5 Energy and Flexibility Trends We’re Watching for 2018
It’s an exciting time to be in the energy business. Technology and knowledge are expanding our ability to solve problems and deliver meaningful change. Costs of renewable energy and distributed energy are plummeting. And the need for a solution to global climate change is more urgent than ever.
So it’s a good time to look ahead at how our industry is evolving. Here are five trends in energy and energy flexibility we’re watching for the coming year.
1. Growing need for flexibility—and the ability to manage it
As the cost of renewables falls and adoption levels climb, electrical grids require more and more flexibility to keep the system in balance, integrate more intermittent energy, develop new grid services, and enable new revenue streams. This has led to a boom in global flex capacity. Bloomberg New Energy Finance estimates that capacity will reach 1,041 GW by 2040. That increase will occur across all geographic regions and all sources of flexible capacity.
Power systems require flexibility services across the time spectrum—from seconds to seasons. On very short time frames ranging from seconds to minutes, fast-responding DERs such as energy storage and DR keep the grid in balance and compensate for intermittent renewables and uncertain demand forecasts. On a predictable, hourly basis, fast-ramping DERs can pick up the slack for solar and wind output that changes rapidly, such as resources to meet the evening decline in solar production. On a daily basis, aggregated DR, price signals and batteries can shift or store energy to meet daily needs when renewables production doesn’t match load profiles. When wind and solar output lag demand for weeks or months, dispatchable resources such as pumped hydro and natural gas combustion can provide the needed flexibility. Greater interconnectivity between neighboring grids also can make it easier to balance supply and demand across greater distances.
Thus, grid operators and energy companies increasingly need ways to manage that flexibility—in real time and at scale.
DER flexibility management software monitors, predicts, optimizes and controls flexible capacity from any type of grid-connected DR and DER resource, both behind and in front of the meter, in real time and at scale. By managing flexible capacity from distributed assets, energy companies can balance supply and demand in real time, integrate renewable energy into the grid, co-optimize large portfolios of distributed assets, monetize flexible capacity from DERs and deliver new energy services to customers in regulated and deregulated markets.
Aggregating DERs and DR can also create new value streams, allowing utilities to supply ancillary services, defer capital investments through non-wires alternatives, and develop revenues for customers in wholesale markets.
2. Digitalization of energy systems
Digitalization is a buzzword that comes with a sliding scale. The simplistic view is of the process of turning analog information into ones and zeroes. But digitalization, as defined by Bloomberg New Energy Finance, is “… the process of connecting devices through digital communications, collecting and sharing data, and analyzing that data to improve machine or systems operations.”
In its report, “The Digitalization of Energy Systems,” BNEF says digitalization will determine utilities’ abilities to compete as the rules of the road change. “The next energy revolution will change how power is bought and sold,” BNEF says. Whereas, a decade ago, innovation in energy focused on hardware and making clean energy work at scale, the new challenge will be to “… reorganize the energy system to make it more efficient, resilient and digital.”
Among the emerging technologies participating in energy digitalization are flexibility management systems, blockchain, edge processing, machine learning, artificial intelligence, smart data, cybersecurity, and Internet of Things (IoT) and digital systems.
Utilities are already using digitalization to reduce operations and maintenance costs, aggregate and analyze third-party and operational data to improve forecasting, and optimize grids for better power-flow control. The benefits and potential applications of digitalization will expand as utilities leverage sensors, software and communications networks and incorporate advanced machine learning algorithms into their digital systems.
Digitalization introduces new technologies and processes that will help utilities tackle the challenges facing the energy value chain, from integrating intermittent renewable energy to incorporating locally distributed energy assets. For example, as customer self-generation grows, utilities will need flexibility management systems—including DER and virtual power plant (VPP) systems—to connect with, aggregate and co-optimize these DERs. They’ll need these load aggregation capabilities to play in ancillary service markets, drive cost savings, and unlock new revenue streams.
Digitalization of energy systems will enable utilities to holistically participate in their markets to provide services that customers want. It will also help utilities to collaborate with suppliers and consumers to develop the products and services to attract and retain customers.
3. Proliferation of distributed energy resources
When you gathered around the table with family over the holidays, chances are you didn’t strike up a conversation about distributed energy resources. If you did, you might have been greeted by an awkward silence followed by a request to pass the potatoes. Today, the average consumer doesn’t know a DER from a donut, but that may change in the near future.
As consumers increasingly install home energy management devices like connected thermostats and become accustomed to seeing solar PV modules on their neighbors’ roofs and electric vehicles in their neighbors’ garages, a distributed, decentralized system will seem like the new normal.
Indeed, in more sophisticated energy business circles, you can’t pick up a trade publication these days without seeing headlines about the rise and impact of DERs.
And with good reason. “DER is one of the most disruptive factors affecting the grid today and into the future,” according to Navigant Research. The energy researcher forecasts strong DER penetration over the coming decade, predicting global DER capacity growth from 132.4 GW in 2017 to 528.4 GW in 2026.
The fourth biennial Grid Modernization Index, published in November by the GridWise alliance in collaboration with Clean Edge, tracks grid modernization across the United States. While including other factors beyond DERs, the report is a good window into activity in this market. It finds “increased participation in and acceleration of grid modernization” efforts in clean energy, distributed resources, smart meters and other technology.
DER growth is being driven by a numbers of factors, says Navigant. Among them are:
Falling system costs
Supportive regulatory policies and incentives
Consumer demand for greater choice and control
Concerns about grid reliability and resilience
Technology and product availability
Availability of financing
The big trends in DERs include distributed renewable generation, distributed storage, and aggregated demand response. Also in the mix are energy efficiency, microgrids, electric vehicles and EV infrastructure, generator sets, and fuel cells. Definitions of DERs vary, but most say they are utility- or third-party owned, smaller, grid-connected resources in front of the meter (e.g., utility-scale storage) or customer-owned, behind-the-meter assets, typically solar PV or storage.
Distributed generation continues to grow, particularly residential and commercial solar, spurred on by falling costs, federal tax credits (at least until 2020) and customer choice. Witness the drive by major corporations such as Walmart, Kohl’s, Costco, Apple, and IKEA to purchase renewable energy as part of their corporate sustainability commitments, with 117 companies committing to power themselves with 100 percent renewable energy through the RE100 initiative alone.
The push for DERs has not gone unnoticed by utilities. They have little choice but to adapt by modernizing their grids. So they’ve been installing smart meters, sensors, and communication technologies that support two-way power flows and improved visibility into the system, all of which requires new investments that have to be justified as expenses to regulators.
Governments are taking notice, too. The push for DERs is leading regulators to study DER valuation and rate design. And they’re paying more attention to things like rates for smart homes and electric vehicles, according to Rocky Mountain Institute’s Electricity Innovation Lab’s Leia Guccione, whose article in GTM chronicled the top ways DERs are changing the grid.
4. Energy storage moves to center stage
Energized by lower costs, market demand, regulatory directives and the need to manage flexibility on the grid, the energy storage business is booming.
The first quarter of 2017, for example, saw the biggest growth in the history of the technology. Storage installations of 234 megawatts (MW) were 50 times greater than in the first quarter of 2016. Much of the growth was attributable to utility-scale projects, including deployments to offset the Aliso Canyon natural gas leak.
That torrid pace cooled a bit later in the year. Still, deployments grew 46 percent in the third quarter of 2017, representing 42 MW of capacity, according to the latest available figures published by GTM Research and the Energy Storage Association in December.
In dollar terms, McKinsey estimates the value of the U.S. energy storage market could reach $2.5 billion by 2020—a sixfold increase over 2015. Updated figures from the U.S. Energy Storage Monitor put the value of the storage market at $3.1 billion by 2022—a sevenfold jump over 2017.
In terms of capacity, GTM Research estimates the size of the U.S. energy storage market could grow almost nine times between 2017 and 2022. By 2022, total deployments of energy storage are expected to reach 2,535 MW, according to GTM Research. The market will be divided evenly between utility-scale and behind-the-meter installations, though residential behind-the-meter deployments will contribute nearly $4 out of every $10 of revenue by 2022, compared with only about $1 out of every $10 in 2017.
GTM notes an emerging trend for more progressive regulatory commissions to direct utilities to incorporate storage and other emerging technologies into their integrated resource plans. Commissions are interested in how storage can provide system flexibility and improve reliability and resiliency. As GTM noted, energy storage was not even on the radar for many utilities in their resource plans ending as recently as 2015.
Helping to push this industry ship is the incredible drop in the price of lithium-ion battery packs, which has declined 24 percent since 2016, according to Bloomberg New Energy Finance. Lower prices are pushing energy storage from bit player to leading roles in replacing fossil-fueled generation, providing backup power and supporting the integration of intermittent energy sources. For behind-the-meter installations alone, battery storage provides myriad foundational energy services for grid operators, utilities and energy customers, according to the Rocky Mountain Institute.
Storage provides a major source of flexible capacity, with its ability to quickly ramp up and down as needed for real-time grid operations, short-term reserves, and daily balancing. Storage-plus-solar combinations will continue to expand as well—allowing greater off-grid viability and challenging utilities to come up with new methods for keeping customers, all while facing declining load/revenue.
It remains to be see who can unlock the maximum value from storage systems. Storage, as McKinsey notes, is “… uniquely flexible in its ability to stack value streams and change its dispatch to serve different needs over the course of a year or even an hour.” So it’s both a challenge and an opportunity for utilities—a challenge because it allows customers to partially or fully disengage from the utility, and an opportunity because it offers utilities a non-wires alternative to defer riskier capital construction projects while increasing reliability, resiliency and asset optimization.
Going forward, a major trend for utilities will be incorporating storage into the aggregation of all DERs on one platform. Rather than treating storage as a siloed asset, flexibility management software providers will be expected to include those resources in their orchestration and optimization capabilities, creating an added challenge for that segment of the energy industry.
5. Customer collaboration: the new watchword of the utility business
Utilities are well aware of the competitive threat posed by customer adoption of solar-plus-storage combinations. But the flexible nature of DERs also offers a competitive opportunity for utilities to engage with their customers.
Utilities realize that they’re in a new era of customer engagement. As a result, their mantras are being pushed towards new ways of thinking: of customers rather than ratepayers, of customer experience rather than energy consumption, and of value to customer rather than costs.
Progressive utilities understand that the benefits of flexibility management go beyond having new sources of flexibility on the grid. That’s because flexibility management delivers value on both sides of the meter. While the meter has traditionally marked the end of the utility’s influence, flexibility management software bridges the gap at the grid edge—both technically and in terms of customer engagement.
Flexibility management software allows access, visibility, communication, control and dispatch of customer-owned behind-the-meter assets. But the software also enables real-time collaboration between energy companies and their customers. To cite just one use case, on-site storage can help a commercial or industrial customer to lower its demand charges. But the value translates back to the utility company as well, which, by working more closely with the customer and demonstrating the additional benefits of DERs, can aggregate the customer’s available storage capacity—which the customer could not do on its own—and bid it into wholesale capacity markets.
Better collaboration using flexibility management turns on new revenue streams for both the customer and the utility. It also strengthens the bonds of the utility-customer relationship. We’ll see more utilities embrace customer collaboration in 2018, and flexibility management gives them a tool to enable those transactions.