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Reworking the traditional electric utility

Some new and disruptive business forces are rendering the traditional electricity business model obsolete and it may not serve well to accomplish the government’s strategic goals in the power sector. It is imperative that this business in the country be reorganized along a more dynamic, flexible, and innovative lines to embrace the emerging realities and new developments. The risks of not acting timely could be serious as well as expensive, and also difficult to correct later.

Four major developments in the world’s electricity marketplace have altered the fundamentals of the electricity business, and are raising serious questions about the continued viability of the traditional way of doing this business.

Shahid

First, the recent technological strides and cost reductions in the renewable electricity generating technologies, particularly photovoltaic panels, have brought generation costs from these to a competitive level with those from conventional generation technologies.

Second, similar developments in the electricity storage technologies have made it possible for residential and other small consumers to opt for photovoltaic systems for meeting their electricity demands, either bypassing the local electric utility’s system entirely or using it only as a backup to cover times when power from their own facilities is unavailable or uneconomic.

Third, the rapid inroads made by electric vehicles (EVs), and in particular plug-in hybrid electric vehicles (PHEVs), in the transport sector, especially in developed countries, are significantly impacting electricity demand. It is only a matter of time when these electrically-driven vehicles start penetrating the developing countries’ markets, including Pakistan.

Fourth,the advent and deployment of intelligent and smart-grid technologies are making it possible for customers to manage their own demand to minimize their electricity bills as well as offering some this demand response capability back to their electric utility to cut their own electricity bills, and in some cases, even to earn extra money.

Collectively, the above trends are being termed “disruptive” by industry analysts because these are challenging the fundamental principles of the traditional electric utility business; some have been quick to even predict that these forces may be drifting the traditional electric utilities into a “death spiral”.

The traditional electric utility business operating model in which power flows predominantly in one direction (from public- or private-owned power generating plants to the end-users via the grid) and revenues flow in the opposite direction (from end-users to the power company) with electricity prices fixed and controlled by a regulator may not be adequate or effective any more in dealing with the new challenges of the emerging electricity market.

In the changed environment, power can and will flow in either direction, sometimes within localized loops, as some of the consumers may now be able to meet part or all of their electricity demand by generation at their own premises, either avoiding the utility’s grid altogether or using it only for back-up, and not infrequently, providing the utility their excess power and generating facilities to contribute to grid security and reliability. Like the power, revenues can and will also flow in either direction.

There is a compelling need to transform the existing electric utility business along more innovative lines to deal with the technical and economic challenges posed by these new developments and to derive the true value that these hold for society.

 

In the absence of a conducive business environment and facilitative operating mode, these newer technologies and schemes will be merely”connected” with the utility grid, and not optimally “integrated”, thus raising numerous technical and financial challenges for grid operators and utility managers. Consumers will lose too because some of the economic and technical benefits their newer technologies and schemes hold for the utility may not be fully realized and compensated in the existing operating model. The society on the whole will thus suffer.

In order to deal with the above challenges and to derive the most value that these can provide, the existing electric utility business in the country will need to be reworked along the following lines.

First of all, the government will need to provide an enabling policy and regulatory framework to encourage the promotion and deployment of distributed energy generation, storage technologies, and demand management schemes in the local electricity system. This framework should empower power sector entities to devise and introduce innovative pricing and compensation schemes to induce consumers and other investors to install such technologies in the system. It should also enable proper accounting, allocation, and recovery of the various costs from the participating consumers and other investors while allowing them a fair compensation for the benefits their facilities contribute to the power grid.

Second, the electricity business in the country will need to be reorganized along a more open and flexible lines to treat these new distributed supply and demand options as not competitors or threat to the utility business but instead as partners and compliments to the utility’sown efforts to serve the economy and society with reliable and economic electric power. The utility managers should not just encourage, but actually aggressively seek out, potential contributions from customers and investors on such options and technologies.

Third, the various entities that have the mandate to serve the electricity demand in the country will need to develop appropriate tools and the requisite data and information bases and make these freely accessible to potential customers and investors for using these to assess the scope and technical and economic viability of these options and schemes in meeting customers’ own demand for electricity as well as their contribution to the local utility’s system. This should also include any technical assistance or support customers and investors might need for making such assessments.

As the electricity grid will act as the enabling platform and conduit for integration and operation of diverse and distributed technologies, the fourth and perhaps the most critical pillar in the above reform effort must focus on modernizing the exiting transmission and distribution networks in the country to transform these into a smart and intelligent electricity grid that can facilitate the successful integration of such technologies and schemes.

The modernized grid will have to be capable of bringing together a range of energy technologies and processes, both electric and non-electric, and various market actors, producers, operators, and end-users, with the aim to optimize resource utilization and operational performance, minimize economic and environmental costs, and maximize system security, reliability, and resilience.

Pakistan’s energy sector decision makers cannot afford to sit passively in the face of these new trends and let these disrupt the existing electricity business as the political and financial costs of their inaction to the nation would be huge and serious. They should instead embrace these new trends as a challenge and use them as a good opportunity to transform the currently ailing power sector into a vibrant and self-sustaining business.

Dr. Rahim is a freelance consultant specializing in sustainable energy and power system planning and development. He can be reached via email at msrahim@hotmail.com.

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