Smart Grid The Regulatory Challenges.

The word smart is nowadays frequently touted in connection with electrical energy in media reports. Invariably this hints at the emergence of a new paradigm in the power sector- The Smart Grid. In this short article I am trying to analyze how this new concept has emerged and what led to this wide spread debate and its possible acceptance by utilities. Subsequently we also try to look at how the regulatory landscape is going to adapt considering the enormous changes that the electricity utilities are going through. Electricity has traditionally been considered as a commodity that has a low price elasticity of demand and has very low consumer involvement. The consumer has come to see the regulated, flat prices as more of a right. The price that the consumer saw was more or less a fixed one and any change in the tariff did not result in a significant change in consumption pattern. One of the fundamental changes that the smart grid has tried to bring in is a far greater degree of consumer involvement. Before we look at how smart grid attempts achieves this, a discussion on how the electricity supply industry evolved over years is in order here. Electricity utilities have traditionally been regulated and had been treated as natural monopolies. Subsequently limited competition has been allowed in generation and distribution side primarily because there was an increasing feeling among the consumers and regulators that many of these utilities were not efficiently managed. Introducing competition was thought to be an action which will improve this situation. But complete deregulation has not happened in power sector primarily due to the unique nature of the electricity markets. Electricity market has a unique requirement that the supply and demand should be matched on a real time basis and that there is no cost effective solution as yet for storing electricity in bulk. This condition required that there is a perfect coordination between the generators , transmission and the distributors.

But matching the demand and supply on real time is not easy as the power utilities were reeling under peak power shortages in most of the developing countries including India. Since most of the utilities are even now regulated, they do not earn adequate profits to plough back into further generation. So, one way to reduce the peak power requirement (and thereby defer the need for building new power plants) is by going for energy efficiency programs and demand response initiatives. Energy efficiency programs aims at improving the efficiency of energy consuming equipments and thereby reducing the energy consumption. Demand response programs on the other hand aim at shifting some portion of the peak hour demand to off-peak hours. In this case there is not much energy saving per se but the investment required for creating peak hour capacity generation is reduced as portion of the demand is transferred to off

peak hours. At the same time utilities were having a relook at the way electricity was priced. The traditional pricing scheme used a flat price which was an averaged cost across different generators. Shifting demand to off peak hours required a different pricing, as the existing flat pricing did not offer any incentive to the consumer for deferring the demand. Ideally a consumer using power during the peak hours has to pay higher power charges since the marginal cost during the peak hours is higher as the high cost, low efficiency peaking generators are also put to service during those hours. But the flat power tariff cannot signal this cost information to the consumer. Signaling the time varying tariff was also difficult as the investment required for this was considered to be prohibitive. But as over a period of time, the technologies became cost effective, the power utilities have begun toying with different pricing schemes like Time-of-use pricing, peak power pricing and real time pricing. So there was a fundamental need among utilities to be able to make retail electricity prices properly aligned to the marginal cost. Traditionally, Power utilities have been one of the biggest polluting industries and with increasing stress on environmental preservation, there is significant pressure on the utilities to clean up their act and to gradually shift to greener technologies to produce electricity. Naturally the non renewable energy technologies were the option. Encouraging households and business houses to set up small renewable energy sources have led to spawning of significant generation capacity distributed along the grid. These generators also needed facility to feed their surplus generation to the grid. This along with the congestion in the grid led to distributed generation capability and to microgrids. These changes brought in the need for a much smarter grid to effectively co-ordinate and achieve these results. The Smart Grid is born out of this need for a tightly integrated network. So what is Smart Grid ? There are many different definitions that can be found on the internet, but essentially it is a basket of technologies that effectively links all the players from the generator to the retail meter , allows a host of different generating technologies to be seamlessly integrated to the network (in electrical engineering parlance , the grid) , allows twoway flow of power (both to the consumer and from the consumer) and more importantly seeks to bring in more consumer involvement by signaling real time price information and promises improved reliability. Naturally creating such a high technology grid is prohibitively expensive for most of the utilities which are already cash strapped. Now lets look at what forced these utilities to look at Smart Grid seriously. In the recent years two major issues took centre stage when it came to any debate on energy related issue, and more so in the electricity supply industry. These are the issue of containing the damage to environment and the issue of energy security. The electricity generating plants, especially the coal fired plants, have been among the most polluting industries across the

globe. With increasing environmental awareness, the power utilities are put under tremendous regulatory pressure to bring down the pollution levels. This meant that utilities needed to source substantial portions of their electricity supply from renewable energy sources. The issue of energy security is gaining prominence in the face of increasing oil prices and unreliable supply lines from countries in the strife torn regions in the South East Asia. So the oil importing countries are forced to look beyond the hydro carbons for their future energy needs. To further reduce their oil dependence, many countries are encouraging their transport sector to adopt Plug-in Hybrid Electric Vehicles (PHEV). This is going to be the single most important factor that is going to drive the consumption of electricity in the coming future. The fear of terror strikes demanded that much of the generation capability should be distributed across the grid so that parts of the grid can be isolated and will still be functioning in an eventuality. These two factors demanded a tightly integrated and coordinated electricity supply industry. Naturally any such attempt should start at the aging grid that exists in many countries. So we are about to see a grid that is a way smarter in its new avatar, and which typically has all or most of the ingredients listed here, A substantial generation capacity of various technologies strewn across the grid which is referred to as the distributed generation (DG) capacity. A higher component of renewable energy sources in its energy portfolio. Involves an effective way to signal the retail prices to the consumers to bring more effective consumer involvement in energy consumption by encouraging them a to shift part of the demand to off peak hours popularly known as the demand response (DR) programs. Two way communication that connects the utility and the generating plants with the retail energy meters which gives accurate and time wise energy consumption data. This also helps the utility in making more accurate prediction of the demand and to defer demand during peak hours. A grid that is able to support power flow in both the directions as the households will have electricity generation capability and can now feed their surplus power back to the grid as well.

The Smart Grid, which is essentially a technology solution, has thrown up a lot of regulatory challenges. Smart grid brings with it substantial distributed generation capability, real time pricing and a range of demand response initiatives. Traditionally the electricity utilities had encouraged consumption by offering declining rates for higher consumption, especially for industrial consumers. But with the emergence of the twin aspects of environmental conservation and energy security, the focus has more or less shifted

to the issues of higher productivity and sustainability. So the stress is more on containing the demand growth by improving the energy efficiency and deferring the construction of new power plants by reducing the peak hour demand. In order to achieve this, utilities have to invest billions of rupees in Smart Grid initiatives. If you read between the lines , the utility invests significant amounts of its resources to kill the demand for its own product The electricity. Now, take a look at the evolving regulatory structure from a renewable energy perspective. Technology Diversity in energy technologies is thought to be a desirable outcome of many policy initiatives as this along with distributed generation will enhance energy security. With an idea to achieve this objective, Governments have installed incentive schemes for encouraging distributed, renewable energy generation. This is in the form of capital subsidies or through preferential buy back arrangements with the utility. In many countries the utilities pay a feed-in tariff , which is higher than market price for power, to the renewable energy supplier. Households and businesses can feed their surplus power to the grid and can walk away with a significantly higher price than the market price. In many countries the renewable energy suppliers are assured of priority grid access which further distorts the situation. The utility may decide to generate all the green energy by itself (because of the mandatory requirement of specified percentage of total power portfolio to be of renewable energy sources) . But the choice of technology in this case may not be the most efficient one; rather it will be mostly the cheapest technology. These are naturally the issues that the regulator wishes to avoid. So here the power utility finds itself in an unenviable position. While hoping to increase the revenues and to maximize profits, it ends up trying to destroy its own demand and buying renewable power at much higher price further eroding the profits. So one of the key issue is to define a regulatory structure to effectively address this issue. The utility makes huge investments in Smart Grid and it can be seen that the major part of the welfare accrues outside the utility. So one key regulatory issue is to ensure the right pricing of electricity so that sufficient incentive is provided to the utility for assuming the risk and at the same time ensuring sustainability.