The Future of the Power Industry: Implications for Network Regulation Paul Centolella President, Paul Centolella & Associates, LLC Senior Consultant, Tabors Caramanis Rudkevich ACCC/AER Regulatory Conference Brisbane, Queensland August 4, 2016
Overview • Challenges and Opportunities: Common to US and Australia • Approaches to Distributed Energy Resource (DER) Valuation and Integration – Planning and Administrative Valuation – Markets and Pricing • Structuring a Market for DER: Platforms and Distribution System Operators (DSOs) • Grid Architecture for Networks with Significant DER • Implications for the future of network regulation August 4, 2016 ACCC/AER Regulatory Conference 2
Challenge: Remaining Affordable • AU Forecast Electricity Consumption to 2036 Revenue growth is disappearing: “ Consumption of grid-supplied – electricity is forecast to remain No Increase flat for the next 20 years, despite projected 30% growth in population” 1 • Electric utilities have to invest: – Replacing aging infrastructure: U.S. utilities need $673 Billion (USD) in new reliability investment in this U.S. Investor Owned Electric Utility Capital decade, exceeding market cap of US Spending & Free Cash Flow 120 investor owned electric companies 2 100 – 80 New requirements: Climate 60 adaptation, Distributed resources, Billion US$ 40 Physical and cyber security 20 • Potential for Negative Cash Flow 0 & Increasing Rates 3 -20 -40 -60 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Capital Expenditures Free Cash Flow August 4, 2016 ACCC/AER Regulatory Conference 3
Challenge: Ensuring Reliability and Security • Growing dependence on reliable electric service: – Economy is increasingly digital – Population is increasingly urban • Mounting weather & climate risks: – Severe Storms – Extreme heat – Drought & fire Metcalf Substation • Vulnerability of critical cyber / physical systems – Interdependence, Inherently Open System, Unregulated Supply Chain, Fragmented Control, Dynamic Threats August 4, 2016 ACCC/AER Regulatory Conference 4
Challenge: Providing Access to New Resources • High penetration of variable resources impacts network operations, ramping requirements, system costs, & conditions for price volatility • Reported 7/7/16 price South Australia price variance: $100 to $14,000(AU$)/MWh 4 • Economies of scale remain important 6 CA ISO Forecast 2020 Impact of PV: • Utility scale PV < Half Cost of Small Distributed PV 5 3 Hour Ramp More than 12,000 MW Cumulative PV Installations 7 Australian PV Institute 6000 5000 4000 MW 3000 2000 8 1000 0 2008-01 2008-06 2008-11 2009-04 2009-09 2010-02 2010-07 2010-12 2011-05 2011-10 2012-03 2012-08 2013-01 2013-06 2013-11 2014-04 2014-09 2015-02 2015-07 2015-12 2016-05 ~1,100MW on installed domestic PV capacity on a ~5,000MW network. In some postcodes >40% of customers have PV. Total energy delivered is ~ 7% (1438GWh) of total usage August 4, 2016 ACCC/AER Regulatory Conference 5
Challenge: Becoming Sustainable • Climate is a Global Problem: – If developed economies had Zero CO 2 emissions, Carbon budget for 2 o C stabilization could be breached by 2050 Onshore Wind Costs = 142% of • Low carbon technologies need to Advanced Gas Combined Cycle (US$) With $30/T Carbon Price cost less to scale globally – While costs of low carbon power have fallen, the full cost remains above that of gas generation in most of the US & of coal in many growing economies 9 • Requires Innovation – Learning by doing is insufficient to achieve timely improvements August 4, 2016 ACCC/AER Regulatory Conference 6
Opportunity: Integration of Digital Technology • Expansion of affordable computation + connectivity + data collection is producing: – Low transaction cost and multi-sided markets – Unbundling of products and services to match consumer specific characteristics and preferences – Intelligent and high speed cyber/physical systems – Improved asset utilization and recruitment of underutilized resources – Greater precision in system controls • Electricity sector has yet to fully realize the benefits of digital technology August 4, 2016 ACCC/AER Regulatory Conference 7
DER Valuation: 2 Approaches • Fundamental Approaches to Valuation: – Planning and administrative valuation approaches (e.g. LMP +D, feed-in tariff, net metering retail rate credits) – Market based valuation via Distribution Locational Marginal Prices (DLMP) • What is the difference? – LMP+D and similar approaches are based on planning or administrative forecasts of average expected “avoided costs.” For example LMP (i.e. nodal, or wholesale value, of real energy) plus D (an planning or administrative forecast of average avoided distribution system costs). – LMP+D requires more transparent distribution planning & more detailed regulatory review of distribution plans – DLMP is a granular, market measure of short run marginal cost (SRMC) at the specific time and location for the provision or use of core electric products August 4, 2016 ACCC/AER Regulatory Conference 8
LMP + D Value by Time and Location: Consolidated Edison (New York City) • Only 22% of Consolidated Edison’s NYC distribution networks have peaks that coincide with system peak 10 – Demand response programs based on the needs of the bulk power system would not address many of the needs of distribution systems • Half of the incremental PV installations are in ConEd’s night - peaking distribution networks – Such PV installations may have little or no positive distribution (D) value and may increase distribution costs August 4, 2016 ACCC/AER Regulatory Conference 9
LMP + D Value by Time and Location: Consolidated Edison (New York City) • In ConEd’s mesh network placement of distributed resources has a significant impact – Must be placed near constrained component to be effective • Multiplying effect: The farther DER are from constrained component, the more DER kW are needed to provide equivalent load support – More distributed placement is less efficient: Smaller amounts of DER at multiple node points will require even more kW than shown here August 4, 2016 ACCC/AER Regulatory Conference 10
Plan Based LMP + D Value: ConEd Brooklyn Queens Demand Management (BDQM) Project • Targets load growth in 3 networks of Brooklyn and Queens Burroughs of NYC • Plan to defer $1 Billion (US$) in traditional network upgrades with $200 million (US$) incentive program • DER procurements through open RFI and structured auctions • Regulator treating expenditures as 10-year regulatory assets earning base ROE + performance adder (up to 100 bp) August 4, 2016 ACCC/AER Regulatory Conference 11
Anticipated 2018 BQDM Resource Portfolio • Energy Efficiency, Voltage Optimization, Gas-fired Generator, Fuel Cell, and Evening Demand Response • Supplemented with modest contributions from PV and Battery Storage Targeted Need Fuel Cell & Gas DG may operate when no load relief is needed August 4, 2016 ACCC/AER Regulatory Conference 12
Planning / Administrative Valuation • Targeting DER can defer more expensive distribution investments • Time and location have a significant impact on value • Planning forecasts /administrative valuations won’t fully capture load and network configurations changes or emergence of better resource options • Scaling planning and administrative valuation to optimize high penetrations of DER will be challenging for utilities and regulators • Use of competitive procurements (without first disclosing avoided costs) can contribute to savings • Fixed output resources may defer costs in some hours and provide unneeded and more costly power in other hours • Option contracts that enable utility to call DER when needed may provide a more efficient alternative August 4, 2016 ACCC/AER Regulatory Conference 13
11 Pricing: Core Electric Products from DER (ONLY 3!) • The 3 Rs – Real Energy – Reactive Power – Reserves • The 3 Rs require tradeoffs – Tradeoff between producing real versus reactive power – Tradeoff between committing now to produce real or reactive power (now and forward) and being available to provide reserves August 4, 2016 ACCC/AER Regulatory Conference 14
Granular Pricing: Time Variance Peak Day Hourly Zonal LMPs for Selected PJM Zone 90 80 70 60 US$ / MWh 50 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 PJM Data Miner: Locational Marginal Prices Total LMP August 4, 2016 ACCC/AER Regulatory Conference 15
Granular Pricing: Locational Variance (RTO) Variance in Peak Day Ave. Hourly Nodal & Zonal LMPs for Selected PJM Zone 1000 800 600 400 US$ / MWh Minimum Nodal LMP 200 Maximum Nodal LMP Zonal LMP 0 -200 -400 12 Hours with Max LMP Variance in Zone >$50/MWh -600 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 PJM Data Miner: Locational Marginal Prices Total LMP August 4, 2016 ACCC/AER Regulatory Conference 16
12 Granular Pricing: Real & Reactive Power DLMPs Modeling Results: Summer Day, High DER Scenario for an Illustrative 800 Bus (US$) Commercial / Residential Distribution Feeder (US$) August 4, 2016 ACCC/AER Regulatory Conference 17
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