The Future of Decentralized Electricity Distribution Networks

By Fereidoon Sioshansi

The Future of Decentralized Electricity Distribution Networks assesses the evolution of the services delivered by the distribution network as demands placed on it proliferates from distributed, self-generating, power storing and power sharing ‘consumers’ – which Sioshansi terms ‘prosumagers’. The work outlines the processes by which passive and homogeneous electricity consumers become prosumers and prosumagers, the nature of their service needs, and dependence on the services delivered by the distribution network diverges. Contributors assess how consumers are discovering and exercising options to migrate away from total reliance on upstream generators to produce electricity and on the delivery network for its transmission.

As they do so, the "utilities" – be they distributors or retailers – must rethink the traditional utility business model. How will they find sufficient revenues to cover their fixed and variable costs as volumetric consumption declines when some consumers become prosumers – or go a step further and become prosumagers? This work argues that new service, business models and new methods for collecting sufficient revenues to maintain the network are mandatory for the survival of modern utilities.

• Examines the future of services demanded by electricity customers as some diverge from their traditional total reliance on the network for delivery of all their service needs
• Reviews the emergence of new business models to meet the diverging needs of customers
• Explores the costs imposed by new types of customers on the delivery network and how to collect sufficient revenues from all to maintain it in ways that are efficient, equitable and fair

• Language: English
• Publisher: Elsevier Science
• Release date: May 23, 2023
• ISBN: 9780443155925

Book preview

Preface

About 30 years ago, I read a paper on electricity pricing that was written almost 20 years earlier. Between the writing of that paper ¹ and my reading it, privatization had dramatically changed the structure of the British electricity industry. Between my reading and the present day, the industry has seen potentially greater changes as decarbonization gets under way. Carbon emissions per kWh have fallen 70% since the last year of public ownership and are probably lower than at any time since the UK's only electricity consumer, Lord Armstrong, was a prosumer using a hydroelectric generator to light his home. Similar trends are visible across the globe, as reflected in this volume.

Despite these changes, the electricity prices most customers pay today—in the United Kingdom and around the world—have exactly the structure described 50 years ago—a standing charge per day and a uniform price per kWh of electricity. The costs of the distribution system mainly depend on the peak loads it has to meet but are mostly recovered through volumetric per-kWh charges, just as they were in the early 1970s. The paper set out the industry's marginal cost pricing methodology, based on the cost of expanding the system to meet additional peak demand, but as there was no practical way to measure individual households' peak demands, their annual demand had to be used as a proxy. Privatization and vertical disintegration mean that distribution costs are now recovered through regulated charges on retailers (known as suppliers in the United Kingdom), and while the methodology for splitting the permitted revenues between domestic and nondomestic customers has evolved over time, it follows the same underlying principles.

After a 10-year campaign, just under half of the UK's electricity meters are smart, capable of automatically recording and reporting half-hourly consumption. These customers' retailers pay distribution charges based on the customer's actual demand in (preset) peak, shoulder, and off-peak time bands. But only a minority of customers (one-fifth of consumption) pay a retail tariff with more than one per-kWh component, and almost all of those are on the Economy 7 tariff which offers cheaper power for 7 hours overnight. This tariff was available 50 years ago in the United Kingdom, along with the system of tele-switching signals that ensures several million night storage heaters don't all start at once. Economy 7 was introduced to encourage overnight heating demand when the variable cost of generation was lower and there was spare capacity on the networks and remains the most sophisticated tariff that most retailers offer their domestic consumers. Only a handful, at best, offer retail prices that follow the wholesale market's half-hourly prices, such as Octopus Energy's Agile tariff. Worldwide, there are over one billion smart electricity meters, but few are used to their full potential.

How much longer will these historic pricing structures be fit for purpose as the world decarbonizes? One-quarter of Britain's electricity comes from wind power and solar PV, and wholesale prices are likely to become more volatile as this proportion continues to rise. A rising proportion of variable renewables increases the demand for balancing power and reserves for when the expected generation is not available. Customers willing to reduce their demand at short notice could contribute some of these reserves. One-third of the UK's generation capacity is now connected to the distribution system, twice the proportion of 10 years ago. Those networks were designed around one-way flows from substations on the transmission system to consumers connected at lower voltages, but the increase in distributed generation (including over a million rooftop PV systems) mean electricity is moving in unexpected directions.

In sunnier places (Queensland in Australia is a leading example well studied in this volume), an even greater proportion of households has invested in solar panels. The resulting reduction in consumers' electricity purchases (exacerbated in some places by net metering policies) hits the distributors' revenues, even as the changing power flows increase their costs. Higher tariffs to offset this would make it even more attractive to install PV, risking the so-called utility death spiral. Finding ways to address this problem is a major theme of this volume.

The typical UK solar panel produces too little electricity, and there are too few of them (under 5% of households) for this to be perceived as a major threat to electricity distributors, but our natural gas networks face a related challenge. From 2025 onwards, new homes must be built without a gas boiler, which implies electric heating instead, and replacement gas boilers in existing homes will be banned from 2035. In some areas, the gas network may be reconverted to carry hydrogen; before natural gas from the North Sea was available, the town gas that the United Kingdom made from coal was almost 50% hydrogen. In the absence of hydrogen, the gas network will become a stranded asset with its own death spiral as all its customers switch away, mostly to electricity.

Electrified heating will increase the demand for electricity in winter but not in summer, worsening the system load factor. In warmer climates, the peak comes in summer from air conditioning demand, which will increase as temperatures rise and economic growth makes it more affordable (particularly in lower-income countries). Uncoordinated charging of electric vehicles could further raise peak demands, but as the timing of this is often flexible, smart charging would create a shiftable load that can help offset fluctuations in renewable output. Home energy storage (some of it perhaps coming from the batteries in electric vehicles) means that electricity no longer has to leave the grid at the moment energy services are consumed.

As noted by the contributors to this volume, this means that electricity retailers and distributors (and retailer-distributors) face opportunities as well as challenges. Is it possible to get customers to respond to the system's changing needs? The standard answer from economists is that we should set prices to send the right signals, and people will then respond if they consider it worth their while to do so. If they don't respond, this implies that the cost of doing so was greater than the benefits to be had.

However, there's growing evidence that while consumers respond to the average level of their bills and to sharp signals of the benefits of reducing consumption during critical peaks, the marginal prices within more complex tariffs receive little attention. If so, electricity companies will have to do much more than simply setting the right prices. Innovative business models might combine price signals with home automation systems that ensure the electric vehicle is charged and clothing washed when this is cheapest, without requiring that scarce commodity, consumer attention. Or could time-varying price signals be replaced by direct instructions to the customer's flexible loads from the retailer's energy management system? Perhaps consumers would choose between subscription packages for their energy needs, with the cheaper packages requiring a greater willingness to have their loads shifted. A fixed-price subscription might neatly match the fact that the industry's input structure is shifting away from variable fuel purchases toward fixed capacity costs.

At present, it is often a regulatory requirement that every household connected to a given distribution network faces the same distribution tariff, whether in a dense urban area or at the end of a long rural line. Prices do differ between networks, but there are few complaints about the fact that customers in Liverpool pay 20% more in network charges than those in London. The Great British public is believed to be allergic to postcode lotteries, the name given to location-based differences in public services, but this one is not transparent, and the difference is only a few percent of the overall bill. If the differences were more localized, however, and perhaps changing over time, would there be a backlash? It is easy for an expert to accept the idea of consumers being paid for the first solar panels connected to a given substation, but those payments turning into charges if the number of panels in the area grows so much that it starts exporting power. Would the customers and their elected representatives be so understanding? Addressing the utility death spiral may require rebalancing tariffs away from volumetric charges and toward fixed fees per month. How much will those who lose relative to the status quo complain? Several chapters discuss these issues, which are as much political as economic.

The smart energy system of the future will depend on large amounts of data passing between consumers and companies. Who will own these data, and who should have access to it? How can it be secured? The UK's Energy Data Taskforce (set up by the government, but independent) has recommended that the energy sector should be digitalized, using data to optimize its operation in consumers' interests. Energy data should be presumed open, which does not mean sharing consumers' private information, but allows suitable data to be modified and redistributed by anyone, creating value for customers. For example, the apps that tell me when buses are due at my local stop, so I can avoid a long wait on a cold morning, were made possible (but perhaps not anticipated) when Transport for London made its real-time monitoring data open source.

These developments, and the many open questions around them, make this book particularly timely. The editor has yet again assembled a distinguished team of authors to report on developments from around the world and set out the challenges facing the industry and its regulators. Addressing those challenges will require sharing information on best practices, how they can be applied elsewhere and how they might be improved. The multiple examples and perspectives in this book will be of great assistance in that task.

Richard Green

Professor of Sustainable Energy Business

Imperial College Business School

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¹  Boley, T.A., Walker D.L., 1974. The effect of prices and economic growth on consumers' energy requirements. Paper Presented at 9th World Energy Conference, Detroit.

Part I

How technological innovations are changing customers’ service needs

Outline

Chapter 1. What motivates consumers to become prosumers or prosumagers?

Chapter 2. Commercial rooftop solar in Australia: State of play, innovations, and prospects

Chapter 3. The sunshine state: Cause and effects of mass rooftop solar PV take-up rates in Queensland

Chapter 4. Are networks keeping up with what customers need?

Chapter 1: What motivates consumers to become prosumers or prosumagers?∗

Fereidoon Sioshansi     Menlo Energy Economics, Walnut Creek, CA, United States

Abstract

A growing number of consumers in many parts of the world are becoming prosumers by installing solar panels on their roofs. This means that during the sunny hours of the day, they produce some or most of their electricity needs. As the cost of storage continues to fall and electric vehicles move mainstream, many prosumers go a step further by becoming prosumagers—that is prosumers with storage. This chapter examines what motivates this migration, why it is more pronounced in some regions and what are its longer term implications on the viability of the distribution utilities who serve the divergent needs of future consumers.

Keywords

Distributed storage; Distribution utilities; Prosumagers; Prosumers; Revenue adequacy; Rooftop solar; Utility business models

1. Introduction

Starting from an expensive and rare novelty in the1990s, rooftop solar panels have grown into a common feature of many suburban neighborhoods in sunny parts of the world (Fig. 1.1). In the case of the United States, it took 40 years to reach the one million milestone in 2016, but only 3 years to reach the two million mark in March 2019, according to Wood Mackenzie Power and Renewables and the Solar Energy Industries Association (SEIA). ¹

At the time, Wood Mackenzie forecasted that the number of installations will reach 3 million in 2021 and four million in 2023. It reported that there were one new installation every 10 minutes in 2010 and predicted that the rate would reach 1 per minute by 2024, according to Wood Mackenzie. California accounted for 51% of the first million installations, a figure that dropped to 43% for the second million—suggesting that other states are catching up, not that California is slowing down.

More recently, an increasing number of solar installations are accompanied by battery storage. Recent surveys of homeowners interested in installing solar panels suggest that more than half are considering pairing solar with storage from the outset. This allows some of the generation in excess of consumption to be stored for use after the sun goes down. Moreover, many of the same households are buying electric vehicles (EVs). The trend is quite noticeable in certain parts of the United States.

Figure 1.1  Growth of rooftop solar in the United States, 2010–19. Source: Wood Mackenzie Power and Renewables and the Solar Energy Industries Association, March 2019 available at https://www.seia.org/sites/default/files/inline-images/Number%20of%20U.S.%20PV%20Installations%20-%20Quarterly%20and%20Cumulative.png

This chapter starts with an examination of who are the solar customers and what motivates them to invest in rooftop solar panels, and for those who also invest in storage and/or EVs, what are the motivating factors.

For most customers, the motivation to go solar is strongly influenced by the payback period, which in turn depends on the retail tariffs, how much sun they can collect on their roofs, and how much they can get by feeding the excess solar generation back into the grid, the backfeed. A practice known as net energy metering (NEM), also extensively described by McCann and others in their respective chapters, was introduced in a number of states to incentivize rooftop solar generation. Similar schemes such as generous feed-in-tariffs (FiTs) were introduced in a number of European countries and in Australia, as explained by Simshauser et al. in their chapter. In some cases, other incentives such as tax credits and low interest loans also play a role.

The attraction of storage is that it offers a level of protection against power outages. At the same time EVs are increasingly becoming attractive on cost, performance as well as the fact that they can be charged from the free sunshine during the sunny hours of the day.

As the number of customers with solar, storage and EVs increases, they impact the revenues of the distribution (and retail) companies. And depending on how and when the batteries of the EVs are charged and/or potentially discharged and when the excess solar generation is fed into the grid, these behind-the-meter (BTM) assets impact the local distribution network, causing two-way flows and, if concentrated in certain localities, may strain the distribution system. The chapter contributes to a better understanding of the impact of the distributed solar, storage and EVs on the revenues and operations of distribution utilities, the theme of the book.

The balance of the chapter is organized as follows:

• Section 2 asks who are the solar customers;

• Section 3 provides a personalized narrative of three consumers who have turned into prosumagers and describes what drove their decisions; and

• Section 4 examines the variables that determine the economics of becoming a prosumer followed by the chapter's conclusions.

2. Who are the solar customers?

A recent report by the Lawrence Berkeley National Laboratory ² (LBL) based on data from 2.3 million residential solar adopters across the United States describes the uptake of solar rooftops including trends in household income levels, rural versus urban, education levels, age, home value, credit scores, and much more. A companion report, also from LBL offers the latest rooftop solar trends including costs and performance data on 2.5 million U.S. rooftop solar PV systems. ³

The former report, Residential solar-adopter income and demographic trends, also describes income differences across system ownership models, installers, system sizes, both stand-alone and solar-plus-storage systems, and systems on multi-versus single-family buildings installed through 2020.

The report's first major conclusion is that solar adopters span all income ranges, but generally skew high, i.e., they tend to be more affluent than average. In 2020, 41% of adopters were low and moderate income households. Solar-adopter incomes tend to be higher than those of the general population. Nationally, solar adopters' median household income was $115,000 in 2020, compared to the U.S. median income of $63,000. These findings support the claims that, as a group, rooftop solar customers are indeed more affluent hence any costs not paid by them for the maintenance of the network is shifted to nonsolar customers, all else being equal. This raises questions about the equity of the current NEM laws in a number of states.

The LBL report, however, notes that the disparity is partly related to home ownership, and also to the fact that up to 2020 roughly half of the U.S. residential solar adopters were in California (Fig. 1.2, left) a relatively high-income state.

But even when controlling for these factors, solar adopter incomes still tend to skew high. For example, solar-adopter incomes were 58% higher than the median income of all households in the same county, or 23% higher when compared only to owner-occupied households. The LBL report also shows that penetration tends to be high in sunny, high retail regions of the country, as expected.

Figure 1.2  The growth of U.S. rooftop solar installations (left) and market penetration (right). Source: Residential solar-adopter income and demographic trends, LBL, Mar 2022.

The study's second major conclusion is that the disparity between solar-adopter incomes and the general population has been slowly narrowing over time. Between 2010 and 2020, U.S. median solar-adopter incomes fell on an absolute basis from $138,000 to $115,000. Other features of solar adopters are that they tend to be English speaking, middle-aged, non-Hispanic White, with business or financial jobs, better educated, with higher credit scores, and more likely to live in rural or suburban areas.

The controversy about how much to pay for the excess generation fed into the grid from rooftop solar customers is in part driven by the suspicion that solar customers tend to be more affluent than the average customer population—and if solar ownership is incentivized through generous NEM or other incentives, it acts as a regressive tax on the less affluent nonsolar customers. These arguments are extensively covered by others in this volume and further examined in Section 4.

The second LBL report, Tracking the sun, indicates that the size of the average residential solar installation continues to rise as the cost of solar panels continues to fall. It also shows the growing popularity of pairing solar with batteries in high penetration states notably Hawaii.

3. What motivates consumers to become prosumers and prosumagers: Three personal experiences

This section is the personal story of three prosumagers living in California, Maryland and Queensland, Australia and what motivated them to do what they did. In all cases, the narrative is similar in the sense that the decision was not solely based on economics or the payback period but also other factors such as the desire to reduce the household's carbon footprint and/or be shielded from annoying distribution-level power outages. Moreover, in all cases, the households would have done things differently because of what they learned and have experienced since they became prosumagers. Clearly, there is a lot of learning-by-doing and as the technologies to generate and store electricity improve, so will the learning.

It must be emphasized that the three prosumagers highlighted are not typical or representative of all consumers. They, however, live in different parts of the world facing different climate, tariffs, and incentives. Their stories offer a personal narrative that probably resonates with many prosumers and EV owners across the globe. The three are

• Ahmad Faruqui, a professional friend and colleague of the author who generously shared his experience and data in what follows and has published extensively elsewhere⁴;

• The second is Benjamin Schlesinger, another friend and professional colleague whose experience is described in a chapter to a prior book; and

• The third is Andrew Wilson who was featured in an article in Renew Economy.

3.1. Prosumager #1. Ahmad Faruqui

⁵

Faruquis live in a detached home in a sunny suburb of San Francisco. Describing his journey from "… an average consumer to a prosumager and from owning a gasoline-powered vehicle to owning an electric vehicle (EV), Ahmad Faruqui says he was motivated to lower his … ever-rising electric bills, enhance resilience and promote clean air. ⁶ "

In the late 1980s Faruquis moved to a bigger house and noticed rising energy bills. To lower them, they switched to time-of-use (TOU) rates, which meant they had to pay an extra $4 a month for an interval meter.

But as the local utility's retail tariffs continued to rise, so did Faruquis electric and gas bills, eventually hitting $500 per month on two occasions in 2015. That, Faruqui says, … was a tipping point, prompting him to invest in improving the energy efficiency of the house. ⁷ I was keen on doing energy efficiency first, believing the cleanest kWh is the one you don't use. The Faruquis shared their experience in an op-ed in The LA Times. ⁸

The result was a 20% drop in the energy bills, but they were still paying over $200 a month ⁹ .

With all the energy efficiency investment, my average monthly electric bill went down from $250 to $205 a month. That was still a lot higher than I wanted it to be.

In 2019, the Faruquis decided to make a significant investment by installing photovoltaic (PV) panels on their roof, which was subsequently paired with a battery (Fig. 1.3). The 8 kW system, consisting of 25 panels rated at 320 W each, was sized to make Faruquis self-sufficient on a net annual basis with an estimated 7-year payback. ¹⁰

The photo on left shows the 25 solar panels with capacity of 8 kW. The middle photo shows the SolarEdge inverter which converts the DC power coming from the panels into AC power that feeds into the house, and if there is any surplus, feeds into the grid. On the right is the 240 V charger for the EV.

As illustrated in Fig. 1.4, after installing the solar panels production (solid bars) typically exceeds household consumption during the sunny months of the year, generally March through October for the Northern Hemisphere, making the household a net producer while remaining reliant on the local utility for the reminder of the year.

Figure 1.3  The picture of a prosumager: Solar on the roof, battery and EV in the garage. Source: Ahmad Faruqui.

Figure 1.4  Faruquis solar production versus household consumption in California. Source: Data for Faruqui household using the address on the NREL website.

But why stop there? Next, Faruquis decided to install a 9.8 kW battery (Fig. 1.5) to make their "… prosumer experience more fulfilling," that turned them into a full-fledged prosumager.

Faruqui estimates the payback period for solar plus storage to be around 9 years, noting that "… the battery provides enhanced reliability and it has come in really handy during the five power outages experienced during the past 9 months. ¹¹ The sentiment is shared by many prosumagers who enjoy the reliability enhancement provided by the battery as an important motivator.

"To further enrich our prosumager experience, Faruqui says, I decided to replace one of my gasoline-powered cars with a Tesla Model 3." Having invested in all this expensive behind-the-meter (BTM) assets, Faruqui had to pick an appropriate electric rate for the house and for the EV and this, he admits, was far from trivial despite his long career in utility rate design.

Previously the household was on a time-of-use (TOU) rate whose off-peak price was 26 and on-peak price 37 cents per kWh. ¹² With all the BTM assets, the household's load shape had changed and it was not immediately obvious what tariff would result in the minimum bills. According to Faruqui,

A neighbor with EVs was on a whole-house EV rate with the off-peak price at 13 and the on-peak rate at 43 cents per kWh. Would the bills rise or fall if I switched to that