Who Designs the Grid of the Future?

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1 Who Designs the Grid of the Future? Frank A. Wolak Director, Program on Energy Sustainable Development Professor, Department of Economics Stanford University Renewable Energy Goals and the Interstate Transmission Network Austin Electricity Conference Designing Three Grids Three interconnected grids Inter-state transmission network Intra-balancing-area transmission network Distribution network Characterize major design challenge faced by each grid Integrated grid planning process Top down transmission planning Bottom up distribution grid planning 2 Renewable Portfolio Standards 29 US states have renewables portfolio standards (RPS) that require either Absolute levels of renewable generation capacity in state A pre-specified share of the total energy consumed in the state to come from renewable sources Many states have long interconnection queues for intermittent renewable energy resources Existing transmission infrastructure is a major barrier to delivering renewable energy to major load centers 4 1

2 Regional Barriers Major wind and solar resources in the US tend to be where population density is low Little existing transmission infrastructure Few local resources (e.g. storage and ramping generation) to manage intermittency Lower renewable generation construction costs Much higher generation capacity factors possible Latter two factors lead to lower $/MWh average cost Rich resources outside of California in Western Electricity Coordinating Council (WECC) Difficult to see how California can meet 50% RPS goal at least cost without access to these resources Significant expansions of interstate transmission capacity throughout WECC needed 5 Regional Regulatory Barriers Transmission expansion across state boundaries even more difficult than within California Federal government does not have siting authority that it has for natural gas pipelines Energy Policy Act of 2005 gave Federal Energy Regulatory Commission (FERC) authority to designate strategic transmission corridors and order transmission lines to be built Palo Verde/Devers 2 line proposed by Southern California Edison was a test case for this authority Need for renewable energy supply to major load centers strongly argues for regional transmission planning process At least at Western and Eastern Interconnection levels 7 Wind Resources in US Intra-Balancing-Area Transmission Network 6 8 2

3 The New Role of the Grid Re-structuring fundamentally changes role of grid Before Grid expansions improve performance of imperfectly regulated vertically-integrated utility Increases ability of utility to substitute high cost supply near load center with low cost supply from distant resources After Grid expansions improves performance of imperfectly competitive wholesale market Increases number of firms able to compete to supply electricity at each location in transmission network Increases amount of low-priced energy that can displace highpriced energy at load centers Conclusion--Optimal grid configuration different for vertically-integrated regime versus wholesale market regime Owners of productive assets face different incentives under each regime 9 New Role of Grid Wolak (2015) quantifies magnitude of competitiveness benefit for actual wholesale electricity market Measuring the competitiveness benefits of a transmission investment policy: The case of the Alberta electricity market, Energy Policy Finds sizeable competitiveness benefits from transmission investments that eliminate perception of transmission congestion by strategic suppliers Competitiveness benefits are specific to concentration of generation ownership, pricing mechanism, and configuration of existing transmission network in market General methodology can be applied to any ownership structure, pricing mechanism, existing network, configuration, and proposed upgrade Wolak (2016) Measuring the Competitiveness Benefits of Transmission Expansions in a Zonal Market: The Australia Electricity Market, 11 New Role of Grid Least-delivered-cost-to-consumers grid is not the same under both regimes Transmission network configuration impacts ability of expected profit-maximizing suppliers to impact wholesale prices to increase their profits Suppliers take this into account in formulating their expected profit-maximizing offer curves Additional grid capacity can increase number of hours per year that a strategic supplier faces competition from all suppliers in market This causes more competitive behavior by strategic suppliers (offer curve closer to marginal cost curve) Can measure consumer benefits from this change in strategic behavior due to expanded transmission network 10 New Role and Renewables Competitiveness benefits of transmission expansions greater during hours with less intermittent renewable energy output Less intermittent renewable energy production provides greater opportunities for conventional generation unit owners to raise prices through unilateral actions Least cost to consumers grid planning process accounts for competitiveness benefits of transmission expansions Particularly in regions with significant renewable energy goals 12 3

4 Distributed Generation and the Distribution Network Factor Increasing Distribution Charge As more distributed solar is installed in a given distribution grid, upgrades may also be necessary Solar system sized to produce customer s monthly consumption will yield more electricity than customer consumes during daylight hours Grid upgrades raise fixed cost of grid, which further increases $/KWh charge for use of distribution grid Approximately 100% increase in $/KWh distribution charge from 2003 to 2014 for each investor-owned utility in California 13 Distribution Network Pricing Fixed cost of distribution grid does not depend on how many KWh are delivered Very small marginal cost of delivering KWh As more customers install distributed solar, the same fixed cost must be recovered from fewer KWh $/KWh charge must increase Higher distribution charge increases incentive to install distributed solar Avoid paying higher retail price of electricity Other factors increase distribution charge and retail price California Solar Initiative (CSI) Provides $2.167 billion between 2007 and 2016 to support distributed solar CSI is funded by electric ratepayers through higher retail prices Higher $/KWh retail price encourages more consumers to install distributed solar California has 33% Renewables Portfolio Standard (RPS) by 2020 and 50% by 2030 Above-wholesale-market price cost of qualified renewable energy included retail price Average statewide retail price increased from approximately 13 cents/kwh in 2003 to 23 cents/kwh in

5 Impact of Renewables Policies CSI has reduced volume of energy withdrawn from grid and increased fixed cost of distribution network CSI and RPS has increased retail electricity prices to fund distributed solar and above-market-price cost of renewables Research Question: How much of increase in distribution price can be attributed to distributed solar? No CSI Distribution Price Dependent Variable Proj(i,t) (0.0083) Project(i,t-1) (0.0077) DC(i,t) DC(i,t) DC(i,t) (0.0163) (0.0159) Observations R Standard Errors are clustered at the utility level Utility Fixed Effects and Quarter-of-Sample Fixed effects included in all regressions DC(i,t) = logarithm of average distribution charge for utility i in quarter t Proj(i,t) = logarithm of solar PV installs for utility i in period t Proj(I,t-1) = logarithm of solar PV installs for utility i in period t-1 No CSI Distribution Price Regress log of average quarterly distribution charge for each of three California investor-owned utilities on current and lagged quarterly solar installs for that utility service area Pacific Gas and Electric (PG&E), Southern California Edison (SCE) and San Diego Gas and Electric (SDG&E) Model includes utility and quarter-of-sample fixed effects Sample period is Q to Q No CSI Distribution Price Borenstein, S. (2012) The Redistributional Impact of Non-Linear Electricity Pricing, weights used to computed average distribution rate 5

6 Improving Efficiency of Distribution Pricing Distribution pricing much move away from $/KWh charge for each KWh withdrawn Base prices charged on cost causation principles Charge a very small, less than 1 cent/kwh, per KWh price to withdraw energy from grid Cost of use of grid small Charge a $/MW price for customer s utilization of grid during system peak hours of month Cost to expand grid is large Requires interval meters to measure utilization during peak distribution grid demand hours of month Who Designs the Grid of the Future? 23 Improving Efficiency of Distribution Pricing Recover embedded cost of grid and renewables support mechanisms from $/MW charge assessed withdrawals during system peak distribution network demand Provides incentives for distributed storage investments to avoid $/MW charge Limits ability of households to opt out of paying for grid or support mechanisms by installing distributed solar Small charge for use of distribution grid allows distributed solar to sell all excess energy No limitations needed on net metering Designing Grid of the Future Joint utility and state regulator planning process can leave a significant number socially beneficial upgrades on drawing board Particularly true for regions with significant renewable energy goals Least cost transmission network requires regional planning process, particularly for reliable supply of renewable energy All transmission expansions create winners and losers A regional planning process can bundle expansions so that as many balancing areas as possible benefit from implementation of bundled plan Considering expansions one at a time risks socially beneficial upgrades being rejected if one entity loses from upgrade 24 6

7 Designing Grid of the Future Distribution network pricing based on costcausation principles essential input design of distribution network Maximizes amount of avoided distribution network investment due to distributed generation Frank A. Wolak Department of Economics Stanford University Stanford, CA Related papers available from Conclusions Inter-regional transmission planning process Particularly for regions with significant renewable energy goals Failure to account for competitiveness benefits of transmission upgrades can unnecessarily increase wholesale electricity prices paid by electricity consumers Likely to be even greater source of benefits for a wholesale electricity market with larger share of intermittent resources Distribution network pricing on based on cost causation principles Low cost of utilizing grid High cost of expanding capacity of grid

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