The Utility of the Future

Preparing for a Changing Energy Sector

Robert Armstrong Director; Co-Author: Ignacio Perez-Arriaga    ·    November 10, 2014    ·    MITEI
The electric power sector is at a pivotal crossroads that may lead to revolutionary changes. With the drive to decarbonize our energy sources continuing to gain support, the deployment of renewable energy generation such as solar and wind may grow significantly. Improvements in the cost and performance of distributed energy technologies and potential breakthroughs in energy storage are creating new opportunities for on-site generation and storage. At the same time, changing patterns of electricity use — such as from plug-in electric vehicles — are altering demands and broadening what it means to be an electricity consumer; and new information and communications technologies are enabling the collection of massive amounts of data and unprecedented visibility and control over the power system.

What does this mean for the future of the electricity sector? Will a new wave of distributed energy systems — comprised of distributed generation, responsive demand, storage, electric vehicles, and communication and control technologies — take shape? What new business models and regulations will emerge, and how will they transform the sector?

The electricity sector will surely change in the coming years and decades, but the details of these changes are largely uncertain, which is a cause for concern in the electricity industry. With this in mind, the MIT Energy Initiative is setting out to determine how the electric power sector may evolve and how electricity services will be provided in the coming decades.

We have launched a comprehensive study of the technology, policy and business models shaping the evolution of the delivery of electricity services. We aim to examine several possible scenarios for the future of the electricity sector in order to inform utilities, regulators, policymakers and new market actors attempting to navigate a rapidly changing industry. To guide our work, we are building a consortium of stakeholders who can help provide insight into the challenges they are confronting.

Over the course of a multi-year study, we will seek to answer key questions such as:

In preparation for this multi-year study, we completed an initial assessment of the drivers of change in the electric power sector that underscored several key observations.

Technological improvements in performance and cost, as well as in sensing and control, are transforming the electricity distribution sector into one that is more adaptive and responsive.

New technologies such as microgrids, virtual power plants and smart charging systems may drive or emerge from a more distributed paradigm.

People have compared the nascent changes in the power sector to the replacement of landlines by cell phones. Although this analogy is certainly imperfect, it is fair to say that the development of distributed energy technologies may likewise give rise to new business models that could reshape the sector. Incumbent utilities must find innovative ways to evolve their value proposition, as they capture the opportunities presented by new distributed systems and their component technologies.

The utility business models of the future will need to find ways to use distributed energy resources such as rooftop solar, fuel cells and batteries to improve the operational efficiency and reliability of the grid. This calls for utilities to be aware of and responsive to the growing needs and demands of system users.

To explore this evolving electricity landscape, we will employ quantitative models to analyze the effect of distributed energy systems at three levels. First, we will examine business model design and management. We will study the internal optimization of investment in and operation of distributed energy systems (DESs) as providers of services with economic value. Second, we will assess the market price corresponding to electricity services when DES penetration is modest. DESs can impact and add value to a wide range of energy services and markets, including real-time and day-ahead energy markets, regulation and reserves, congestion management, voltage control, ramps, peak shaving or capacity markets. Third, we will study the effects of greater DES penetration on the power system, including changes to the generation mix, wholesale market prices, transmission and distribution grids, and the retail electricity market.

To allow new business models to be successful, regulations must enable utilities and other market actors to meet changing needs and demands. For instance, regulations should ensure that utilities are adequately compensated for and incentivized to make investments to accommodate distributed generation where it is beneficial for system users. Likewise, regulators must provide efficient and fair price signals for distributed energy resources and ensure that energy market rules create a level playing field that allows distributed and centralized energy sources to compete. If regulatory innovation does not keep pace with the changing nature of the electric power system, large inefficiencies will result.

The integration of distributed energy resources may well reshape the provision of electricity services. How the sector adapts to changes over the next decade will define the landscape for incumbent utilities, create roles and opportunities for new entrants, and transform the way each one of us receives and uses electricity in our daily lives.

Robert Armstrong is director of the MIT Energy Initiative, and Ignacio Perez-Arriaga is a visiting professor at MIT and chairman of its Utility of the Future project.

Learn more about the Utility of the Future.

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