A couple of weeks ago, I presented to a group of institutional investors, clients of Jefferies Group investment bank. One of the big questions was regarding what they should be considering in terms of regional, national, and regulatory concerns for grid investments. That was worth a full article of its own, but there were a couple of other questions.
Ancillary Service & Other Markets
The first concerned ancillary services markets. The investor had heard pushbacks regarding things like inertia, that electrifying everything and moving to renewables would hamstring these necessary elements. I had covered the requirement for frequency and voltage control, and the growth of ancillary services markets. More detail on this type of thing was requested.
One of the things that was interesting over the 2010s was we used to just be able to plug solar farms and wind farms into the grid and not care. We’d just plug them in, we didn’t have any power management solutions on them, didn’t have to be particularly well-behaved because the amount of generation was so small, that the rest of the grid just took care of it.
Then over time, people said, “Well, you’re building how much power? Well, put some power management on that. Otherwise, we won’t allow you to plug in.” Now, we have this power management technology associated with these large-scale wind and solar farms, which is doing a lot of that stuff to match what the grid is doing. It’s matching frequency, it’s matching voltage.
Studies started emerging in 2014 demonstrating these capabilities. I first heard about it at WindPower 2014 in Las Vegas. There have been multiple studies about using wind farms for backup, voltage control and frequency control, including a National Resources Canada study run by my friend Tom Levy.
Backup with wind farms or solar farms is trivial, actually. They are controlled remotely with SCADA interfaces. It’s possible to feather the blades of wind turbines a bit or turn off strings of solar panels so that they are generating a bit less power, normal in periods of very high demand, but still have the ability to be turned up quickly as needed if something disrupts power elsewhere.
Both solar and wind farms are seeing the addition of storage for hybrid model farms, which obviously enables even faster response backup.
Once obvious model is day ahead reserve markets in the USA. Jesse Jenkins did a great study that showed that the USA’s nuclear pressurized water reactor fleet had some ability to offer reserve power at some points in their fueling cycle and lifespan if they were allowed to operate flexibly. Regulatory constraints prevented that. But regulatory constraints typically don’t prevent wind or solar farms from reserving power on high wind and sun forecast days to provide fast response reserve power.
The power management assets of the wind and solar farms already make the electricity well behaved as it enters the transmission or distribution grid, and can be set up to provide voltage and frequency balancing to a great extent. That typically draws auxiliary power from the renewables, so once again is foregoing some generation revenue for some
I project that the majority of inertia and other types of things will be leveraging those power management assets more efficiently, but we’ll also value those big rotating hunks of steel differently and they’ll be able to bid on them as well. That will give hydro dams and nuclear power plants some additional revenue, as their characteristics will be rewarded instead of taken for granted. That would assist in bridging nuclear plants to retirement, just as day ahead reserve market access would, but doesn’t make new nuclear economically competitive particularly.
The UK’s new inertia market is a good example. It’s a new market and they are already running inertia auctions. The first was won by ABB technology, which spins a big hunk of metal up to grid speeds with grid electricity and keeps it there, and hooks it to a condenser. I was surprised that power management technology attached to renewables didn’t win, but I will be unsurprised to see it winning in the future. The UK has deployed the market innovation, and now it will spread.
One of the challenges which I expect to see overcome is more regional- and continent-scale grid and transmission planning in developed countries. In the USA, historically it’s been state by state, which means that entrepreneurs like Michael Skelly run into significant roadblocks trying to bring renewable electricity across multiple states, as is documented in the great book Superpower.
There need to be larger geography organizations doing this work for continent-scale grids. China is leading on this with the example of the Global Energy Interconnection Development and Cooperation Organization (GEIDCO). It has 141 member states which of course overlap heavily with the Belt & Road Initiative countries. One major study that came out this year was led by Chinese and African researchers using Europe-developed simulation software to assess the optimal mix for a 12-country, 10,000 km, sub-Saharan Africa HVDC transmission line tying renewables and countries together.
We need something like that in the developed countries. It’s start to emerge in the USA, with major utilities in the densely populated north east working together more closely, but it’s early days.
Rooftop Solar & Storage
California and Australia’s models of great penetration of rooftop solar were top of mind for at least one of the investors, as well as home storage. An investor wondered if those examples were replicable and scalable.
My most recent talk with Jefferies’ clients included distributed generation. There are value propositions, but also downsides. It remains a very expensive way to build generation compared to utility-scale solar, but is funded out of the pockets of building owners. Per a McKinsey study a few years ago, rooftop solar was about 15 times as expensive per ton of carbon dioxide avoidance, but less of a concern for utilities.
While it does enable some reduction in utility-scale investments, it also creates the infamous duck curve which isn’t necessarily easy to manage with the generation behind the meter. Utility-scale solar farms like wind farms have contracts and controls allowing them to be shut down when they are excess of requirements, but that doesn’t exist nearly as much for panels on Joe Median’s roof.
There does need to be net metering regulations in place, but the next problem is that it still requires all of the wires and ancillary services. It can cannibalize utility revenue while maintaining its expenses. That’s why there tends to be a lot of changes to billing and utilities aren’t necessarily eager to engage in net metering approaches. The costs of wires and ancillary services have to be unbundled from the per-kWh costs, and that’s deeply uneven across geographies.
China added 55 gigawatts of rooftop solar in 2022 alone, making it an explicit strategy. That compares to the total US solar capacity of 73.5 GW at the beginning of this year.
Mark Z. Jacobson and I have debated this. He thinks 15% of total energy demand will be from behind-the-meter solar mostly on rooftops, I think 5% to 8% of energy will come from distributed solar, but that’s still a lot. This is a difference in degree in our perspectives, not a disagreement on the merit of it.
I’m not nearly as bullish on behind-the-meter residential storage as many people are. I don’t think that scales to grid assets particularly. I’m not as bullish on vehicle-to-grid as most people are either, but do think there will be a lot of rolling batteries. I think they provide tremendous demand management opportunities. Kahneman and Tversky’s prospect theory tells us people fear loss more than they value potential gain. That psychology directly plays into the ability to take advantage of the power that’s in distributed storage and suck it back out.
There’s some commercial plays to be made there where corporations with fleets might do that, but for the most part, with cars it would create the fear of not being able to get to work or to get to the lodge or the golf course in order for some money to be made. I think the psychology doesn’t work well, but if you guarantee with a service level agreement that people will be able to wake up in the morning with a full battery, and then you can manage that battery over the night about when you’ve got storage, you don’t have to build nearly as much storage. Aggregated demand management is a strong vehicle play, but that’s just putting electricity in cars more slowly.
Let’s take my condo building, with its 330 parking stalls as we go through electrification. A full quarter of our electricity bill is peak power overage costs, $5.65 per kilowatt, not kilowatt hour. As we add cars, we’re going to add smart metering that spreads that demand for the building and the cars over the night. That automatic demand management smart metering will be one of the things that will save utilities as we move forward. Then what we’ll start seeing is aggregation of charge points through the major vendors like Electrify America or Tesla, to once again balance smart charging and fleet charging overnight to reduce peak demand.
There’s a strong value proposition in terms of grid management, but it’s taking the stuff that used to be applied to lumber mills and aluminum plants, where they would have contracted agreements for demand management in five-megawatt chunks, and putting those through the major chargers as a demand management aggregation facility. They’d say to Electrify America, “Hey, we need 100 megawatts of power reduction in the next hour.” Electrify America would go, “Yes, here, click.” That’s the model I see most dominant there, and that’s a valuable model.
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