Building the New SG 2.0 Infrastructure (III) – There Will Be Losers

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Dominic Geraghty

 

This dialog addresses the fifth success condition for SG 2.0: regulations and market structure.

We have a problem: there is (and will be) a lag in the changes in regulations and market structure necessary to realize the full benefits of SG 1.0 and SG 2.0 applications.

These delays negate potential returns on SG 1.0 and SG 2.0 investments, reducing their ability to cut customer bills by preventing the monetization of their potential value.

We need concomitant changes in different types of SG 2.0 support “infrastructure”: regulations and market structure. Examples of needed regulatory and market changes include, but are not limited to, TOU and RTP tariffs, interconnections to utility assets, privacy and ownership of consumption data, regulated return incentives, and market structure/products/protocols. We invite you suggest others in the comment box below.

Our rate-making process must also shoulder a portion of the blame

The rate-making process incentivizes over-investment in capital assets (the “Averch-Johnson Effect”) and can also dis-incentivize conservation investments. Incentive regulation, similar to that now being implemented by Ofgen in the U.K. offers an opportunity to better align utility risks and rewards with SG policy goals. But that’s a dialog for another day………………….

There will be “losers” -- the benefits of further IX investments and Smart Grid 2.0 implementations will be unevenly distributed

The implementation of SG 2.0 will result in asymmetric benefits across SG stakeholders, in terms of both the size and timing of these benefits.

A Cisco white paper on Gridonomics provides an interesting analysis of value flowing to stakeholders from the implementation of a basket of SG 2.0 applications in three states with different power market structures.  The following table summarizes Cisco’s analysis:

Value Chain Stakeholder Analysis

Customer value gain

Retail value gain/loss

T&D value gain

Generator value loss

Uncaptured value

$40B

-$1B

$15B

-$33B

$16 B

Adding across the row in the table, we get $37B in net benefits for the three states of GA (100% regulated power market), CA (~ 50% deregulated power market), and TX (fully deregulated power market).

Not unexpectedly, generators shoulder the majority of the losses associated with the transition to the SG 2.0, while customers accrue the majority of the benefits. Cisco defines the uncaptured value column above as comprising reliability, carbon emissions reductions, and other benefits not monetized in U.S. power markets.

To support a policy goal related to the implementation of the SG, a portion of the net positive benefits could be reallocated to compensate some of the biggest losers, while still coming out ahead in terms of the customer case as a whole --  good grist for a future dialog.

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