Smart Power: the Future of Electric Utilities in the US and China, Peter Fox-Penner (June 2012)
- 1. The Future of Electric Utilities in the U.S. and China Presented to the Beijing Energy Network by Peter Fox-Penner and Judy Chang June 27, 2012 1850 M Street NW, Suite 1200 Washington, DC 20036, United States Peter.Fox-Penner@Brattle.com Judy.Chang@Brattle.com Views expressed in these slides are solely those of the authors. Copyright © 2012, The Brattle Group, Inc.
- 2. Today, Utilities Everywhere Face Four Gigantic Disruptive Forces 2
- 3. Disruptions Affecting U.S. and EU Utilities Enables lower $ 1 trillion sales, distributed investment (U.S.) power, and by 2030 much more competition New firms take Sales barely market share increasing each away from year centralized grid The result: Increasing prices, lower sales, loss of market to competitors. 3
- 4. Decarbonization –– U.S. U.S. Generation- 2012 No U.S. national climate policy yet, but regional policies and proposed Clean Energy Standard 12% Few new coal-fired plants, no CCS, and almost 42% 20% all new fossil fuel plants will be gas Environmental rules could force 30-60 GW of 27% coal plant closures U.S. Generation- 2035 State and federal renewable laws mandate 65 14% GW (2025) - - mostly wind 36% 18% Integrating renewables and storage into grid requires operating changes and new capital 33% Sources: ““Annual Energy Outlook 2012, Early Release,”” and ““Annual Energy Outlook 2011,”” Energy Information Administration. 4
- 5. Substantial Costs of Decarbonization Lead to Price Increases Total generation decarbonization ~ $1 trillion $/MCF New transmission to integrate renewables and maintain reliability- $ 250 billion Replace aging distribution system U.S. Average Annual Retail Price of Electricity Cent Per KWh, Real $2005 with smart grid - $600 billion Price increases so far have been moderated by the fall in price of ¢/KWh 75% natural gas Sources: Peter Fox-Penner, ““Smart Power,”” Presented at Exelon’’s Annual Attorney Meeting, Philadelphia. ““U.S. Natural Gas Wellhead Price,”” Energy Information Administration, 2012. ““Electric Power Annual 2011,”” Energy Information Administration, October 2011. 5
- 6. Power Sales and Energy Efficiency (EE) Energy efficiency policy is a mixture of national standards, state utility programs, and private firms selling energy efficiency (““ESCOs””) –– no nationwide strategy U.S. power use is projected to increase around 0.8%/yr with current policies, but growth could be much less U.S. Projected Power Demand AEO 2008 –– 1.10%/ year AEO 2010 –– 0.89%/ year AEO 2012 –– 0.76%/ year Smart Power –– 0.51%/ year Source: ““Annual Energy Outlook 2012 –– Early Release,”” Energy Information Administration, 2011. 6
- 7. DG In The U.S. and Europe Overnight Costs for Wind and PV (Onshore Wind and PV) The price of solar panels in the U.S. dropped by 50 % in 2011. Even with declining feed-in tariffs, solar conditions 2010$/kW are expected to rise steadily. Buildings will integrate PV (and later microwind) as well as geothermal- Utility Scale vs. Distributed Solar California is targeting 100% Net Zero (CSP and PV) buildings by 2030 Community-scale PV and wind increases Installed MW resilience, reducing cascading failures Sources: ““Annual Energy Outllok 2011,”” The Energy Information Administration, 2011; ““U.S. Solar Market Insight 2011 Year-In-Review””, Solar Energy Industries Association, 2011. 7
- 8. Over Time, the Smart Grid Will Change Everything Enable time-based rates (““dynamic pricing””) and smart EV charging with 5-15% bill savings. End billing based on cumulative commodity KWh –– enable value-added services. Enable behavioral and information-based energy efficiency. Create multidirectional distribution grids with storage. Allow better management of distribution grid: outages, voltage, maintenance, more. 8
- 9. Summary of the U.S. and EU Challenges Trillions of dollars of investments needed in generation, transmission, and distribution Sales are barely increasing, so average costs and rates rising for many years to come New competitors can enter and steal customers away by offering retail power and energy efficiency services Today’’s electric utilities will only get weaker and farther from the customer if they keep their traditional business model 9
- 10. Contrasts With China 10
- 11. China’’s Electric Power Industry is in a Very Different Position Than the U.S. Growth is 5% - 12% a year doubling the system in <10 yrs; demand is 70% industrial Scale economies and vertical integration are still significant Large-scale supplies are far from load centers very large grid buildout Goals from 12th Five Year Plan: •• 11.4% non––fossil fuel generation by 2015, and renewable energy resources 20% by 2020 •• Optimize existing capacity and distribution system •• Construct gas and pumped storage to meet peak demand •• Develop distributed energy resources •• Smart and strong grid- develop inter-provincial transmission, a strong grid backbone, and deploy smart grid technologies Yet China still has the fundamental challenges of trillions of RMB of investment, higher power costs, and opposition to higher rates 11
- 12. Some of China’’s Electric Power Challenges- From an Analytic Perspective Are changes needed to pricing and contracts? Is further structural reform needed? With rapid expansion in so many areas, how can long term system costs be minimized? Rapid urbanization and distance to large sources raise questions of best resilience and strategy. Will the smart grid operate based on non-price factors or price? 12
- 13. Renewable Integration Issues Can be Defined Across Different Timeframes Operations Planning Seconds Minutes Hours Days Months/Years Primary Frequency Load- Generation Generation Frequency Regulation Following/ Commitment and Response (AGC) Energy and Transmission Blocks Capacity Capability Ancillary Services Energy Resource Adequacy & Procurement 13
- 14. Simulating Wind and Solar Impact on Grids Frequency Regulation requirement for each 5 minute interval is estimated with two components of variance of load and generation: 1. 5-minute forecast error, PLUS 2. intra-5-minute volatility intra-5-min volatility average actual 5-minute load 5-minute forecast error Minute-by-minute 5-minute schedule deviations from 5- min schedule t t+5 14
- 15. Renewable and Storage Topics Have Gained Worldwide Attention Storage can be used to complement and integrate renewable energy But the cost of energy storage needs to drop significantly 15
- 16. Thank You 16
- 17. About The Authors Dr. Peter Fox-Penner is a consulting executive and internationally recognized authority on energy and electric power industry issues. He is a principal and chairman of The Brattle Group, a leading international economic consulting firm. In his consulting practice, Dr. Fox-Penner advises energy companies, government agencies, and their counsels on energy regulatory and market policy issues. Although his work has spanned most areas within the energy field, his current primary focus is on electric industry competition and structure, global climate change, and energy efficiency policies. Dr. Fox-Penner’’s background includes co-founding Environment2004, the Environmental Alliance, and Patriot's Energy Pledge; service as a senior official in the U.S. Department of Energy and the White House Office of Science and Technology Policy; and staff positions in the Illinois Governor’’s office. He has a Ph.D. in economics from the business school at the University of Chicago and M.S. and B.S. degrees in engineering from the University of Illinois. Peter Fox-Penner Chairman Contact: Peter.Fox-Penner@brattle.com or +1.202.955.5050. The Brattle Group Judy Chang is an energy economist with a public policy and engineering background. She has expertise in the analysis of electricity power markets and advises clients on the financial and regulatory issues relating to renewable energy investment and procurement decisions. She is experienced in leading utility executives, board members, and stakeholders in making challenging strategic decisions complicated by pressures from customers, policy makers, regulators, and wholesale and retail competitors. Ms. Chang has authored expert reports and submitted expert testimony before the U.S. Federal Energy Regulatory Commission and state regulatory authorities regarding power market issues. Her other recent work includes evaluating the potential impact of integrating renewable energy onto power systems. Accordingly, she has designed and helped develop a model that estimates the operational effects and the associated costs of variable resources on a grid. Ms. Chang has authored a number of articles and reports and presented at a variety of industry conferences. She holds a Master’’s in Public Policy from Harvard University’’s Kennedy School of Government, is a member of the Board of Judy Chang Directors of the Massachusetts Clean Energy Center. Principal The Brattle Group Contact: Judy.Chang@brattle.com or +1.617.864.7900. 17
- 18. Firm Overview The Brattle Group provides consulting and expert testimony in economics, finance, and regulation. We have assisted government agencies all over the world with electric and gas restructuring, tariff calculations, market design, contract renegotiations, and regulatory policies. Our services to the electric power industry include: Climate Change Policy and Planning Rate Design and Cost Allocation Cost of Capital Regulatory Strategy and Litigation Demand Response and Energy Efficiency Support Electricity Market Modeling Renewables Energy Asset Valuation Resource Planning Energy Contract Litigation Retail Access and Restructuring Environmental Compliance Market Design and Competitive Analysis Fuel and Power Procurement Mergers and Acquisitions Incentive Regulation Transmission We have more than 200 staff across six global offices: Cambridge, MA; San Francisco, CA; Washington, DC; London, Madrid; and Rome. 18