While I have spent the majority of my career in the electric industry, including over 20 years in the regulatory environment and five years at a regional transmission organization, my training and my perspectives reflect the fact that, first and foremost, I am an economist and social scientist.
Given that background, it is understandable that, when observing electric transmission planning conferences and other similar events, I am struck by the demographics of the participants.
We are, almost without exception, an older demographic cohort. The graying of this industry concerns me greatly when we discuss a future much beyond the next three to five years, which we inevitably must when we are considering long term transmission planning.
Considering today’s economic trends, the implications of the reduction in electricity demand we’ve experienced over the last five years, and the overall shape of our demand curve for electricity, I am concerned that our long term planning is ignoring the “new normal.” Given the broad demographics of the 24 to 54 year old age group, I am apprehensive that our current approach to demand forecasting may be highly inaccurate with regard to demand.
With this 24-54 demographic, adaptation has become a watchword. This cohort, and particularly the younger members of it, is more accepting of the transformational characteristics of technological change. Consider the statistics. An ever-increasing percentage of this group has “cut the cord” when it comes to telecommunications and is relying solely on their wireless devices. That trend will continue with cable as technology advances, thanks in large measure to their ever-accelerating adoption rate of digital technologies. Staying with this digital trend, consider the productivity gains in all the industries that have embraced a digital transformation and one can perceive what may occur in the utility industry once the infrastructure is in place to enable it.
Those factors will likely have an effect on the demand curve that we are planning toward, and I am concerned that, just as in the past, we are highly unlikely to be building the right resources, in the right places, at the right time and finally to the right load shape.
I am reminded of Santayana’s admonition that, “Those who cannot remember the past are condemned to repeat it.”
It seems to me that the last time we embarked on a massive build to a future demand curve that turned out to be less than accurate, significant and transformational public policy shifts resulted. If I’m not mistaken, one of these public policy shifts led to the creation and formation of ISOs and RTOs.
My greatest concern is that, other than during peak periods, we really don’t have significant congestion problems.
PJM’s Reliability Pricing Model (RPM) auction itself is based upon a forecast of the highest demand over five peak hours a year. Understanding that we have to build systems to meet the peak, the inevitable question in my mind is: is it cheaper to have policies and build systems that reduce peak demand rather than policies and systems built to meet an ever-increasing needle peak?
The follow-on question is: which model would be more reliable?
Looking forward, I see economic indicators that suggest that arresting the rate of growth of costs to the consumer is going to be paramount, both in the near and in the long term. Certainly, as my generation of boomers retires, we are well aware that the wealth that has evaporated over the last five years due to the Great Recession may significantly impact these retirees’ purchasing power.
From all the trends I’ve seen, the younger demographic that follows will share this same concern. The difference is they are more accepting of, and more adept at operating, technology that is able to automate and manage both hardware and software that can help mitigate these economic considerations.
Take a look at what the smart grid can enable. Spend some time with the technology vendors that already have products that address these needs. There are already products on the shelf that can reshape the load curve without sacrificing comfort or security, and more are coming. Are we developing and adopting policies that enable this transformation? Are we doing it fast enough? And are we taking it into consideration in our transmission planning? Or is this “Meet the new boss; same as the old boss”?
Review the policies now being considered with regard to energy efficiency, both at the state and national levels. Illinois has a policy of reducing overall energy consumption by 2% per year. While, from my perspective as an economist, it might be more appropriate to seek out peak demand reductions first, followed by energy efficiency, there is no doubt in my mind that the demand curve that we have all come to know and love is about to change. And that change may be transformative.
I’m also concerned that our state policies toward renewables have so little flexibility with regard to their mandates. I’m troubled that forcing renewable supply that is negatively correlated with demand into a system where demand is contracting is patently unsustainable.
Building new transmission to support that public policy model reminds me of past mistakes that led to systemic change.
I believe we should be taking a more holistic and agnostic view of our future mix of resources considering not only environmental factors, but overall demand and, most importantly, demand shape as well. Unless and until we see a demand increase in the off-peak area of the overall demand curve that cannot be met efficiently with existing generation, adding more generation supply that feeds the off-peak makes no economic sense, no matter what the fuel source.
The 24-54 demographic may support renewable energy investment, but at what level of delivered cost? What we need is a real shake-up in public policy: a culture change that reflects the realities of a changing world in which technology offers tremendous opportunities to integrate sensible policy with economic realities.
I’m encouraged by the planning processes we are all engaged in and I’m hopeful that they will provide some guidance with regard to some of the public policy choices that are inevitable in this progression. My hope is that we minimize the potential economic harm of building high cost and long life supply side solutions for a future level and shape of demand that may not exist.
Sherman J. Elliott is a former Commissioner with the Illinois Commerce Commission