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Flattening The Demand Curve

 

 

                                               Photo by Dave Hoefler on Unsplash

 

Covid-19 is not an epochal crisis for the energy industry.

Rather, it speaks to an increasing speed of existing patterns that were well in progress before the novel Covid took its portentous leap from creatures to individuals

Crises always seem to tend to exacerbate tough situations for both societies and economies. They just seem to shine a light on weaknesses & existing problems.

And they also seem to accelerate pre-existing trends.

The flattening of the U.S. demand curve is one such trend that will likely continue after a vaccine finally rids our planet of this terrible plague.

 

Lower peaks mean lower prices

Source: Level10 Energy

 

 

As we discussed in PCI’s August Blog Post, pandemic related teleworking is impacting the traditional load demand profile. If the trend of increased teleworking continues, we know the load data indicates some likely degree of:

  • A more gradual morning ramp
  • Higher mid - day loads
  • Smaller, less steep ramping during the evening peak

By 2025, the energy markets will be fundamentally changed regarding technology and demand profiles. FERC Order 2222 all but guarantees this transformation.

Four things in life we know to be one hundred percent true:

  1. You don’t tug on Superman’s cape
  2. You don’t pull the mask off the ole Lone Ranger
  3. You don’t spit into the wind
  4. And you NEVER bet against technology.

Distributed energy resource technology will flatten the demand curve going forward. Like all technology advances, the speed of change will likely catch people by surprise.

Satya Nadella, Microsoft CEO, recently stated, “We saw 2 years of digitalization transformation in 2 months.”

Moore’s Law on steroids.

The financial implications of the transformation will impact all energy market participants.

Especially utilities.

 

FERC Order 2222 - Game Changer

 

On September 17th, the Federal Energy Regulatory Commission has passed a long-awaited order to open up the country’s wholesale energy markets to distributed energy resources (DERs) like rooftop solar, behind-the-meter batteries and electric vehicles.

According to FERC Chairman Neil Chatterjee, “Projections indicate that from 65 to more than 380 gigawatts of DERs could be added to the country’s power grids over the next four years.”

Experts called the rule “a gamechanger”.

The long-awaited FERC order validated the existing trend of large scale DER growth. The regulated markets will see improved competition and operational efficiency.

 

Deflationary Technology

 

Demand Response + Electric Vehicles + Battery Storage = Supply Side Shock

The Digital Revolution is introducing deflation to our economy, especially the energy industry.

These advancements are welcoming “supply-side shocks” by allowing a more extraordinary and effective use of assets as well as by the substitution they can provide. Software is disrupting and replacing the traditional view to generating power to meet load demand.

When you add the massive rollout of utility scale solar power coming this decade, the result will be a flatter demand curve, lower peak demand, and lower wholesale energy prices.

The assessment of inflation is a critical process for countless private and government analysts, and the consequences of arriving at a given number are profound. Cost -of-living adjustments, Federal Reserve interest-rate policy decisions, and assessment of stock’s valuations can all hinge on what inflation number goes into the analysis.

The assessment of either coincidental or non-coincidental peak load demand is a critical process for utilities and RTO organizations. Revenue and costs are often budgeted on peak load numbers that may soon change drastically.

Generation investment decisions traditionally viewed to meet a specific load demand curve now must be viewed in a different light.

 

Rate Design & Budget Challenges Ahead

 

The decline in energy prices and a flattening demand curve will present budget challenges for utilities. Especially public power entities expected to contribute money to the overall city or state budgets.

Enormous abundance of cheap natural gas plus the zero-variable cost of wind, solar and storage will continue to pressure energy prices.

The new ability of the residential consumer and commercial customer to utilize technology and peak shave will continue to pressure revenue projections for utility budgets. At least under the current construct whereby we generally employ a volumetric approach to assigning bills for electric power usage.

The coming budget challenges will shine light on the difference between variable costs and fixed costs. It will also shine a light upon the true cost and value of reliability.

While the variable costs to provide a carbon free future are zero, the fixed costs associated with delivering power reliably are not.

The transmission buildout, gas fired generation required to back up renewables, cyber security, and the personnel expertise required all entail fixed costs.

Any business must cover fixed costs in order to survive.

Lower energy prices, lower peak demands, and a flattening demand curve will spark a rate design conversation in most regions of our country. A fixed charge to value capacity or a time of use model will likely emerge.

 

Conclusion

 

Crisis come in two kinds: those that change the standard, and those that intensify current trends.

The Covid-19 pandemic is accelerating some global trends like teleworking and some energy industry trends like the flattening of the demand curve.

The disruption potential of distributed energy resources to our generation and demand projections will be enormous and the recent FERC Order 2222 will accelerate the transformation.

At the end of last year, industry experts correctly pointed to the three D’s as the future:

  1. Decarbonization
  2. Decentralization
  3. Digitalization

Decentralization refers to the reduction in reliance on just a handful of large generation plants.

Decarbonization refers to eliminating carbon-based fuels for electricity generation.

Digitalization refers to the effective management and monitoring on all areas of the electricity system, from generation to transmission, distribution, supply and demand.

Data strongly indicates the Covid-19 pandemic is validating and accelerating all three predictions.

Data analytics has and will remain a critical role for utilities and RTO organizations.

As Haruki Murakami wrote in “Kafka on the Shore”, “When you come out of the storm, you won’t be the same person who walked in. That’s what this storm’s all about.”

The energy markets will be fundamentally changed by 2021 and it is happening in front of our eyes today.

The seat belt light is now on.

 

Sources:

 

Patrick McGarry's picture

Thank Patrick for the Post!

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Discussions

Matt Chester's picture
Matt Chester on Sep 29, 2020 9:57 pm GMT

According to FERC Chairman Neil Chatterjee, “Projections indicate that from 65 to more than 380 gigawatts of DERs could be added to the country’s power grids over the next four years.”

That's a WIDE estimate-- is that gap based on any defined uncertainty like what technology, the economy, or related policy will look like, or is it just a matter of 'they're about to blow up and we simply don't know by how much'?

Patrick McGarry's picture
Patrick McGarry on Sep 30, 2020 12:23 am GMT

Matt- Distributed energy resources are about to blow up in the next five to eight years. The amount of adoption will depend on the market design and the adoption of the technology. The speed of the economic recovery will definitely have an impact because we are recovering from the greatest economic disaster since the Great Depression, But like all meaningful technology, you cant bet against what is coming and the deflationary impact.

 

Jim Stack's picture
Jim Stack on Sep 30, 2020 1:28 pm GMT

Patrick, Great article on how the power and GRID are changing. I feel the biggest key will be the battery storage. It's already great and will get better and lower in cost in the next 3 to 5 years similar to the Moore's Law for computer chips. Tesla announced their big innovation and MB already has solid state batteries in buses that will lead this change. 

   But don't count on your excess natural gas. It's been from fracking for oil and will die very fast. QUOTE=Enormous abundance of cheap natural gas plus the zero-variable cost of wind, solar and storage will continue to pressure energy prices.

Rao Konidena's picture
Rao Konidena on Sep 30, 2020 8:57 pm GMT

This is impactful, "Satya Nadella, Microsoft CEO, recently stated, “We saw 2 years of digitalization transformation in 2 months.”"

I am so glad we are finally talking about DER and Aggregators. I just wish FERC made compliance on DERA/Order 2222 specific enough for RTOs to respond to. Even though, they would have asked for extension.

Matt Chester's picture
Matt Chester on Sep 30, 2020 9:29 pm GMT

"Satya Nadella, Microsoft CEO, recently stated, “We saw 2 years of digitalization transformation in 2 months.”"

Great point, necessity is the mother of invention, and also the implementation of that invention I suppose! Many of these digital upgrades had been championed by CTOs for numerous years, but once the situation changed and progress was needed ASAP we really got to see what was possible!

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