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The Grand Finale: Energy-Grid Barriers and Solutions

Grand finale with fireworks above a circus tent

This essay is the finale of a six-part collaboration between Benjamin Bovarnick (FES ’18) and Sara Harari (FES ’19, SOM ’19). The collection closely examines the barriers facing adoption of new, advanced energy technologies that can revolutionize electric grid operations and utility business models and spark potential solutions to elicit faster transformation in this expansive industry.

On social media and at industry conventions, it is easy to find high-profile discussions on the technological revolution of electric grids. Experts on energy storage, distributed generation, and wireless options describe how emerging technologies are poised to transform the electricity sector.

The hype is real. Energy companies are developing technologies at an increasingly rapid pace. As new technologies are introduced to the grid and the costs of more mature technologies continue to fall, we are poised to experience a new generation of electricity production, distribution and consumption patterns. These technologies, commonly termed ‘grid-edge technologies,’ are increasingly diversified. They can offer services to energy companies that were unimaginable a decade ago.

Based on these new developments, World Economic Forum (WEF) expects a rapid adoption rate for grid-edge technologies. WEF predicts an “S-curve” adoption for distributed energy resources, advanced metering infrastructure, and other new technologies. This curve is characteristic of that of many modern appliances but moves at a faster clip.

But for all the attention on these new devices and expectations of market growth, there’s still no clear path to widespread adoption. As this series shows, several key barriers prevent technology adoption from keeping up with technology development.

Finding Key Barriers to Technology Adoption

Through interviews with over 40 utility executives, electricity regulators, technology vendors, and outside stakeholders, we identified four broad barriers within the electricity sector that new technologies often encounter.


1) Communication challenges

As we discussed in “Juggling Approaches to Power Procurement,” utility project proposals are not always designed to accommodate new energy technologies. In particular, they may fail to account for the unique or transformative characteristics of innovative systems.

If a vendor is trying to sell a battery or sensors, the company may struggle to find receptive utilities interested in projects that don’t readily conform with the previously assessed needs. Without keeping utilities and regulators well-informed of the services new technologies can provide, vendors may fail to find receptive markets for their products.

In addition, a lack of clear lines of communication between different utilities and among regulators can limit the spread of new technologies beyond their initial pilot stages. Regulators and utilities must believe that new investments are prudent.

When a utility conducts a successful pilot, insufficient communication channels can keep the lessons learned sequestered in the company’s territory. This can cause the technology to struggle to grow in future markets. The vendor may have to start at square one in new states.


2) Unproven or unfamiliar technology

New energy technologies tend to be unfamiliar and unproven. In contrast, conventional electric infrastructure typically has a long lifespan. It also tends to be reliable. As a result, utilities tend to gravitate towards products and companies they know have reliable reputations.

Young or unfamiliar companies marketing products without extensive track records can struggle to cultivate relationships with utilities. Utilities may be reluctant to invest in a relationship with a company that cannot point to a record of success or that could have unpredictable income streams.

The electric grid is a web of interconnected systems in constant sync. New infrastructure investments must also have high interoperability and support overall grid stability. To stress-test new technology, utilities typically run pilot projects, as we discussed in "Regulators and Pilots: Now for Our First Act.” Since each utility operates in a unique environment, technology vendors may have to customize each deployment. This can inflate implementation costs.


3) Financing and regulatory challenges

New projects only are built if utilities can secure an effective means of financing them. They also must prove they will produce a new source of revenue and provide value for the utility. Today, both of these are lacking for new technologies.

As we discussed in a "A High-Wire Act: Balancing a Modern Grid with Regulated Assets,” when investing in a new asset like a substation, a utility estimates the costs, submits a request to include financing in the utility’s rate base, and – once approved – adjusts customer rates to include the new investment.

Regulators approve new investments that are prudent and provide customers with value. However, this model of rate-basing new investments that utilities have traditionally relied on can be misaligned with the financial needs of new technologies.

Many new energy technologies are designed to minimize costs by exploiting efficiency opportunities within the electricity sector. Others can provide value through frequent technological improvements that are realized on shorter timeframes than standard project upgrades are. For example, this may be the case with software technologies that undergo frequent upgrades.

Finally, new energy technologies may provide value beyond the services sought for a specific project. Traditional investment analyses may fail to account for the range of values. For example, a battery-storage system that replaces a substation may help balance voltage and frequency across the grid while also serving to reduce circuit congestion. However, project budgets only value the congestion reduction.


4) Status quo barriers that weight competitive advantages toward traditional technologies

The electric-utility industry has existed in the United States for over a century. During that time, a framework has evolved that drives a persistent preference for conventional technologies that often have high upfront costs and extensive track records. New technologies often have neither of these two characteristics.

As we explored in the “Elephant on the Grid: What about the Federal Government,” state and federal regulators can have very different tools to tackle this barrier. Utility investors earn returns for new additions to a utility’s capital base that regulators allow to be rate-based. This means that capital-intensive projects offer greater rewards. These rewards can come at the expense of more efficient technologies and system operations.

If a utility will not realize new value from an innovative technology, it is unlikely to invest in the technology without policy drivers, even if there might be overall system benefits.

Utilities and regulators also tend to view new technology investments through the lens of liability. The traditional utility model holds utilities liable for any equipment or service failures. This makes utilities cautious to embrace new technologies.

Regulators are also hesitant to approve of technology solutions whose liability would rest with an unregulated third party. Today, companies like Salesforce are developing innovative third-party service models for industries and customers. The absence of methods to share liability in the electric industry limits opportunities for energy-technology vendors to market new technologies and services beyond the boundaries of traditional investments.

Finally, many investments utilities make in electric infrastructure – including substations, transformers, poles and wires – have long lifespans. These long cycles for new utility investments and upgrades can leave new technology vendors struggling to find receptive buyers.

Taking New Approaches to Technology Adoption

In the face of these impediments, we have identified six focal points for accelerating the evolution and adoption of new energy technologies. These reforms are based around structural incentives and risk evaluation. While there is no silver bullet for solving these problems, a strategic combination of reforms can cultivate an electric industry increasingly amenable to new energy technologies.

Assessment of Benefits and Risks

Utilities and regulators need tools to compare conventional options with new solutions. Without accurate methods for evaluating the risks and benefits associated with different investment options, choosing the right technology can be a challenge.

Today, new investment decisions are often based on how well a given technology meets three standards: safety, reliability and affordability.

However, evaluating innovative technologies under this framework can be like wearing blinders. You risk only perceiving technology solutions that are directly in front of you and missing innovative solutions that are elsewhere.

A new framework for stakeholders to better assess the merits of investments in an ever-evolving energy system should account for four key questions:

  1. How can the decision framework remain relevant in the face of continuous innovation?
  2. How much of each decision must be individually customized versus geographically standardized?
  3. How can the decision-making process remain transparent to and inclusive of stakeholders?
  4. Does the promise of future capabilities justify investment today?

Several organizations are currently debating this issue. They include state regulatory authorities, private partners, and electric utilities. Each organization has its own evaluation framework – and that makes it more difficult for technology vendors to address broad markets.

Solutions for Creative Financing

Innovative investment models for financing pilot projects and frequent software upgrades are also critical. New financing solutions can accelerate demand for innovative technologies and grid solutions that are not limited to building a larger asset base.

However, regulators must be careful when embracing new financing structures. If they rush to promote pilot projects by assuring utilities they will recoup any losses, they may encourage unnecessary risk. Poorly designed financial incentives can spread new investment risks across utility customers while privatizing the benefits accrued to investors.

Innovative models for capturing and allocating both the risks and the rewards of projects to utilities and ratepayers should foster new energy investments without limiting the benefits to shareholders. For example, one value of a pilot is in information collecting. To fully capture and leverage the value of this, companies should share information with other vendors, utilities and stakeholders.

Incentives to Support New Technologies

Clear incentives from policy makers and regulators can spur utilities to integrate innovative energy technologies. Utilities can be motivated to proactively implement solutions that impact the strengths of their core businesses. While other industries reward innovative thinking, utilities can be punished for adopting new technologies that impact their rate bases.

There are split incentives for utility staff, executives and investors who are considering projects. This can prompt utility staff who may otherwise be interested in investigating new technologies to instead maintain status quo practices. On the distribution grid, state regulators currently bridge this gap by mandating and paying for innovation, effectively taking the decision out of the utilities’ hands.

Instead, a system that rewards utilities that take on financial risk to provide additional benefits to customers could result in long term gains for consumers. New York and Minnesota currently employ some performance-based metrics for evaluating new practices and rewarding utility performance. Also, this year, Hawaii passed legislation to develop a system of performance-based regulation by 2020.

While changing to a performance-based model is not feasible for many states in the short term, it could address many of the barriers raised in our research.

Ways to Share Risk

In vertically integrated utilities, risk is a zero-sum game borne by the utility and its ratepayers. In some states with vertically integrated or divested markets, regulators are considering allowing deployment of new technology under a shared risk ownership model.

In this model, the technology developer or other third party owns and operates the system in partnership with the local utility. Some developers view this as giving utilities a free trial and providing training in exchange for opening doors to a future market. Others view it as a way to shut out competition from inexperienced firms. It remains to be seen whether this approach or other shared risk models can address some of the barriers highlighted in our research.

Separation of Earnings from Sales

In decoupling regulatory proceedings, each utility must make a case to the state regulators to “decouple” its earnings from the sales volume of electricity. In these states, utilities continue to earn a guaranteed rate of return on their investments. They are typically judged on their performance when they implement efficiency programs and sell electricity.

This policy is designed to move divested energy companies further away from incentives for more generation towards more investments in an efficient electric grid. This structure readily embraces the value of energy efficiency and demand response programs.

Overhaul of the Utility Business Model

The utility business model was developed in the 1800s when companies first began to electrify the United States. It is unreasonable to expect that a business model and regulatory framework could survive for over 200 years and continue to effectively incorporate emerging technology in the same way.

Advocates for more extensive overhaul suggest alternative models for electric grid operation might be necessary. One example is the Long Island Power Authority (LIPA) model, in which regulators can set clear goals for their utility. If there is no improvement, the regulators can replace the operator after their contract expires.

Wrapping It All up

So where do we go from here? Our full report will be released later this summer, digging into each of these topics in detail, with comments from experts and case studies on successful technology integration.

If you have any further thoughts on this topic, we’d love to hear from you. Please reach out to us through the link below! Thank you for participating in this wild circus with us.

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