Smart grids set to revolutionise national power systems

Smart meters, big data, analytics, cloud-based technology, and the internet of things are all making contributions to a smarter energy system, which is likely to revolutionise the energy sector, according to delegates at the recent Smart Grid World Summit in London. The combined impact is expected to rival that already seen in telecoms or banking, where much of the technology has its origins. Development is being driven by regulators in the area of smart metering, and by price variations and customer choice in countries with competitive markets, along with the need to accommodate more intermittent renewables, major offtake points and distributed generation. All this has major potential implications for utilities, new business models and consumers.

source: astro.uni.wroc.pl
When it comes to smart grid development, one major question came up at the summit repeatedly: where is the value and who, if anyone, gets to keep it in competitive unbundled markets? There were concerns that in the current format, there would be a danger that new entrants and customers might take it all at the expense of established suppliers – in which case, how will utility investors ensure returns on the capital outlay required? Most conference attendees agreed the changes tend, overall, to undermine the existing centralised power system model, in favour of a more distributed one, and that established suppliers needed to develop new business models.

The changes also alter what is important to energy systems, but so far regulators have been unable to attach value to these new desirable inputs. Above all, in order to increase the proportion of renewable or low carbon power sources, smart grids are necessary - but as this proportion rises, there is also an increased value associated with system and capacity flexibility, in order to cope with the periods of low renewable output. However, most current market models do not recognise this, and many felt they needed to be redesigned, including a replacement for feed-in-tariffs.

Filling in the gaps

Stephen Woodhouse, a director at consultants Poyry, noted that there was no economic model for a system where the marginal cost of production is zero, as is effectively the case for renewable power. “If we are not careful this will eat away at the value of the whole energy sector.”

there was no economic model for a system where the marginal cost of production is zero
There is no surprise that in Germany utilities see solar, with its zero marginal cost, as a threat, because it undermines daytime prices in the summer, making flexible gas-fired power generation unprofitable. “That flexibility is needed - whether in the form of gas-fired back-up, demand side management or storage - for when intermittent solar and wind are not operating”, he said. No base-load is required, as this will be displaced completely by renewables when they are running – it is only the gaps that need filling in a majority renewable smart system.

That flexibility is critical to the future roll-out of more renewables, according to Oliver Schaffer, President of the European Photovoltaic Industry Association (EPIA). “We need smart regulations to enable an effective smart grid and more renewables… FITs don’t work anymore – they are not customer-centric.” He noted there were three million solar installations that grid operators must deal with in Europe already, which supplied 3.3 percent of its demand in 2013, from 90 GW of capacity. “Already inverters are part of the smart grid, integrating existing supply nicely. However, there is a need to revolutionise the system and market design away from simple kilowatt hour sales to accommodate the next wave of renewables, bringing totals above 50 percent of generating capacity.”

“There needs to be incentives for the sort of flexibility provided by gas-fired generation, DSM or storage… Technically there is no problem to roll out more solar, the barriers are regulatory – it blocks cooperation between solar and grid networks – some regulators don’t even allow inverters.” Martin Wilcox, Head of future networks at UK Power Networks (the Distribution System Operator or DSO for SE England) agreed: “UK regulation is 20 years old; it didn’t envisage these issues.”

Mr Schafer said the EPIA had teamed up with international wind and gas associations to develop suitable regulatory proposals and market redesign, with an initial paper due to be released in early 2015. “We have talked to Greenpeace and other environmental groups about this and they understand we need to cooperate with relatively clean fossil fuels like gas in order to expand renewables, but they still won’t say anything positive about gas”, said Mr Schafer.

Regulatory confusion

He said the solar-wind-gas alliance was working closely with the European Commission, but competing political pressures were muddying the waters at national level. Germany, for example – clearly pro-renewables – is also promoting a capacity market system similar to the UK’s to ensure its coal sector is protected, he said. That would pull the business model in two directions as such an option is designed to support base-load providers, and does not encourage the flexibility needed – and made possible using smart grids - in a more renewable-based, distributed and smarter system.

Mr Schaffer said: “We don’t want to protect the past, we need to build the future – if you want to increase solar [and wind] installed capacity further then a system redesign is needed, in combination with smart technology.” Kevin O’Donovan, Sales Director at Intel agreed: “technology is the easy bit, regulatory models are not as innovative as the technology”.

New regulatory models could include tradable options or insurance systems to guarantee supply or demand flexibility – rather than a capacity market – according to Mr Woodhouse. Options would be available for different classes of flexibility, including gas-fired back-up, demand side management (DSM) – which relies on an effective smart grid roll-out – and, especially if the others are relatively unsuccessful, storage – both central and in the home or business, including in the form of electric vehicles. He added that Poyry was in discussion with the Irish regulator on this matter.

Customer driven

In the past politicians and industry could decide how to move forward centrally, now the situation is evolving independently and in an increasingly customer-centric way, according to attendees. This requires reactive adaptation on the part of regulators and suppliers. According to an IBM survey of utility CEOs, 65 percent are considering the development of new business models, but because the technology is developing faster than the regulatory models, their direction is unclear.

The experience from the US, according to John Dorn of Accenture, was that while consumers are interested in managing their own home energy use, with savings only currently at around 8 percent they quickly lose interest. For customers who wish to “fit and forget” their systems there is another new role for the utility or another energy service provider. But In order to act on behalf of their consumers, a supplier must understand its customers’ behaviour through the use of big data and analytics.

Customers must also trust suppliers, which is lacking in countries like the UK, where the big utilities currently suffer a bad press.

Customers must also trust suppliers, which is lacking in countries like the UK, where the big utilities currently suffer a bad press
In addition, utilities are not yet using big data effectively, all of which leaves plenty of room for incoming disruptive business models. IBM noted that energy systems were already dealing with vast amounts of data. “There will be 1 trillion connected objects and devices generating data by 2015, producing 2.5 billion GB of data each day, and 80 percent of this is unstructured, requiring advanced interpretation”, said Laurence Carpanini, head of smart grids at IBM. What these new businesses don’t yet have is the energy companies’ access to a portfolio of supply assets and customers – while supply can be purchased in the market, a customer base needs to be built up.

Two-way flow

As consumers increasingly also become generators in a smart, more distributed system, their home or business based energy systems will require two-way flow, putting pressure on distributors to adapt. Attendees called for a review of local energy systems and micro-grids, and the ability for consumers to sell power back to the market, which is currently not possible on a commercial basis in some countries, including the UK.

The smart meter part of smart grids require consumer cooperation, and it was noted that this may be more difficult in a rising energy price environment as consumers will not be able to see the savings being made. Some consumers may indeed blame the rising prices on the smarter systems, as that is the only change they see. “The two main risks to the roll out of smart meters and other smart grid components are a lack of consumer engagement and flexibility in regulation and market design”, said Rosie McGlynn, head of smart energy at the Energy UK trade association.