The cost of solar and wind energy and energy storage have been coming down at double-digit rate per year for many years. Every year. Double-digit percentages. Again. It continues. Tirelessly. No end in sight. Capitalism and innovation at their best. No government regulation nor corporate ego will stop it. And it will reshape – no, it is reshaping – the power industry in Canada.
By 2030, renewables will be so inexpensive that they will have upended the traditional economics of the industry. But we can see this transformation to its logical conclusions, based on how the power industry is evolving elsewhere in the world and how other industries went through similar transformations.
If ever lower-cost renewables and energy storage triggered the reshaping of the electricity industry, other factors tint how industry stakeholders: the impacts of climate change, our increased dependence on reliable electricity, and the higher cybersecurity threats. Each of these factors helps define how utilities, customers, regulators, policy makers and product and service vendors react to or take advantage of the situation, sometimes trying to accelerate change, sometimes attempting to slow down. However, if broad conclusions can be drawn, we need to be mindful that local specificities in resource availability, cost structure and ownership will mean that the end game will not exactly be the same everywhere.
Wind, solar and storage are not only becoming increasingly cost effective, but doing so at a much smaller size than traditional generation. By 2030, customers will be installing solar panels on their side of the electricity meter, on rooftops and backyard, even in absence of incentives or net metering, taking whatever “free electrons” they can and wasting what they will not be able to use or sell. If wasting electricity seems heresy, think about the iPhone in your pocket: it has more computing power than a supercomputer of a generation ago, and yet it is idling most of the time, its vast computing power wasted. Yet, the iPhone has transformed our daily relationship to computing. Similarly, inexpensive renewables and storage will transform our relationship to electricity.
Even with this abundance of distributed generation, grid defection will be the exception, as customers keep the utility connection as a last resort and because space constraints and the low energy intensity of solar and energy storage make it impractical to generate all the energy needed in urban areas. Nevertheless, abundance will cause energy (kWh) price to plummet, especially since electricity consumption has plateaued in Canada, taking traditional utility revenue along.
Commercial and industrial customers, as well as some residential customers, will take this a step further by having energy storage as well. By adding storage, customers can arbitrage time-of-day rates or peak demand charges, shifting consumption at other times to reduce costs. Having local generation and storage also turns a customer site into a microgrid able to maintain power during grid disturbance or outage, maintaining production for businesses and food stuff cold for consumers. Some smart communities and campuses will also become microgrids regrouping multiple customers and utility-scale resources for better resiliency and efficiency.
Given how low-cost renewables and storage are advancing, by 2030, if not before, the traditional, centralized grid will have been transformed into a digital grid of microgrids integrated to distributed renewable energy resources. This will have repercussions across the industry, transforming competition, energy markets, regulation, grid architecture and utility operations.
Retail Unbundling and Competition
Having so much customer-owned distributed generation will put pressure on policy makers and regulators to allow retail competition, so that distributed generators may sell surpluses on open markets. With retail competition, customers have more choices in what energy they use, what energy they sell, and how they use it, including sophisticated demand response programs to support energy balancing on the grid.
The retail arm of utilities and the wire business will be unbundled (as it is already the case in Alberta), allowing energy service providers to compete in energy retail, perhaps along with utilities’ unregulated subsidiaries. This will also expose the capacity-driven cost of the distribution grid, now charged separately. This is similar to long-distance telephone service unbundling in the 1990s. With competition forcing energy market players to keep price low, energy price regulation will be lightened, just like telephone regulations are much lighter now than they were 25 years ago.
Renewed Energy Markets
Today’s energy markets were not designed for the large number of players distributed across the grid with varying capabilities that we will have in 2030. Energy markets will evolve to improve the way electricity is priced, scheduled and procured in order to ensure reliability, transparency, efficiency and at the lowest cost. Through the energy market, distributed energy storage systems will accumulate electricity when the sun is shining or the wind blowing, releasing it at time of use. Demand management will shape the load curve to better match availability of inexpensive renewable resources. Electric vehicles will be charged during the day, and give power back to the grid if needed.
New transactional technologies, such as blockchain, may be required to deal with the sheer volume of automated transactions. Market intermediaries to act on behalf of distributed asset owners, simplifying the process and offering financing.
In the traditional Canadian rate-of-return regulatory framework, electric utilities earn a return on investments based on the depreciated cost of past capital expenditures approved by the regulator. This model will no longer be suitable in 2030 to regulate the wire business of utilities because of its “capital bias”, its insensitivity toward grid reliability, its inhibition of innovation, and its short-termism. The regulatory regime will evolve to incentivize lower total costs (including incentives to use non-wire alternatives such as third-party energy storage) and better reliability (to avoid momentary service interruptions that trip distributed generators offline), with utilities freed to implement innovative solutions without regulators and interveners second-guessing investment in technology. Multi-year incentive plans will allow utilities to plan ahead better. Similar approaches already exist, as in Great Britain, where the regulator developed its RIIO (Revenue = Incentives + Innovation + Outputs) 8-year model.
High-Availability Distribution Grid?
By 2030, we will obviously not have replaced all poles, conduits and wires that make up the legacy grid – nor should we try to. Utilities, however, will have transformed this critical infrastructure to make it resilient (especially against the impacts of climate change) and reliable (to keep now-essential distributed energy resources online).
We will more storm-proofing of critical feeders, including undergrounding of mainlines, with intelligent protection devices on laterals, near customers and distributed energy resources to minimize disturbance while faults are being cleared on overhead lines. Protection devices, switches and sensors will be automated to the best extent possible and remotely operated, from a control room or from a truck, freeing operators and crew to better manage and repair outages. Remote control will allow protection settings to be more sensitive to limit the risk of forest fires caused by the electrical grid.
New Operating Model in Distribution
In a technology-intensive environment in constant innovation and with ever-increasing cybersecurity threats, utilities will develop new skills and will learn to leverage partnerships with vendors. This is very different than traditional distribution grid operation, still largely relying on physical work and manual switching.
In their new high-tech and fast-changing environment, utilities will implement new business process and organizational structures to take advantage of the latest technology innovations. At the same, new skills technology skills are required, including cybersecurity. Rather than doing things internally, as they are often used to, utilities will partner with technology vendors that have the scale and the expertise to provide better products and professional services at a lower cost. Essentially, utilities will follow the path already taken by telecom network operators.
New business models in the industry
New businesses will cater to energy customers, distributed generators and microgrid owners, removing complexity and turning energy into services.
Energy customers, distributed generators, and microgrid owners will be supported by an ecosystem of third-party vendors and unregulated utility subsidiaries. Vendors will support customers with low-cost financing and technology to optimize the use of distributed assets on energy markets, lowering costs. For utilities, this is a clear growth opportunity, not limited to traditional territories. With transportation electrification, the electric industry will essentially replace the petroleum industry, with new businesses supporting public charging of electric vehicles – a welcome development as it could prevent further reduction in electricity consumption.
This new, distributed and digital-enabled electrical grid will be more resilient and sustainable. Its resiliency is based on multiple and alternate energy local sources and paths, with reduced reliance on large infrastructure. This new resilience is welcomed given the growing importance of electricity in energy use, as residential and industrial customers are dependent on electricity to power our modern life in smart communities and with the advent of electrical transportation. The new grid will also be more sustainable, reducing the environmental impact of communities and improving quality of life – while being financially affordable.
Preparing for the future is essential for Canadian electric utilities and new players. In an industry traditionally defined by centralized generation and rigid geographic boundaries between utilities, new linkages need to occur: utilities and customers, vendors and entrepreneurs, cities and businesses, ensuring that all see the opportunities that didn’t exist before and have the support they need to get their ideas to market quickly. The structure of the industry will emerge transformed, with Canadian-owned service providers offering novel energy solutions in Canada, backed by a web of hardware, software, and professional service vendors. Realizing this vision will increase opportunities for Canadians to export their energy, their expertise, and the fruit of their labor.