The end of the energy grid could be upon us

A wave of decentralisation is coursing over the energy market, and threatens to deliver the biggest industry shake-up in more than a century

With our reliance on electricity greater now than it has ever been, any threat to the grid is a threat to the population at large, and glaring inefficiencies warrant serious cause for concern

Pearl Street Station became the first central power station in the US when, in 1882, Thomas Edison plugged it in to serve 59 customers in Lower Manhattan. Powering 400 bulbs and charging $5 per kilowatt-hour, the station laid the groundwork for a sophisticated network of interconnected plants and presented the best solution yet to the issue of energy poverty: the grid.

Since then the grid has stood up to technological adjustments, rocketing demand and the whims of the private sector, though never in its 100-plus-year history has it been forced to confront the possibility that another model could supplant it. Electricity, not just for the average American but the global population, is an obsession, and any vulnerability in supply means billions – if not trillions – of dollars in losses.

With our reliance on electricity greater now than it has ever been, any threat to the grid is a threat to the population at large, and glaring inefficiencies warrant serious cause for concern. Electromagnetic pulses, cyber attacks, terrorism and natural disasters are among the threats cited by the Secure the Grid Coalition, though all pale in comparison with the rise of distributed power.


Americans draw power from the grid


Value of the US energy industry


Share of GDP


Workers employed by US energy industry

Where rooftop solar panels and backup generators not long ago made up an almost imperceptible fraction of the energy mix, the consensus at last year’s DistribuTECH smart grid conference was that distributed energy resources (DERs) could make up a third of supply by the end of the decade. And with individuals and businesses able to produce their own power, the move off-grid means centralised generation will edge ever closer to what is known in the industry as “the death spiral”.

The situation in the energy market is often likened to that of IT, where more open client-server and networked computers emerged in the 1980s and 1990s, replacing mainframes. The Boston Consulting Group went so far as to say the grid’s days were numbered, and claimed the costs of supporting such a system were no longer sustainable.

“What is clear is that business as usual is no longer an option”, said the group’s report. “In most scenarios – even if this is delayed by a few years – the landscape is set to change dramatically, leaving only a very small role for utilities’ business models in their present form.”

Funding gap
Energy sales in the US are stagnant at best, and experts warn that, if things continue as they are, utilities will be without the revenues to maintain the grid’s many ageing and expensive components. Energy-saving devices and rooftop solar panels are but a taste of the measures adopted by consumers to reduce their footprints, though a penny saved here is a penny less for the US’ creaking grid infrastructure. Without major improvements, the grid will in no way be a “fast-acting energy-storage system that can respond dynamically to ever-changing demand and supply”, according to the founder and Director of the UCLA Smart Grid Energy Research Centre, Rajit Gadh. A major study undertaken by the California Public Utilities Commission found distributed generation could cost the country’s non-solar users over $370m a year, as the pressures on the existing system continue to mount.

This is a system that’s essential not just to 300 million Americans, but also to the country’s continued economic prosperity. All in, the $900bn industry accounts for more than two percent of GDP and » employs half a million workers, according to Thomas Kuhn, President of the Edison Electric Institute, speaking at a Wall Street briefing last year.

“Most analyses seem to indicate that there is a need to upgrade transmission and distribution infrastructure, owing to both ageing assets, as well as the need to accommodate more renewable energy and distributed energy resources”, said John Banks, Nonresident Senior Fellow at the Brookings Institution’s Energy Security and Climate Initiative. “The investor owned utilities in the US are expected to spend about $100bn in annual capital expenditures in the coming years, with more and more dedicated to distribution.”

In 2012, the American Society of Civil Engineers (ASCE) said the US energy network needed $566bn of investment over the eight years up to 2020 in order to remain competitive. Going by 2012 figures, that leaves a funding gap of approximately $107bn. If that gap is not filled, the country can expect frequent capacity bottlenecks and service interruptions, and at no small cost. “Just like the roads we use every day, when there are bottlenecks or congestion in our electricity infrastructure, it affects everyone. And fewer disruptions mean real money to American businesses and households”, said the ASCE’s President, Andrew Herrmann.

The IEA’s inaugural Quadrennial Energy Review, published last April, touched on the all-important issues of modernisation, competitiveness, security and sustainability, and called for an immediate response to the looming infrastructure crisis. “Our current infrastructure is increasingly challenged by transformations in energy supply, markets, and patterns of end use; issues of ageing and capacity; impacts of climate change; and cyber and physical threats”, it said. “Affordable, clean, and secure energy and energy services are essential for improving US economic productivity, enhancing our quality of life, protecting our environment, and ensuring our nation’s security.”

ASCE’s 2013 report card, in which the US was awarded a D+, noted parts of the electrical distribution system were sorely in need of an update, with some being almost 140 years old. According to the report, permitting issues, weather patterns and inadequate maintenance have all contributed to the problem, although none has caused more consternation than distributed power.

Distributed power
“The right mix with more local energy production and storage is more energy efficient, environmentally superior and more secure”, said Chuck Manto, CEO of Instant Access Networks. “Security, reliability and economic drivers will force a new future energy system and market. Those who fail to embrace and establish distributed energy will diminish over time if they experience long-term prolonged outages of their overly centralised systems.”

The grid itself is made up of an interconnected network of independent generators. Flexible, efficient and modular, DERs are in many ways better suited to the times than a sprawling electricity grid, and the growth of solar and wind power – tenfold since 2000 – means the megatrend is not only more efficient but more sustainable.

Going by GE estimates, distributed power capacity will be almost 200GW by 2020, up from 142GW in 2012, equating to an average annual growth rate of 4.4 percent. Despite the focus on mature economies, demand for distributed power is at its highest in countries where per capita income levels are less, and the fragility of centralised systems has made local energy strategies appear more attractive.

Nowhere is the case for distributed power better made than in Morocco, where, between 1995 and 2011, the electrification rate rose from 18 to 98 percent. As of 2014, 12 million Moroccans in 35,600 villages had been connected to the grid, and 5,600 photovoltaic (PV) kits had been given to Moroccan consumers in 3,663 villages. In nearby Egypt, policymakers are toying with the idea of a mostly gas-based distributed system to address the country’s budgetary and political constraints, and much the same proposal has been put forward in Mexico, where 8,800km of gas pipelines have been proposed in place of centralised heavy fuels.

India, meanwhile, is weighing up the advantages of distributed power in electrifying hard-to-reach terrain. With some 10,000 villages in these areas, access to the grid is both a complicated and costly affair, whereas distributed power could more easily offer the villagers a route out of energy poverty. According to GE, the western state of Gujarat achieved 100 percent electrification in 2011 by doing just that, and the region is far better off socially and economically as a result.

“A grand transformation is underway”, said the GE report The Rise of Distributed Power. “A wave of decentralisation is sweeping across the globe and changing the way we live, work and play. The organisation of resources and people is moving away from centralised systems toward integrated networks that include both distributed and centralised elements. The rise of distributed power is being driven by the same forces that are propelling the broader decentralisation movement.”

More widely available, more efficient and less costly than it was only a decade ago, distributed power can more easily overcome the pressures of large capital projects and the costs tied to the continued upkeep of transmission and distribution lines. And, insofar as the risks associated with the building and installation of distributed power are less, decentralisation is an attractive proposition. The benefits include improved reliability and resilience, a smaller environmental impact, and more flexibility and diversity of supply. However, the economics of distributed power systems are not quite so black-and-white.

John Banks wrote in a 2011 report that distributed power system technologies were uncompetitive with central station fossil fuel generation, with a few exceptions. However, his cost comparisons failed to take into account the improved efficiency of distributed systems, nor did they account for externalities such as improved efficiency and job creation. And while little has been done to address what Banks called “market failures”, the situation in terms of renewables – and certainly in terms of price – has changed in the five years since he wrote his report.






Average annual growth rate

The link with renewables
Distributed power is as much about renewables as it is decentralisation. “There are several interrelated drivers”, said Banks. “Policy support for renewables generally, but also specifically for DERs, has played a major role. For example, net metering has fostered significant deployment of rooftop solar PV. Second, and clearly related to policy, the costs of technologies have continued to drop, especially for wind and solar, and the costs are coming down at a time when we have witnessed the increased ‘customerisation’ of everything – and the electricity sector is part of this overall trend. Customers are demanding more choice and interactive management of their energy use, and DERs fit into this paradigm.”

In a country where there is little incentive to increase the supply of electricity, the added promise of energy efficiency is doing much to keep enthusiasm for distributed power high in the US. Over the years, renewables have become a mainstream component of the energy mix, and the small-scale, low-cost nature of distributed energy means utilities need not participate in their installation. Buoyed by the incentives offered for the installation of renewables, utility-scale, fossil-fuel-fired plants are being phased out – albeit gradually.

California’s climate change law and net zero energy goals mean renewables are set to make up one third of the state’s energy mix by 2020. The state has also set in motion plans to develop 12,000MW of distributed capacity by that time, and, in all likelihood, others will do the same as they, like California, look to reduce emissions by the cheapest method possible. According to GTM Research, the use of solar energy has more than tripled since 2010, and some 45,000 businesses and 600,000 individuals are using PV panels to their own ends.

Smart grid
Distributed power has problems of its own, of course, and the inconsistency of distributed supply – renewables in particular – means the grid will have an important part to play for some time yet. “There is no question that we are seeing the emergence of a more flexible distribution grid to accommodate more DERs and variable renewables”, said Banks. “The trends toward decentralisation, customer choice, and two-way flows of power and information will continue. The key, as-yet unanswered, questions are what role the utilities will play, especially vis-à-vis managing DERs and the relationships with third-party service providers, and the type of regulatory framework that will emerge to govern this transition.”

By far the most-talked about development for existing energy systems is the emergence of smart grid technology, which, according to BCG, will be among the main enablers of distributed power in the developed world. A GTM Research report forecasted the smart grid market will surpass the $400bn mark by 2020 and rack up an over-eight percent growth rate in each of the next five years. If only to acclimatise to this new landscape, utilities must make allowances for new sources of supply and invest not only in grid maintenance but, more importantly, grid infrastructure technology. “Energy would evolve from a commodity to value-added service”, said Rajit Gadh.

According to IBM, utilities are a necessary part of the energy landscape, though disruptive innovation is as much a part of the modern industry. The challenge for the energy market, therefore, is to find a balance between new and old systems, and utilities have an important part to play in reconciling the differences between the two. According to the Global Smart Grid Federation, “smart grids anticipate and respond to system disturbances in a self-healing manner, enable active consumer participation, accommodate all generation and storage options, enable new eco opportunities, optimise asset utilisation and efficient operation, and provide the power quality needed in a digital economy. The smart grid brings together the idea of grid modernisation and the closer integration of all actors in our electricity system”.

Despite what many assume, decentralised energy has not brought an end to the grid, but rather paved the way for a more efficient and modernised system. The smart grid is very much a product of our time, and here, as with distributed power, great strides can be taken to realise broad-based gains with regards to sustainability and reliability. The energy market of the future need not necessarily lie with decentralised solutions, but we should not assume on- and off-grid solutions are mutually exclusive. Surely the future lies not with any one, but a combination of decentralised and centralised systems: only when the two work hand-in-hand will the real transformation be made.

Related topics: