in some cases, be classified as a public distribution, and in other places may fall under the regulations developed to regulate steam heating utilities if it has thermal storage. If it has components that cross public roads, then it may fall under regulations and transmission and distribution (T&D) cost allocations or may be required to obtain a municipality franchise or be obligated to serve as provider of last resort.

The coordination of several microgrids and the operation of virtual power plants may ultimately mimic the full functionalities of central power plants. This would allow DER to take the responsibility for the delivery of energy services in conjunction with, and perhaps taking over the role of, utility central generation.

As the drop in price from distributed rooftop solar falls below the price of delivered power from some of the grid (the actual cost without subsidies has reached parity with the delivered price of electricity without subsidies), so does the demand from the grid. This could require a higher cost per kWh of power delivered, which in turn makes distributed options more competitive. This can be expected to be a reality in the next ten years, or even sooner in some places in the United States (U.S.) Their use can be further propelled by the development of cost-effective, scalable, technological breakthroughs in battery energy storage technology.

A perfect storm for the regulated utilities may brew if the assumption of relatively low cost of borrowing begins to get questioned based on the need for significant investments in dealing with aging assets and/or hardening the system against extreme weather at the same time that technologies erode power demand. Shares of utility companies have been a mainstay of conservative portfolios everywhere for generations. For risk-averse investors, utility stocks have offered reliable income, price stability, and minimal risk – a foundation that may be in peril.

In conclusion, it can be assumed that the future U.S. power grid may look quite different than we know it today – and utilities and regulators alike should get ready for it now. It is not hard to envision a grid that can ultimately be split into a controlled set of independently survivable islands, and then stitched back together as needed to create a balanced network of supply and demand. Sailing into these unchartered waters means that it is time to re-examine the strategic vision and innovation by electric utilities as their existence may be in the balance.

EET&D : We can’t thank you enough Nicholas for finding the time to speak with us about the future of the grid and what we may expect going forward. It’s highly topical and your in-depth explanation is very enlightening particularly on the emergence of a decentralized model and the future of microgrids.


About the author

Nicholas Abi-Samra, DNV GL, Senior Vice President, Electricity Transmission and Distribution, Energy Advisory, is experienced in power systems, planning, operations, maintenance and smart grid. Abi-Samra served as the General Chair and Technical Program Coordinator for the IEEE General Meeting of 2012. He is a professional engineer.