The Evolution of the Smart Grid | The Decentralized Grid


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The electric utility industry is currently undergoing the greatest period of transformation in its history. Utilities are facing new challenges, and these challenges present opportunities for them to reevaluate business processes that have remained unchanged for decades. This blog series delves into six of what we consider to be the most impactful challenges, dissects them, and hypothesizes how they will shape the future of the utility industry. This blog post explores the second challenge we have identified – the transition from centralized electric generation towards decentralized grids with distributed energy resources.

  • Ameritown Utility and the Decentralized Grid

On October 29th, 2012, Hurricane Sandy tore through New Jersey and New York. Communities were flooded, and more than 2.6 million people lost power. The storm was unavoidable, but some communities weathered the aftermath better than others. In the Newark Bay town of Bayonne, Midtown Community School became a literal light in the midst of darkness. Thanks to the foresight of local officials eight years prior, the school had a hybrid backup solar system installed on its roof that was large enough to power the building independent of the grid. During the aftermath of Sandy, the solar panels ran in tandem with a diesel generator, and the school opened its doors to over 50 evacuees.

This story is not an isolated event. A quick Google search returns dozens of similar stories about renewable energy powering homes and communities during emergency recovery situations. The contrast between having power and being in the dark during an emergency drastically highlights how diversification of energy sources is extremely beneficial. However, renewables have a time and place outside of worst-case scenarios. Increasingly, day-to-day life in the United States depends on renewable energy to provide safe, reliable, and quality electricity.

2.1 The Current State of Renewables

In 2016, 15% of U.S. electricity generation was supplied by renewable energy sources, excluding nuclear power. That translates to over 600 billion kWh of electricity per year. Let’s break this percentage down into renewable energy types to better understand how renewable generation might expand in the future. Hydroelectricity makes up 6.5% of U.S. electricity generation. This percentage is unlikely to change significantly, because hydroelectric dams can only be built on bodies of water with certain geological features, and the U.S. does not have many remaining locations that meet these requirements. Plus, hydro plants can be disruptive to their surrounding ecosystems, so ecological concerns must always be taken into account when considering new dams. Biomass, or the conversion of organic materials into fuel, contributes 1.5% of the total electricity generated. The three main types of biomass generation are biofuels (mainly ethanol), wood and foliage products, and fuels produced from landfill and sewage waste. New biomass innovations are constantly being researched, but biomass is limited to how much organic matter can be sustainably grown and/or harvested. Furthermore, biomass still involves burning fuel, so it is not a carbon-zero energy source. Only 0.4% of total electricity in the U.S. is generated by geothermal plants currently, but the technology has potential. Utility-scale geothermal generation harnesses the Earth’s heat by pumping heated water or steam from its crust to power generators that, in turn, produce electricity. Geothermal energy can be accessed across many parts of the country, and it is a zero-carbon energy source. However, more research is needed to determine the geological impacts of building these plants, and there are financial obstacles as well. A new geothermal plant requires significant capital investment upfront, and the cost to generate a kWh of electricity can be as much as 16 times more expensive than a kWh from a traditional coal plant. The final two renewable sources are wind and solar. At 5.6%, wind is the second most common type of renewable generation. 41 out of the 50 states have utility-scale wind installations, and almost 11% of Texas’ generation comes from wind energy. Currently, solar only contributes 0.9% of the national total, but it is the fastest growing form of renewable electricity generation. All 50 states have solar capacity installed, with California being the prominent leader. Almost 10% of its generation comes from solar.

The first three sources, hydro, biomass, and geothermal, all share a common trait: they are dispatchable energy resources. Dispatchable generation is generation that utilities can control and schedule. Hydroelectric dams can release water on command, biomass facilities can ration fuel, and geothermal plants can supply water or steam to their generators as needed. Each of these sources has a reliable and constant source of energy, which contrasts with wind and solar generation sources. Wind and solar are both known as variable renewable energy (VRE), meaning their generation fluctuates due to uncontrollable external factors – in this case, changing weather patterns. Utilities cannot control wind and solar generation in the same way other sources can be controlled. One minute, solar panels could be operating at full capacity; the next minute, a cloud could cover the sun, and the panels are reduced to generating at 40%. The same is true for wind generation. A storm pattern could move into the area and significantly change the output from local wind turbines.
We have been focusing on utility-sized variable renewable energy generation, but each of these sources also has privately-owned, small-scale applications. Distributed energy resources (DER) are localized energy generators that produce power for the home or building to which they are attached. Solar panels are the most common form of DERs – small-scale residential and small business solar photovoltaic systems produced an additional 19 billion kWh in 2016 – which means the most common type of distributed energy generation is variable renewable energy. Since the majority of DERs are not controlled or maintained by the utility, the utility relies mainly on forecasting models to predict what generation they can expect, although utilities can receive communications from meters and sensors in the grid.

2.2 Preparing for a Future Filled with Distributed Energy Resources

In our introductory blog post, we hypothesized about what a typical American utility – “Ameritown” – would look like in 2050. Part of the picture we painted depicted utility customers becoming electricity producers via distributed energy resources and being compensated by the utility for the excess electricity they generate. However, we left a lot of uncertainties unanswered. How much variable renewable energy can the grid support? How will utilities cover their operational costs when customers only rely on them for part of their demand? California and New York have pledged to produce 50% of their power from renewable sources by 2030, Vermont pledged 75% by 2032, and Hawaii pledged 100% by 2045. In fact, only 13 states do not have renewable portfolio plans or targets, so the utility of the future needs to address these questions today.

  • How much variable renewable energy can the grid support?

The first question points to the technical limit of variable renewable energy (VRE) penetration. First of all, advanced metering infrastructure (AMI) and other sensors throughout the distribution and transmission network will allow operators to better monitor and identify disturbances or instabilities. To benefit from the increased monitoring capabilities, the infrastructure of the electric grid needs to be updated with control automation that can immediately respond. These improvements will allow the transmission and distribution networks to maintain stability and reliably deliver electricity from VRE sources, but despite these improvements, VREs are constrained by their capacity factors. Capacity factor is described as the percentage of time a generation plant is running relative to how much capacity is installed. Traditional generation sources usually have capacity factors of around 90 percent, because they can run continuously except for maintenance and repair downtime. VREs are on the opposite end of the spectrum. They can only generate electricity when the sun is shining or the wind is blowing. Based on estimations we have from installed wind turbines and solar photovoltaic systems, the solar capacity factor is 20%, and the wind capacity factor is 34%. Furthermore, most researchers agree that the capacity factor of a source is equal to its maximum penetration into the electric grid. From these numbers, the grid can be expected to handle a maximum of 54% variable renewable energy, and the remaining 46% must come from other sources. Innovation can always surprise us, but for grid planning purposes, the variability of wind and solar must be combatted by integrating quick and cheaply dispatchable sources to cover the remaining 46%.

  • How will utilities cover their operational costs when customers only rely on them for part of their demand?

The second question hints at the economic considerations. As more customers become distributed energy resource owners, the electricity they demand from the utility decreases, and the compensation they expect for generating electricity increases. Utilities will have to revise their business models to continue to cover their operational costs as their customer base shrinks. Furthermore, utility-scale solar and wind generation has a phenomenon known as “merit order” with which to contend. Utilities dispatch electricity from the cheapest source first, and wind and solar generators produce electricity without costly fuel, making them virtually “free.” Furthermore, VRE responds to weather conditions, so its generation floods the market at the same time, which lowers the wholesale price. During sunny days or windy nights, they produce electricity. Solar and wind VRE cannot schedule their generation. As VRE penetration increases, it will become less and less profitable. Renewable energy is sustainable, cleaner and – once systems are installed – cheaper to produce than fuel-based generation methods. It also enables fuel independency. Customers benefit by supplementing their own generation to lower their monthly bills, and environmental regulations are met by the decrease in pollution and other waste. However, utilities must address the technical and economic limitations of variable and distributed renewable energy sources. We will spend the next blog post discussing some of the customer programs and technologies utilities can use to complement increased renewable energy penetration.


To learn more about Red Clay’s work implementing solutions for net energy metering programs, read Grid Energy Storage: A Look Into the Future of Grid Resources, or contact


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About the Author

As a consultant at Red Clay Consulting, Megan Milam has comprehensive training and functional experience with Oracle Utilities Application Framework software and Oracle Utilities Lodestar software Furthermore, her Bachelor of Science degree in electrical engineering, with an emphasis in power systems and smart grid technology, and her previous work experience at a transmission System Operator give her a technical background with a firm understanding of industry best practices and an ability to implement optimal solutions