Grid First, Green Second

The breakup of the Bell system in the 1970s and 80s led to an unprecedented wave of innovation and business growth in the telecom industry. The rapid evolution of technology, business models and markets also transformed and dramatically improved customer choice and experience. Former Morotola CEO Bob Galvin, a pioneer of the mobile phone industry, launched the Galvin Electricity Initiative in 2005 with the goal of transforming the nation’s power grid in a similar way. He tapped former EPRI president Kurt Yeager to lead the effort to devise a “Perfect Power System,” that is reliable, efficient and clean. Green Utility spoke with Yeager about the Perfect Power concept and the notion that efficiency efforts have to start with the market.

GU:Everyone knows that transforming the grid from mid-20^th Century technology to much smarter, more responsive and efficient system is imperative. Is your vision more of a perfect-world ideal, or a viable roadmap for the future?

KY: Bob Galvin said when we started that there’s only one quality level to seek, and that’s perfection. If you seek anything less, you’re settling for mediocrity. So Perfect Power means, from our perspective, that every customer, large and small, can reliably get exactly the quantity and quality of electricity that they need. That is certainly within the means of technology today, the issue is the lack of incentive. In this captive monopoly business model, utilities are still for the most part incented to maximize the sale of electricity, not improve the quality of service.

GU:Your approach seems to put smartening the grid ahead of developing renewable generation projects. Why is that?

KY: I served on a National Academy renewable energy study a couple of years ago. We concluded that getting more than single digit percentages from intermittent renewable energy sources is really not possible in today’s grid. We would have to build so much backup gas power or storage capacity that it doesn’t make sense. So we really have to transform the grid, so that the system is operating at the same speed as the power that it’s delivering. Today it’s operating the equivalent of a railroad that would take you ten days to open or close a switch. When we do make that transformation, we don’t need nearly that amount of backup power.

I also believe, as we see occurring a great deal in Europe, that over much of this country we could turn buildings from power pigs into power plants, and not just in California. In Chicago we built a couple of smart homes with solar roofs, and they produce power when there’s several inches of snow on the roof. That would be a tremendous asset and a way to bring renewable energy in, and give customers control of their destiny, but again, utility incentives are the problem.

As the president of EPRI, my board was made up of Utility CEOs. Many of them have told me, Kurt, we agree with you in principle, but if we did what you want us to do today, our stockholders would fire us tomorrow. Because the way the rules are written, their stockholders are rewarded primarily based on the amount of power they sell. Not on the quality or reliability or efficiency of service. That is something heavily wrong in today’s world.

GU:So the challenge is not technology, but regulation, the various shareholders and old business models that companies are locked into where they perceive efficiencies as a threat. How do you go about changing that?

KY: We’re a non-profit initiative. Our role is to demonstrate to consumers, communities and policymakers that done properly this transformation is a tremendous economic, environmental and energy security asset, essential to our nation. We focus on microgrids, because most of the transformation must be done at the distribution system level—at the community level. This is where the bulk of the reliability and efficiency opportunities really rest, not bringing wind power in from the Dakotas and building new transmission lines.

So we work with communities—a number of which of course have their own utilities that are not investor-owned—and those communities become good models. We’re working in a number of states. This requires legislative change and it requires convincing political leaders that these legislative changes are absolutely necessary.

GU:Working from a consumer-based perspective, as you are, requires the consumer to be more engaged than they typically have been in this industry. How do you change that?

KY: Well, again, the model has been demonstrated in other industries. What you do is open up the market, because the monopoly will never modernize. We would still have black rotary dial phones if AT&T hadn’t been forced to change. Not everyone’s going to buy in at once, but the younger generations—when you start to explain the system to them—really want these tools. So you need to open the door, allow the home-automation systems and all of the systems that entrepreneurial innovators can provide, to be put on the market and allow early adopters to use them.

The home-automation system is controlled by the utility in most locations. That is absolutely wrong. It must be opened up. This is in the best interest of the utilities strategically as well. They may sell less power, but the value of the power they sell will get increasingly higher. My kids and grandkids spend a lot more money on their telecommunications than they do on electricity, and they don’t do it because they have a rate-base. They do it because they want the tools, they want the toys, they want everything else. And that’s what’s going to happen when we have really that kind of electronet equivalent here.

GU:Utilities often position themselves as not in control of this. They’re beholden to legislatures and regulators and so forth. What can utilities do to shift the value proposition themselves?

KY: I’ve been very pleased that an increasing number of investor-owned utilities, at least at the retail business end, are saying ‘yeah, we’ve got to get out of this business model.’ San Diego Gas & Electric, for example, a decoupled IOU, has said that they make more money for their stockholders today than ten years ago, even though they’re selling less electricity. So done properly there is no reason why performance-based standards, even in today’s world, cannot improve the business proposition for utilities.

GU:Still, it often seems like a Catch-22. It’s virtually impossible for a top-down regulatory solution, like you had with the telecom industry, because of the regulatory patchwork. At the same time, it’s really hard to build national standards from piecemeal projects.

KY: Yes, that’s unfortunately the case. We’re focused on the microgrid because starting at the substation optimizes the service for customers, whether residential and commercial. Those demonstrations show the economic and environmental advantages, and eventually everyone wants that. We’ve been quite successful making progress in Illinois, for example, and beginning to get the local utility to recognize that this is ultimately in their best interest.

GU:A lot of the consumer-facing technology that we talk about in smart grid—things like smart devices and appliances, home area networks, demand response, net metering—have been talked up a lot, but they’re not really reality yet. Do you think they will be in the near future?

KY: It will only be a practical reality if we open the door to allow the entrepreneurs in. If we rely only on the utility in most cases, there will not be very much progress. If you do open the door—in all of our demonstrations the benefit to cost ratio is almost immediately about of four or five to one. The cost of the total transformation of the grid is now in the order of half a trillion dollars, but within two years, we would save two trillion dollars.

GU:That’s just through the proliferation of new technologies and market competition?

KY: That’s not even taking into account the entrepreneurial opportunities. The electronet opportunities that I’m talking about here go beyond that. That’s just eliminating the productivity losses, efficiency losses, enabling the broader use of domestic energy resources, renewable and otherwise.

We’ve demonstrated this using university campuses. We’ve worked with several, the Illinois Institute of Technology, for example. They did it at their own expense, because they could immediately see a return on the order of three dollars for every dollar they spent on the transformation. They were able to sell power into the day-ahead market. The ISO, PJM, also operates in Chicago and enabled that. IIT was losing at least half a million dollars or more every year in outage costs. They eliminated that. And they were able also then to attract a lot of new business and new investments in their research.

IIT is just one small example. There are others—a lot of communities that are working in this way. Leesburg, FL, is one that’s moving quite aggressively, in spite of it being pushed back by many of the other municipal utilities in the state, but they’re moving very aggressively.

GU:What will it take to make your Perfect Power System a reality?

KY: I hope it won’t require a total national crisis to make it happen. I hope we don’t have a major collapse in the power system, which frankly, it is still very vulnerable to a major outage like we had in the Northeast back in 2003. Unfortunately, often the only way change of this nature occurs—really transformative change—is as a result of a crisis.

Utility company executives need to focus on moving from just powering and lighting captive ratepayers to empowering and de-lighting customers. They will make a great deal more money as a result. While I recognize that the rules right now do not encourage them to do that, what they need to do is sit down with their board of directors and sit down with the regulators, and say look, this transition has got to take place. Let’s work out a game plan that benefits everyone.

AT&T makes a lot more money now than they ever did selling black rotary dial phones. But we’re still in the black rotary dial phone era of electricity. Utilities should do their own studies and be able to present to their stockholders what it really takes to get from here to there. Utility CEOs nod their heads and say ‘yeah, but I’m only going to be here another year or two, I think my successor is going to have to take that on.’ It’s not going to be done overnight, but what you need is for these companies to say look, our future depends on it.