Electrifying regulatory flexibility

Transmission towers against sunset (ausnet community fund)
Image: Shutterstock

By Matt Robinson, Head of Strategic Service Development, PSC Group

Moving away from climate-changing fossil fuels to cleaner sources of energy inevitably means more of our world will become electrified. Transport, industry, space, and process heating will all steadily shift to rely on electricity.

By 2050, around half of global total end-use energy demand will be met by electrical power and hydrogen, according to recent analysis from McKinsey & Co1. This is clearly a benefit in terms of establishing a more sustainable energy system, but it also increases vulnerability and potential disruption in the event of a blackout.

Today, if the power system goes down it is still possible to drive, heat the home and cook. In the future that may not be possible without significant changes to the electricity network. With the energy transition already well underway, it is becoming increasingly important to understand these risks and consider them when designing the future electricity system and the market it serves.

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Building reliability through change

The underlying assumptions around how we design and operate the modern electricity grid are there largely because of the technology used when the power grids were initially established. As a vital utility service, electricity networks are typically operated so that reliability levels are of the order of 99.97% or better. In Australia, for example, this standard is 99.998%. And, under typical grid rules, the entire network must be able to deliver that level of reliability too. Inevitably, that requires a lot of expensive infrastructure and significant long-term investment.

However, given the fundamental changes that are underway, sustaining reliability using the existing grid architecture in the face of this new paradigm is going to drive investment far higher. Without fundamental change, that will come at a huge cost to consumers and industry. We don’t necessarily have to maintain those current assumptions and operational models, though. New technology actually allows things to be done in a slightly different way to maintain that desired level of reliability. After all, what consumers really want is not reliability of the grid but reliability of supply at the point of use.

There are already potential solutions available, for example, using inverters and batteries to create grid-quality electricity independent of the grid is just one of the many ways we can address this supply-side risk. Instead of spending billions rewiring the entire network to make it more robust, installing just a few hours’ worth of storage in each vulnerable house could potentially mitigate any grid failure. Consumers wouldn’t care if the local line went down for a couple of hours because they wouldn’t notice.

To achieve that outcome and attract the investment needed to provide these kinds of services does require changes to the market design, though. It’s an intellectual leap to change the underlying assumptions about how the grid and its associated systems are designed and operated, but it is absolutely necessary to break that cycle in our minds and think differently if a low-cost and robust grid is to emerge. 

In some respects, the electricity distribution system is already being turned on its head as large, centralised power plants running on fossil fuels are decommissioned and replaced by a far more distributed and diverse power system. Featuring renewable generation like rooftop solar but installed at the far edges of the grid, this change is becoming far more prevalent in remote communities in Australia and elsewhere. Here, conventional grid connections are failing consumers in terms of reliability, given that the frequency and duration of outages for rural customers are significantly higher than for their urban counterparts2/3.

Recent weather in Australia’s Victoria has seen large areas of the state flooded completely, with many substations disconnected because they’ve been inundated. Similarly, long feeder lines that traverse hundreds of kilometres present a bushfire risk. Not only are grid operators taking lines out of service to reduce the risk of bushfires, but usually, several communities are cut off every single year as a result of wildfires. These customers are experiencing longer outages than would otherwise be the case.

With the growing evidence of climate change impacts and extreme weather events around the world, it is already becoming increasingly evident that providing these remote communities with stand-alone power such as storage, solar, and wind actually gives them a more resilient system. It is also clear that in rebuilding network infrastructure, many customers really want more reliability in terms of delivery of energy as a service, not necessarily the extended power system, nor the continuation of the status quo.  

Moving beyond technology

Using alternative technologies and thinking about what constitutes a grid in a different way is something that will naturally form as consumers and regulators get used to these distributed technologies and develop different ways to use them. But to enable that transition requires a more thoughtful and deliberate approach to developing appropriate market structures that reflect the changing realities of the power system. Introducing greater agility within regulatory and market structures can allow people to be incentivised to develop these methods. That means being less prescriptive about what it means to have a network connection. For example, mandating that a network connection must be an overhead line automatically precludes many kinds of grid innovation. A far better approach might be to define a grid connection as a reliable energy supply service to a consumer at a price that is comparable to the next best economic alternative. Putting such a structure in place certainly provides the necessary network incentives by giving the operator the ability to maintain reliability but actually operate under a lower-cost structure. At the same time, the value of the energy to the consumer stays the same but could be provided more cheaply. A win-win.

Indeed, trials are now underway that are hoping to establish both ground rules for the market and understand their implications for reliability. In Western Australia, for example, Horizon Power and Western Power have been running a pilot scheme in which long transmission lines to remote communities are being replaced with stand-alone power systems, which are a mixture of renewables and batteries. Like many electricity networks, sections at the edge of Western Power’s grid are over 30 years old and are due for replacement. Looking for alternatives to traditional poles and wires, they have been exploring stand-alone power systems running a trial across six rural farms.

Positive results from this trial suggest that such a system would be more reliable. When a major storm caused flooding and power outages of up to 24 hours, the trial sites were unaffected. The program did require changes to regulatory requirements in the state, though. Enacted in November 2021, the rule change meant that up to five consumers could be served by a single system rather than the previous one only. 

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Embracing innovation through collaboration

As critical infrastructure, the energy business is typically conservative. In a decades-long steady-state scenario with the same regulatory model, it could afford to be. Understanding the system intimately meant that it could be extensively modelled and tested.  It was possible to take the time to work out if any change would have a major impact and be confident about what the model would reveal. Now though, the system needs to be far more dynamic. Technologies are changing fast, and that process is opening up the market to all sorts of new players and new thinking. For example, the rise of hydrogen generated by renewables is likely to raise the possibility of new types of sector coupling between the gas market and the electricity market. If regulators need to know the precise answer to a potential problem well before any change is implemented that is going to take far too long; the climate clock is ticking.

Under these conditions, there’s an extremely good case to be made for a more agile model and to create ways to implement change more rapidly. Sharing knowledge and collaboration between nations, regions, and institutions is definitely an important way to short-circuit development times. Bringing new players into the development process and the right people with the right kind of thinking is another key part of the solution. Involving universities—which are used to assessing problems that haven’t been dealt with before and finding answers—is a valuable addition that can help solve problems that don’t necessarily exist in the power system right now but will likely emerge over time. PSC is, for example, partnering with Monash University Energy Institute’s Grid Innovation Hub. This collaborative research vehicle brings together industry, government, and academia to tackle some of the challenges and potentially realise the tremendous opportunities.

To realise those opportunities in the real world does require a change to the regulatory mindset, though. It’s quite a radical concept for a body that embodies stability to get comfortable with the fact that change is happening much more frequently. To respond, any regulatory framework that is put in place must enable that agility whilst still managing risk to consumers. The challenge for energy system regulators is getting comfortable with uncertainty. Working in collaboration with academia and industry will allow them to foster the innovation and flexibility we all need.

  1. https://www.mckinsey.com/~/media/McKinsey/Industries/Oil%20and%20Gas/Our%20Insights/Global%20Energy%20Perspective%202022/Global-Energy-Perspective-2022-Executive-Summary.pdf
  2. https://www.westernpower.com.au/media/2500/stand-alone-power-systems-stakeholder-report-20170906.pd
  3. chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.wa.gov.au/system/files/2022-03/Independent-Review-Christmas-2021-power-outages-Report-Final.pdf
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