July 3 2015
The Case for Distribution
Last Week Steven Collier published a great post on the “Top 10 Challenges for Electricity Distribution”
An underlying theme to the article is that the distribution grid may become increasingly irrelevant to the future needs of customers. I am not setting out to contradict Steven’s perspective – I agree with his assessment of the challenges faced by electric utilities. Instead, in this post I set out some of the opportunities for distribution utilities to remain relevant.
Energy is cheap
Electricity delivered to the home is, especially in North America, cheap and convenient. The economies of scale inherent in large scale centralised electricity generation and wholesale electricity markets have sustained a belief that electricity is a right not a privilege. The cost of distributed energy systems such as Solar PV is falling rapidly but still has a way to go before it is fully competitive. And once it is cost competitive, there are two further hurdles that have to be overcome.
Upfront cost: Distributed generation requires a high purchase and installation cost which is, in time, offset by near zero energy costs. Many customers will be unable, or unwilling, to face the upfront costs.
Convenience: The convenience of grid supplied electricity is a powerful incentive for customers to stay connected. It avoids the inconvenience of repairs and maintenance to distributed generation systems. Although centralised generation also requires maintenance and repair, there is no customer involvement and the costs are conveniently wrapped up in the unit price of energy.
Reliability is expensive
For a small energy system, 100% reliability requires at least 100% spare generating capacity (one and a spare). For a large interconnected system, the capacity margin is typically 20%. For most small users with own-generation, the cheapest way to provide a reliable backup is to remain connected to the distribution grid.
Transactive Energy Trading is coming
Most distributed energy schemes incorporate renewable generation – most notably solar PV. An individual site is unlikely to have a perfect balance of generation and demand at any instant. This can be mitigated with storage although the comments above on cost and convenience apply equally to storage. For the moment the most convenient approach is to maintain a distribution connection to buy shortfalls and sell surpluses to the distribution company.
An increasingly attractive approach is for neighbours to trade energy surpluses between themselves. The economics of transactive energy trading are compelling. The regulatory framework has yet to catch up. However, to establish physical connections between participating customers would be costly and is unnecessary. The existing legacy distribution grid already provides these interconnections. Future participants in transactive energy schemes will wish to retain a connection to the distribution grid to provide a route to market.
Over time, as distributed energy production grows, the volumes of energy generated at centralised generation plants will inevitably fall. However the activity at the grid edge will increase. Distribution utilities can transition themselves from being energy suppliers to being connectors. The value of the connection is in: being the provider of last resort, accepting, surplus generation, increasing reliability and facilitating transactive energy trading.