The Fractal Grid: Part IV
Institutional inertia – Units of fracturing – What to build?
“Infrastructure, and the institutions that support them, lag behind.”
– Gretchen Bakke
The standard decarbonization template is to electrify the energy-intensive sectors of the economy currently dependent on fossil fuels and shift electricity production to renewable resources. Electrifying heating, transportation, and industrial processes will dramatically increase demand, requiring utilities to build substantially more lines, substations, and generation capacity at the grid edge to serve new load as efficiently and resiliently as possible. Whether the current institutional environment will facilitate construction of this grid, at least to the magnitude required for the energy transition to occur, is controversial.
Two friends walk into a bar. Tyler DERden builds dope microgrids at the grid edge and has a fairly deep interest in cryptocurrency and past energy transitions. He hates franchise rights and is a bit cynical and skeptical of those in positions of power. DERblius is a wonky (in a good way) power systems optimization modeler from MIT who has been working on capacity expansion models and considering cost allocation on decarbonized grids for a long time. She dabbles in political philosophy in her free time and generally has faith in institutions but is not naive.
Tyler DERden: Derb! Great to see you. Did you read that essay about data and the challenges of building on distribution grids?
DERblius: Sure did, Tyler. That fractal stuff was kind of out there but I think I got the gist of it. My first thought is that this information asymmetry on the distribution grid, or rather the lack of any trustworthy information at all, makes it hard to know whether our DER Bill of Rights is being violated. We can’t enforce rights like “reasonable interconnection times” without the requisite data. What are your reactions?
Tyler DERden: It got me heated.
DERblius: Yeah, I saw that coming.
Tyler DERden: To me, this series illustrates that the top-down management of the distribution grid disincentivizes the build-out of a truly distributed, two-way network and puts an arbitrary ceiling on distributed generation. We have a pure market for on-site resilience at the grid edge and imperfect but functional wholesale markets, but the monopoly for delivery, interconnection, and distribution of power is a black box whose inefficiency is now leaking out in the form of high delivery costs and painful interconnection processes. We need to find a way to put the infrastructure for power delivery in the hands of the people and the market because the current institutional environment impedes beneficial evolution.
DERblius: I don’t think setting everyone loose tinkering with the most complicated machine in the world is a good idea. Private and decentralized development of substations and wires would be bedlam. You’re underestimating how difficult it is to link the physics of a power system to a financial market; distributing electricity is, and will remain, a natural monopoly.
Tyler DERden: The logic of this monolithic natural monopoly is unwinding before our eyes. The reason we have such limited awareness on the distribution grid, a masochistic interconnection process, and nonexistent NWA opportunities is because utilities only care about what they can rate base, which tend to be big infrastructure projects.
DERblius: To be fair, we have seen regulators force utilities to rate base new types of infrastructure, like smart meter rollouts.
Tyler DERden: True, but even if they can legally rate base more complex operations they are still not built to do it well. In fact, they have no financial incentive to spend intelligently at all, or record a timely, accurate inventory of the assets they own, or provide quality services and products for the litany of private companies, non-profits, and consumers that are forced by law to depend on them to get anything done.
DERblius: We can selectively introduce markets and add transparency to existing institutions by providing utilities with the hardware, telemetry, data and software tools they need to build faster and more efficiently. But I don’t think the model that has worked for a century is fundamentally broken. Even the mesh network of the future will be a natural monopoly, and therefore the assumptions underpinning key laws like franchise rights will hold true. The solution is to leverage more direct political pressure, better research, and new regulatory structures align incentives and provision services from innovators like Camus and Kevala, who are systematically breaking down every reasonable excuse a utility might have to not do something.
Tyler DERden: I don’t think an adoption model dependent on regulatory pressure can create the hockey-stick growth curve we need. Investor-owned utilities routinely manhandle regulators because their shareholders have a vested interest in providing them with the resources required to maintain the status quo.
DERblius: I think you’re casting a lot of good, hard working people as ill-intentioned. Plus, not all utilities are made equal. Smaller and municipally-owned co-ops and utilities like Green Mountain Power have made great progress. There is much better incentive alignment when the person running your power grid is your neighbor.
Tyler DERden: I don’t think they’re ill-intentioned, but on a macro-level, the incentives and logic of this techno-economic system only allow marginal changes and peripheral tinkering. We need to think in orders of magnitude and big paradigm shifts, which are brought into existence via carrots, not sticks. Every exponential technological transition we’ve had in the past was stimulated by willing adoption of products and processes undeniably better than their alternatives; if we are to create a fractal grid and decarbonize fast enough to address climate change, we need to realign the institutional environment.
DERblius: What you’re missing, and what that fractal guy didn’t dive into deep enough, is how institutions scale differently than physics, which makes it much more difficult to implement the solutions you envision on the distribution grid.
Tyler DERden: Ah, enlighten me.
DERblius: As mentioned in those earlier essays, we’ve seen the most change at the highest and lowest levels of the grid. On the bulk grid, we largely broke up vertically integrated utilities and introduced various types of market products to reduce costs but still have a single orchestrator that steps in unilaterally as a last resort. Change slogs through a sort of oligarchy consisting of political appointees, stakeholder advocacy groups, private lobbyists, utility commissions, etc. which requires an enormous amount of cooperation just to function, nevermind initiate change, and as evident by Winter Storm Uri, things still break.
Tyler DERden: Things will always break because they’re inherently unpredictable externalities, which is why we need resiliency at the grid edge.
DERblius: Right, and we’re starting to see people and organizations take power into their own hands by deploying DERs and microgrids to hedge that risk. These independent actors have strong motives and the means to “exit” the grid. But the intermediate section of the grid reflects the “community” level, which has limited grassroots gusto in its ability to exit, small amounts of power and money flowing through its poles and wires, and the most difficult technical challenges. This makes it the hardest collective action problem, which is why we’ve underinvested in it, and therefore requires a top-down solution. It’s a public good.
Tyler DERden: What I’m hearing is that markets always generate data sufficient for their existence but the telemetry, hardware, and data processing investments required to safely run wholesale markets stop above the distribution sinks. We see underinvestment in the remaining delivery infrastructure precisely because we didn’t expand markets past the arbitrary threshold where monopoly delivery service begins.
DERblius: Three points. First, the threshold isn’t arbitrary. Second, you’re conflating markets for energy and ancillary services with markets for building infrastructure. There are no markets for building infrastructure and adding transmission is arguably just as painful and opaque as adding feeders and substations.
Tyler DERden: I think that’s somewhat debatable because of market products on the transmission grid like Financial Transmission Rights (FTRs), where participants pay for the right to transmit electricity and therefore have incentives to optimize power flow. If the constraints create enough price pressure, there is a market-based mechanism to justify building a new line.
DERblius: Perhaps. My main concern, however, is about the disparities in power, money, and value flowing through the bulk grid vs. distribution grid. Microgrids have lower coordination costs because there is one independent actor procuring resilience; bulk grids have higher coordination costs but a few independent actors with huge financial incentives and political power. The distribution grid contains many independent actors with limited interest in participation, high coordination costs, and proportionally lower value per transaction. The cost of administering a market at this level is not worth it. It’s working against one of the most powerful laws in the universe: returns to scale.
Tyler DERden: I see a few reasons why the window for decentralization and more market constructs may yet crack open. The rise of variable, zero marginal cost energy production has raised the relative importance of delivering power at the exact time and place it is needed, rather than simply generating it cheaply. This makes our outdated process for building delivery infrastructure increasingly burdensome on consumers and magnifies the importance of optimizing the flow of electricity through existing wires and building quickly. Additionally, the growing importance of resiliency at the community level and technological breakthroughs from software players like Camus and Kevala, as well as hardware players like SunRun and Sunnova, could create the political opportunity for a CCA-like movement of distribution infrastructure ownership. If technology can make mini-ISOs financially viable, I can imagine many smaller T&D and generation owners springing up yet remaining interconnected using the common standards and equipment enforced by regulators today.
DERblius: Who exactly owns the infrastructure? And who, or what, coordinates the market activity of so many houses and service providers in a neighborhood? Moving up the distribution grid from single party microgrids to community microgrids with many independent parties will have seriously high standards for transparency and fairness in an environment where stakeholders, namely, individual homes and business owners, will have minimal appetite for understanding and advocating for their own interests.
Tyler DERden: A community fund with consumer shareholders owns the substations, poles and wires, independent actors and service providers own the generation and load flexibility assets, and the futuristic ADAS providers like Kevala or Camus compete to manage the network, market, and mini-RFPs.
DERblius: How do you ensure the entity providing the DSO service, building infrastructure, and running the market does not abuse its power? You’re proposing the same information asymmetry the utility has today with less regulatory oversight.
Tyler DERden: Transparency will be the market standard. Communities with the most at stake, such as those threatened by wildfire shut-offs, will invest in auditing the service provider. Eventually, we might even have decentralized coordination and decentralized control so no central party would have to be trusted.
DERblius: Sounds like crypto-babble.
Tyler DERden: Imagine all members of the community microgrid using their computers to solve the state of their distribution network, getting rewarded for it, and having the means to validate power flow calculations and payments. You could even provide fractional ownership and governance of all the poles and wires to create added rationale for not violating constraints. Who wants to damage something you own?
DERblius: Idealistic and cool… in theory. Sounds like Bitcoin but instead of solving math riddles with no purpose you’re using that computational power for something useful. Anyways, it still sounds like an expensive and risky way to deliver a public good. Plus each community’s grid is a snowflake.
Tyler DERden: Ah, baiting me with a jab at Bitcoin’s energy consumption. Anyways, that’s why I think if this is to occur, the most likely approach is for a microgrid developer to aggressively provide off-grid services for commercial and industrial loads and co-located power production. An industrial campus with a few independent actors has a strong incentive to audit their mini-market and ensure power and resilience is traded fairly and efficiently. In this way, the microgrid operator would genuinely be acting like a utility by setting rates and owning delivery infrastructure.
DERblius: Ah, so if they can drive down the cost of this service they could attack the distribution grid market from the outside-in, pending the regulatory revolution you anticipate. But I still don't see how that necessarily means that it has to break the utility’s natural monopoly. With better performance-based regulation, utilities would pay this company to deploy a community-level microgrid, as they would pay Kevala or Camus.
Tyler DERden: True. But I think the lack of a utility incentive to provide cost-effective community resilience breaks the natural monopoly model.
DERblius: That's where we disagree, although I think we see different means converging to the same end.
Tyler DERden: Agreed. Now let’s finish our beers, we are going to be late for the DERTFest 2022!
Thank you to Bryce Johanneck, Elias Hatem, Colin Bowen, Jake Jurewicz and the DERTF community admins for their valuable feedback on earlier versions of this essay series.