AFFORDABLE ELECTRICITY MARKET TRANSFORMATION Howard A. Learner1
Environmental Law & Policy Center
HLearner@elpc.org, 312-673-6500 September 12, 2015 (draft v.3B) Smart policies drive new energy markets. They spur clean energy technological innovations developed and deployed here that, when transferred globally, can help save the world through more energy affordability, reliability and climate change solutions. Solar energy combined with battery storage, and LED lighting and other energy efficiency and energy management technologies are as disruptive and destructive to the current electric utility sector as wireless technologies have been for telecommunications.
Smart policies should open up the electric utility monopolies to competition, remove regulatory barriers to new clean technologies, and nudge and incent capital investments accelerating solar energy and wind power, energy efficiency and other modern clean energy technologies. The electricity market is on the verge of rapid transformation through distributed solar energy generation, new energy efficiency technologies and battery storage technologies. Technological advances are bypassing the antiquated monopoly electric utility and consumer “regulatory compact” just as cell phones bypassed landline phones, fundamentally changed the Ma Bell monopoly and made historic telecommunications regulation mostly obsolete.
These changes are poised to move as rapidly as smartphones, digital cameras and wireless technologies reshaped telecommunications leaving landline phones behind and changing the ways that businesses do business, and people communicate, research and access information, take photographs, listen to music, and share photos and information. We have learned to live and work very differently over the past two decades. For many people, a smartphone (and a laptop or tablet computer with Skype), Wi-Fi, router and Bluetooth internet connection have replaced the landline phones that were in almost every home connected to wires and poles running up streets, alleys and roadways across our landscape.
Chicago can and should be a leading global city on the leading edge of this clean energy policy, technological development and deployment that are a win-win-win for environmental progress, job creation and economic growth, and for building sustainable and resilient communities.
How can Chicago lead and not follow? The Chicago region has: smart policy, business and financial talent; investment capital looking for opportunities; top engineering schools and two national laboratories; a skilled technical workforce; many commercial and industrial buildings, including big-box retail stores and warehouses, schools and multifamily residential buildings with flat, unshaded roofs that are prime for installing rooftop solar photovoltaic panels; underutilized old industrial brownfield sites that are ripe for installing solar brightfields; old buildings with greatly untapped energy efficiency opportunities to avoid waste; and national and global visibility. Chicago and Illinois already have more than 400 solar energy and wind power supply chain businesses.2 What’s needed is policy innovation and political will to accelerate the clean energy development transformation.
Why should Chicago lead and not follow? Clean energy technologies will sweep the world the way that semiconductors, wireless communications and biotechnology have fundamentally changed the ways that we live and we work. Chicago was late to the game with “Silicon Prairie” and didn’t really get to the early game with wireless telecommunications or biotechnology. Chicago should not miss the opportunity to be at the leading edge of the global economy when it comes to clean energy.
Moreover, Chicago’s and Illinois’ fiscal crises will ultimately require increases in Illinois’, Cook County’s, the City’s and related City agencies’ taxes and fees of various types, all of which will hurt many people and businesses and make Chicago less economically competitive. That necessitates that we save money in other places wherever possible. Energy waste is avoidable, and energy savings can be monetized.
Energy waste is a prime opportunity for both economic savings and environmental gains. The Chicago region does not produce coal, uranium or natural gas. When Chicago businesses and residential consumers buy electricity from Commonwealth Edison and other conventional energy providers using centralized coal, nuclear and natural gas-fired generating plants, and buy natural gas from Peoples Gas and other providers, the fuel charges3 are a large component of their utility bills. Chicago consumers’ fuel payments drain billions of dollars out of Chicago’s economy to those places where coal, uranium and natural gas are produced.
Chicago’s underlying utility infrastructure is also stressed. Peoples Gas is enmeshed in a controversial, very expensive pipeline replacement program extending over many years, and Commonwealth Edison’s electricity “wires and poles” distribution grid – with transformers, substations, capacitors, etc. – have shown many signs of aging, stress and problems. Fixing these centralized systems is costly. Distributed solar energy generation and energy storage combined with smart energy efficiency retrofit improvements and demand response programs will lighten the load on the existing grid and enhance reliability and resilience.
This more distributed system is more flexible, adjustable and diverse, and less bulky, static and vulnerable to massive disruptions and wide scale outages. (It is also less vulnerable to terrorism and other security threats.). The improved resilience from a more distributed, and less centralized, electricity system is even more important as climate change causes more extreme weather events that can greatly damage and paralyze the currently centralized electricity generating system. Hurricanes Sandy and Katrina, and many recent tornadoes, floods and storms have tragically demonstrated the impacts.
This White Paper will explain:
Solar Energy Generation Is A Transformational Technology as commercial photovoltaic (PV) panel efficiencies improve about 1.0% each year, and inverter technologies improve from 80%–85% efficiency to 98% efficiency.4 PV module (panel) costs have dramatically dropped over the past seven years to 60 cents – 80 cents per watt, and overall solar installation costs have sharply declined to $2 – $4 per watt as shown in the graphs in Part I below. “U.S. distributed solar prices have continued to rapidly fall, declining by 10 to 20 percent in 2014, with similar trends persisting into 2015.”5
The pace of technological change for solar energy reflects the experience with computers, smartphones, digital cameras, remote sensing equipment, streaming music, Skype and other videoconferencing tools, and Uber. More than 90% of Americans now have cell phones6 – virtually all of which have been acquired over the past 20 years. Over the past four years, smart phone ownership has almost doubled.7
The inflection point for solar energy in the hockey stick curve is coming fast. 2014 was the third consecutive year of more than 50% growth in the U.S. residential solar market, and the first year that residential exceeded non-residential installations. According to GTM Research, this rapid growth reflects the widespread availability and increasing diversity of financing solutions.8 The Illinois Power Agency’s recent $5 million distributed solar generation “pay as bid RFP” procurement was oversubscribed with prices that a few years ago would have been viewed as shockingly low. The IPA auction prices averaged $134.84 per REC.9 The IPA contracted for 37,082 SRECs or 7,416 per year for 5 years, which is about 6 MW of solar. If the trend continues with the two upcoming auctions, that will lead to about 40 MW of distributed solar contracted, which will more than double the amount of distributed solar in Illinois. The two upcoming procurements in November 2015 and March 2016 will allow systems up to 2 MW to compete so prices will likely be even lower.
Solar power is making great advances through policy drivers, market changes and technological innovations. Energy efficiency is saving businesses and consumers money on utility bills, is creating jobs and is the best, fastest and cheapest way to avoid carbon pollution. New clean energy technologies that are successfully developed in the United States can be shared with developing countries to help change the world by reducing global carbon pollution.
There Is A “Quiet Revolution” Accelerating Energy Efficiencythrough more efficient lighting, heating and cooling technologies, more efficient refrigerators and other appliances, better building design and more efficient pumps and motors. These continually improving energy efficiency technologies are saving people and businesses money on their utility bills, creating installation jobs, keeping money in local economies, and reducing carbon and other pollution to protect public health and the environment.
LED lighting is rapidly coming into the mass consumer market and, alone, can reduce overall electricity demand by about 7.5% in places like Chicago as explained in Part II (B) below. This one technological improvement – LED lights last longer and are about 85% more efficient than incandescent bulbs – is easy to implement, will significantly reduce electricity use, thereby saving consumers’ money and avoiding pollution. Federal appliance efficiency standards on a wide range of household appliances and business equipment, combined with voluntary industry actions to greatly improve flat video panels and TV set-top boxes10 among other electricity-using equipment, reduce electricity demand even as people use more gizmos and gadgets.
But don’t all of the new electricity-using gizmos, gadgets and high-powered equipment increase overall electricity use and demand? Nope. Look at the data. Commonwealth Edison’s retail electricity sales are declining. Energy efficiency is driving down electricity demand in Commonwealth Edison’s service territory in Northern Illinois: Weather-normalized retail electric deliveries decreased 1.2 percent in the second quarter of 2015 compared with the same period in 2014. The three previous quarters were: -1.9%, -1.2% and 0% (all weather-adjusted). That continues the trend starting in 2008. Meanwhile, by contrast, Chicago’s regional economy is growing around 2.5% - 3.0% annually. Declining electricity use demand is disconnected from Chicago regional economic growth; put another way, we are growing, but more efficiently. Look forward to an annual negative 1.0% - 1.5% demand in the Chicago area. (For another Midwest example, American Electric Power’s official electricity use forecast is negative 1.5% annually over the next 15 years in Ohio.
New home and business energy management systems and smart thermostats with easy user interfaces are beginning to provide control settings and automatic adjustments that dim or turn-off lights and adjust heating and cooling temperatures when people are not home. Commonwealth Edison and other utilities have programs to “cycle” air conditioners to turn-off for 15 or 30 minutes when peak power demands occur. Other commercial and industrial demand response programs allow customers to bid in their load reductions when more cost-effective than central power generation and they can displace highly-polluting diesel back-up generators at peak power demand times on hot summer days. All of these technological improvements are now available and gaining an expanded market share. They help consumers save money and avoid electricity waste. What’s wrong with that?
The key here is simplicity and automation. People don’t have to be energy wonks or tech geeks to install LED bulbs to replace incandescent light bulbs. New refrigerators, video screens and other appliances are, on their own, more energy efficient; they don’t require technical adjustments by their new owner. Just as all cars and trucks are becoming more fuel efficient under the federal CAFÉ (Corporate Average Fuel Economy) standards, all refrigerators, air conditioners and other appliances, lighting, and business equipment, including pumps and motors are more energy efficient. As older appliances and equipment turn over, and consumers buy new replacements, which are more energy efficient, thereby “automatically” reducing electricity use.
Energy management systems, including smart thermostats such as the Google Nest and its competitors, and other controls, have simple interfaces, automatic settings and actions, and are as easy to use as today’s basic computer software programs and smart phones when it comes to making phone calls, sending emails and text messages, and taking photos. In short, these energy efficiency improvements are beginning now with “early adopters” who tend to be younger or more tech-savvy. As seen with smart phone, digital photography and computer use, however, where user rates exceed 90% of Americans, these energy efficiency technological improvements will rapidly benefit lower-income as well as higher-income consumers, and older consumers as well as younger tech hipsters.
Finally, energy efficiency is the best, fastest and cheapest solution to climate change problems. States’ compliance with the U.S. EPA’s Clean Power Plan standards will spur more energy efficiency resources as a smart, cost-effective implementation strategy. It’s worth noting that the Clean Power Plan’s “Clean Energy Incentive Program” provides states with bonus allowances for early actions to install energy efficiency improvements in low-income communities.
Advanced Batteries and Other Storage Technologies Are Coming. Rooftop solar and wind energy farms plus advanced batteries and other storage technologies are the holy grail that will enable clean renewable energy to power our homes and businesses on a 24/7 basis. Look at the tremendous advances in battery improvements for computers, smartphones, cameras and, now, electric vehicles. The batteries are increasingly smaller and lighter, more powerful and less expensive. As GE, Johnson Controls, Tesla – which, in some ways, is more a battery company than a car company – and others seek to improve batteries for electric vehicles, there are new opportunities for that very distributed storage to supply electricity to homes and back to the grid when needed.
Argonne National Laboratory’s “multidisciplinary team of world-renowned researchers are working in overdrive to develop advanced energy storage technologies to aid the growth of the U.S. battery manufacturing industry, transition the U.S. automotive fleet to plug-in hybrid and electric vehicles, and enable greater use of renewable energy.”11 The Joint Center for Energy Storage Research at Argonne National Laboratory is a national research consortium with the “5-5-5” goal of developing new battery technologies within five years to store at least five times more energy than today’s lithium-ion batteries at one-fifth the cost. Tesla’s Gigafactory 1 – a large-scale lithium-ion battery manufacturing plant under construction in Nevada – is planned for operation by 2016 – 2017.
New home energy management systems can help allocate solar PV generated electricity for use and for storage depending on instant market prices and priority household power needs in the same way that sophisticated trading programs guide stock purchases and sales amidst changing market prices. Microgrids and new community solar gardens using distributed local generation with local storage can stabilize the grid, increase resilience by reducing reliance on long-line transmission and support cleaner solar generation.
The Clean Power Plan Opportunity for Chicago – How Illinois Achieves Compliance Makes A Difference. On August 3, 2015, the U.S. EPA issued its final Clean Power Plan rule, which is intended to reduce carbon pollution from power plants by 32% by 2030. Among other things, the EPA’s Clean Power Plan requires Illinois to adopt a plan to reduce its carbon pollution by 31% by 2030 from 2012 levels and to achieve interim progress by 2022.12 The final Clean Power Plan provides states with three essential “building blocks” for compliance: (1) Increasing the efficiency of coal plant operations to reduce the amount of carbon pollution per unit of electricity generated; (2) Moving from coal generation to less carbon-intensive natural gas-fired power plants; and (3) Accelerating renewable energy generation, like solar energy and wind power, which is zero-carbon.13 There are also some very particular energy efficiency opportunities for investment and compliance.
The “devil is in the details” of this comprehensive set of carbon pollution reduction standards, but, overall, the strategic implications for Chicago are clear. Investments in solar energy developments and in energy efficiency retrofits of buildings in Chicago to achieve Illinois’ Clean Power Plan compliance inject capital, create local jobs and benefit the Chicago economy. On the other hand, investments in retrofitting coal plants and new natural gas plants elsewhere in Illinois pull money out of the Chicago economy. Chicago’s policymakers and business and civic leaders should strategically focus on Clean Power Plan compliance strategies that are good for Chicago’s economy and good for Chicago’s environment.
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Let’s Focus on the Competitive “Energy Market of the Future” Rather Than the “Utility of the Future.”Chicagoans currently choose among seven or more wireless phone companies offering different, competing rates and billing packages, services and equipment. By most accounts, that competition and choice has lowered cost to consumers and expanded communications opportunities. More than 90% of Americans have cell phones and other wireless services, and as of 2013, 44% of Midwestern homes did not have a landline phone.14 That percentage is likely much higher in Chicago, and many people under age 35 are wireless-only, having chucked their landline phones long ago. As Time magazine put it: “Landline Phones Are Getting Closer to Extinction.”15 (So have gone Kodak film, Blockbuster videos, and most local record stores).
As wireless technologies entered the market, different telecommunications companies adopted different business strategies. Verizon divested and sold off its landline phone service and concentrated on building the nation’s largest competitive broadband, wireless mobile phone business. Other telephone companies stuck with regulated landlines and plain old telephone service (POTS). The market results are reflected in the rapidly accelerating number of households in Chicago that rely much more on a smartphone and laptop computer (or tablet) wirelessly linked to a router or directly to a cell tower instead of a landline phone connected by wires to poles to more wires and then distant switching stations. Northern Illinois has a legacy of wasted investment in telephone wires and poles scarring our landscapes. (Think about the opportunities for removing some excess telephone and electricity lines cluttering up Chicago’s streets, parks and neighborhoods.)
But, isn’t electricity different than telecommunications? Well, yes and no. Yes, it’s truly easier to transfer radio signals through the air than it is to move electrons. No, because rooftop solar panels on much more energy efficient buildings with smart energy management systems and storage technologies can be a more flexible, decentralized electricity system served by an array of competing businesses with some offering total energy management services and others offering separate pieces of the system.
What about Exelon, Exelon Generation and Commonwealth Edison? What is emerging is more of a pricing and customer-choice issue than a physical structure issue even though electricity is more complicated in some ways than telecommunications. Exelon, the holding company, and Exelon Generation, its subsidiary that owns and operates all of the nuclear power plants in Illinois (and some elsewhere), are competitive market enterprises that can and should rise or fall in the competitive electricity market based on their business savvy, investment choices and ability to successfully navigate changing risks and opportunities.
There will continue to be some, but fewer, large centralized coal, natural gas and nuclear power plants generating electricity and transmitting it along long transmission lines to the Chicago area. There will likely be more zero-fuel cost, clean wind power generation as many aspects of wind turbine design, equipment components, and siting continue to improve and capacity factors increase, thereby lowering costs per megawatt-hours (MWh). Wind power technological improvements are leading to more efficient and economically competitive generation.
Commonwealth Edison, the electric distribution utility company in Chicago and most of Northern Illinois, is situated differently. Since the 1920s, it has largely operated under the traditional regulated monopoly rate-of-return utility structure advocated by the company’s founder Samuel Insull. But, what if many Chicagoans no longer need or want Commonwealth Edison’s services, just as many consumers have deserted AT&T’s landline phone services?
What will bemost needed, initially, is back-up electricity services in case the solar panels and battery storage operating in much more energy efficient homes and community microgrids are not sufficient to keep the household lights on and refrigerators running. That back-up service can be provided and priced by Commonwealth Edison just as AT&T and Comcast continue to provide landline back-up service alone or as part of a package for those who still want and need landline, priced accordingly. However, Commonwealth Edison will soon be facing competing businesses offering back-up supplies from small, local combined heat and power (CHP) generating units in basements and neighboring buildings, back-up batteries and other electricity storage units, and electricity purchased on the grid. Electricity backup might be less expensive than many think because the slimmed-down more decentralized electricity system will be less expansive and thus less expensive to operate.
What are likely to emerge along with back-up services are more networked services connecting information and energy technologies at homes and businesses and in communities. There are multiple decentralized local electricity solutions that are becoming increasingly viable. In addition to solar PV panels + household batteries, there are emerging community battery storage technologies that can provide back-up or network support. Most commercial buildings have natural gas connections, and about 85% of Chicago homes use natural gas for heating. Natural gas supplies are currently robust and inexpensive. Combined heat and power, especially with effective micro turbines or fuel cells, combined with solar PV panels can provide on-site power for commercial, governmental and multifamily residential buildings, as well as providing networked or back-up support for community grids and nearby buildings and vehicles.
Commonwealth Edison won’t be the only game in town – unless the City of Chicago, Illinois Commerce Commission and Illinois Legislature allow regulatory barriers to constrain competition. Commonwealth Edison and other monopoly utilities won’t be able to keep their market share through overpriced service – they will lose customers to new competitors just as AT&T has lost Chicago-area customers to Verizon, Comcast, Sprint, T-Mobile, U.S. Cellular, Cricket and Boost. Other companies will provide networked services and backup support, alone, or through fully-packaged overall electricity supply and services.
Who will be the new competitors? Keep an eye on both energy companies such as NRG and consumer services companies such as Google, which now owns Nest Labs and markets Nest thermostats, and has enormous amounts of individual consumer and household data. “Get ready, get ready, ‘cause here [they] come.”16