Important changes in the provision and consumption of electricity services are now underway, driven to a significant degree by a confluence of factors affecting the distribution side of power systems. A variety of emerging distributed technologies—including flexible demand, distributed generation, energy storage, and advanced power electronics and control devices—are creating new options for the provision and consumption of electricity services. At the same time, information and communications technologies are rapidly decreasing in cost and becoming ubiquitous, enabling more flexible and efficient consumption of electricity, improved visibility of network use, and enhanced control of power systems.
These technologies are being deployed amidst several broad drivers of change in power systems, including growth in the use of variable renewable energy sources such as wind and solar energy; efforts to decarbonize the energy system as part of global climate change mitigation efforts; and the increasing interconnectedness of electricity grids and other critical infrastructure, such as communications, transportation, and natural gas networks.
The MIT Energy Initiative’s Utility of the Future study presents a framework for proactive regulatory, policy, and market reforms designed to enable the efficient evolution of power systems over the next decade and beyond. The goal is to facilitate the integration of all resources, be they distributed or centralized, that contribute to the efficient provision of electricity services and other public objectives.
The framework includes a comprehensive and efficient system of market-determined prices and regulated charges for electricity services that reflect, as accurately as possible, the marginal or incremental cost of providing these services; improved incentives for distribution utilities that reward cost savings, performance improvements, and long-term innovation; reevaluation of the power sector’s structure to minimize conflicts of interest; and recommendations for the improvement of wholesale electricity markets.
This study also offers a set of insights about the roles of distributed energy resources, the value of the services these resources deliver, and the factors most likely to determine the portfolio of cost-effective resources, both centralized and distributed, in different power systems. We consider a diverse set of contexts and regulatory regimes, but focus mainly on North America and Europe.
The study does not try to forecast the future or predict which technologies will prevail. Instead, it identifies unnecessary barriers and distortionary incentives that presently impede the efficient evolution of the power sector and provides a framework that will enable an efficient outcome regardless of how technologies or policy objectives develop in the future.
In addition, the authors recognize that regulatory and policy reform often proceeds incrementally and that each jurisdiction faces unique challenges and contexts. As such, we offer this framework along with guidance on the key trade-offs regulators and policy makers confront as they pursue opportunities for progressive improvements.
The measures identified in the study could produce significant cost savings. Low-cost information and communications technologies and advanced metering enable more cost-reflective prices and charges for electricity services that can finally animate the “demand side” of the power system and align myriad decisions with the optimization of net social welfare. Efficient prices and charges will unlock flexibility in electricity consumption and appropriately value the services that distributed energy resources provide.
To date, power systems have been designed to meet infrequent peaks in demand and to comply with engineering safety margins established in an era when electricity customers were largely inflexible and blind to the true costs and potential benefits of their electricity consumption or production decisions. In many cases, this has resulted in costly and significantly underutilized infrastructure. Smarter consumption of electricity and, where cost-effective, the deployment of distributed energy resources, could deliver billions of dollars in savings by improving the use of electricity infrastructure.
At the same time, the need for proactive reform is clear. Customers now face unprecedented choice regarding how they get their power and how they manage their electricity consumption—regardless of whether they are aware of those choices or are acting on them today. New opportunities include the ability to invest in distributed generation, smart appliances, and energy efficiency improvements.
At present, the vast majority of power systems lack a comprehensive system of efficient prices and regulated charges for electricity services. As a result, some customers are making inefficient investments and are overcompensated for the services that they provide to the power system. At the same time, many more opportunities that could deliver greater value are being left untapped because of inadequate compensation. For example, the combination of simple volumetric tariffs and net metering policies has contributed to the rapid adoption of rooftop solar photovoltaics (PV) in several jurisdictions, while exposing several flaws in current ratemaking.
The rapid uptake of solar PV also demonstrates how quickly customers can react to economic signals—whether well or poorly designed—and the importance of proactive, rather than reactive, policy-making and regulation. In multiple jurisdictions, challenges that once seemed insignificant have quickly become overwhelming, and failure to act can catch policy makers and regulators flat-footed.
The study’s proposed framework is designed to establish a level playing field for the provision and consumption of electricity services, whether via centralized or distributed resources. The goal is to remove inefficient barriers to the integration of cost effective new sources of electricity services, rethink ill-designed incentives for certain resources, and present a system of prices and charges that can animate efficient decisions. With this framework in place, all customers and producers of electricity services can make efficient choices based on accurate incentives that reflect the economic value of these services and their own diverse personal preferences.
This study highlights several core findings:
The only way to put all resources on a level playing field and achieve efficient operation and planning in the power system is to dramatically improve prices and regulated charges (i.e., tariffs or rates) for electricity services.
Read the rest of the seven-page summary: https://goo.gl/6S0SuI
For the full 384-page report: https://goo.gl/cbjxPP
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