Energy market schemes – how utilities make money from trading electricity

 In Electric Utility

In the past, electric utilities were what economist would call natural monopolies, dominating all parts of the value chain from electricity production to retail supply. Energy service providers buy from a third party and sell electricity to individual households. While, energy marketers trade future contracts that enable power-hungry businesses to secure power at a fixed price, all of which has supported strong utility balance sheets.

However, the dynamics of the market is changing significantly. The rise of electric vehicles (EVs), technology, and the advancement of renewables are encouraging distributed self-generation, new platforms to trade and manage loads, and incentivizing customers to play an active role.

Changing market dynamics

According to Bloomberg New Energy Finance (BNEF), In 2017, the majority of electricity was produced by coal, natural gas, and nuclear. The graph below shows the breakdown by fuel type.

U.S. electricity generation by fuel type %

Source: BNEF

Renewable electricity generation has doubled in the period from 2008 to 2017 to eighteen percent. At the same time, coal’s share has plummeted from 48% to 30%. Natural gas has increased, however, is much less carbon intensive than coal. Importantly, solar and wind projects made up approximately 62% of new power construction in 2017. Furthermore, as costs decline, BNEF estimate that 72% of global investment will be in renewable infrastructure by 2040. The growth in renewables is significant, as it is driving the platform of distributed energy grids.

The new e-Mobility ecosystem

Electrification in mobility means electricity demand is set in increase dramatically. An aggressive assessment by BNEF forecast that EVs will cause electricity consumption to rise from 6TWh in 2016 to 1,800TWh by 2040. This is potentially good news for utilities as it could provide new sources of revenue.

EVs are essentially batteries on wheels, and a cheaper way for utilities to capitalize on energy storage, and in turn help regulate the flow of electricity on both the demand and supply side.

However, utilities face challenges. Among them, the need to integrate distributed renewable energy. The growing production of solar is helping customers become self-dependent. And, utilities are tackling with the necessity to engage customers and interest them in new products and services. The following sections go into further detail on how utilities in combination with EVs can benefit from the changing environment of electricity production, load management, and storage.

Can utilities benefit from a distributed grid?

Utilities must plan for the future, building new generation capacity will be required to manage new loads, however embracing vehicle-to-grid (V2G), load management and other technology will hold the key.

The difficulty with solar and wind (which make up a significant portion of renewable electricity generation) is having to rely on either sunlight or the wind to be blowing. Peak demand requires instance electricity, and therefore would cause substantial problems should you have to rely solely on wind or solar. However, the innovation of energy storage changes this completely.

V2G technology turns parked EVs (which is almost 95% at any given time) to power service providers.

How V2G works

Source: Newmotion

V2G creates flexibility within the electricity grid, by either charging or discharging based on energy demand. Furthermore, using EVs as mobile energy storage units rather than building large-scale battery storage facilities can eliminate the need for new infrastructure. V2G encourages renewable generation, as electricity can be stored efficiently and deployed at peak times and therefore, creating better stability within the system. For instance, OVO Energy recently announced that they would be offering a V2G charger to the public in the summer of this year.

Load Management is another challenge for utilities. The issue revolves around cluster charging, whereby multiple EVs within a locality simultaneously charge of the same local transformer. And, since transformer are not designed to accommodate cluster charging, they are exposed to overloading. According to the Sacramento Municipal Utility District, an estimated 17 percent of all utility transformers might need to be replaced due to EV load, costing $7,400 each.

FleetCarma, Grid Edge Innovation Award Winner, offers a load management solution to help manage vehicle loads. The SmartCharge Manager provides access to vehicle-side-data that can help understand the impacts to individual and fleet owners on charging. Real-time data enables better decisions and the tools to manage vehicle load efficiently. Strategic partnership with utilities will help develop, test, and evaluate such technologies before widespread adoption occurs. For example, Pacific Gas & Electric and BMW successfully proved that EVs could serve as a reliable and efficient grid addition, which could, in turn, save money for both utilities and EV owners.

Also, FleetCarma is working with utilities to engage with customers with a turnkey EV charging incentive program. Owners of individual EVs, or of fleets, can access statistics via an app to better understand driving/charging patterns and at the same time offer customers rewards. This level of customer engagement in EV programs could provide incentives for utilities to offer new services. For example, utilities could own and/or lease EV batteries, or fleet owners could sell EV batteries back to utilities once their capacity declines, and no longer useful in vehicles but still operational in less-intensive storage applications on the grid.

Conclusion, the democratization of electricity

Technology is challenging the traditional methods of utilities. No longer it is as simple as serving electricity to households and business in a linear fashion. The expansion of renewable electricity capacity and the development of distributed grids is changing the role of utilities and allowing customers to become an active participant.

The deployment of EVs create new challenges (for example, meeting new electricity demand), but also opportunities. V2G technology turns EVs into storage facilities to help manage both supply and demand of electricity, And, load management software, can optimize EV electricity loads. The need for electricity is set to increase significantly, the challenge for utilities is to adapt in a way that embraces smart technology and establish product/service offerings in line with distributed renewable energy.

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