Beneficial Electrification and Grid Opportunities
A digital report by the Active Efficiency Collaborative
Beneficial electrification – transitioning end-uses powered by fossil fuels to electricity in circumstances where certain benefits are achieved – is a major trend that is accelerating in energy markets across the world.
For Utilities and Utility Commissions
What Beneficial Electrification Can Achieve for the Grid
Electrification of transportation, building space and water heating, and heating operations in the industrial and agricultural sectors represents opportunities for electric utilities to grow load, increase asset utilization, and generate new revenues. These opportunities mitigate rate increases while achieving significant societal benefits. For many utilities and utility regulators, these objectives are appealing, but the path to achieving these benefits is neither simple nor immediate. For other stakeholders, especially natural gas utilities and petroleum industries, a shift to beneficial electrification raises concerns around market share, the possibility of stranded assets, and increased costs. As electrification continues to accelerate, how can this transition be guided to create the greatest good along the way?
Regulatory environments remain deeply siloed between different fuels; new partnerships and stakeholder connections are required to advance beneficial electrification – e.g., to incorporate transportation networks, and to ensure tailored solutions for customers’ needs. The cost-benefit analysis for different beneficial electrification strategies can vary dramatically based on local context. In commercial buildings, for example, 100% electrification may be cost-prohibitive, while it remains more viable in residential buildings.
Additionally, advancing beneficial electrification must ensure consumer rates are affordable, maintain high delivery reliability, and ensure equitable distribution of costs and benefits. These challenges can be addressed through a combination of technological and economic innovations, each of which presents its own new opportunities. Though there is great interest in accelerating beneficial electrification, a national-scale transition will not happen overnight, providing time to develop strategies that are customized for specific grid needs and evolve with technological innovations, new capabilities, and the nature of a specific grid (e.g., whether it is more centralized or distributed, and to what extent it relies on technologies such as microgrids, distributed resources, and storage).
Each of these issues can be framed as a challenge and a commensurate opportunity:
Load Shape Management
As space heating, water heating, transportation, and various industrial/agricultural loads shift from natural gas or fuel oil to electricity, the traditional load shape for the electric utility can change significantly (e.g., if 100% of space heating load is electrified, many utilities in cold climates will become winter peaking) and the increased amplitude of peaks can create greater challenges for the utility.
“Smart” loads offer an opportunity to mitigate this challenge, especially when combined with storage (thermal or electrical), enabling a utility to engage buildings and industry as new generation resources.
As electric vehicles proliferate, utilities will add new loads that may be charged in unpredictable patterns (e.g., location, time, duration, rate). These new loads may exacerbate peak demand, especially in suburban environments.
The ability to engage vehicle charging systems to incentivize the desired timing, rate, or duration of charging can significantly mitigate this challenge, and potentially serve as a grid or distributed resource.
Many distribution service areas have limitations in their electricity delivery capacity, constraining the number of new loads they can serve without making significant new investments (e.g., upgrading feeder lines or substations, adding new assets such as batteries); this can drive up costs. In some urban service areas, utilities may have capacity limitations due to their existing infrastructure and/or geography (e.g., a lack of real estate available for a new substation or battery storage).
Managing loads in a way that avoids adding new physical infrastructure has very high value. This includes maximizing the energy efficiency and other distributed energy resources (DERs) in the system.
New (Capital or Non-Capital) Assets
As new investments are pursued in beneficial electrification, storage systems, and DERs, utilities will be challenged to assess the value of new assets such as grid-scale battery storage versus the value provided by “responsive” customers who manage their electricity consumption to the benefit of the larger system. Utilities will also have to consider seasonal storage as a means of managing system performance and cost.
Equitable Costs and Benefits
Even in the case where electrification satisfies all necessary criteria to be considered “beneficial” (including either reducing costs or having a neutral impact on costs for consumers), the benefits of the investment or program may not be equitably distributed. There may be differential impacts on industry players (e.g., natural gas utilities concerned about stranded assets) and/or among consumers (e.g., equity concerns between wealthy communities and frontline communities/communities of color).
In both cases, the clustering of benefits and costs may create actual or perceived unfairness, impacting the benefits achieved and complicating implementation.
Beneficial electrification, like all investments, requires a proactive approach to consider its impacts to the energy system and the equitable treatment of consumers. Utilities and utility regulators should consider policies to ensure the transition benefits all affected customers.
Achieving this outcome requires a targeted approach and measurable and verifiable objectives. While the precise strategy must reflect local context, the following tools may be of use to ensure electrification is transformational for low-income residents:
- Assessment of customer needs (e.g., through surveys and outreach) and open communication with affected communities;
- Prioritization of benefits to communities most harmed by the extraction and burning of fossil fuels;
- Designing programs to ensure low-income customers do not experience significant cost increases for electricity and/or rent, such as by conditioning funding for building owners on limits to rent increases – a requirement that is also included in the federal Weatherization Assistance Program.
Greater reliance on electricity for end-uses has raised concerns about resilience. In a time where extreme storms and wildfires have become more frequent, there is concern that increased reliance on the electricity grid will make disruptions more damaging.
Ensuring resilience in a beneficially-electrified world requires multiple considerations.
In the near term, hybrid systems, such as hybrid water heaters able to run on either natural gas or electricity, can be an important stepping stone to facilitate electrification while providing consumers with an option for different fuel sources.
Viewed at a system level, however, flexible, beneficially electrified loads – especially through microgrids – may be a critically important resilience benefit to help grid operators manage outages. This was observed in the recent 2020 wildfires in California, where various groups of microgrids delivered flexible load and provided backup electricity to help keep the lights on for Californians. For instance, six microgrids funded by the California Electric Program Investment Charge reduced load by about 1.2 MW per day when activated. On August 15, OhmConnect leveraged its network of home microgrids and networked home appliances to provide 220 MWh to the grid, which could power more than 9,000 average American homes for a day.
Electrification of transportation, building space and water heating, and heating operations in the industrial and agricultural sectors represents opportunities for electric utilities to grow load, increase asset utilization, and generate new revenues.
Principles for Utilities and Utility Regulators
There are several principles that policymakers and regulators in the utility industry can use to guide beneficial electrification.
- Build on a strong energy efficiency strategy. Energy efficiency is often a least-cost investment, and by reducing energy use it both contributes to overall emission reductions and facilitates beneficial electrification. Further, the value of demand flexibility is enhanced when combined with energy efficiency to provide additional cost and energy savings. Energy efficiency results in smaller energy loads, which are operationally easier to shift to a different time of day and can increase utilization during periods with greater renewable resources available. Combined with grid-interactive strategies, energy efficiency can provide additional relief from system stress and further resiliency benefits.
- Deploy smart meters, sensors, and controls that allow end-uses to communicate and respond to grid conditions. Greater control over load shapes and aggregated end uses can enable improved grid management through load shifting, peak shaving, ancillary services, grid balancing services, load-following demand response, and regulation demand response. Depending on the program and rate design, these activities can keep overall costs low for consumers or directly save consumers money on their electric bills or appliance purchases. In contrast, the absence of these technologies could lead to severe grid consequences as electrification scales.
- Simplify end-use operation through low-cost, turnkey, and automated solutions. Most energy consumers – especially residential consumers – do not want to be inconvenienced by real-time choices about their energy consumption. Automating end-use operation in a way that simplifies interactions and enables demand flexibility is key for scaling up beneficial electrification in these markets.
- Recognize the value of flexible load for grid operations and compensate asset owners for value delivered. Beneficial electrification can provide flexible load and enable the incorporation of variable energy resources, thus reducing the need for non-renewable resources to meet demand peaks. This flexible load requires recognition and compensation, with incentives being more powerful than avoided costs.
- Understand the marginal emissions impacts – both short- and long-term – of changes in load. Recognizing the emissions from the addition of one more kWh used or avoided helps quantify the emission impacts associated with electrification.
- Measure the impact of beneficial electrification on air pollution. Determining the pollution impacts associated with different types of investments can assist regulators and utilities in developing a more complete picture of the relative benefits of electrifying certain end uses.
- Account for the useful lives of different investments. Providing customers with standard estimates of useful equipment life ensures that utilities and consumers can make informed decisions on investments such as water heaters, heat pumps, industrial boilers, or vehicles.
- Design rates to encourage beneficial electrification. Well-designed rates can send signals about costs of providing electricity at different times and can incentivize and maximize the benefits of beneficial electrification and smart, grid-interactive capabilities.
Examples of Implementation
Many utilities, regulators, and other stakeholders are exploring different models to implement beneficial electrification and demand flexibility. These examples provide some insights on different approaches and outcomes.
Adjustments to the Regulatory Framework
- CPUC changes guidelines to allow electrification in energy efficiency program funding: In August 2019, the California Public Utilities Commission (CPUC) unanimously voted to alter the 1992 “Three-Prong Test for Fuel Substitution,” which determined which fuel substitution projects were eligible for ratepayer-funded program support. The decision resulted in three main adjustments: it designated the “baseline” for comparing energy and emissions savings, identified carbon emissions as the measure of environmental impact, and updated the methodology for determining fuel energy savings. The changes effectively allow building electrification to compete for $1 billion in energy efficiency funds.
Utility Programs – Incentives and Rebates
- Incentives for smart thermostats and demand response participation: Duke Energy’s EnergyWise Business Program provides free smart thermostats and monetary rewards for participation in demand response events. During an event, Duke Energy sends a signal to customers’ smart-thermostat-connected air-conditioners that cues the equipment to ramp down/reduce its energy use for a few hours.
- Incentives for high-efficiency electric equipment: Georgia Power administers a number of utility programs that replace equipment using non-electric fuel sources with high-efficiency electric equipment, such as the residential Home Energy Improvement program, Earth Cents New Home Program, Commercial Custom Program, and Small Commercial Direct install program.
Utility Programs – Financing Beneficial Electrification
- Orcas Power and Light Cooperative (OPALCO) Switch It Up! On-Bill Tariff beneficial electrification program: Administered by Washington State co-op OPALCO, the program finances the replacement of propane-powered residential and commercial equipment with electric, efficient equipment and EV charging stations. The program is supported by a $6 million zero-interest loan from the U.S. Department of Agriculture through the Rural Energy Savings Program.
- Loan financing options for heat pumps: In the New York State Clean Heat Program, utilities administer incentives for heat pumps for all customer sectors. The program provides two loan financing options — on-bill recovery loans and smart energy loans administered by NYSERDA’s loan servicer — ranging from $1,500 to $25,000. The program requires contractors to follow best practices for heat pump selection and installation.
- Heating Electrification Program and Flexible Load Management Pilot, Efficiency Vermont: In 2018, Efficiency Vermont published a year-long investigation into consumer products and energy management systems that could complement distribution utility demand response services. That same year, Efficiency Vermont partnered with Washington Electric Co-op (WEC) on a two-year pilot program called PowerShift that aims to enroll 100 heat pump water heaters and 100 electric resistance water waters with WiFi-enabled thermostats for demand response.
- Increasing Demand Response participation by creating better market signals: Portland General Electric is piloting a multi-year Smart Grid Test Bed in three neighborhoods that creates market signals through a combination of behavioral economics and technology deployment.
- Creating an independent marketplace to trade decentralized energy: To effectively promote flexible beneficial electrification, it is necessary for the benefits of this technology to be valued in the marketplace. In Europe, the NODES marketplace — created by Norwegian utility, Agder Energi, in collaboration with Nord Pool, a European power operator — was established in 2018 as an independent marketplace that allows European grid operators, energy generators and customers to “trade decentralized flexibility and energy.” The first energy market that enables consumer participation, NODES has already enabled Western Power Distribution in the UK to procure 50 MW of flexibility services from August to September of 2020 alone. NODES leverages Microsoft’s Azure IoT software to collect vast amounts of data and use predictive forecasting for energy optimization to ensure the market’s smooth operation. The result is a more flexible grid that needs less infrastructure investments, allows better control over local grid congestion, and reduces renewable energy curtailment.