The Microgrid Option

Microgrids would make it easier to integrate more rooftop solar and other distributed energy resources into the electric grid.

By Jane Twitmyer

Building a clean electric system takes more than switching from fossil fuels to renewables. To make good use of wind and solar power, Virginia needs a modern, flexible electric grid that can exploit and optimize the unique attributes those resources bring to bear. And it needs new rules — laws and regulations — that can allow such a system to develop.

A more flexible electric system will be built in part around microgrids. The Navigant consulting firm defines microgrids as networks incorporating a variety of distributed energy resources, such as wind and solar, that can be aggregated, can balance loads and generation with or without energy storage, and can function whether connected or not to a traditional utility power grid.

As distributed renewable energy resources replace large central generation plants — more rooftop solar, more community wind and solar — electricity generation becomes more localized. Localized generators, particularly photovoltaic solar, require less supporting infrastructure. For instance, local generation doesn’t require transmission lines to wheel electricity across long distances (leaking electricity in the process). And unlike natural gas, it doesn’t require pipelines to deliver fuel to the generating site.

The traditional grid was built to send electricity from a large central plant to all consumers in a large, interconnected area. Locally generated electricity has additional abilities.  It can be owned by the customer or by a third party. It can be aggregated, often by a utility, and it can even feed excess generation into the central grid if properly integrated with the central grid.

Full integration will require a structure capable of exploiting these capabilities. It also requires a distributed energy resource (DER) management system, able to control both the DER and the traditional grid.

While most of today’s installed new resources are connected to the grid and can draw electricity from the grid when they need to, most distributed resources are not truly integrated into grid operations.

The military took the first stab at building a local, self-contained system, tied to the central grid but capable of separating and operating on its own for a reasonable amount of time. Their original purpose was base security. For many years the military had relied on small, isolated, self-contained grids in remote locations. In the mid 2000’s they began to look at ensuring power at bases stays on, especially in mission-critical operations. The modern microgrid fit their requirements.

A current test bed is Otis Air Force Base on Cape Cod, Mass., where the plan is for the base to be electrically self-sufficient with all of the power coming from renewable resources.

Microgrids also are being developed at universities. Princeton University, showcased how microgrid technology kept power on when the central grid failed during Hurricane Sandy.

Communities are also creating microgrids for critical facilities in hurricane zones, and utilities are building microgrids to postpone expensive expansions. The Brooklyn Microgrid connected a network of building owners who own solar arrays with their neighbors who want to be buyers of solar electricity. The microgrid replaced the utility’s need to build a $1 billion substation.

In 2018 Illinois regulators approved Commonwealth Edison’s microgrid cluster in Chicago. The $25 million project is the first “utility-scale microgrid cluster. Two microgrids that interact with each other will directly serve more than 1,000 residential, commercial, and small industrial customers in the South Side of Chicago.”

Finally, data centers, so integral to Virginia’s future energy profile, are moving away from direct ownership of hard assets and mitigating downtime risks through options like advanced microgrids. Grid downtime is extremely expensive, and IT companies are racing to meet their huge electricity needs with 100% renewable energy.  They are developing ways to supply multiple locations with advanced microgrid technology, essentially “virtual power plants” able to aggregate disparate, geographically dispersed resources capable of responding to the microgrid’s needs with speed and accuracy.

The key is the ability to interact with and act upon data from many sensors in a way the old grid could not. The new system will rely on software and a smart grid to remotely and automatically dispatch retail DER services to the markets.  These digital platforms, made up of a variety of microgrid interconnections, can also perform valuable grid functions. Employing them will make the highest and best use of the operational qualities of our new resources.

Here in Virginia a good place to start would be to develop microgrids for essential facilities, especially along the coast. Microgrids will improve system reliability, maintain crucial services during a grid outage, and speed up the return of service to the full grid. The microgrid approach could possibly replace a lot of proposed transmission line fixes, and be even more effective.

Jane Twitmyer, a renewable energy advocate and former consultant, lives in the Blue Ridge Mountains.

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28 responses to “The Microgrid Option”

  1. […] To make good use of wind and solar power, … Source: Renewable Resources The Microgrid Option – Bacon’s Rebellion The Microgrid Option – Bacon’s Rebellion Renewable […]

  2. Steve Haner Avatar
    Steve Haner

    Somehow I don’t think this is the proposal that we will be seeing if and when Dominion issues its Grid Transformation Plan 2.0…..

  3. TooManyTaxes Avatar

    From what Jane posted and from other sources, microgrids seem feasible in some locations. A college campus, a military base, a data center would probably make this work both internally and for sale of excess power to the grid.

    But I strongly suspect these locations would need to retain a connection to the grid in case the microgrid fails. And in that instance, the microgrid’s customer(s) must pay all of the standby costs to have grid access and the higher of embedded or forward-looking marginal costs to ensure small macro-grid customers aren’t subsidizing the micro-grid customers.

    I suspect a micro-grid might also work on a more dispersed basis. For example, a town or community within a city might be able to contract with the utility or a third-party to run a micro-grid to serve a specific area. Would the costs for running a micro-grid plus having back-up access to the macro-grid be less than, equal to or more than traditional regulated electric prices?

    Traditional economics has always suggested that because of infrastructure costs, electric generation and distribution is a natural monopoly. Changes in technology appear to suggest that this is not true for electric generation. But is it still true for distribution? At the macro-grid level? At the micro-grid level?

    A fascinating subject that deserves study and discussion.

    1. Jane Twitmyer Avatar
      Jane Twitmyer

      Too Many Taxes … Yes, in most cases a microgrid is established with a central grid connection. They are recently being developed in places around the world where there is no central grid, but I am mostly talking about the microgrid that serves an area with defined boundaries, has one or more renewable energy generators and/or storage units, is connected to the main grid but can ‘island’ if the grid goes down.
      I don’t have a lot of info on prices but note the monies saved in the Brooklyn project. Sure looks cheaper for the customer.

      1. TooManyTaxes Avatar

        Thank you. Interesting reading.

        I can see a case where the total costs for a microgrid might be less than the incremental costs for the utility adding generating capacity and, thus, all ratepayers might benefit. If the microgrid customers have backup access to the main system, they need to pay for that or other customers will be harmed. As always, the devil is in the details.

  4. Rowinguy Avatar

    Here is a working link to the Commonwealth Edison Chicago project:

    Interesting takeaways from that page:

    “A microgrid is a small power grid that can connect to the main grid or disconnect from it to keep locally generated power flowing in times of emergency.”

    “The completed project will serve approximately 1,060 residential, commercial and small industrial customers.” Fittingly, I suppose, Chicago Police Headquarters is prominent among these customers whose power will keep “flowing in times of emergency.”

    “ComEd is leveraging two grants awarded by the Department of Energy to construct the Bronzeville Community Microgrid.” Thus, it appears that federal taxpayers, and not ComEd customers, are paying for a microgrid that will provide service in times of emergency to a tiny tiny fraction of them.

    1. Steve Haner Avatar
      Steve Haner

      Magical thinking abounds….

  5. Welcome, Jane, to those who’ve dared post something here and suffered the slings and arrows of outrageous fortune. And I’m always happy to see the electric grid and its components get more attention.

    The problem I have with “microgrids” is, the term refers to something very complicated for very little gain, other than sidestepping in part the retail franchise of the local utility (which in some locations may be its chief attraction).

    Rowinguy quotes from the ComEd project in Chicago; let me provide a somewhat longer definition from Wikipedia: “A microgrid is a localized group of electricity sources and loads that normally operates connected to and synchronous with the traditional wide area synchronous grid (macrogrid), but can also disconnect to “island mode” — and function autonomously as physical or economic conditions dictate.”

    This ability to operate as an “island” begs at least three questions: 1) who will control the “island’s” operation, balancing supply and demand through a control center in constant, real-time and secure communication with key suppliers and key delivery points; 2) when in “island” mode how is the electricity that’s delivered from individual generators and to individul customers priced, measured, billed, and (in case of dispute) regulated; 3) when NOT in “island” mode who is responsible for paying and allocating to microgrid customers the bill for net energy imports from the macrogrid, and for the facilities used, and how is that bill priced and measured, and who regulates disputes over that service and those facilities?

    These are real-world issues that can’t be swept ‘under the rug.’ This is what retail electric utilities and independent system operators and grid facility owners (with their utility regulatory commissions) do as a matter of course; collectively they are the “grid” — or what Wikipedia refers to as the macrogrid. The question is, what does a microgrid add to this? And, what does it take away?

    Wikipedia adds, “Control and protection are challenges to microgrids.” I agree, but I think pricing and billing is also a big practical problem that receives little attention in the glowing accounts I’ve read. On the plus side, Wikipedia adds, “A very important feature is also to provide multiple end-use needs as heating, cooling, and electricity at the same time since this allows energy carrier substitution and increased energy efficiency due to waste heat utilization for heating, domestic hot water, and cooling purposes (cross sectoral energy usage).” Yes; I’ll even say hell yes!, but that complicates the operation of this mini-utility, and complications require complicated administration and must be paid for.

    Now, what about the local retail utility — Commonwealth Edison (or ComEd) in the example cited? They have lost a chunk of retail load and are stuck with a bunch of facilities that are now underutilized. They may also benefit by NOT having to build new facilities that these customers would have required. How is ComEd compensated for the net loss? And how about all the customers on the microgrid who may not have any other financial connection with one another — who writes all this up into an agreement, figures out the pricing, hires the microgrid operator, oversees the disputes that arise, and changes the agreement as costs change? Of course, a big DOE federal grant can make it all worthwhile for ComEd — at taxpayer expense.

    This is what a “microgrid” entails. I won’t call it “magical thinking,” but it’s not to be undertaken lightly.

    1. Jane Twitmyer Avatar
      Jane Twitmyer

      Acbar, I guess I am not surprised that you are looking at a microgrid with all its capabilities as a “mini-utility”. In some cases it is not just saving utilities from building expensive expansions, but is taking over for those administrative duties you think might be a problem and making them easier. Check the reply to TMT for info on the Brooklyn microgrid that ComEd built.

      I think the point I was trying to make is that the character of renewable generation is different. Distributed siting can make the most of renewable resources, except for offshore wind. Microgrids are good solutions for distributed and campus type installations where the software of the microgrid can provide services that the grid won’t be forced to serve.

      Here is a quote from a Schneider Electric Paper …
      “Consider an example that illustrates energy optimization and what it means in practice: A higher education is supplied by a microgrid with solar PV, Combined Heat and Power (CHP) generation and energy storage. The weather forecast predicts high sun radiance for the afternoon, the gas provider schedules an elevated tariff after 2PM, and its Friday when people will typically leave work before 6PM. The microgrid software controller can decide to use the CHP generator at max power to recharge the batteries and warm up the educational buildings until 2PM. Then it will shut off the CHP and run on batteries plus solar PV for the rest of the afternoon, having enough energy to supply the predicted average load and, according to the building’s thermal behavior, slowly decrease the temperature to its acceptable minimum by 6:30PM.”

      Schneider Electric has lots of microgrid papers. This one is How Microgrid Technologies Enable Maximum Cooperation Among Distributed Energy Resources.
      Another info place is email updates from Microgrid Knowledge

      Regarding compensation for the utility for the loss of retail load … Oh dear! Guess that means decoupling! Other states are doing it!

    2. You are correct, I tend to foresee problems that utilities have had to solve over the years when attempting to build an electric utility system from scratch. And an “electric utility” is what most people would call the mix of generation and wires and delivery systems and grid interface that keeps their lights on.

      That said, energy use management is a huge frontier, especially for single customers (industrials, educational or health campuses, data farms) that consume enough to be able to pay for an energy manager and software from the savings achieved by better management such as you describe. BR ran an article a few years ago about a consultant doing such work in NoVa for a number of various business/ federal agency clients. The future of customer energy management for smaller business customers is, I think, especially bright. Throw in cogeneration where the electric generation’s heat source has alternate uses on-site, combined with storage of both heat and/ or electricity, and there’s a lot of potential for innovation. And if this all takes place on a single site the local retail utility has no say in the matter other than the cost of interfacing with the grid.

      But it’s far more complicated than the average customer can deal with alone. And if anyone thinks the likes of Dominion is going to embrace a group of its customers doing for themselves over its wires what it is in business to do, and has a franchise to do exclusively, within its service territory, at least without a damned good quid pro quo, I have a bridge to sell you . . ..

      1. Jane Twitmyer Avatar
        Jane Twitmyer

        I just read this and want to add it to our discussion of microgrids … summarizing RMI’s thoughts that microgrids can be an opportunity for utilities not a disrupter.

        “A real opportunity exists in the coming years for utilities to participate in advanced microgrid solutions. By deploying microgrids, utilities can maintain or increase revenue while keeping the lights on and keeping the meters running, even in the wake of shocks to their electrical grid. Additionally, distributed energy resources can provide seamless redundancy and resilience to a utility’s operations, while continuously powering services that are critical to health and safety. ”

        “Finally, utilities are uniquely positioned to operationalize and monetize the value of microgrids to all ratepayers instead of a select few, thereby creating a distributed energy grid to many instead of a set of early adopters.”

  6. LarrytheG Avatar

    I remain a skeptic because the primary best candidates for micro-grids are the thousands of inhabited islands that burn diesel fuel for electricity and could, in theory, reduce the amount used if they could supplant some of it with solar and wind – stored in batteries for later use – and the reality is that there are very few such projects and they are pilots.

    When I see an island convert it’s 24-7 diesel electricity to a hybrid using wind/solar/battery to offset at least some of that diesel – I’ll buy into the technology.

    And again – I’m NOT an opponent of wind/solar/batteries – I’m a fervent supporter but I’m also a pragmatic and we have to tell the truth about the current state of this technology – it’s not there yet and worse – it’s not cost effective. When it comes to be for a good number of the 10,000 inhabited islands in the world – it will have finally arrived.

    1. Jane Twitmyer Avatar
      Jane Twitmyer

      Larry, Not there yet, but islands are moving … Tesla, among others, is taking storage and microgrids to islands …

  7. Acbar, as usual, you raise a number of excellent questions.

    Microgrids are arising, in part, to optimize the use of distributed energy resources, and to provide opportunities to establish “mini” versions of modern energy systems in regions (such as Virginia) where archaic regulations add to customer costs and encourage utilities to build more generation and other projects than are necessary, in order to make more money.

    As you note, most privately owned microgrids are best suited to applications where multiple buildings are under the operation of a single organization. This would include military bases, or corporate, university or hospital campuses. A complex of government buildings at the local, state, or federal level could also benefit from being within a microgrid, especially if crucial services such as first responders were included in a way that gave them more reliable power during extreme conditions. The entity controlling the area would then be responsible, perhaps with the help of an expert third-party, to manage the resources within the microgrid.

    Currently, in these situations, multiple buildings have their own diesel generators for backup power. These are dirty, inefficient, and sometimes malfunction. Sandy proved to many that they had a false sense of security, just because their building had a backup generator. Even when the generator worked properly, the roads were flooded and many units could not get refueled, so crucial functions did not not get accomplished.

    Many universities have a combined heat and power facility that produces much the necessary electricity as well as space heating (or cooling) and maybe water heating. But current regulations in Virginia do not allow them to add solar units as a supplemental source of energy. See Dominion’s lawsuit against Washington & Lee as an example. Often the open land, parking lots and rooftops that are good candidates for solar are not where the buildings that need the energy are. Dominion will not approve a net metering connections if the solar panels are not at the same address as the building they are providing the energy for.

    In a microgrid, these resources and storage batteries can be optimally sized and located for the benefit of the whole campus, without the constraints currently imposed by the utilities. These obstacles might be overcome by a microgrid if the metering point was at the connection with the grid, so all of the other activities could be considered to occur “behind-the-meter” and be exempt from being considered a “utility” activity.

    These innovations are being used in other states. Soon businesses and citizens in Virginia will understand how much our current energy policies are going to increase our cost of electricity. They will either replace as much usage from the utility as they can, or clamor for reasonable new regulations to keep energy costs down, or do both.

    Failing to address these changes occurring in the energy industry harms our economy now and will hurt the utilities soon.

    Microgrids can be innovative solutions to some of these issues. They are not a magic bullet, but can move us towards a more reliable energy system. They can help get the grid up faster when it is down. Many generating stations cannot start without a source of power (blackstart). If pockets of generation exist within microgrids nested within the larger (macro) grid, then with careful coordination with the utility, that available power can be used to safely bring up other portions of the grid during blackouts, more quickly than might otherwise occur.

    1. Agree with you about the additional blackstart capabilities. But I think the opportunities today for multi-party (or multi-site) “microgrids” are essentially zero in States that have NOT adopted retail access for ALL the retail customers involved. Virginia is on the cusp of exploring just what large customer (over 5mw) retail access means and I’m confident it will prove to be less disruptive than the SCC fears. But Dominion likely will continue to fight any expansion to smaller customers or customer groups every step of the way because retail access is a direct threat to its regulated-return-on-generation-and-wires-investment financial model. ComEd and ConEd have a different business model, different regulatory environments, different relationships with their grid operators.

      1. I agree. That’s why I started talking about single owner situations. But Dominion will see those as a potential loss of load too.

        We need to help them find a way to get off the need for a constant “fix” of demand growth. That will give them a better business model for the long run.

    2. Re: “See Dominion’s lawsuit against Washington & Lee as an example.” Tom, I thought the problem there was, at W&L the generation was off-campus at a non-contiguous location. I don’t think Dominion could have stopped a on-campus generator (supplying load on the same property or selling to the grid).

      1. I don’t know a lot about the details of this. Only that Dominion opposed it, then worked out a one-time-only deal.

        If I get time, I’ll try and find out more.

        1. Jane Twitmyer Avatar
          Jane Twitmyer

          I remember that controversy so looked it up again …
          It was about the ability to contract for renewable energy with PPA’s under Virginia law and it led to the 2013 legislation that confirmed the ability to use PPA’s with limitations.

          That law will is now challenged in a letter to te SCC by Secure Futures regarding the Fairfax County’s new proposal to install solar at up to 130 county-owned facilities and schools, with another 100 sites to be considered for a later round. The request for proposals (RFP) covers solar on building roofs, ground-mounted solar and solar canopies over parking lots.

          “PPAs allow customers to have on-site solar installed with no upfront cost; the customer pays only for the electricity the solar array produces, at a price that is typically below the price of electricity purchased from the utility. It’s an especially critical tool for cash-strapped local governments and school systems, letting them save taxpayer money while lowering their carbon footprint.”

          and was what W&L used for their solar installation of 2 solar systems totally 444-kilowatt. Then Dominion Power (Dominion) issued two “cease and desist” letters to Secure Futures,LLC for using a PPA. … Dominion raised legal concerns over the selling of electricity to a customer in their exclusive service territory. Looking at massive litigation costs, Secure Futures and W&L agreed to convert the PPA into a lease.”

          “2012 legislation to allow PPAs (HB 129) sponsored by Delegate Terry Kilgore (R-1). The legislation passed unanimously in the House, but was ultimately tabled in the Senate Commerce and Labor Committee.”
          “The 2013 legislative session provided hope for PPA legislation, as Senator John Edwards (D-21) introduced PPA legislation in the form of SB 1023, at the request of Secure Futures, modeled after the previous year’s HB 129. In a surprise move in mid-January, Dominion supported PPA legislation,

          • It is a pilot program, subject to review by the State Corporation Commission starting in 2015 and every two years thereafter
          • Only applies to wind and solar (HB1917 also passed in March, 2013 defines solar thermal as a renewable energy source and is considered solar)
          • There is a cap of 50 MW on PPAs as a part of the overall 1% net-metering cap (§56-594 of Virginia Code)
          • Minimum project size is 50kW with a maximum of 1MW, tax exempt entities are exempt from the minimum – important to note that because of the 50kW minimum, homeowners will not be eligible to participate”

          And here is where the issue stands. The SCC has the power to review the limits although they have not so far.

  8. LarrytheG Avatar

    Jane – these are GOOD! I’m optimistic! Thanks for sharing!

    I still think the islands that burn diesel are the benchmark.

    When they make the switch – mainland grids will follow in short order.

    While I remain a skeptic – I’m a hopeful one – unlike the folks who oppose wind/solar and the additional grid upgrades that will support their further expansion.

    I’m still also hopeful that we will find some cost effective way for solar/wind to “crack” H2O into hydrogen fuel that then can be used when wind/solar are not available.

    we don’t know the future – but we should look forward to whatever changes we can get – for more reliable and less polluting electricity; where the opposition to this comes from is beyond me.

  9. “I’m still also hopeful that we will find some cost effective way for solar/wind to “crack” H2O into hydrogen fuel that then can be used when wind/solar are not available.” That’s being actively researched as we speak! Another storage frontier.

  10. “Cost-effective” is the key. Hydrogen has a very tight bond with oxygen. That’s one of the things that give water its special properties. So far, the best way we have found to separate the hydrogen is through electrolysis.

    The platinum electrode works well, but we don’t enough of it and it is too expensive to do this at scale. Plus, hydrogen transportation and storage will require an entirely new infrastructure. Work has been done on hydrogen for decades without major breakthroughs.

    Hydrogen fuel cells still need a feedstock, either hydrogen from electrolysis, or from ammonia or methane. New battery chemistries and designs seem to have a better chance of being much cheaper and easier to fit in our existing systems. But innovation for all sorts of options should continue.

  11. oakleighpark Avatar

    Very interesting article and comments.

    Why limit microgrids to data centers, university campuses, fire stations, military bases etc. Why not think of them at the city/town block level?
    California is not only requiring new residential builds to be net zero (producing as much energy on site as they use in a year) but also that the state develop a standard for direct current (DC) metering and that all barriers to DC microgrids be eliminated. This makes sense, given that solar and batteries use DC and any appliance that is electronic also requires DC. Unfortunately, all we have to offer is AC that must be converted.
    One way to get to net zero is to pay attention to the building envelop in both new builds and retrofits. By sealing the envelope, and adding a mechanical air exchange (fresh air 24/7), not only in the energy needed for heating and cooling dramatically reduced you get a more sustainable and healthy residence.
    Now add PV, storage and all DC appliances and we could maybe reduce our “plug loads” by 40%. We now have a home that has significantly reduced it’s energy load that sits on a block with another say 30 similar homes that are all connected via that DC microgrid. Not only can the microgrid aggregate all the renewable energy resources of that city block community to provide ancillary services back to the big grid, provide aggregated fast DC charging for the communities EV’s but also eliminate the need for each residence to have their own inverters to connect to the big grid as only one point of contact to the big grid is needed.
    Finally, by breaking up the big grid into islandable, self contained energy units we would be taking a big step in reducing the nations vulnerability to solar flares, EMP and terror attacks on the existing grid.

    1. Everything you say is true and is being explored in other states. Potential installations, such as you suggest, offer many advantages for a modern “networked” grid.

      However, as Acbar pointed out, Virginia’s major utilities see such innovation as a threat rather than a business opportunity. We have to do some very basic work here to help them see that moving to the type of systems that are being adopted elsewhere will be good for the energy companies too.

      1. If Dominion is the obstacle, how do we incentivize the utility to look more benignly upon projects that will undercut its monopoly? We can talk until we’re blue in the face about what ought to be done, and we can demonize Dominion (you don’t demonize Dominion but many people do), but we’re not going to get anywhere unless someone proposes a legal/regulatory regime that Dominion sees as offering it a risk-adjusted profit-making opportunity comparable to what it has now. What would such a legal/regulatory regime look like?

        I would invite you to contribute an op-ed to Bacon’s Rebellion describing such a system. Among the questions that would have to be answered:

        – How would Dominion be made whole if it had to write off significant assets?
        — Whose ass would be on the line for maintaining electric grid integrity?
        — What assurances will the public have that Dominion (which presumably would retain some role in transmission and/or distribution) will not become a capital-starved PG&E unable to maintain its public obligations?

        I’ts not enough to say that other states are reforming their regulatory oversight. Virginia, like every state, is unique. What changes do we make here. Put a concrete proposal out there, and let’s debate it.

  12. Jim, I appreciate the offer. Others have requested something similar. This is a complex issue and hard to do it justice in a short essay. However, if I can get some free time in the next month, I might put something together for discussion.

    In the meantime, let me address some of your questions.

    Writing off assets – I don’t think this will be necessary in a large way. Even moving to disconnect future generation additions from the ratebase would not require a big write-off. Others might disagree, but I believe if the regulator agreed to repay a utility investment in an asset either through base rates or in a Rate Adjustment Clause (RAC), that agreement should continue to be honored for the financial life of that asset.

    The real risk is with future investments. Our current energy plan (the GTSA) is encouraging our investor-owned utilities to invest in projects that will be much more expensive if built by the utility compared to the life-time payback required for a similar project to be built by a third-party or supplied by another means. Over-priced projects that do not deliver equivalent benefits are always at risk of becoming stranded assets. This is why work on an updated regulatory scheme should begin right away.

    Who is responsible for grid integrity? – Every regulatory modernization proposal that I am familiar with in other states maintains the responsibility for the “wires” with the local utility, whether it is investor-owned, a co-op, or a government-operated organization. The wires are the natural monopoly. Avoiding the duplication of wires was the original reason that utility monopolies were granted. It was decades later before investor-owned utilities discovered that more profits could be made by putting generation in the rate base. Regional (PJM) and national (the North American Reliability Corporation – NERC) organizations exist to maintain reliable operations throughout an extended region. PJM’s capacity market ensures that adequate capacity exists to reliably meet future demand. PJM requires that every member has enough reliable capacity to deal with its own peak load, plus a reserve. It is up to the states to decide how that capacity is paid for. PJM, FERC, and NERC do the same for interstate transmission lines.

    All of the hand wringing about “will we have enough electricity in the future” isn’t really justified. We have more than enough for quite some time, even if demand begins to increase a bit. The greater hazard is having too much in states like Virginia, because we pay for it in full whether we need it or not.

    Who makes sure utilities are properly paid? – Virginia law requires the SCC to reimburse a utility for an approved project, plus a “fair’ return. Investments in a modernized grid would be profitable for a utility. Unfortunately, very little in our current “Grid Transformation” Act actually applies to creating a more modern grid. Nothing was included in the latest IRP about that topic, although it was required to be included.

    Are we unique? – Yes, every state has its own issues, challenges and opportunities. However, we can learn from the processes that other states have gone through and apply the lessons of their successes and failures to our own situation.

    Virginia, and perhaps North Carolina, is different from most other states. New York has seven investor-owned utilities, a large state-owned Power Authority, and numerous co-ops and municipal utilities. No single organization has a great influence on the legislative process. The states where regulatory modernization is taking place have multi-term governors and independent legislatures. New ways of doing things usually require a legislative mandate that lays out the goals and general principles that guide the effort. Then the detailed work of developing the specific proposals and enabling regulations is done by the state energy regulator. Countless meetings, white papers, symposia, give-and-take with the utilities and other stakeholders take place over several years and usually phase in a series of changes that allow everyone time to adapt to a new situation.

    Utilities were skeptical about the Renewed Energy Vision in New York, but they are naturally conservative and slow to change. They were also accustomed to a rigorous balancing process undertaken by the state regulator that has been in place for decades. The utilities operated in an environment where it was understood that what was good for shareholders also had to provide benefits to the customers. There were bumps in the road, but the regulator proved to the utilities that their viewpoint was extremely important, but not the only one. Gradually the utilities trusted the process and realized that they had significant input in solving their own problems, such as dealing with declining load growth.

    Things are different here. You ask if there is a scheme that allows Dominion “a risk-adjusted profit-making opportunity comparable to what it has now?” I am not sure that it is possible to develop a modern scheme that is fair to customers that provides Dominion with the same profit-making opportunities it has today. They have no risk at this time. Every new project is paid for by a RAC that requires ratepayers to reimburse the full cost of a new project, plus the cost of financing, and a stream of profits that usually amounts to about twice the cost of the project, on a cash-flow basis, over the financial life of the project (typically about 35-40 years). Other profits can be made from the operation of many of these projects.

    No other unregulated business can be assured of rates of return in the 10% – 15% range that are guaranteed by their customers. That is why, over the past 15-20 years, Dominion has adjusted its business model from having 40% of its revenues from regulated or “regulated-like” sources to 95% from regulated or “regulated-like” sources today. It is much less expensive for them to manage the legislative and regulatory process than it is to compete in the energy marketplace with other energy companies.

    Currently, Dominion can increase profits for its shareholders by writing its own legislation that curtails or excludes regulatory review of whether new projects provide a benefit to its customers. Except perhaps for Duke, Dominion operates in a unique regulatory environment. They regularly remind financial analysts of this during earnings calls.

    Dominion Energy executives are intelligent financial managers. The current scheme serves them best and they are making the most of it. In the short-term, they have every reason to obstruct or subvert the process of modernizing the way they are regulated. I am concerned that they would choose not to participate, as other utilities have, in collaborating in designing a modern energy system for Virginia. They would likely not want to upset the special situation they currently have.

    For every financial manipulation there is a price to pay. Shareholders are counting on a long-term stream of profits from a variety of new projects (spelled out in the GTSA) that will raise energy costs in Virginia by billions of dollars. The pipeline alone will raise energy costs by $4 – $6 billion for Dominion Energy Virginia customers and $2 – $3 billion for customers of Virginia Natural Gas, over the next 20 years. Utility-owned solar and wind, as well as energy efficiency projects will require billions more from ratepayers than they would pay if such projects were not put in the ratebase.

    As a former utility executive, I believe that customers will find ways to self-generate some of their electricity and find ways to use less, as the prices continue to climb. This will leave lower-income customers with a greater share of a higher bill and less ability to pay it. As long as the utility clings to a business model that requires continual increases in demand and a steady stream of new projects in order to prosper – this will create hardship for everyone, including the utility.

    That is why I recommend that we get to work on a better alternative; for everyone’s sake. It doesn’t pay to demonize Dominion. They will be our most important energy company for a long time. We need their insight and expertise to help design our future energy system. But they must adjust to not being the only one steering the boat. Other utilities throughout the U.S. must balance shareholder gains with benefits to customers. We need to do that in Virginia too.

  13. LarrytheG Avatar

    Excellent discussion. Thank you!

  14. Peter Galuszka Avatar
    Peter Galuszka

    Thanks for the excellent post. I would think that users need some kind of commonality of purpose like the military’s need for secure power. As for Virginia, the big obstacle is Dominion since they wouldn’t be running the show any more.

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