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This is the first installment of our series: The Top 5 Challenges Facing Distribution Utilities. Subscribe to automatically receive future installments.
To manage the grid, electric utilities are tasked with a tenuous balancing act. They must deliver reliable electric service and maintain a functioning power system, often requiring expensive investments to replace aging infrastructure or serve new electricity demand. At the same time, they must keep rates affordable for electricity consumers. As a result, utilities are frequently forced to evaluate difficult tradeoffs between important investments in their grid and promoting affordability for their community members. This is especially salient for the nation’s non-profit cooperative and municipal utilities.
What many may not fully appreciate is that there exists a secret weapon for improving affordability of our power system. Local energy resources, such as rooftop solar systems, home batteries, and EV charging stations, are being adopted at rapidly increasing rates by utility customers – without any influence from the utility itself. And while these resources have a primary, customer-facing job, they can be harnessed by utilities to lower the operating cost of the grid. Unfortunately the vast majority of local energy resources are not being used to help operate the grid today – even as utilities across the country begin to struggle with rising rates.
That’s about to change.
An estimated 70% of the country’s transmission lines and power transformers are 25 years or older. Utilities must consistently replace, modernize, and expand existing T&D infrastructure to meet the needs of its customers and address the growing demands of electrification and decarbonization. These upgrades create upward cost pressure on customer bills.
While the advancement of renewable energy technologies over the last decade has reduced the cost of electricity generation, rising natural gas prices, permitting concerns, transmission reform, and other market forces have driven up transmission and distribution (T&D) costs to a significant degree. According to the US Energy Information Administration (EIA), between 2011 and 2021, U.S. investor-owned utility (IOU) generation expenses declined by about 10%, while distribution expenses increased by 40%. Transmission expenses more than doubled, despite the fact that new transmission installation slowed from 2,000 to 700 miles per year. At the same time, the number of utility customers has increased by only 20%, meaning that T&D costs per customer have dramatically increased.
Higher T&D costs have directly translated to increased rates for customers: The average retail electricity rate climbed nearly 30% from 9.8 cents per kilowatt-hour (kWh) in 2012 to 12.5 cents per kWh in 2022. With electrification of transportation and buildings, utilities are facing an even greater uptick in T&D expenses – and there’s very little hope that falling generation costs can continue to mask the impacts of massive T&D investment.
The result will be pushback on utility investment plans: from public utility commissions to co-op board members. Utilities need a plan for improving affordability while making the necessary investments to support electrification.
Fortunately, utilities can mitigate today’s growing affordability challenge by strategically leveraging customer-owned resources. If customers are already installing flexible energy resources in their homes and businesses, why not use them to help the system run more efficiently?
Many utilities can realize immediate savings by harnessing local energy resources to lower their peak electricity usage – such as by shifting EV charging away from early evening peak periods. These savings typically come in the form of lower power supply expenses – via lower demand charges or increased procurement of low-cost renewable generation. Even for investor-owned utilities with a profit motive tied to capital expenditures, the flexibility provided by local energy resources is a boon. By reducing operating costs, IOUs can create more headroom for critical infrastructure investments – such as those required to achieve transportation electrification and decarbonization goals – without further raising rates.
With better visibility and control of local energy resources, utilities can also better understand - and prioritize - the most urgent and important upgrades. A mid-size utility installs tens of thousands of transformers, reclosers, and other grid equipment that will eventually need to be repaired, replaced, or upgraded. By gaining visibility of local energy resources – especially high-power resources like electric vehicle chargers and battery storage, a utility can better understand where to prioritize investments, reducing total system costs while improving reliability.
For example, electric vehicle charging is beginning to overload distribution transformers – creating an urgent problem for utilities. Utilities that are able to identify the most frequently overloaded transformers can proactively identify and prioritize upgrades, avoiding emergency truck rolls and prolonging the use of lower-stressed equipment. With recent transformer shortages, making informed decisions about replacements can help utilities mitigate rising costs.
Broadly speaking, utilities today can take two fundamental steps to unlock affordability gains via local energy resources:
Harnessing customer-owned resources starts with engaging the customer. Many utilities design programs that encourage customers to participate directly with the utility – usually exchanging a financial incentive for the limited right to dispatch the customer resource.
A few examples of utility programs include:
Another path to engaging customer resources includes partnering with independent device aggregators – sometimes referred to as Virtual Power Plant (VPP) operators. These entities optimize the behavior of the device on behalf of the customer – often including providing services to the utility in exchange for customer bill credits or other financial incentives. The VPP model is growing in popularity, especially in states where resources can participate in wholesale energy markets, such as Texas.
Many utilities with few local resources today don’t feel much need to engage with customers until adoption increases. Unfortunately, waiting until EV, solar, or other resource adoption ramps up is a mistake. It is crucial for customers to be able to enroll in programs in parallel with purchasing electric vehicles, batteries, smart thermostats, and other flexible devices. Encouraging them to participate after they’ve already installed devices has proven time and again to be ineffective. Standing up utility programs and working with third-party aggregators is time-intensive, so every utility should be taking steps today to engage local energy resources.
Once utilities have permission to interact with local resources, they need the technical capabilities to do so. This means investing in tools to monitor near real-time grid conditions and send coordinated dispatch signals to fleets of devices. Many utilities focus exclusively on the latter – procuring a DERMS (or Distributed Energy Resource Management System) to directly control local resources. Unfortunately, the popular command-and-control approach usually leads to disappointment; failing to provide sufficient intelligence of how each resource can influence the grid around it. Without understanding the relationship between resource and local grid conditions, operators struggle to figure out what to tell local resources to do.
One major source of savings from local resource orchestration is deferring or eliminating equipment upgrades – such as spreading out the charging of electric vehicles to avoid upgrading the service transformer. For these types of use cases, it’s essential that utilities incorporate grid awareness into their orchestration strategy. Delaying energy use during peak periods across the entire grid is pretty straightforward, but coordinating local resources for hyperlocal grid services requires a scalpel, not a hammer.
To enable fine-tuned control, we recommend looking for true “orchestration” partners – those who provide visibility into local grid conditions, direct control of resources enrolled in utility programs, and coordinated dispatch with third-party aggregators. Doing so can unlock millions in additional savings from local resource orchestration compared to traditional command-and-control approaches.
Investing in awareness, local resource control, and aggregator coordination can pay huge dividends when it comes to lowering costs for the end consumer. At Camus, our grid-aware orchestration platform provides the grid intelligence and coordinated control that utilities need to harness local energy resources for cost savings, improved reliability, and decarbonization.
To learn more about how we help utilities orchestrate local resources, check out our offerings or contact our team.
