Ocean or Archipelago

DeLoreans are rare, especially ones with the flux capacitor option. But if we happened on a pristine example, set the date to 2044 and mashed the pedal, what would we see upon our arrival? Would the energy landscape resemble an ocean where energy consumers and producers are in constant contact, fluidly exchanging energy to capitalize on small differences in price, or would it resemble an archipelago where everyone produces their own energy locally like an island? And what’s so special about 2044?

Bell System

Well, it has been 30 years since the consent decree broke up the Bell Operating Companies that had previously provided local telephone service over copper land-lines in the United States. At the end of 2012, fully half of American households had no land-line telephone service whatsoever, relying 100% on wireless carriers for their real time interpersonal communications. That is a remarkable transformation by any measure, and verifies 30 years as plenty of time for a sweeping sea change. Plus, 30 years is well within the capability of a standard DeLorean flux capacitor.

So ocean or archipelago; the answer may be tied up in how social obligation colors this 30-year sea change. Before diving into the how and the why, though, it’s worth spending a few words on the what.

Ocean

Ocean

What is an energy ocean? Arriving at an energy ocean requires dramatic change to be sure, but most of the fundamental pieces of today’s energy ecosystem remain. Transmission exists. Its role involves bi-directional interstate energy delivery with service offerings delineated by capacity and quality. A consumer of transmission services buys, say, two terawatts of peak transmission capacity per month with five “9”s of reliability at a much higher price than if they were buying 150 gigawatts of off-peak transmission capacity at three “9”s of reliability. This consumer of transmission capacity may be pulling or pushing energy through this transmission pipe.

Distribution exists as well, with a similar role in the energy ecosystem as transmission but covering smaller capacities and more regional geographies; megawatt and kilowatt capacities spanning cities and neighborhoods with similar service level agreements for reliability.

Centralized generation continues to participate in the ecosystem, utilizing transmission and distribution to deliver product into markets that lack the resources for distributed generation. Yet centralized generation lives right alongside distributed generation, competing for customers on price and quality, each winning business when and where its service and economics are more favorable.

Finally, energy consumers remain in the ecosystem, but their energy bills are decoupled. Line items appear for the kilowatt-hours of off-site energy consumed but also for the distribution and/or transmission infrastructure used along the way for delivery to the service address when consuming as well as when generating and delivering energy offsite, beyond the meter. What’s more, a single service address may have multiple meters provided by different energy companies measuring different businesses in which a single service address is participating. Even more fundamentally, however, all these ecosystem pieces are connected. The grid remains.

Archipelago

Archipelago

On the other hand, what is an energy archipelago? An energy archipelago looks very different from an energy ocean, even though both involve water. Connectedness is gone. Each service address is an island that generates all of its energy needs locally. No transmission or distribution or centralized generation exists and in fact, the grid is no more.

In some regions where there is a dearth of locally available fuels like sunshine, wind or geothermal, there will be alternative fuels. Natural gas and hydrogen delivered via pipeline and used in high-efficiency fuel cells are examples; other examples will emerge to fill this gap as well.

The consumer’s conception of energy changes radically as well. Instead of an ongoing energy service measured in kilowatt-hours, energy morphs into just another appliance like a refrigerator or a furnace. It’s an expensive appliance for sure, so it may be financed when purchased new or rolled into a mortgage when buying an existing home or office, but it comes with a manufacturer’s warranty and will eventually be owned outright.

The service address becomes a dispatch location for maintenance services, just like the appliance provider down the road that services dishwashers and repairs ice makers. In fact your energy storage appliance will have a magnetic sticker on it that unabashedly promotes “Jake’s Energy Appliances” as the last provider to have serviced the appliance, which you call with your smartphone because you have no land-line. Since energy is generated and consumed locally, summertime brownouts and widespread outages caused by hurricanes become stories told to grandchildren as evidence of the much harder life endured by the story teller when they were a child. The grid morphs into thousands of microgrids, then into millions of nanogrids and then the meters disappear altogether, leaving just enough on-site energy generation and storage to meet each site’s demand.

Social Obligation

Energy ocean or archipelago: which eventuality we experience depends on the path taken, of course. The road to an energy ocean is evolutionary. A meaningful number of Investor Owned Utilities (IOU) and municipal utilities make the hard decisions early regarding existing business models. Via their net metering infrastructures they begin providing pricing signals that encourage rather than punish long-term connection to the electrical grid. Distributed generation is rewarded with favorable pricing while utilities carve out revenue from other services involved in maintaining the reliability of the grid and delivering centralized generation into underserved markets with favorable economics. These hard yet critical decisions keep utility companies and the electrical grid relevant long term.

The battle line is drawn at the meter. If utilities are not so proactive and continue to send pricing signals that encourage investment behind the meter, they will be locked out long term. Utilities have no control behind the meter beyond meter-based pricing signals so penalizing distributed generation and storage in order to preserve existing business models necessarily drives innovation behind the meter. Technology and financing creativity flourishes. Meeting residential and commercial energy needs onsite with economical generation and storage becomes commonplace and the grid becomes irrelevant because residential and business owners are forced to take control and hedge against the future risk of skyrocketing energy prices.

Social

Social obligation plays into this story in at least two ways: the stranded utility customers who cannot invest behind their meter are left shouldering an unfair proportion of the utility’s profitability burden while the billions of large financial institution dollars tied up in utility bonds evaporate. Can market dynamics be allowed to dispassionately select the most efficient and economical solutions regardless of the social cost? Probably not.

There will be carnage, just like there was throughout the 30 years following the breakup of the Bell Operating Companies. Many and possibly even most of the utilities we know today will disappear. Large financial institutions will lose hundreds of millions and possibly even billions in capital tied up in stranded utility sector investments. Energy customers who cannot invest behind their meter will suffer much higher energy costs for a time. In the end the societal cost of a complete failure on either of these fronts is too high. Help will be provided. The grid will not disappear entirely. A steady state will be re-achieved that is mostly archipelago, but a fluid ocean like grid will persist in areas where there are fundamental limits to 100% onsite generation and storage. This grid will be funded and managed differently – no PUC but instead, public-private ventures will dominate the financing and ownership structures require for these large societal investments.

So the answer to ocean or archipelago is… yes.

Home Ownership & Distributed Energy: Two Peas in a Pod

At first blush, home ownership and distributed energy seem about as similar as kale and cheeseburgers. Look a little deeper, though, and a striking similarity emerges, suggesting they may actually be two peas in a pod. That similarity is funding. Where does the money come from for mortgages or distributed energy installations? In the near future, monies for both may come from an identical mechanism.

Ever heard of Fannie Mae or Freddie Mac? If you own a home or have ever worked with or known a mortgage broker, these names may be familiar. Fannie Mae, a friendly nickname for the Federal National Mortgage Association (FNMA), was created in 1938 as part of FDR’s New Deal. The goal was home ownership, and it worked! By creating a secondary market for mortgages, funds became available for home loans – lots of home loans.

But what does that mean – secondary market? In the old days, your neighborhood bank provided passbook savings accounts. They paid you interest in return for holding your money. To pay that interest they put your money to work. By pooling your money and all your neighbors’ monies together, they could do things like make loans. As long as the interest they received on loans exceeded what they were paying on savings accounts they made money. However, they could only loan the money they collected from you and your neighbors. This was very limiting. Few people owned their own homes as a result. Enter Fannie Mae and the secondary market.

Nobody Wants To Be Second

Fannie Mae was established to provide local banks with federal money to finance home mortgages. They accomplished this by creating a secondary market, which sells mortgage-backed securities (MBS) to investors. An MBS is a pool of loans with similar characteristics. An investor buys, or invests in, an MBS because it provides a fixed return over a period of time. This process is called securitization. More importantly, this process expanded the amount of money to lend well beyond what any neighborhood could support. Today investors all over the world invest in US mortgage-backed securities in droves. Over time the primary market, your neighborhood bank, has given way to the scale and efficiency of this secondary market.

Secondary Market

In 1970, Freddie Mac was created to perform the same function as Fannie Mae and provide competition to the deemed monopoly Fannie Mae had become. Like Fannie Mae, Freddie Mac is a friendly nickname for the Federal Home Loan Mortgage Corporation (FHLMC). Together Fannie Mae and Freddie Mac, both government-sponsored enterprises (GSE), have made pervasive home ownership a reality, even for people with poor credit.  But don’t get me started on the sub-prime debacle of the previous decade…

Put the “Fun” in Funding

How is this related to energy? Today if you want to put solar on your rooftop or a wind generator on your property you must pay for the system with money you have saved, or possibly a home equity loan from your local bank, after you fight with your homeowner’s association of course. It’s happening, but locally, and in ones and twos. Widespread adoption of distributed renewable energy is not occurring, even though the economics make tons of sense in many regions today. Like the limitations neighborhood banks placed on home ownership, access to funding is inhibiting widespread adoption. Can securitization of energy help?

Rooftop Solar

It can. And it’s starting. SolarCity Corporation is the poster child for the securitization of energy. A SolarCity customer signs a twenty year agreement for energy services. In return they receive an additional energy bill from SolarCity. Nothing gets paid up front. The combination of their old utility energy bill and their new SolarCity energy bill is generally about 30 percent less than they paid before because a meaningful percentage of their energy needs are met by the sun. The rooftop equipment delivering this solar energy is essentially leased and rolled into the customer’s monthly payment. SolarCity owns the equipment and operates it on the customer’s behalf. But where does SolarCity get the funding to pay for the equipment in the first place? Well, they have a fund. An investor buys, or invests in, the SolarCity fund because it provides a fixed return over a long period. It’s not a mortgage-backed security, but it plays one on TV. Plus, because of the solar Investment Tax Credit (ITC) the fund provides unique benefits to investors with a tax equity appetite. In turn, SolarCity uses this money to pay for the upfront cost of the solar equipment needed to deliver the energy. Returns to the investor are paid from monthly energy payments by customers. Like a mortgage-backed security, the fund aggregates large numbers of rooftop solar installations and customer payments, improving the economics and mitigating risk in the same way a diversified portfolio mitigates risk.

Government Sponsored or Star Trek Enterprise?

SolarCity is a private sector company, although it recently IPO’ed so it is publicly traded as SCTY. It is not, however, a government-sponsored enterprise like Fannie or Freddie, even though it shares many characteristics of a GSE. What would happen if a GSE or two were created as part of a New New Deal, with a goal of widespread distributed energy generation via energy-backed securities and a nickname of Felix? Well then, home ownership and distributed energy would indeed be pod-mates.

Grid, Grid Everywhere, But Not An Erg To Drink

Everywhere you read it’s energy grid this, electrical grid that. The grid is getting smart, and clean. The grid can store energy. Two-way communications throughout the grid is commonplace, as are renewable energy sources. Microgrids are improving grid reliability and the overall grid architecture is becoming more and more distributed.

Yet looking out my window, nothing appears any different. Is my grid smarter or communicating or more distributed? Are today’s ergs somehow richer or more glamorous?

Distributed Is the New Black

No. Well, not yet anyway. But change is afoot! In the beginning there was the electrical grid, a truly dizzying feat of real-time engineering. Hit brew on your coffee machine and viola, it turns on. 120 volts at 60 hertz (in the U.S.) delivered to your doorstep from a dam or coal-fired power plant or nuclear power plant hundreds or even thousands of miles away. It’s magic!

Then there was the microgrid. A microgrid is a localized grouping of electricity sources and loads that normally operate connected to and synchronous with the traditional centralized grid, but can disconnect and function autonomously as physical and/or economic conditions dictate.[1] The scale of a microgrid is smaller than a traditional, centralized energy source like a coal-fired power plant. A microgrid might generate 1 to 10 megawatts into a 20 kilovolt distribution system, as opposed to 667 megawatts for an average coal-fired power plant into a 110 kilovolt transmission system on the centralized grid. Of course the service territory for a microgrid is smaller too, so its capacity can be smaller, matching a smaller demand.

Nanogrid Figure 2

And now we have the nanogrid. A nanogrid is an autonomous, self-contained grouping of electricity sources and loads that need not be connected to the traditional centralized grid, or microgrid, yet can be aggregated together and connected to the grid when the economic value of its available energy overcomes the infrastructure cost of the connection. As its name implies, we have moved the decimal on scale to the left a few more places. Nanogrid electrical sources are smaller still, from a few watts up to many hundreds of watts. More fundamentally, nanogrids are autonomous. They need no grid in the traditional sense, nor any of the costly infrastructures required to be grid-connected. They are able to generate their own energy, enough energy to perform their function, plus more in many cases. Examples include personal kinetic chargers like the nPower PEG product that can charge mobile devices, street side trash compactors like the BigBelly that use solar energy to compact garbage, solar-powered transportation fleets like eNOW Energy Solutions that generate and store enough energy to control the environment inside a trailer during transport, and outdoor lighting like Inovus Solar-Enhanced Lighting that captures solar energy during the day and uses it to provide lighting at night. Electric and hybrid vehicles may also qualify as nanogrids to the extent their batteries have available charge.

Connections Are the Key

Energy is becoming more and more distributed, even mobile in some cases, and autonomous. Yet being connected remains fundamental, whether grid-connected, control-connected or both. Being grid-connected allows a nanogrid to operate as just another electricity source on the grid, or redundantly alongside the grid, but the connection requires costly infrastructure. This type of connection is electrical. Control-connected is different. This type of connection involves two-way communications. Electricity sources and loads in a nanogrid communicate, coordinating behavior to insure autonomy. For example, a solar light directs its solar energy to one or more loads while the sun is shining, and may also top off the batteries when low. Then when the moon is shining, its behavior changes to run the loads off the batteries. So a nanogrid doesn’t need to be grid-connect, but it may be, and it is always control-connected.

Nanogrid Figure 3

Together We Stand

A single, autonomous nanogrid has at most a relatively small amount of energy at the ready. However, nanogrids can be aggregated. When the economics are favorable, large numbers of grid-connected and control-connected nanogrids can be summoned to wield large and meaningful amounts of energy. For example, all the electric vehicles within a county that are plugged in and have more than 10 extra kilowatt-hours of stored energy onboard can be selected and then targeted to deliver their energy to the grid during a 15 minute window in the afternoon while the natural gas peaker plant spins up.

Nanogrid Figure 4

A centralized aggregation point with detailed, near real-time information about these nanogrids is required for this example to be realized, but these can be high value uses for the highly distributed energy in nanogrids that warrant the economics of being connected.

Distributed Ergs

Outside your window things may not look any different today, but they will. It’s inevitable. The electrical grid must evolve. Energy generation is moving to the edge – to the county and city and neighborhood and commercial building and residential house – closer to the consumer. Your ergs may not be richer or more glamorous, but they will be less haggard from their travels.