Technology Corridor
Building a Digital Utility: A Question of Survival
EPRI challenges the industry to modernize the grid.
August 2004
By Kurt Yeager
At a time when a secure and reliable electricity infrastructure should be one of our highest priorities, we find ourselves with a system that is increasingly vulnerable to power quality problems and to intrusion, both natural and man-made. The constraints on utility investment that have brought us to this state must be released so that we can move forward to enable a truly digital society and economy.
The reliability of our power supply needs to be fundamentally improved. Consumers are paying an increasingly high price in terms of unreliability, largely driven by the digital revolution. Computer technology is driving assembly lines and process control, and all the things in the flow of commerce. The cost of power disruptions, small and large, has grown to about $100 billion a year, or in effect a 50-cent surcharge for every dollar spent on electricity-a cost that is buried in the cost of goods and services. It can be eliminated.
Certainly, policy confusion depresses the financial health of the industry, and investment abhors uncertainty. You don't want to put your money in a venture when you don't know whether or not you're going to get it back. The system today makes it very difficult to justify investment because the rules are not clear and they're subject to almost whimsical change. That is not a situation that can be tolerated.
We have reached a state where there is a loss of clear accountability incentives for system development and investment. The obligation to serve, which was traditionally at the root of this business, has been clouded. Who is accountable? The public sector says, "We've turned it over to the market." The market says, "You haven't given us rules that allow us to do it." So the market, which was expected to solve the obligation-to-serve issue, and provide it in a market-driven system, can't do so within the confused system of rules guiding infrastructure investment, or in the analog system of infrastructure that exists today. As a result there is a sense of a growing tension between the electricity sector and national well being.
Rebound Dilemma?
If the utility industry has got problems now, what will happen as the economy continues to strengthen? Are the lights going to go off? Are they going to flicker? How is the industry going to keep up with demand? And what is it going to take for this industry to get the investment it needs?
The industry is currently in a low-growth period with single-digit rates of return. But what's going to happen when utilities have to compete with double-digit rates of return? What sorts of business structures are going to have to be created, perhaps at the expense of the public good, in order to justify those levels of return? Those are things that policy and decision-makers have to come to grips with in terms of stabilizing policies and providing leadership so that investments look not only to the immediate payback, but the strategic payback for future generations.
This electricity infrastructure is at the root of everything in the U.S. economy and society. Everything depends on it. Nothing is separate from it. As the electricity infrastructure goes, so goes the nation. So the key issue to be resolved is: Will the system continue to be the critical infrastructure for the 21st century, or will it be left behind as another industrial relic? I would suggest that the industry and the nation cannot afford to let the latter case be. There is no option. The country will continue to depend, and in fact increasingly depend on its electricity infrastructure. There is no alternative source of electricity that can be plugged into homes or businesses that will in any way provide the resources needed to run this country in the future.
Distributed energy sources are great, but they are no panacea. In fact, they work best and most reliably as part of a network. They should be an integral part of the grid.
Time's Up
So the industry is at an inflection point, a fork in the road. Utilities are at a point where they must provide transformative leadership. Continuing the status quo is not feasible. The industry typically goes through such an inflection point in its life-cycle about every 35 years. For example, the Public Utility Holding Company Act (PUHCA) coincided with such a change. This is not to say PUHCA was the root of why there was rapid growth, but it was a point in time, an event if you will, that marked a transition. From then until about 1970 there was major growth and consolidation of the industry. In 1970 all that changed. There were no longer declining rates. Demand was slowing. There were new environment rules, and fuel costs were going up.
For the last 35 years utility executives have been trying to maintain the traditional declining-cost commodity business model in the face of pressures that really can't be withstood anymore. And that has culminated in the financial crisis that the industry has faced for the last several years.
The industry is now at the point where it must either transform or decay. And it's not just the industry, it's the nation. Transformation is tough business. It's easy to talk transformation, but whether you're an individual, a company, or an industry, transformation is the toughest thing you can do-and you usually don't do it unless there is no other option. Utilities need to look to innovation to transform their business as well as the service value of electricity.
The electric system today is the last vestige of the 20th century analog industry, which is ironic; electricity drives the digital revolution, but the industry providing it is forced to use analog switches and relays that Thomas Edison would recognize. They're bigger and more sophisticated, but they don't operate any faster or more precisely.
Utilities need to increasingly integrate electricity and communications, whether for the last millimeter, the last mile, or the last 100 miles. At the end of the day, whether at home or business or wherever, the world is going to be managed by microprocessors that depend not on bulk energy but on a stream of precise electrons with which there are connected bits of information, absolutely coordinated. That's the model of service for the future.
Those microprocessors will operate through a portal, so that today's meters-which are more of an iron curtain limiting communication-are replaced by a portal that facilitates two-way communication between consumers and suppliers. When the industry has that, it can begin to offer new services and to integrate distributed resources, bringing on board renewable energy and other intermittent energy sources.
Double Up
A digitally controlled system can integrate those distributed generation sources, and can use silicon rather than iron and steel to manage those sources. The bottom line is that the technology exists, the means are there, but we have to acquire the will and the incentive to roughly double the rate of investment in this power industry.
The pattern of investment in the industry has always been spiky. Utilities have overbuilt and then underbuilt.
But the industry has institutionalized underbuilding during at least the last 10 or 15 years.
Many thought utilities would make up for this by building market-based combustion turbines. In many ways, those combustion turbines have simply reinforced the inherent vulnerability of the underlying power-delivery system. There was little coordination between those efforts, and now energy markets are faced with a problem of much higher gas prices, which will also reinforce the boom-and-bust environment in supply and prices.
Utilities have to build up investment in every aspect of the business. What's that going to cost? There's no free lunch. But this would cost the average consumer about $3 a month, and I would suggest that because that consumer would have far greater control over electricity service - what kind, how much and under what conditions-he or she has the ability to save far greater than the cost.
In addition, utilities will have the ability to eliminate the cost of power disturbances that raise the costs of goods and services. That's going to be worth several hundred dollars a year to every consumer.
On top of that, utilities will accelerate national productivity and economic growth dramatically, which will build income for everyone. Right now, listening to customers, the issue is trust. Utilities have to provide leadership and build trust at every level so that consumers are an active part of this coalition for electricity value transformation.
This is not a partisan issue. When you get right down to it, the modernization of the U.S. power system is something that is absolutely essential. It's one of the most important policy steps that this nation can, and must, take. It may not be the most dramatic step, but it is the most important step toward ensuring the future welfare and livelihood of this nation.
Kurt E. Yeager is president and chief executive officer of the Electric Power Research Institute. He can be reached at 650-855-2456 or kyeager@epri.com.
[Editor's Note: The article was excerpted from comments made by EPRI CEO Kurt Yeager as part of the "Future of Electricity Forum," sponsored by the Committee for Economic Development. The event was held June 21, in Washington, D.C.]
Yeager's 5 Maxims
Maxim #1 The Smart Grid: Resolves Power System Vulnerability
Digitally control the power delivery network by replacing today's analog electromechanical switching with real-time power electronic controls as the foundation of a new smart, self-healing power delivery system. This is the essential step needed to most cost-effectively address the reliability, capacity, security, and market-service vulnerabilities of today's power system.
Maxim #2 Advanced Market Design: Fosters a Revolution in Energy Services
Create an economic framework supporting fully functioning, transparent markets that allow for confident, real-time wholesale and retail transactions, and maintain a sustainable balance in demand and supply. This will enable more effective risk management and will restore investor confidence and capital attraction, while contributing to the financial security and stability of market participants.
Maxim #3 The Consumer Portal: Accelerate Productivity
Integrate energy and communications through the transformation of the electricity meter into a two-way interactive consumer gateway that will provide real-time information and power exchange. The portal will be the linchpin technology that leads to a fully functioning marketplace involving consumers far beyond the commodity paradigm of current electricity service.
Maxim #4 A Commitment to Environmental Protection
Emphasize market incentive mechanisms that confidently align business prosperity with the move toward more efficient, cleaner, low-emitting innovative electricity supply technologies and reduced health and welfare risks.
Maxim #5 An Advanced Generation Portfolio: Manage Global Sustainability
Develop a robust and diverse set of electricity generation options ensuring the most secure and least-cost electricity supply, including distributed energy resources and renewables as well as nuclear, gas, and coal refining. Combined with this is the trend toward electrification of transportation, and increased end-use efficiencies.-K.Y.
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