While the energy efficiency measures detailed in part one of
the review are admirable and necessary, the shift that is about to occur in
electricity production and distribution is potentially even more important and
thus, I think, deserving of its own review.
Though dramatically increased energy efficiency in buildings and
industry is predicted to keep overall electricity demand flat or declining for
the next few decades, even as we electrify vehicles, the distribution of ubiquitous,
clean and renewable energy would be nothing short of a technological and
geopolitical revolution that could negate the need for energy efficiency
measures.
History
In order to understand why today’s inefficient, insecure and
environmentally degrading system is holding us back, it’s important to understand
its roots. Modern electricity production
is a 120-year-old story, driven by the complex interplay between the laws of
physics, the principles of prudent engineering, the evolution of technology and
shifting economics and regulation.
It began with a legendary debate between two of the fathers
of the electricity industry, Thomas Edison and George Westinghouse. In the 1890s, they disagreed on the best
method for transmitting electricity – direct current (DC) or alternating
current (AC). Eventually Westinghouse
prevailed, laying the foundation for the centralised architecture that
dominates the AC electricity system today.
Following this, many cities sought lower prices and a high quality of
service by granting non-exclusive franchises to competitors in the same region. However, as companies invested and competed
to serve the same customers, this competition often led to the duplication of
plants and wires, which had high fixed costs.
Consequently, due to the nature of these investments and
decreasing cost of production per kWh produced, electricity was declared a
“natural monopoly” where regulation should play the role that competition fills
in the free market: “control of entry, price fixing, prescription of quality,
and conditions of service”. As a result,
the question became not whether but only how to regulate the electricity
sector. Legalised monopolies “eliminated
investors’ fears that utilities would lose market leadership” and reduced competition
for capital and the cost of needed funds.
Fast-forward to the current day, where legalised monopolies
still prevail, day-to-day demand is first met by using generators with the lowest
operating costs. These generators are
commonly called “baseload” plants because they are used to meet the lowest
expected level of continuous aggregate demand.
Traditionally, baseload plants have been coal and nuclear plants, which
are costly to build but cost only a few cents per kilowatt-hour to run, and
which operate more efficiently at a constant high output. When demand rises moderately – so-called
shoulder demand – operators tap higher-operating-cost generators. When demand peaks, operators may need to use
the costliest-to-run generators, typically combustion turbines. These generators are flexible, able to start
up quickly and to ramp electricity production up and down rapidly to meet
fluctuating demands. This is why we see
a constant fluctuation in electricity supply and prices.
To date, this has culminated in a regulatory structure that
rewards building a large asset base and selling more electricity.
Problems
At first glance, using large, centralised sources of
electricity and rewarding producers and distributors for selling more can
appear to be unproblematic. However,
Lovins and his team rightly illuminate three key problems with this model that greatly
affect its long-term sustainability: carbon emissions, in-built inefficiency
and a lack of competition (not to mention fuel security and the exacerbation of
geopolitical tensions).
At present, I don’t feel much needs to be said about carbon
emissions. It has been well documented
that the unnecessary long-term use of fossil-based fuels presents risks to the
global environment too grave to ignore.
It suffices to say that according to the RMI, on our current path,
expected growth would drive up the electricity sector’s carbon emissions 38% by
2050, to levels nearly 600% above Kyoto protocol reduction targets.
The current centralised, fossil-fuelled electricity system
also promulgates a series of storage and transmission loss inefficiencies. Electricity is the only important “energy
carrier” that cannot yet be easily and cheaply stockpiled or stored. Therefore, electricity must be produced and
used at the same instant; it is the ultimate perishable commodity. Lovins makes the point that two-thirds
primary fuel is discarded as waste heat or used internally before the
electricity leaves the power plant.
Furthermore, each hour a 1 GW coal-fired plant burns 500 tons of coal and
uses 25 million gallons of cooling water.
Consequently, large centralised power generators use swathes of other
precious resources and consistently decrease in effectiveness the further they
are situated from the consumer.
Regarding lack of competition, it should be noted that the
vast majority of electricity sectors in the world remain largely regulated
industries in which protected public utilities dominate the market. While capitalist economies the world over
hail competition as the driving force of innovation, the electricity sector has
succeeded in convincing the public that this is a vital service which cannot be
privatised despite bloated profit margins and chronic under-funding in new
technologies. In such an environment,
incremental progress trumps innovation, avoiding risk is the watchword, and protecting
the status quo has become the norm.
Before moving to discuss renewable energy, I want to address
what many view as half-way houses for the electricity industry: nuclear and
carbon capture sequestration (CCS).
Many advocate such a switch, however Lovins produces a
cogent argument that nuclear is just not economically viable. In the three years following August 2005,
when nuclear power enjoyed the strongest political and policy support, and most
robust capital markets in history, none of its 34 proposed U.S. projects was
able to raise any private financing despite federal subsidies rivalling or
exceeding their construction cost. The
market verdict is similar in other countries.
Of the 64 nuclear power projects that were under construction globally
in 2012, all were in centrally planned power systems, mainly run by authorities
with no private funding.
This is mainly due to the popular notion that no other
source of the energy is so prone to catastrophic failures that cause massive financial
losses. In the wake of the Fukushima
disaster in Japan in 2011, Tokyo Electric Power Company posted a $14 billion loss. At present, a fifth of the world’s reactors
are based in significant seismic zones.
Fundamentally, though, nuclear power had been overtaken in
the marketplace long before Fukushima, just as its U.S. orders had collapsed
from poor economics a year before Three Mile Island. Its costs and risks are simply unattractive
to investors. In time I genuinely hope
this can change as the potential of nuclear energy dwarfs that of any other
energy source (and that is just talking about nuclear fission; if we ever crack
nuclear fusion it would be hard to charge money for electricity it would so
abundantly available), however, at present it is not a viable candidate when
compared to the more mature, safe and investor-friendly renewable energies I
will discuss.
Like nuclear power, CCS could be used to eliminate carbon emissions
but also faces challenges from its high costs and uncertain performance, which
limit its access to capital. Issues regarding
how to store the captured carbon emissions with appropriate safeguards and
liability protection mean it is unlikely to be cost-effective enough to keep
coal-fired power plants economically competitive in the short or medium
term. Furthermore, moving towards
nuclear and/or CCS does nothing to address the critical issues of fuel
security, financial stability, and above all competition.
Opportunity for
decentralised renewable electricity
In energy production and consumption the electricity system
is facing a convergence – some would say a perfect storm – of changes including
technology development, reliability and national-security concerns (prolonged
electricity blackouts are just as economically serious as oil interruptions),
and environmental issues that together create some of the largest opportunities
for innovation and investment seen since the industry got its start over a
century ago. And the market is already
reacting. Half of the world’s total
2008-2010 additions of generating capacity were renewable.
Renewable markets are now immense, global and dominated by
developing countries, and will become increasingly so. Through 2035, official projections say China
and India will together add nearly twice as much new capacity as the U.S. and
Europe combined, continuing to drive renewable markets. China is now the world leader in five
renewable energies and is aiming for them all.
As discussed in part one of the review, the way we consume
energy is about to become radically more efficient. Information technology providers are quickly
infiltrating the electricity business with products that greatly enhance the
level of information supplied to customers, utilities and even energy-using
devices (I refer back to the Buildings section in part one of the review). Passive consumption of electricity is on the
brink of a radical shift. Advances in
smart-grid technologies that combine IT with the electricity grid are enabling
bidirectional control, distributed intelligence, two-way communication,
ubiquitous real-time price information, and demand response.
Regulatory solutions
Beyond the economic and technical challenges facing the
industry, regulatory and institutional shifts must occur that quite clearly
challenge a lot of powerful vested interests.
Electric utilities’ business models and regulatory structures will need
to be reformed to level the playing field between investments in supply- and
demand-side solutions, and between non-renewable and renewable, and centralised
and distributed, options.
Regulators need to share benefits and costs equitably
between customers and shareholders and to hold utilities to standards of
investment and operation that are far more ambitious. Achieving a transition to a largely renewable
and distributed future will require transparent, fair, and non-discriminatory
rules that ensure the safety and reliability of the grid while minimising
barriers to entry. These rules
critically affect project economics and, in turn, scope of competition.
At a national level, a first important step would be the
widespread adoption of policies that reward utilities for efficiency rather
than the bulk amount of electricity sold (here I echo the points made in the
discussion of “decoupling” policy in part one of the review). At a local level, liberalisation of the rules
affecting small-scale distributed resources (for example the permitting and
inspection procedures for home rooftop solar systems) would open investment in
a diverse array of new electricity markets and increase competition.
Furthermore, rewarding utilities for cutting bills, not
selling more energy, aligns their interests with customers’ interests and
society’s larger goals.
There may even be a whole new business model: acting much
like the internet service provider, the utility could be the open source for
myriad power generators and other companies, allowing these providers to get
their electricity and services, like demand response, to customers on the
utility’s new supergrid.
Commercial solutions
If you’re sold on the reasons for changing, and the
regulatory environment that would encourage such a change, I’d like to outline
in more detail some of the outstanding commercial projects that Reinventing Fire advocates.
But even if you’re not sold, it is important to realise you
are swimming against the tide. If you’re
one of the nation’s largest emitters, it doesn’t matter whether you believe
human activity is changing the earth’s climate; it matters only whether you
think your emissions might be restricted or taxed. Very few nations around the world are not
embracing a long-term strategy towards taxing carbon emissions more
heavily. That’s why we’re seeing the
world’s largest oil and natural gas producers investing in large renewable
portfolios; in order to at least hedge bets.
It just so happens they’re also great investments too. While
renewable technologies generally have had higher capital costs than fossil-fuelled
power plants, their fuel is free, their energy price is locked in for decades,
and their capital costs are falling. However,
these investments generally come in two different varieties with very different
investment profiles: distributed and large-scale renewables.
- Distributed solutions:
“Distributed” usually means
dispersed geographically and connected to the distribution system rather than
the transmission system, so the resources are nearer customers, saving grid
costs and reducing losses and failures.
But “distributed” resources are also often modular – made in small,
similar chunks that can be linked together.
Consequently, distributed
resources avoid the losses of delivering power.
Also, distributed resources’ combination of short lead time and small
unit size reduces financial risk by building capacity in increments more
closely matched to changing customer demand, easily ramping investment up or
down as new demand information unfolds. This
more interactive, informed, rapidly evolving electricity system is not
centrally planned from the top down.
Lovins details a number of distributed projects that outline how new
energy solutions are moving away from the public sector:
o
Chicago’s 108-story Willis Tower is now exploring
the possibility of becoming the nation’s largest vertical solar farm;
o
A superefficient, affordable housing development
in Sacramento, CA, will use a first-of-a-kind private, commercial microgrid to
manage and distribute intelligently the generation and storage of solar power
among 34 single-family homes. The
project, known as 2500 R Street, aims
to achieve net-zero efficiency levels, with each home generating as much clean
energy as it uses;
o
The global distributed-generation market grew
91% in 2010 to $60 billion. In the past
decade, micropower has more than swapped with nuclear power their respective
shares of global electricity production, and in 2008 micropower provided
roughly 90% of the world’s additions of electricity generation.
o
Seattle-based start-up Clarian Power even offers
a novel solar panel system completely bypassing the normal connections to the
utility’s grid. You simply plug a cord
from the PV solar system and its accompanying “SmartBox” into any wall outlet
in your house, and its microinverters let electricity from the solar panels
flow to all household lights and appliances, using only existing wiring. Some of these firms are remarkably
innovative. SolarCity, SunRun,
Sungevity, SunPower and a growing collection of other competitors offer rooftop
PV panels for zero money down – eliminating the sticker shock that frequently
deters customers.
- Large-scale renewable solutions:
Long have large-scale renewable projects been
the fantasy of clean energy advocates, however, fervour for their investment is
diminishing after years of political stagnation. While multi-GW-scale PV farms are already
planned in the Chinese deserts and have been proposed in North Africa, and California,
these are necessarily centrally-planned projects. These projects should continue to be
encouraged due to their incredible potential to provide ubiquitous clean
energy, however, they share few of the advantages that make distributed power
so commercially appealing. Firstly, they
suffer similar transmission losses to traditional power plants. The enormous proposed solar park in the
Sahara would lose almost half its produced energy in transmission when
delivering to Europe. Secondly, the cost
and financial risk is far too large to allow agile investment; these are large,
long-term bets that don’t appeal to the majority of investors and consequently
require major public backing.
Nonetheless, large-scale renewables should be developed in
order to replace current baseload coal facilities. The more agile and scalable distributed
sources should be developed in order to meet shoulder demand and to spur
innovation and investment.
Risks
Reinventing Fire
is not oblivious to the risks inherent in such a transition and the RMI team
deliver a healthy dose of reality by presenting opportunity and challenge in
equal measure.
Firstly, harnessing distributed, renewable power sources
would require siting and building 116 million MW-miles of new high-voltage
transmission lines, costing an estimated $166 billion before 2050 (and that’s
just the book’s U.S. estimate).
Furthermore, a system dominated by renewables has security
and reliability risks. More inputs and
greater dependence on IT and smart-grid technology will increase cybersecurity
threats to the system. Any electricity
scenario dependant on the frail aerial arteries of the transmission grid –
without the ability isolate demand centres from grid disturbances – carries a
national security risk.
Another challenge is the potential for public
resistance. PG&E, one of the U.S.’s
leaders in smart-grid deployment, has experienced considerable customer
backlash, largely based on (misguided) concerns about the health effects of
electromagnetic radiation from smart metres.
Some households and small-business operators simply may not
be interested in a more active, technology-intensive system, or they may not
want what some see as “big brother” technology in their homes.
Financial capital is an obvious bottleneck. Investment will fail to flow in the direction
of renewable projects so long as state subsidies continue to prop up the oil
industry (artificially deflating their price and distorting the market). While immediate withdrawal would punish those
on low income with more costly energy bills, plans need to be agreed to sunset
all state support of non-renewable sources over the next decade.
Perhaps most crucially, the perception that the green
economy is the pet project of the privileged seriously undermines the message
and distorts the value proposition of making such a transition. Without a long-term, focused government that
can deliver the necessary regulatory structures and the social and
environmental reasons for doing so, the ability of a green economy to reinvigorate
national infrastructure to create a more open and legitimately competitive
society will never be realised. That
starts with us; that starts with political pressure.
Conclusion
The challenges outlined above make clear that this is not a
plan without risk. However, Reinventing Fire has delivered the most
comprehensive and ambitious plan for a green economy that I have ever read. Six main criteria should gauge success in the
new electricity sector: affordability, technical feasibility, security,
reliability, environmental responsibility and public health, and public
acceptability. Reinventing Fire’s plan works on all above the criteria.
By focusing on the four sectors of transportation,
buildings, industry and electricity, a complex and daunting problem now appears
to have a clear solution. By reframing
the environmental agenda as a commercial opportunity, entrenched political
positions are dissolving and emotion is being replaced by common values and
pragmatism.
Rapid innovation, combined with society’s need to reduce
fossil-fuel use, has created a golden opportunity to reinvent the electricity
system – to the great advantage of clever and agile businesses and nations. As Thomas Edison exclaimed to Henry Ford in
1931: “We are like tenant farmers chopping down the fence around our house for
fuel when we should be using Nature’s inexhaustible sources of energy – sun,
wind and tide…I’d put my money on the sun and solar energy. What a source of power! I hope we don’t have to wait until coal and
oil run out before we tackle that.”
Score: 95/100
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