Utilities in the Eye
Caught in the Perfect Financial Storm
Deregulation, reregulation, distributed generation, renewable energy, solar cells, wind generation, geothermal generation, microgrids, off the grid, battery storage, electric vehicles, hybrid electric vehicles, fracking for natural gas, oil production slowing, oil exploration costs increasing, natural gas exploration costs increasing, pollution, emissions, public forums, green movements, “not in my backyard” parties, hydro destroyed to restore river flows, nuclear energy short-term storage, nuclear energy long-term storage, radioactive waste transportation, homeland security, demand-side management, demand-side bidding, tariff simplification, reliability, hurricane and storm response, and others are the phrases on the debris encircling utilities just as such debris circled the eye of Hurricane Sandy. All is quiet in the eye of the storm, so the disaster about to hit cannot be absorbed.
Deregulation (reregulation) in the 1990s led to an alphabet soup of new terms—GENCOs, DISTCOs, TRANSCOs—and expanded to more terms to include ESCOs, ISOs, and EMCOS. Reregulation led to mergers and bankruptcies, to a new library of regulations to macro-manage utility business, and to implement markets. Market-based computer exchanges were installed as were monitoring systems and settlement systems. The total costs of these changes cannot be estimated as the process is still in progress or stalled in some states. Yet retail competition is being raised once again in California. Most utilities were not prepared for the alterations in legislature and did not survive the transition due to the economic risks.
Political and technological change has always upset the industrial portfolio. The Pony Express, wired telegraphy, stagecoaches, railroads, each in turn was a threat. The computer altered the value of information during war and, afterward, in all business processes. The microprocessor changed business processes, leading to the demise of several mainframe computer firms. The technology changed anyway as the economic efficiencies overwhelmed the previous.
Tariffs have been studied, developed, implemented, and revised since the first regulation of utilities. Tariffs are to allocate the costs of operations over time to present and future consumers to provide service not only for the present but also for the future. Tariffs are calculated as rates based on approved expenses, capital as well as operating costs, including approved return on investment, incentive-based or performance-based incentives, incentive efficiency/productivity improvement, improved transmission access, etc. Tariffs are still evolving as the goal of a regulated environment is to converge to the prices of a competitive market.
The first task is to identify the costs of operation. These are generally separated into centralized services, generation, transmission, and distribution. Centralized services include system-wide activities from construction and maintenance crews to energy managementsystems and system protection. Such centralized services are often provided for a large geographic region to gain economies of scale. Pooling companies such as AEP, PJM, and Southern Company have provided such economies of scale. The coordination of renewable resources, distributed generation, distributed storage, micro-grids, reliability, as well as the traditional fuel supply chains have increased in complexity and accordingly in costs. Pooling, now recognized as umbrella companies, is surely to continue to reap the benefits of economies of scale.
Generation was based on long-term assets to use fossil fuels with lifetimes expressed in decades. The capital expenses were then divided over the expected life cycle. Early retirements of assets require reallocated costs through tariff increases, or write off against shareholder value. Early retirements of nuclear units, coal units, and hydro units have altered life expectances. A new major cost component is the interim term nuclear fuel storage.
Transmission project costs have increased as transportation distances have dramatically increased, which leads to more complex operation with heavy compensation to increase transfer capability. Transmission projects also include more complex equipment as high-voltage direct current (HVdc), quadrature phase-shifting transformers, and other flexible alternating current transmission devices (i.e., static VAR convertors). Construction expenses have increased also due to routing issues such as “not in my backyard” and other siting restrictions. Transmission life expectancies have decreased as more severe weather is damaging assets, such as from Hurricane Katrina, Sandy, and tornadoes.
HVdc links have been added in several long-distance projects to transport energy over large distances. The choice to move the fuel to the demand versus producing the electric energy remotely and then transporting electric energy is the classic power system planning question. An HVdc network has been proposed to increase the transfer capability of the grid and to connect major energy resources without incurring other transportation costs.
Distribution systems are growing in complexity due to the advent of distributed generation, energy storage, smart meters, demand-side bidding (management), time of use rates, etc. Distribution often accounts for over 50% of the capital requirements of the historical utility. Distribution costs are increasing as equipment suppliers are reduced. Installation costs are also increased for the more complex smart grid equipment. Note that such devices do not produce or transfer one watt of electric energy but increase costs dramatically. Instead, the benefits of such equipment are flexibility and reliability.
All of these expenses are to be allocated across time to be paid by present and future customers. The use of bonds and other debt instruments are intended to enable this smoothing of the costs from the present to future time periods. The risks of these markets have led to corporate bankruptcies not only in the financial domain but also other industrial domains. The importance of selecting the best portfolio for future energy consumption is the major key to long-term company growth. Previous forecasts did not predict that energy use would decline over the last five years. These forecast errors led to portfolio selection errors that require increases in energy rates.
Predictions indicate increased renewable energy resources, such as solar cells and wind generation, as well as off-the-grid installations based on biofuels, even hydrogen and methane generation, to provide for distributed generation and to fuel transportation. Geothermal home energy storage is promising to shift demand just as pumped hydro did in the past. Such forecast errors show a direct threat to the present utility portfolios. The early retirement of nuclear generation is no longer unexpected. Early retirement of coal generation is occurring more frequently. Capital projects are being delayed due to recovery uncertainty and threats of regulatory changes.
The reliability of the electric grid has been debated for decades. Early experience demonstrated that the system was available beyond expectations. It was so reliable as to be called the gold-plated grid as is obtained by installing overcapacity of generation, transmission, and distribution. As costs escalated and the complexity of the grid increased, less redundancy was installed. Reliability calculations were revised, expanded, and benchmarked against actual operation. Computer models enabled reliability calculations to be refined to increase the productivity of each piece of equipment. Several economists belabor the productivity of some transmission lines needed less than 30% of the time. Manufacturing facilities strive for 100% on a 24/7/365 basis to make best use of financial capital.
As with all systems, failure will eventually occur as the redundancy is reduced and productivity increases. All systems eventually fail, as demonstrated by the risks faced in transportation, housing, and finance. As more complex controls were installed, especially digital relays, the probabilities of failure extended beyond previous experience. Blackouts were not on the public mind before 1999. After 2003, blackouts were the reason for extensive research, development of training simulators (similar to flight simulators), and more computer monitoring and control of the electric grid. Since that time, local and regional blackouts have occurred. Each time more extensive computer protection and control has been applied, such as remedial action schemes (RASs), to maintain the reliability of the power grid. An RAS is a concurrent processing of relaying rules through a matrix of computers. The costs of computers (microprocessors and memory) have decreased dramatically, but the number of computer systems as well as the communications have increased just as dramatically.
Reliability competes with transfer capability in our present market structure. Availability focuses on the under-use of equipment in normal conditions to provide capability under emergency conditions. Transfer capability enables the interchange focusing on increased use of equipment for all time periods that provide a profit for a supplier or a buyer. Computer monitoring, analysis, and control, such as from EMSs, PMNs and RASs, provide the insight to balance operation for reliable transfer capability.
The recent deployment of phasor-measurement networks demonstrates such a dramatic evolution of computer control from “SCADA” based energy management systems to synchrophasor (satellite time coupled) computer control systems. The success of phasor-measurement networks in voltage stability, frequency, and stability is now being documented.
As noted for smart meters, these systems do not produce another watt of electric energy but do enable less equipment to implement the transfer. As all of these costs are born by the customer, the balance of costs to savings has to be monitored and improved. Not only is the number of computers increasing but the communication systems to support the interaction between these computers are also increasing dramatically.
Distributed generation such as solar cells, wind generation, and fossil generation by natural gas or biofuels reduces the use of the grid as less transfer capability is needed. Thus, the costs of the grid are supported by less remote generation use, increasing the costs for traditional electric energy generation and transportation. Solar cells mounted on rooftops for residential, commercial, and industrial direct use reduce the use of the grid and thus increase the tariffs as the electric grid becomes the backup for the distributed generation. The average use of the grid declines, and the tariffs increase. Technology changes are altering the life cycle of this infrastructure just as the microprocessor altered the expected life of mainframe computers.
Solar power provided .11% U.S. electricity generation in 2012. Nearly 90,000 business and residential owners installed solar projects totaling about 1.1 GW, roughly the amount generated by a nuclear generator. This is a 45% growth over 2011. The number of customer-sited photovoltaic systems in the United States exceeded 300,000 by the end of 2012. As solar cells are very early in the growth cycle, future conversion to these devices may outstrip all predictions for equipment life expectancies, especially coal and nuclear-based generation.
Off the Grid
Recent changes to solar cell legislation in Arizona have shaken the solar industry and the green activists. The tariffs are increased for those with installed solar facilities as the impact of uncertain generation is balanced against the certain generation. The only way to avoid the increased rates is to go “off the grid.”
Line in the Sand
The line is now drawn for confrontation or for inclusion. These threats to utilities are just as strong as deregulation. The economic force is that consumers need heating and cooling, refrigeration, cooking, lighting, communications, etc. Economic forces, such as the invisible market hand, have always forced less-expensive solutions in the long run. The future portfolio path for each utility should be charted to examine the economic process as it unfolds. Reliability, transfer capability, distributed generation, distributed storage are the key technology changes to monitor survivability while in the age of the perfect economic storm.