The transition from centralised electricity systems to ones that increasingly comprise both large-scale centralised resources and distributed energy resources (DERs) is under way globally. However, to successfully manage the shift will depend substantially on sending the right economic signals, a leading Massachusetts Institute of Technology (MIT) energy academic argues.
In fact, Professor Ignacio Pérez-Arriaga, who is visiting professor at the MIT Center for Energy and Environmental Policy Research and a leading contributor to MIT’s ‘Utility of the Future’ research effort, likens the human body to the emerging electricity system, where a comprehensive system of “efficient tariffs and regulated charges” acts as the nervous system.
Speaking at the University of Cape Town Graduate School of Business’s Johannesburg campus recently, Pérez-Arriaga cautioned that, without such signals reaching every corner of the power network, it would be impossible for countries to realise the opportunities, and manage the risks, of a system that includes both centralised and decentralised components. It could also increase the threat of grid defection, which would penalise the remaining consumers and undermine system sustainability.
Recent changes in the electricity sector, notably the steep fall in solar photovoltaic and wind costs, were already offering electricity consumers unprecedented levels of choice, which they were beginning to exercise.
As a result, a large proportion of future generation resources would be distributed and the previous top-down supply model would make way for one where there was no clear dominance of centralised over distributed.
The current electricity tariff model, which relied on periodic meter reading, would become “completely inadequate” to reflect true system costs and would also fail to capture the opportunities associated with not only rooftop solar, but also the integration of electric vehicles, battery storage, thermostats and electric geysers.
Currently, if a household installed solar panels and produced, over the period, as much electricity as it had consumed (albeit at different times) the meter would not move and the household would face no charges.
“However, that house has been injecting power at times, say noon, when it has not only used the network, but has probably created voltage problems in the network. Then, it has consumed electricity in the evening when the network was under stress. Clearly, the power injected has a value far lower than that which was consumed. Yet it is cancelled out on the meter.”
In addition, the tariff doesn’t only include energy, but also network and the regulatory charges, which would not be paid if the meter reflects no change in energy consumed. “This is completely unfair, because you are passing those charges on to those people who don’t have embedded generation.”
In the new world, therefore, economic signals should reflect what is happening at the connection point on an hourly basis. “It’s absolutely necessary for there to be hourly meters, because otherwise we cannot control the situation and we cannot charge, or extend credits, to the various agents in the system,” Pérez-Arriaga explained.
Time-of-use tariffs would also be wholly inadequate to capture what is really happening at the connection point. “We need to know what’s happening every hour to charge, or remunerate accordingly.”
Secondly, charges need to be introduced for using the network when it is stressed, such as when demand is high in the evening, or where the DERs are injecting too much power at midday.
The locational component of prices and charges should be strengthened to send the correct pricing signals that reflect losses and congestions in different areas.
“But most importantly, don’t include the regulated charges in the volumetric signal, because if you cancel that with generation, you are cancelling that regulated component. Instead, that should be a fixed charge that is set yearly and distributed across a consumer’s monthly power bill.”
Including the capacity or the volumetric component of the tariff would be inviting people to defect so as to avoid those charges. “Grid defection would be fine, if it was economically meaningful. But if people are defecting because the tariff has so many added regulatory charges that people want to escape, it is bad, because the rest of the people connected to the network will have to pay all these taxes.”
Creating a comprehensive and efficient system of prices and charges was the only way to put all resources on a level playing field. In addition, achieving efficient operation and planning would hinge on “dramatically” improving prices and regulated charges for electricity services.
The Utility of the Future study also called for:
• An improvement in the regulation of distribution utilities to enable the development of more efficient and innovative distribution utility business models.
• Rethinking the structure of the electricity industry to minimise potential conflicts of interest.
• Redesigning the wholesale market to integrate DERs, reward greater flexibility and create a level playing field for all technologies.
• And evaluating the economic opportunities and costs of DERs to make better use of existing assets, while also recognising that economies of scale still matter and that the distributed deployment of solar or energy storage is not cost-effective in all contexts and locations.
The MIT study shows that creating the conditions for centralised and distributed resources to compete and collaborate on a level playing field is possible and can be implemented with existing technology and reasonable regulatory measures.
“But to bring together centralised and decentralised resources there needs to be a common system of economic signals, otherwise many opportunities will be untapped or lost. What is the use of a battery if the prices at all times of the day are the same? The idea is to charge when electricity is cheap and discharge when it is expensive. If the price is the same, that won’t happen,” Pérez-Arriaga concludes.