Building the Sustainable Electricity Grid &
A New Utility Incentive Framework
by Pentti Aalto & Roy Morrison
I. Sustainability: A 21st Century Imperative
A. Sustainable Development Definition
Sustainable development has been defined most broadly as “ Development
that meets the needs of the present without compromising the ability of future
generations to meet their own needs.” (World Committee on Environment and Development, 1987).
Energy use and development and it’s economic, ecological, and social consequences are crucial issues for sustainable development.
B.
Sustainability Imperative
The unsustainable consequences of current energy use includes the gathering threat of global climate catastrophe,
resource wars for fossil fuels, enormous trade deficits, massive pollution, depletion, ecological damage and habitat destruction. The electricity sector is a significant, but certainly not the only, contributor to these problems. We cannot continue indefinitely
upon the current unsustainable path. In the 21st century, economic growth must mean ecological improvement, not
ecological destruction.
Prosperity and ecological sustainability are not only essential, but possible
for our dynamic market system.
C.
Market Rules for Sustainability
In a market economy the market rules and regulations must send proper economic and ecological signals to all market
participants to properly value and reward sustainable conduct. Our hearts tell us what we should do. Market prices tell us
what we will do. Sustainability as a practical goal cannot be separated from sending proper price signals.
As the amount and rate of pollution, depletion, and ecological damage increases the rate of profit must decrease,
and, conversely, as the amount and rate of pollution, depletion, and ecological
damage decreases, the rate of profit must increase. This is the essential characteristic of sustainable markets and sustainable
market rules.
This inverse relationship between profit and pollution is the basis for making real and monetizing businesses triple
bottom line of sustainability , the economic, the ecologically, and the social. Production and consumption must be based on
market rules and timely price signals that make unsustainable cost more, and the sustainable cost less to send proper incentives
for market behavior including savings and investment, production and consumption.
These sustainable incentives must impact entire supply chains and product and process life cycles. We cannot view
sustainable conduct as meeting a single metric, for example carbon use, or a single goal, for example, preventing global climate
change. Reducing carbon is a necessary, but not sufficient step in meeting the challenge of
building a sustainable and prosperous future, of moving from an unsustainable
industrial present to a durable and prosperous ecological future.
A prosperous, sustainable and democratic market system is dependent upon the ability for all market participants
to do both good and well.
II. Basic Principles of Sustainable
Electricity Network
The 21st century sustainable, smart utility grid will be a network where each user of the network, both
as generator and consumer, indeed each device connected to the network, will respond in real time to signals on system prices
and sate and act in appropriate fashion. The challenges in building this network are not merely technical issues of electrical
and mechanical engineering, but must encompass appropriate market rules, regulation, proper utility incentives, and financial
engineering to take advantage of the emerging dynamics of renewable resources
and sustainability. The principles guiding development of the network include:
A. Rates and Market Rules Send Proper Economic and Ecological
Signals
Building a sustainable and smart utility grid system requires that all participants who generate, transmit, and
use energy at any point in the network can respond in a timely fashion to accurate,
real time price signals that reflect true costs economically, ecologically, and socially of system operation.
1. Market Prices are Fully Loaded
Network market prices should be
a combination of marginal price fluctuations and long term costs and consequences of system investment and operation.
To the extent possible, the market price viewed by all participants should be structured to encompass all costs associated
with operation. Thus, for example, the decision made by a user to respond to price by variously controlling or deferring use, or consuming more, or elf-generating should be made on the basis of a price signal that include fully loaded costs for generation in all aspects, distribution, forward capacity
and other charges, carbon and emissions charges, as we as and renewable energy generation and capacity credits.
2. Market Prices Are Non-discriminatory for All Participants
All participants in the network, large and small, should be exposed to and experience real time costs of system operation. Social needs for cost averaging and rate relief for customer classes should be accomplished
in ways that do not remove effective price signals, although they may mitigate their effects.
3. All Smart Grid Network Participants Must Be Capable of Receiving Real Time Signals on Market Prices and System State
Decisions made on the basis of real time information on price and
system load state will facilitate user economic and ecological decisions and serve in a cybernetic fashion to effect and help
balance the state system. Thus as price and load increases users respond by reducing demand and increasing self-generation
reducing system load and therefore price.
Current technology will allow for use of five minute price signals to users. Ultimately signals can be in two second range or less and allow the network itself to exercise function analagous
to large power plant automatic generation control (AGC).
B. The Smart Grid Network Be Based on Open Source-Open Access Protocols
Open access and open source protocols should be established to facilitate development of innovative control, communication, metering, energy generation, energy storage technologies. The system
should maintain sufficient bandwidth to meet information load and needs as well
as electrical load and needs. Regulators and utilities should be cautious in adopting proprietary standards for metering,
communication, and distributed generation that foreclose innovative future development.
C. The Distribution Utility Has a Key Role in Maintaining and Developing the Smart Grid
The 21st century distribution utility has a vital role in the development, operation and maintenance
of the smart electric grid and its two way communication and control system and distribution network reconfigured, as needed, for the optimal operation of distributed generation and co-generation.
D. Distribution Utilities Must Receive Proper Economic Rewards and Incentives
The current system where distribution utility revenue and profit is dependent upon through-put of central generation
purchased power is incompatible with building a sustainable smart grid system and must be changed. The current system has
perverse economic incentives to limit distributed generation and co-generation and energy efficiency development. Unless a
new and logical sustainable revenue model is adopted, these pillars of sustainability
will remain marginal. Utilities should be rewarded, not penalized for assisting and encouraging development of all aspects
of the sustainable grid in a ion-discriminatory fashion. We will outline our specific
new revenue model below.
E. Sustainable Network Compatible With Other Emergent Sustainable Forms
The sustainable, smart network can work either in parallel or cooperatively
with other sustainable forms such as renewable energy hedge contract for difference financial arrangements between end users
and renewable energy developers, price cap hedges energy efficiency distributed generation investments, user investment in renewable energy facilities and equipment, financing of efficiency measures through
stream of savings arrangements and loan pools, and other financial and physical arrangements that will emerge.
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III. The
21st Century Sustainable Electricity Network will:
A. Minimize Carbon and
Green House Gases (GHG)
The system will send proper price signals that account for all GHG and their contribution
toward climate change. For example, while carbon is the most ubiquitous GHG, oxides of
nitrogen have a GHG potential 270 times that of carbon per unit and emissions
should be subject to an appropriate charge. (Industrial
Ecology, Gradel and Allenby, 1995).
B. Maximize Efficiency
Sustainable electricity network will maximize system efficiency which will include both electrical efficiency and
thermal efficiency. This will encourage, for example, appropriate use of cogeneration, district heating, and heat
pumps as basis for highest system efficiency and lowest system emissions and
waste. An increase in total electric system emissions through the proper application of
technologies such as heat pumps, electric cars, cogeneration may dramatically reduce total emissions and impacts.
C. Minimize Entropy and Maximize Use of Available Resources
Sustainable system efficiency is best accomplished through use of low temperature “waste” streams such as power plant “waste” heat reclaimed to provide end user space heating. Electricity and fuels represent high
value low-entropy energy sources that should be used to obtain the maximum amount of possible work. Using, for example, electricity
for resistance space heating and fossil fuels to boil water for low temperature space heat is an inefficient and highly wasteful
practice. Instead of boiling water for space heat, for example, the use of electricity
for optimized ground source heat pumps could increase C.O.P. to around 25.
D. Minimize Pollution, Depletion and Ecological Damage
Sustainable system operation must be accomplished by price signals
at appropriate points in the supply chain that include costs of pollution, depletion and ecological damage in final price
to users.
E. Communicate Accurate Real Time Prices
Smart network must rest upon the ability of all participants to receive
and act upon in a timely fashion good price information.
IV. New
Utility Incentives for Sustainable Smart Network Development and Operation
We present what we believe is a fair, useful, and durable model for distribution utility revenue that will support
and properly encourage the development, growth and maintenance of a sustainable, smart utility grid system. The traditional utility rate model favored construction of central station generation and provision of utility generated power as a result of
economies of scale, plentiful fossil fuels, and tolerance of ecological externalities as acceptable. These dynamics no longer
obtain.
An effective revenue model for a sustainable, smart electric network system for distribution utilities should:
Provide Incentives for More Efficient Operation and Optimized Use of Distributed Generation, Heat Pumps, District
Heating, Co-generation Leading to Maximum System Efficiency and Economic and Ecologically Sound Operation
The New Sustainable, Smart Network Incentive Revenue Model for distribution
Utilities Will:
1. Determine
distribution utility cost of service and invested capital and calculate estimated
sales in order to determine a yearly total revenue requirement and a projected average price per kilowatt hour of distribution service.
2. Determine
specific user costs such as transformers, feeder line, smart meters, communication devices and controls that should be included in user customer charges.
3. Distribution
utility kwh charges should be included in real time price signals transmitted to end users. Distribution charges, should be
subject to varying time-based price signals based on degree of system load, use, and congestion. As line loading approaches
maximum prices will rise to maximum price permitted. Proper price signals provide the basis for decisions that will effect
the state of the network such as curtailing use and self-generating.
4. Utility
distribution kwh charges should be periodically reevaluated to adjust for actual compared to projected use and revenues with
appropriate adjustments to provide incentives neither for maintaining congestion or overbuilding.
5. A
decline in sales as a result of efficiency measures by users or use of distributed generation or cogeneration should result
in an increase utility rate of return to reward the successful operation of the sustainable smart, network.
6. Generators of any size, from large power
plants to home based distributed generation units while producing power in excess of use do not pay for the use of distribution
network beyond customer charges for feeders and transformers, meters and communication devices When producing power they provide
for some of the load on the system that would have to have been otherwise generated.
Sustainability at Southern New Hampshire University
