Cheaper energy; pricier wires

 A very interesting and informative analysis.  I shall quote only parts of it.

Shortly after covid hit the US and the work from home era began, I looked into buying a bottle of shampoo online. I used to always grab things like that at the drug store next to my office, so without an office to leave, I kept forgetting to buy it. Unfortunately, shipping would have more than doubled its cost, which I couldn’t stomach. Instead, I wrote “BUY SHAMPOO, IDIOT” on a post-it note and put it on my front door.

Increasingly, this is what buying electricity in the US may feel like.

Your electricity bill has two elements: the cost of generating power and the cost of delivering it. People typically assume their bill is mostly or exclusively driven by the former. Far off power plants produce energy, they sell it into the wholesale market, and those costs eventually get passed on to consumers.

In reality, the cost of building and maintaining all the infrastructure to get power to your house (transmission lines, substations, distribution networks, transformers, etc.) is a significant portion of your bill. In fact, when working with large energy users across the country, I even see utility bills where a majority of costs are associated with delivery.

And one of the most slept on trends in the energy industry is that this portion is growing rapidly. According to the US Energy Information Administration,

“After adjusting for inflation, major utilities spent 2.6 cents per kilowatthour (kWh) on electricity delivery in 2010, using 2020 dollars. In comparison, spending on delivery was 65% higher in 2020 at 4.3 cents/kWh. Conversely, utility spending on power production decreased from 6.8 cents/kWh in 2010 (using 2020 dollars) to 4.6 cents/kWh in 2020.”

Put simply, generating power is getting cheaper while delivering it becomes more expensive. In this post I will show how the utility business model creates this situation, how it can meaningfully slow the energy transition, and why DERs must challenge the monopoly if we want to fix it.

There are obvious downsides to electricity becoming more expensive [because of surging 'poles and wires' costs]. For industry, high prices hurt the bottom line. For residential consumers, one can be forced to choose between a credit card balance and keeping the heat on. But within the more specific context of electricity generation becoming cheaper while its delivery cost increases, the impact on electrification should be considered.

The term electrification is used to describe fuel-switching a fossil-fuel energy demand to electricity. The two most common examples of this are electric vehicles and heat pump electric heating. Both are considered by most in the energy sector to be essential parts of decarbonization. The idea is that if we switch as much energy use to electricity as possible, then unlike when using fossil fuels, we can clean up the electricity source.

One reason electrification is supposed to be economical (in addition to sustainable) is that making power through renewables and batteries is getting cheaper by the day. As the power system converts to these sources, electricity prices should come down, making electrification economics more attractive. Or so the theory goes.

But if delivery costs continue to increase at the current pace, they’ll eat any savings generated by large-scale solar and wind. This is a problem for decarbonization, when around 130 million Americans live in a state where replacing an old gas furnace with a heat pump would create higher energy costs than simply buying another gas furnace (ignoring the higher capex as well).

And this doesn’t just impact residential home electrification. Buried in the business model of virtually every new and exciting decarbonization pathway (direct air capture, H2 for steel and shipping, e-fuels for aviation, etc.) is the assumption of very low cost electricity inputs made possible by renewables. You can listen to this episode of The Interchange for a deep dive on the subject, but the quick version is if that cheap renewable energy input is to be accessed via the grid, then delivery costs once again become a problem.

If we want rapid climate action the cost of electricity needs to fall, but its delivery costs may get in the way.

Another outcome of rising delivery and declining generation costs is electricity users will try to avoid those delivery costs. This will be accomplished by building on-site power systems or migrating to locations adjacent to existing cheap energy generation.

The former is becoming commonplace. Homes and businesses are installing on-site solar and storage at a rapid pace, and while they may not realize it, they are doing so to avoid delivery costs. The economics of this choice are often superior to signing up for a grid-delivered power contract because each unit of energy generates value at the retail rate (inclusive of delivery costs) rather than wholesale rate. And as the march of technology learning rates continues, the quantity of locations where this choice makes sense will grow.

Over time, the cost of electricity alone will decline, as renewables get cheaper.
But as the costs of delivery rise, the total cost of utility-scale electricity will exceed
the initially higher costs of distributed generation (rooftop solar)

Simultaneously, load will begin to migrate to places where large wind and solar projects already exist, in attempt to offtake power directly. This has started to happen with new industrial energy loads like hydrogen production and crypto-currency mining because they are extremely sensitive to the cost of power. Soon, other new-build industrial sites will do the same. And eventually, when this dynamic becomes compelling enough, businesses will even consider moving from their existing facilities to capture low cost power directly from large-scale energy sources. If you can avoid the distribution grid, you will.

In the electricity industry we refer to this as load defection, for which the primary concern is the so called utility death spiral. If load defection accelerates, delivery utilities will experience significant decline in energy sales, necessitating rate increases to pay for fixed infrastructure costs. This leads to more load defection, and the cycles continues. This is considered problematic because it will leave those without on-site power systems shouldering the cost of the delivery infrastructure we all (including on-site energy users) rely on.

This argument has been used to levy prejudicial fees on customers with on-site generation, and while this may seem logical, it ignores a crucial consideration; short-run versus long-run costs.

It is true that existing grid delivery assets are fixed costs. Reducing energy consumption from the utility doesn’t reduce the cost of that infrastructure. Once it exists, we’re stuck with it. However, reducing energy consumption (at the right times, more on that later), absolutely does decrease the need for future delivery infrastructure. If the delivery infrastructure needs to support “x” peak load today, and 1.5x at some point in the future, then a 0.25x reduction today means we only need to support 1.25x in the future. While it doesn’t translate immediately into delivery infrastructure savings, it most certainly will over time.

This matters because, while load hasn’t grown for 15+ years, it is about to explode. Earlier I mentioned electrification to show how increasing electricity delivery costs are a problem for decarbonization, but what I didn’t describe was the extent to which this will transform our electricity system. A study from the National Renewable Energy Laboratory (NREL) found high levels of electrification (but not even full electrification) will result in the power system requiring between 2 and 3.5 terawatts of generation capacity, relative to our 1.1 terawatts today.

Doubling or tripling our generating capacity will require a ton of new delivery infrastructure. It follows that reducing load on-site with distributed energy will absolutely reduce total delivery system costs. In turn, this means distributed energy will help keep delivery rates low for everyone, which is a very different outcome than the dystopian utility death spiral narrative some would lead you to believe.

Load defection is good for the grid, because it makes room in our existing delivery infrastructure to accommodate electrification. That results in a more optimized, cheaper power system for all, while making successful decarbonization more probable.

This phenomenon isn't just confined to the US,  It's happened here in Australia, too.  The grid was privatised, despite being a monopoly, and the regulatory system in effect encouraged the grid companies to 'gold plate' the network.  This led to surging electricity prices, which the right-wing party (the badly misnamed Liberal Party) used to justify ditching the renewable energy target, despite the steep actual decline in renewable energy costs.

Solarquotes calculates the cost per kWh of rooftop solar at ~7 cents/kWh.  At first sight, it appears much more expensive than utility-scale solar.  But that's before the cost of the grid is added in.  Utilities are charging anything from 18 cents/kWh to 30 cents/kWh to supply electricity, plus they also add a fixed 'poles and wires' charge to your bill.  In sunny Australia, the risk of grid defection is very real.