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'The transition takes time': Smart grid efforts face power sector inertia

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'The transition takes time': Smart grid efforts face power sector inertia

➤ Legacy power system inefficiencies persist amid transition to cleaner, smarter, more distributed grid.

Pace of technology change in energy industry seen as key challenge for electric utilities and regulators.

The Smart Electric Power Alliance will launch a multi-year "regulatory innovation initiative" to explore obstacles and solutions.

Julia Hamm is president and CEO of the Smart Electric Power Alliance, a Washington, D.C.-based nonprofit organization made up largely of electric utilities and technology companies whose mission is to facilitate the power sector's transition to a smarter, cleaner energy future. SEPA's board of directors includes executives of ABB Inc., Duke Energy Corp., Hawaiian Electric Co. Inc., NextEra Energy Resources LLC, the New York Power Authority, Siemens Digital Grid and Southern California Edison Co. In this interview with S&P Global Market Intelligence, edited for length and clarity, Hamm discusses challenges and solutions related to technological change.

S&P Global Market Intelligence: Is the grid getting smarter?

Julia Hamm: It kind of depends how you define smart. I think it is. It's happening at two different levels. At one level, you have decisions that individual customers are making to put new, cleaner technologies on the system. At the same time, equally important from a system level, the grid is getting smarter in order to be able to effectively integrate and optimize not only all the large-scale assets but also now these customer-driven assets.

If you look at capacity reserve margins across the U.S., they're actually growing in many places. That doesn't say smarter, more capital-efficient to me.

The fact is that we are in a transition and the transition takes time. It's not going to happen overnight. As we see more and more coal retirements, the equation will change. Certainly we've seen this increase in natural gas, but a lot of people think about that as a bridge fuel to more renewables. I think it's just a question of timing on when we get to the point where the system is smart enough to be able to ensure the reliability of the system with a more distributed set of assets. But again, that can't happen overnight. It takes time and it needs to be balanced and done in a thoughtful and intentional way.

SNL Image

Julia Hamm, CEO of the Smart Electric Power Alliance.

Source: Associated Press

Are you saying there is some kind of "energy-transition cushion" that the system needs above and beyond what is required for reliability?

Yeah. I don't know if I'd put a number on it, but philosophically I think we need to understand that during the transition period we may not be as efficient as we want to be. But as long as we know where we're headed and we are moving in the right direction, and it's transparent and clear to people what's happening, that should be an acceptable outcome.

Is there a risk of too much investment going into natural gas?

The energy industry broadly has always recognized the value of having a diversified portfolio. We've been seeing so much gas development over the past couple of years but I'm starting to see a recognition of questions like, "Are we becoming too reliant on natural gas and do we need to think about how to make sure we have a diverse portfolio?" The shift to natural gas has made a lot of sense to a lot of people, for a lot of reasons, in a lot of places. But I do think those who really care about the sustainability of the electric-power sector, which is everyone, will recognize that we cannot be overly reliant on any one resource, and that includes natural gas.

What about the energy transition keeps you up at night?

The thing that has been recently keeping me up at night is, how do we effectively evolve the state regulatory process to ensure that it enables innovation rather than hinders it? The mandates of many commissions were created last century during a time when the pace of technology change was much slower than it is today. Right now we are seeing exponential change in technology so it is only logical that we should be thinking about: how do we evolve that regulatory process to ensure we can keep up with the pace of technology? I think some states have actually made really good progress on that front, but they're probably the exception rather than the majority of states across the country.

How do stakeholders tackle such obstacles to innovation?

In some cases there may need to be legislative changes at the state level, changes in the scope of responsibilities for commissioners in order to allow them to be forward-looking and to initiate processes that are outside litigated proceedings. That way they are bringing stakeholders together to understand what's coming down the road with technology so that by the time they actually do open a docket you have stakeholders who have the same basic level of understanding. We're going to be launching a regulatory innovation initiative in early 2019 and the first task is to identify the key problem statements by asking industry the question, "What are the two or three things with the existing paradigm that are holding back innovation?" And then we will pull in even more stakeholders and ask, "What are the new solution sets we should be looking at?" Every state is different. Some solutions will apply to some states and not others. It will be a multi-year initiative.

How can regulators make better decisions on long-term assets when technologies like solar and batteries are evolving so quickly?

I don't know what the answers are but I think the key is flexibility and agility, not just on the regulatory side, but on the utility investment side, which are obviously connected. Because you've got customers making decisions about grid investments on a very localized level, utilities have to have this understanding of consumer behavior that they haven't needed in the past.

How do you model for customer decisions?

The best work in that space has actually been done by the Sacramento Municipal Utility District, working with Black & Veatch. They are able to do some things that not all utilities will be able to do, given that they have a reasonable penetration of distributed energy resources already in their service territory. They are able to do some customer-behavior forecasting based on past customer behavior. For utilities that have very little penetration of DER, it would be hard to replicate. But SMUD and Black & Veatch are going deep into anticipation of what customer behavior is going to look like in terms of adoption and SMUD is now basing its distribution investment decisions on that information.

Where do you see the most progress with utility business models adapting to changes on the grid?

There is a shift to utilities acknowledging that in order to be successful they need new partners, and potentially more partners than they've had in the past, and that utilities may not be the best entities to try to do it all themselves. New York's Reforming the Energy Vision initiative, for example, has some interesting pilots looking at revenue-sharing models between utilities and third parties. The question remains, from a financial viability standpoint, in the long run are those new revenue streams going to be as significant as the revenue streams they are losing? Maybe, maybe not.