Finance In a World of Distributed Renewables, Who Is Going to Pay for the Power Grid and How?

Utility companies tend to oppose the widespread adoption of distributed renewable generation. They argue that since there is less energy flowing through their power grids, fixed costs must be spread over a reduced volume of kilowatt-hours, driving up the unit price of energy. However, the reality is that power grids are burdened by variability in either supply or demand, not renewable energy per se – it’s just that solar and wind power happen to be variable-output energy sources.The key to financing the power grid of the future lies in addressing the core of the problem: managing variability in both supply and demand. The power grid can adopt a new billing structure that rewards customers who reduce variability, and charges those who produce it.Managing Variability in SupplyCharging a higher fixed fee to all customers who deploy commercial solar power arrays or wind turbines will only slow down the adoption of these technologies. A more effective approach is to incentive energy storage so that the power grid is not forced to manage sudden peaks in output from distributed renewable power systems.

Utility companies can introduce a net metering scheme where owners of distributed renewable generation system are paid a lower feed-in tariff when these energy sources are operating at peak output. For example, energy from solar PV systems can be credited at a reduced rate in the hours around noon, and at the full retail price away from these hours. This creates an incentive to store energy during peak generation hours, to be consumed later or supplied to the grid when the full retail price applies.Owners of variable renewable generation systems who don’t manage their supply effectively are forced to sell their energy at reduced rates, and the profit from this energy can be used by the utility company to help cover the cost of managing these supply peaks.Managing Variability in DemandDemand fees can be expected to play a very important role in the power grid of the future, as the amount of energy in circulation is reduced. Customers who use many types of high-power equipment simultaneously place the highest burden on the power grid, so it makes sense to transfer grid ownership costs to them with increased demand fees. On the other hand, customers who control their peaks in demand are billed lower power bills as demand fees are reduced.Demand fees are effective for controlling the peak demand of individual customers, since they are calculated and measured individually. On the other hand, time-of-day electricity rates accomplish the same effect at the scale of the entire power grid: customers have an incentive to minimise their consumption when rates are high, while taking advantage of low-cost off-peak electricity.

ConclusionThe power grid of the future can cover its costs by managing variability: energy generators who produce supply peaks are paid less, and energy consumers who cause demand peaks are billed higher. In both cases, the profit margin is increased for the power grid.The opposite also applies: generators who trim their supply peaks earn more per kWh produced, and consumers who trim their demand peaks pay reduced energy and capacity charges. These generators and consumers are actually lowering the operating cost of the power grid, so it makes sense to share a portion of the savings with them.