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Facilitating Distributed Energy Resources Requires Policy Actions

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Distributed energy resources can provide key opportunities that would empower India’s retail customers to improve system efficiency, lower costs, and reduce emissions. In the first part of our DER series, we laid out the arguments for how deploying distributed energy resources (DER) in scale provides a key opportunity to empower customers.

DERs include elements such as energy efficiency, demand response, storage resources, distributed generation closer to load (such as rooftop solar), and more. DERs help customers modify their electric usage in ways that will save them money, offer reliability products to electric wholesale system operators and discoms to increase reliability and efficiency of the system, and help reduce emissions. The promotion of DERs, however, requires affirmative action by utility regulators and policy makers.

In the second part our series, we outline policies that will facilitate the entry of DER providers.

Five key actions for activating household demand-side flexibility

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Securing a clean, efficient and affordable power system is a complex undertaking in the best of times. The current energy crisis, however, has compounded the challenge with a cost-of-living crisis, the need to free Europe from its dependency on Russian fossil gas, and the ever-present spectre of climate change. A seemingly insurmountable task begs all available resources. One of the most powerful — and often undervalued — solutions is household demand-side flexibility.

Empowering and rewarding consumers who are able to shift how and when they use electricity is a vital power system resource. Demand-side flexibility contributes to a reliable and decarbonised power system while reducing costs, a critical outcome for low-income and disadvantaged households.

On 28 September, the Electrification Academy was pleased to welcome Sophie Yule-Bennett to unpack the insight and recommendations from RAP’s 2022 study The joy of flex: Embracing household demand-side flexibility as a power system resource for Europe. She explored:

  • The benefits of demand-side flexibility: sustainability, reliability, equity and affordability.
  • Barriers to flexibility as a resource.
  • Five key actions for activating household demand-side flexibility.

Modernizing Gas Utility Planning: New Approaches for New Challenges

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Significant new uncertainties and options for the gas industry are creating new challenges for regulators who are responsible for ensuring that utility investments are in the public interest.

Many of the unknowns relate to the potential for customers to switch from gas to electricity for heating and other uses and the potential for utilities to replace fossil methane with alternative gases. Gas customers could face higher costs if their numbers decline in favor of electrification or if investments in alternative gases far exceed current resource costs.

Yet current typical tools and processes for regulating gas distribution utilities do not give regulators complete information on which to make decisions about long-term utility investments in this context.

Commissions across the country are recognizing the need to review and update their planning approaches. This paper surveys current efforts to modernize gas utility planning and draws lessons for those considering similar work. At the heart of the paper are five principles for redesigning planning to restore confidence that utility investments will be in the public interest:

  1. Build equity into planning so decisions are made with equitable service and distribution of costs and benefits in mind.
  2. Consider an expanded range of investment and resource options.
  3. Establish integrated gas planning by combining integrated resource planning practices with gas distribution system planning.
  4. Use combined energy planning to take the broadest possible view of emissions reduction opportunities.
  5. Foster collaboration with state agencies that have expertise in emissions reduction.

The clash with gas: Should it stay or should it go?

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Europe’s stated goal of achieving a net-zero power system by 2050 is inherently replete with enormous opportunities and challenges. High energy prices and Russia’s invasion of Ukraine have now ratcheted up the urgent need for action to emergency levels. Policymakers are facing the challenge of a lifetime to secure the supply of energy and protect disadvantaged consumers while maintaining momentum towards long-term climate goals. The events of 2022 have made evident to many experts that the transition away from fossil gas will figure prominently in all of these objectives.

To support policymakers and the numerous stakeholders in planning for a deliberate reduction in the use of fossil gas in the coming years, RAP has developed five fundamental guiding principles. The principles are general in nature due to the breadth of this gas transition and the various policy instruments that governments will need to reform such a large part of our energy economy. In light of the current crises, the authors have also applied these best practices specifically to the European Commission’s proposed Hydrogen and Decarbonised Gas Market package and Hydrogen Strategy, as well as to the hydrogen strategies of selected Member States.

To achieve an efficient and cost-effective transition away from fossil gas, we offer policymakers the following recommendations:

Graphic with five principles for transitioning away from fossil gas

 

Empowering Retail Customers: Improve Efficiency, Lower Costs and Reduce Emissions

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As a tool in combating greenhouse gas emissions, India is aggressively adding renewable energy resources to its electric system resource mix to displace fossil fuel and meet future electric load growth. Much of this is being accomplished using competitive procurement processes and private capital for investment needs. At the same time the country is also rapidly implementing wholesale competitive electric markets to improve the efficiency of the electric system.

Deploying Distributed Energy Resources (DER) in scale provides another key opportunity to improve electric system efficiency and combat emissions. DERs empower customers to modify their electricity usage and help reduce emissions, as well as offer reliability products to electric system operators. The promotion of DERs, however, requires action by utility regulators and policy makers. There is a real need to allow private sector participants to assist customers and bring private capital in implementing DERs. Applying advanced metering, while not mandatory, would also be very helpful to facilitate full utilization of DERs. Advanced metering and sophisticated tariffs would allow customers to react to granular wholesale granular price signals, help reduce distribution utility operating and capital costs, and improve efficiency and system reliability.

This paper will be the first in a series about the benefits of DER. The first part describes the benefits of deploying DER and advanced metering for customers and the electric system, discusses different business models that can be used, and recommends key actions regulators and policy makers must take.

Future papers will delve into more detail on the specific regulatory actions that would be required to:

  • allow customers to participate in DER programs;
  • motivate utilities to actively facilitate and promote DERs; and
  • facilitate the entry of DER providers that would allow them to deploy their technical expertise and private capital in the space.

An Escape from the “Jaws of Delusion”: Planning for the End of Cheap Gas

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In 2013, Marty Kushler, senior fellow at the American Council for an Energy-Efficient Economy (ACEEE), gave a presentation in Chicago on gas efficiency programs. He argued that one should not make decisions about programs with lengthy multi-year effects based on the record-low spot market prices for domestic natural gas.  Gas at that time was $2 per thousand cubic feet (Mcf), due in large part to shale gas production from early high-production sites, price support of dry gas from high wet gas and liquids prices, and natural gas energy efficiency programs.

Although in the late 1990s and early 2000s international prices — illustrated below by Russian gas prices and Indonesian liquefied natural gas (LNG) prices — tracked U.S. prices closely, in 2009 domestic and international prices diverged. In October 2013, when European gas was about $11 per million British thermal units (MMBtu) and Asian gas was roughly $16, U.S. prices were a little below $4.

As illustrated below, Kushler referred to this gap as the “Jaws of Delusion” — the delusion being that the United States would continue living with very cheap natural gas while the rest of the world pays three to four times the price.

U.S. vs. Global Fossil Gas Prices (1995-2011)

U.S. vs. Global Fossil Gas Prices (1995-2011)

Spring 2022: Prices Surge

Fast forward a decade to 2022. In April, U.S. natural gas prices reached their highest level in more than 13 years — a surge due in part to Russia’s invasion of Ukraine. In May, the Financial Times reported that Henry Hub natural gas benchmark reached a price ($8.41 per MMBtu) more than double the price at the start of the year and nearly three times the roughly $3 per MMBtu average of the prior 10 years. In June, the American Gas Association reported that prompt-month futures at the Henry Hub reached $9.32 per MMBtu, noting that “Henry Hub had not seen such prices for prompt-month futures in over a decade.”

Despite this surge, these domestic prices are still far below those in Europe and Asia: $37 and $23 MMBtu respectively. But could that be about to change?

The United States started to export LNG from the lower 48 states in early 2016. We became a net exporter a year later. In 2019, we became the world’s third largest LNG exporter, behind Australia and Qatar. And once new LNG liquefaction units in Louisiana — Train 6 at Sabine Pass and Calcasieu Pass LNG export facilities — are placed in service by the end of 2022, the US will become the world leader in LNG export capacity.

U.S. Quarterly LNG Peak Export Capacity (2016-2022)

U.S. Quarterly LNG Peak Export Capacity (2016-2022)

Summer 2022: Why We Need a Plan

So was Marty Kushler mistaken? Not about planning.

Planning programs with lengthy multi-year effects based on spot market commodity prices — even with 2013’s record-low US spot market domestic gas prices — would have been a mistake. When he made his point, gas was $2 per Mcf. Two years later it was twice that. And today, 10 years later, prices are three or four times that.

Gas prices are not only uncertain, but that uncertainty is not “symmetrical.” History, Kushler argued, has shown that there is greater risk of prices increasing.

Nor was he wrong about what he called the “largest factor affecting cost not being taken seriously,” namely the potential effects of global gas prices on the U.S. domestic market. In 2013, when Kushler made his remarks, Russia hadn’t invaded Ukraine; U.S. LNG export capacity wasn’t about to dominate the world market; nor was there the ravenous worldwide demand for LNG that we have today.

In a little over six years we’ve gone from being LNG importers to the doorstep of becoming the world’s leading LNG exporter. How can international demand for our domestic commodity not affect its value, especially given current conditions and winter on the way?

In June we had a clear demonstration as to the effects that international demand for LNG will have on the prices that Americans will be paying for gas. There was a fire at the Freeport LNG plant in Texas, our nation’s second largest LNG export facility. The accident and the resulting outage produced a sharp reduction in export demand for domestic gas, producing a 40% reduction in U.S. domestic prices through early July. So, what will happen when Freeport comes back online, and the U.S. domestic market begins feeling the demand pulling in the other direction?

The Jaws of Delusion: The Summer 2022 Blockbuster We All Want to Miss

In “Jaws,” Roy Scheider’s character who had just been face to face with the great white shark tells Captain Quint, “you’re going to need a bigger boat.” That might have solved their problem. But a bigger boat is not going to help with the Jaws of Delusion.  We are already in a big boat — the global market for gas. That‘s the point: How can U.S. consumers escape the effects of international demand for our gas?

There are steps that regulators can take, given this looming uncertainty for domestic gas prices. How about starting with the one implied by Marty Kushler a decade ago: Let’s stop relying on one resource, and instead, diversify to reduce the exposure of utility customers to the uncertain prices and volatility of gas. This, of course means enabling alternatives:

  • Building weatherization, for example, continues to provide significant savings for consumers. It also puts Americans to work in our communities and keeps energy investment dollars local.
  • Electrification for cooling and heating is another alternative. Despite electricity prices, heat pumps and heat pump water heaters are three times more efficient than other gas end uses. This is one of the reasons that in late 2021, the U.S. Environmental Protection Agency decided to suspend ENERGY STAR Most Efficient recognition of gas appliances. Making efficiency available to consumers in the form of better building envelopes and appliances means making savings available.

This is a good time for utility regulators to reconsider the wisdom of allowing subsidies for gas system buildouts. Given what we know, does it still make sense to encourage gas system expansion? If electric options are cheaper and economically more attractive for consumers, why continue to put more pipe in the ground?

There are other steps that regulators and policymakers can take to protect their citizens’ exposure to gas prices, for example, coordinating planning assumptions around gas and electricity. Instead of letting gas and electricity utilities separately model the future, explore their use of common assumptions in order to be able to make apples to apples comparisons with the resources each provides.

To help incorporate voices from underserved and overburdened communities, states should remember to undertake planning in ways that engage the public to better ensure realistic assessments of the least risky options to heat and cool homes, especially homes of energy burdened Americans.

Today, more than any time in our recent history, energy security is a global challenge. Ironically, many of the solutions to this challenge can start at home. In fact, with the help of utility regulators, they can start in people’s homes.

Understanding the Western Grid: Building a Renewable-Ready Western Grid

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​In a presentation for the National Caucus of Environmental Legislators, Dr. Carl Linvill discussed the economic and decarbonization benefits resulting from regional collaboration on transmission projects, as well as the role legislators can play in paving the way.

FERC Transmission: The Highest-Yield Reforms

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Most of America’s transmission grid was built in the 20th century to serve central power stations burning coal, oil, more recently, fossil gas, and nuclear stations.  In a world where solar and wind energy are now less expensive than fossil-fuel generated energy — and much less expensive with the costs of pollution are considered — it is indisputable that this old transmission system requires a major overhaul. Order 1000, issued by the Federal Energy Regulatory Commission (FERC) in 2011, lowered some barriers to competition, but regional transmission organizations have by and large not aligned their transmission planning and funding with state policies and objectives. A broader, more interregional approach to transmission is also needed to make the grid more flexible and reliable. And the rapid development of offshore wind requires better transmission planning in order to avoid capacity constraints and unnecessary costs.

In this brief, the authors consider FERC’s current efforts to reform interconnection and transmission planning and ask the question: What is the best focus for reform of federal regulation of this complex and disparate set of transmission grids across the United States? The brief answers this question in five parts:

  • What FERC did think about: interconnection;
  • What FERC should be thinking about: competition;
  • What else FERC should be thinking about: integrating offshore wind transmission efficiently and reliably;
  • What FERC can do to drive effective implementation: oversight; and
  • What FERC knows: To be effective, standards need to be mandatory for RTOs and transmission organizations.

Revitalising EU-Ukraine cross-border infrastructure for a secure, clean energy future

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The Russian invasion of Ukraine is having a significant impact on the Ukrainian power sector. In recent years, the sector had started moving towards greater integration with the European Union and was making inroads into the shift to renewable energy sources.

The current situation is very challenging; not only is it slowing the nation’s energy transition, but it is also disrupting past achievements. Burgeoning renewable energy sources are being curtailed or shut down at unprecedented rates. This downturn results from the destructive effects of the war, coupled with inflexible generation sources.

One way to rectify this imbalance would be to maximise the current potential for interconnectivity between Ukraine and the EU. This, in turn, would allow the country to work towards three goals simultaneously. The increases in commercial energy flows can contribute to: increasing energy security, providing funds for continuing operation and reconstruction, and allowing for greater integration of renewables, thus achieving decarbonisation objectives faster.

While there are technical and legal requirements which must be fulfilled in order to expand Ukraine’s connectivity with the EU, decision-makers can maximise the value of the process by:

  • Implementing transparent, market-based instruments for cross-border capacity allocation.
  • Ensuring solutions benefit all customers and do not only serve individual vested interests.
  • Laying out a roadmap for long-term structural reform of the Ukrainian energy system. Ideally, it focuses on ensuring energy security and advancing European and Ukrainian decarbonisation goals.

House power: the hidden powerhouse of the new energy landscape

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Raoul Dufy’s 1937 fresco La Fée Électricité — an arresting 600 square metre tribute to “the great adventure of electricity” — depicts science and technology leaps such as Faraday’s discovery of electromagnetic induction, Gramme’s direct current dynamo, Baudot’s telegraph, and Edison’s incandescent light bulb. These developments changed the world in ways that were previously unfathomable.

Tackling the climate crisis while mitigating the impacts of the war in Ukraine and skyrocketing energy prices will require Europe’s policymakers to champion a new class of energy pioneers in the months and years ahead: households.

A spectrum of challenges

Europe faces a step-change within a step-change. Securing a clean, affordable and reliable energy system is no longer a case of moving fast without breaking things. We must now accelerate while fixing things.

This means ramping up green generation at an unprecedented scale and pace, shunning imported gas without over-relying on expensive alternatives — such as hydrogen in its rainbow of varieties — or relapsing on brown fuels. We also need to secure energy supply, ensure grid reliability and help families and businesses stay out of the red.

No matter how many supply-side resources we pour into the mix, the perfect blend will elude us until we stop treating demand-side flexibility as a final flourish of glitter.

In fact, it is more like the primer — often unseen but foundational to reliability, managing price volatility, enhancing grid performance, efficiently integrating renewables, facilitating newly electrified technologies and reducing cost. Flexibility adds adhesion and endurance to the core principles of energy policy.

Demand-side flexibility binds energy, climate and social objectives together.

graphic depicting how demand-side flexibility addresses reliability equity and sustainability of energy supply

Putting households in the frame

Demand-side flexibility means energy users changing how and when they use electricity in return for financial reward. They offer flexibility by drawing power from the grid at different times and by utilising energy efficiency, onsite generation and onsite storage, including electric vehicle batteries.

We need lots of flexibility and we need it now. The IEA estimates that, to reach net-zero emissions by 2050, a ten-fold increase of demand-side resources is required worldwide by 2030, compared with 2020 levels.

Industrial response receives most of the policy attention on the demand side, which is still only a fraction of that dedicated to supply-side resources. However, European Commission analysis concluded that the greatest potential for additional customer flexibility in 2030 actually lies within homes.

This is due to the, as yet untapped nature of this sector, plus projected electrification and digitalisation of buildings and vehicles. The proportions in the graph below are striking—even though the capacity levels themselves are likely to be a significant underestimate, given the fast-paced technology and market evolution since the 2016 study.

graphic depicting the theoretical potential in megawatts of demand-response capacity in selected European countries by 2030

Policy proposals

To take advantage of these untapped resources, there are three policy actions that should be enacted.

Firstly, make flexibility effortless and stress-free. Policymakers need to stop putting the onus on individuals to solve structural problems. People are busy; they have kids to get to school, shifts to work and boilers and cars that fail at the worst times. It is not their job to become energy market experts, it is the job of energy market experts to ensure that people make decisions — even unconscious ones — that boost flexibility and reduce energy bills.

There should be an EU-wide “mandate for smartness,” requiring products and buildings to be electrified and “flex-ready,” with clear labelling and high-quality customer support. Deployment schemes are urgently required, including subsidies to fast-track uptake and drive down future costs, replicating the success of renewables.

The regulators’ role is to ensure digital inclusivity of marginalised and vulnerable groups and to adapt customer protection rules so they keep up with new retail offers, without picking winners or stifling innovation.

Secondly, allow wholesale pricing to reflect the true value of flexibility. To uncover the value of flexibility and reveal its full potential, wholesale electricity prices should reflect real-time conditions on the power system.

Interventions such as price caps mask the increased costs caused by inflexibility, reducing incentives for efficient actions. Households should be rewarded to increase demand when there is a surplus of renewable generation, for example, but measures like minimum price guarantees prevent payment via the wholesale market.

Safeguards such as supplier hedging, price relief mechanisms for extreme events and targeted support for low-income customers become increasingly important. The baseline, however, should be wholesale pricing and smart network tariffs that reward flexibility in a fair and non-discriminatory way. This creates a positive feedback loop of households embracing flexible assets and seeing tangible benefits, which further incentivises flexibility.

Finally, develop robust metrics for flexibility. Europe lacks a common methodology for assessing and quantifying the multi-faceted benefits of customer flexibility.

Unless we make this value visible and measure it consistently and fairly, we cannot reliably assess flexibility potential or design mechanisms to unlock it. Developing robust metrics supports policies that can accelerate flexibility deployment such as targets, trading platforms and obligations on suppliers to procure demand-side capacity. Standardisation also enables progress to be tracked across Member States.

To create a masterpiece, start with a masterplan

“Art is not what you see, but what you make others see.” – Edgar Degas

Flexibility is a system resource, activating it requires systems thinking. That does not mean treating households like mindless cogs in the machine — a new social contract must be crafted for the age of automation, upheld by equity, agency and opportunity.

Europe’s policymakers should take in the whole picture, rooting out market distortions, barriers to access and bad practices, while proactively showcasing and replicating positive examples of household flexibility, beyond pilot schemes.

If the artwork La Fée Électricité were recreated in the year 2035, what would we see? The fresco could show millions of homes, interacting seamlessly with the power system, for the benefit of people and planet alike.

One thing is certain, we are going to need a bigger wall.

 

A version of this article originally appeared on Foresight Climate & Energy.

Photo: Guillaume Baviere via Flickr Creative Commons