For the wind and solar industry, the past decade has been something of a golden age. Costs have been falling and, not coincidentally, capacity has been rising. Indeed, around the world, renewables accounted for almost half of additional generation in 2017. In the United States, renewables (including hydropower, which is a little less than half of the total, but not growing) accounted for about 17 percent of all electricity generation, and most new capacity; in the European Union, it is more than 30 percent of generation, two-thirds of it non-hydro; worldwide, it is 25 percent, a record high. And given both economic and regulatory momentum, these figures are not likely to represent peaks.
For the utility industry, these trends are something short of a blessing. When wind and solar hit critical mass, problems can emerge for the grid. The issues will vary from place to place, depending on what kind of renewables are being used, the availability of transmission and distribution (T&D) capacity, the fleet of nonrenewable generating stations, and the shape of electricity demand. In California, for example, renewables are regularly dispatched at zero or even negative variable cost, a phenomenon that can stress equipment—and that is surely not a sustainable business model. In another example, seen in Europe, short-term wind-forecasting errors can hamper the grid operator’s ability to match supply and demand. These and related problems are likely to become more acute as more wind and solar is used. Already, these sources made up at least 20 percent of power generation in 10 US states.
At the same time, it is important to remember that wind and solar resources need the services that utilities provide. The wind does not blow or the sun shine on demand, and conventional sources such as gas, coal, and nuclear ramp up to fill the slack. The greater use of renewables is already stressing the grid in some markets. The implication, then, is that for both renewable providers and utilities to secure a healthy future, they need to work together more effectively than they do now—in terms of supply, demand, regulation, and market structure.
There is no universal solution to how to integrate more renewables. Storage, if and when it becomes economic, could be important; so could customer programs and regulatory leadership. For utilities themselves, though, there are universal priorities—specifically, to improve their resiliency and flexibility. That has to start with accepting that the future will be different—and then planning for it. The grid-planning process has to be widened, to include non-wire alternatives; it should consider both utility-owned plants (including storage), as well third-party aggregated distributed energy resources (DERs).
Another approach to consider is to create new services, or at least work with others to do so. In Europe, where many utilities took a big hit as renewables began to gain traction, “virtual power plants” help to balance the intermittency of renewables with the flexibility of DERs, such as onsite generation, and load resources, such as big commercial facilities.
Another is to improve T&D integration. Granted, there are big regulatory issues, particularly when distribution assets provide wholesale-market services. It doesn’t help that standards related to DERs often do not exist or are in flux, when it comes to metering, telemetry, and control in wholesale markets. In the United States, for example, electric utilities struggle to price, measure, and manage DER services, limiting their participation in the market—and also for operators to profit from them.
A third is to allow utilities to become platforms for grid-related products and services, such as measurement and verification, customer acquisition, and DER management services. By leveraging their communications and IT infrastructure, as well as their operational expertise, utilities can create value. In the longer term, utilities may want to redesign their systems with the explicit goal of providing the services necessary to integrating DERs. That will enhance the value of the grid. In the shorter term, it may make sense to work with regulators to allow them to give incentives to move demand to hours when renewable sources are more abundant.
From wood to coal to oil to gas—the historic trend of energy has been toward lower-carbon sources. We believe that this is still the case. For economic, environmental, and practical reasons, the use of lower-carbon renewables will likely grow. As technological improvements and the new operational realities of a renewables-based electricity mix create opportunities for new types of resources, it is important that market designers, market participants, and policy makers take part fully in the market’s evolution. The electricity market will not—and should not—evolve in a vacuum. With thoughtful, concerted action, the benefits will flow widely.