What if your heat and power turned off this winter at Harvard?
Energy in our homes or businesses is something we expect as a matter of course, yet with climate change, utilities like Eversource must adapt to a huge series of new variables thrown into the mix just to keep the lights on.
You’re in your Harvard dorm room reading cases when it starts snowing. No worries – they told you that it doesn’t get that bad. Next thing you know there’s 30 inches of snow, 80 mph winds, no power, and the heater has stopped working – how did this happen in the USA? Will power be coming back soon so you can finish your reflection assignment? Are you going to freeze to death before discussion group?
This scenario seemed implausible given New England electricity and natural gas is largely supplied by Eversource Energy (merged with NSTAR), a Fortune 500 utility company founded in 1966. Climate change however has brought a rising number of record breaking storms[1][2], and a shift in the types of power generation – failing to adapt would jeopardize the grid.
Increased variability from multiple angles
If studying operations teaches one thing, it is that variability is costly for a business. Climate change brings this from both a demand and supply perspective.
- Demand Variability
With increasing “super storms” or “super heat waves”, there can be unusually spikey demand for heating homes or cooling offices. Just as a distributor asking for 10x the usual order from a wholesaler can cause a lot of grief and desire to stockpile inventory, a polar vortex would cause a city to order 10x the amount of energy from utilities than normal. With extreme consequences for not delivering (hospitals shutting down, etc.), Eversource must either develop or procure with contracts that have much more excess capacity than what is normally needed and at great expense.
Increased Prices to Secure Power Regulation During the Polar Vortex Storm[3]
- Supply Variability
Favorable regulatory policy for solar energy[4] combined with increased consumer favor for renewables has increased a new type of power generator to enter the grid. Instead of a utility owning or contracting a few large plants to supply all resource needs, each home with a solar panel and excess energy can be a contributor, through an arrangement called “net metering” – effectively creating a distributed grid. Although there are many benefits to this, such as increased individual household resiliency, and cleaner power sources, aging grid infrastructure may struggle to keep up with this overhaul to their supply chain given the massive CAPEX required. The issue is exasperated by solar energy supply being uneven (more in the middle of the day)[5] and future extreme weather causing downed power lines. To cope with these challenges, Eversource must essentially help build a “smart grid”, via software and electricity rate design, to optimize power flow and minimize the need for capital intensive infrastructure investment.
Tradition vs. Smart Grid[6]
Teaching an old dog new tricks
Although utilities are notorious for being old, slow, and bureaucratic, they are innovating to develop solutions and not only mitigate these issues, but even sometimes create profitable opportunities through several methods:
1. Owning the change
Instead of adapting after solar and energy efficiency solutions have been implemented by consumers, utilities can develop (often with external financing) or partner with 3rd parties to sell these solutions to end customers[7]. Owning this process will not only help forecasting due to an increased information control, but also create new business lines.
2. Changing rates and enabling capital markets
If electricity is more expensive during unwanted peak demand times, entrepreneurs will find a way to provide end customers a solution to reduce demand to reduce energy bills. Using rate design can be a way of smoothing out unwanted variability without intensive infrastructure investment.
3. Creating buffers
With decreasing costs of energy storage[8], the grid can benefit from investing in more decentralized storage facilities to essentially act as buffers against some variability. The prime example is to store the excess solar power coming in at noon in batteries, and then use the power during rush hour when energy demand peaks.
Eversource is moving in the right direction, but will it be enough?
Eversource, like many utilities, has invested in many of the innovations above including helping develop distributed solar and offering energy efficiency tools to their consumers[9].
However, there is still resistance to fully embracing these challenges as an opportunity rather than a threat. Eversource had been fighting against solar and environment groups to reduce net metering allowances[10] rather than collaborating to find a win-win solution. Separately, they have moved slower than their Californian and New York counterparts, who have formed much larger partnerships with solar, storage, and energy-efficiency partners, already altered rates, and found innovative financing for investing in this space[11]. This not only eases the transition to a new grid, but accelerates this inevitable change.
It is a tough process with an uncertain ROI, but the consequences of being left behind are high – Eversource must adapt faster to keep our lights on and our homes warm.
[Word count before citations: 797]
Sources:
[1] – “Monitoring and Understanding Changes in Extremes – Extratropical Storms, Winds, and Waves” , American Meteorological Society, March 2014, http://journals.ametsoc.org/doi/pdf/10.1175/BAMS-D-12-00162.1
[2] – “Blizzard hammers US Northeast, five dead, 700,000 lose power”, Reuters, February 2013, http://www.reuters.com/article/us-usa-weather-idUSBRE91611P20130209
[3] – “Analysis of Operation Events and Market Impacts During the January 2014 Cold Weather Events”, PJM Interconnection, May 2014, https://www.pjm.com/~/media/documents/reports/20140509-analysis-of-operational-events-and-market-impacts-during-the-jan-2014-cold-weather-events.ashx
[4] – “Solar ITC extension approved in the US Sentae”, PV Magazine, December 2015, http://www.pv-magazine.com/news/details/beitrag/solar-itc-extension-approved-in-the-us-senate_100022519/
[5] – “The California Duck Curve Is Real, and Bigger Than Expected”, Greentech Media, November 2016, https://www.greentechmedia.com/articles/read/the-california-duck-curve-is-real-and-bigger-than-expected
[6] – Seminar on Smart Grid Technology, Professor Ram Meghe, 2015 http://www.slideshare.net/asegekar18/smart-grid-technology-53195451
[7] – “2016 State of the Electric Utility Survey”, Utility Drive, 2016, http://app.assetdl.com/landingpage/state-of-the-utility-survey-2016/
[8] – “Lazard’s Levelized Cost of Storage Analysis”, Lazard, 2015, https://www.lazard.com/media/2391/lazards-levelized-cost-of-storage-analysis-10.pdf
[9] – Eversource Company Website, https://www.eversource.com/Content/general/residential/programs-services/customer-generation/solar
[10] – “Action on solar bill at center of fight between Eversource, National Grid and environmental groups”, Mass Live, November 2015, http://www.masslive.com/news/boston/index.ssf/2015/11/action_on_solar_bill_at_center.html
[11] – “New York and California are Building the Grid of the Future”, Rocky Mountain Institute, February 2015, http://blog.rmi.org/blog_2015_02_18_new_york_california_building_the_grid_of_the_future
Amanda, thanks for this interesting piece. With the weather getting colder, the prospect of having a power outage with no heating seems petrifying, to say the least.
I found it particularly intriguing that Eversource has been moving slower than their California and New York counterparts – I just did a quick search and found that the weather patterns are more unpredictable in New England than they are in California or New York. I am curious as to whether this is a function of competition (or the lack thereof), or if this is the result of regulatory incentives that are available in the other two states but not in Massachusetts? Regardless, given the social good element of the provision of energy and gas, more intervention on a governmental level should probably be necessary to ensure that sufficient funds are allocated to investing in more efficient and reliable tools to supply energy in New England.
Really interesting post Amanda!
You mentioned how spikey demand for heating homes or cooling offices can hurt Eversource. Do you think it would be possible for Eversource to incentivize consumers to decrease energy consumption during these weather events? Just as cars pull up when an ambulance or firetruck screeches by, could people unplug their phones, bundle up (rather than turning up the heat), and just consume less energy for the sake of other consumers who may need it more (like hospitals). Perhaps some behavioral economics can be applied here – universities or neighborhoods can compete to see who can use the least amount of electricity during an extreme weather event, and Eversource can organize such a competition and offer prizes. I know companies like OPower and WaterSmart Software operate using behavioral economics to help utilities deal with variable access to energy supply.
http://blogs.wsj.com/venturecapital/2015/04/07/watersmart-software-raises-7m-to-help-utilities-save-water-predict-demand/
http://www2.opower.com/potential
Thank you for the post Amanda. Indeed we take constant source of electricity for granted, even at HBS, and I certainly see opportunities for all of us to improve on that. In my opinion, electricity should not be made ‘free’ or be included as a flat fee in the monthly rent. This masks the estimates of an average usage per room / per house and does not drive any change of behaviors from the student community towards being more eco-friendly. Taking some lessons from our FRC Activity based costing / pricing, I think there is opportunity to convert our energy bills to those based on actual usage, which will likely encourage the student community to be more conscious. The same argument holds true for water consumption and I am glad to see Harvard university as a whole taking some action on this – https://green.harvard.edu/campaign/our-plan and laying out a few key goals on energy and water consumption.
Great post, Amanda. The vulnerability of our grid is a subject of a lot of writing – usually in the context of national defense and hacking. Indeed, very few people realized how devastating it would be to American society if only a few components of our energy infrastructure fail.
I thought your thoughts on the relationship between Utility companies like Eversource and clean tech innovators (Solar City, for example) was interesting. I had never really considered whether the incumbent players were incentivized or disincentivized to promote the adoption of new clean tech. Obviously they would be happy if it reduces the demand variability that they face, but what if it starts to cut into the total energy demands that Eversource receives? As a public utility are they happy that our national energy consumption is going down or are they upset, because they are presumably generating less cash flow for their shareholders?
I agree with Amelia with the fact that, as temperatures drop, it is terrifying to consider the prospect of a power outtage in Boston!
Your article is incredibly insightful as I have only ever considered the impact of climate change on energy suppliers from a limited resource standpoint – i.e. as we deplete our sources of fossil fuels, our traditional sources of energy will become more expensive, placing margin pressure on utility companies who are faced with increasing cost of raw materials and customers resisting the increase in their energy bills. I had never considered the cost of variability of extreme weather events!
The perspective you take from an energy provider makes me also consider, building on Paul’s thoughts, whether we are doing enough as consumers to limit our energy usage. In the UK, generating an energy performance certificate is a requirement when a property is build/sold/rented (https://www.gov.uk/buy-sell-your-home/energy-performance-certificates). This mandates that prospective homeowners or tenants keep energy usage top of mind, particularly as a home’s energy efficiency can impact price. A quick search suggests that the MA government does have some household energy efficiency initiatives in place (http://www.mass.gov/eea/energy-utilities-clean-tech/energy-efficiency/ee-for-your-home/), but that these are not mandated. Given the extreme impact of weather on homes and energy usage here in Boston, I wonder whether this is enough? Would a similar mandatory efficiency certification motivate home owners in MA to consider making their homes more energy efficient? Should this be the responsibility of the government to enforce?
Amanda, thanks for this informative post. I definitely would not like it if my power turned off in the dead winter at Harvard! I agree with you that one of the imminent potential solutions is to create buffers by storing power in batteries. I would point out however that in talking about batteries, there are two types of batteries which will have different use cases and different impacts on Eversource. Tesla makes lithium ion batteries which are ideal for residential renewables and are good for handling surges in demand (ie. peaker replacement). Other companies like Primus Power make flow batteries which is more useful for grid support: there’s actually lots of opportunities for flow batteries to boost support for an existing old grid rather than building a new substation in the grid, especially internationally (https://www.greentechmedia.com/articles/read/primus-power-raises-25m-to-bring-flow-batteries-to-kazakhstan). I think batteries are a really interesting solution, and I would look further into if Eversource might want to invest in flow batteries for the grid or encourage residential usage of lithium ion batteries.