Electricity: Our Messy and Vulnerable Power Grids – 4/11/16

In modern times, electricity is a resource almost as essential as water. Everyone uses electricity, everyone will use electricity. So when electric bills climb it can have effects just as serious as rising prices at gas pumps.

U.S. electricity usage is broken down as: commercial use (~33%), residential use (~34%), industrial use (~24%), transportation (<1%), and system losses (~9%). Though oil is the current motive fuel of choice, transportation’s share of total electricity use could rise substantially as electric vehicles like GM’s Bolt and Tesla’s Model 3 ship in the hundreds of thousands from 2017 to 2020, increasing demand for electricity. By extension, natural gas and renewables would also be in higher demand and see additions to capacity at the expense of oil’s and coal’s share of the total energy mix.

electric addons

Increased demand for electricity is important because it would likely translate into higher power costs in the U.S. Since fossil fuel prices are collapsing one might assume rates would fall as well, but utilities have raised monthly bills for residential customers even as the price of electricity fell citing the need to make up for billions of dollars lost on government-mandated infrastructure repair and improvement. For consumers, electricity itself is only about 1/3 of the average utility bill (versus 50% a decade ago) while retail charges for delivering supplies make up over half.

“Thanks to the shale boom and rise in renewable generation, consumers are paying less for the electricity that keeps their lights,” said Matt Mooren, an energy and utility adviser at PA Consulting Group. “For a residential utility rate of 10 cents per kilowatt-hour, electricity itself accounts for about 3 to 4 cents these days. It was closer to 5 or 6 cents in 2008, before the shale boom took hold.”

Though some might blame rising bills on electric company greed, it is more reasonable to consider how companies are expected to offset the costs of disruptive energy sources and aging infrastructure. In response to climate change risks from super storms and other strange weather, utilities are spending billions on improvements to vulnerable systems to sooth fears raised in the wake of New York and Washington disasters. An unintended consequence of privatization of utilities, under-investment in power grid infrastructure is finally catching up with companies further hurting bottom lines as they play catch-up.

Furthermore, intermittent, renewable energy resources are partly to blame for the rising delivery costs since distributed energy sources like roof-top solar often require digital sensors, meters and secondary power lines. Unconventional energy brings a host of risks to utilities unused to major changes. Negative energy prices – when prices are forced below zero due to oversupply – when renewable energy supplies surge is occurring more than ever in markets from California to Texas thanks to solar and wind farms respectively.

by state

Nuclear plants and coal- and natural gas-fired units are expensive to restart so sudden jumps in output from wind and solar farms forcing supply and demand out of sync mean prices have to fall below zero to force generators offline. And price plunges are becoming more common, squeezing the profits of traditional power generators.

Thankfully, solar and wind energy generation is very much correlated with the rise and fall of the sun; they produce more as the sun reaches its zenith putting the sunlight and temperature differences fueling renewables on a reasonably predictable schedule. “Negative pricing may become so predictable in California that the state’s utilities may eventually be able to encourage consumers to use power during the hours it occurs,” California Public Utilities Commissioner Carla Peterman said in an interview at the Bloomberg New Energy Finance Summit “We have some predictability about that — forecasts are getting better,” she said. “So why not encourage people to use power when it’s cheaper with negative prices?”

Selling electricity across state lines could be the solution to many of the excess capacity problems. Texas’s wind power boom was driven in part by policies that led to a massive high-voltage transmission lines project meant to carry wind power out of the windy Plains region covering West Texas. On March 23, wind accounted for almost half of the state’s total supply, the highest ever, according to the state’s grid operator. Policy makers in the state are now consider incentives just to keep conventional plants running.

Investors are already looking to solve power grid woes through creative restructuring and consolidation. For example, Berkshire Hathaway Inc.’s energy unit is in talks with dozens of power transmission operators in the western U.S. aimed at bringing them together with the California grid in trading power electronically and instantaneously. If successful, the so-called Energy Imbalance Market would allow automatic purchase and sale of renewables. Cutting out human initiated scheduling would supposedly be much better suited to the variable nature of renewable energy supply, trading electricity at five-minute intervals instead of hourly and making renewable power available more widely to consumers in the West.

With open transmission lines, renewables could sell anywhere without causing the headaches of negative prices. The problem is that the U.S. has a jigsaw of regulatory policies across states compounding issues associated with a decentralized grid separated into a few large regional networks.

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