Make Electricity Cheap Again, Part 2.

The second best way to make electricity cheaper after making rooftop solar cheap and using lots of it, is to make the distribution costs lower by delivering more electricity over the same wires.

Most media outlets do a terrible job describing the price of energy, particular the price of electricity. You have all heard the headlines about the cost of wind power and solar power being so cheap, and even the addage that nuclear will be “too cheap to meter”. All of these conflate the cost of generating electricity with the cost of delivering electricity. They aren’t nearly the same. The cost of electricity begins with the cost of generating it, but then must also include the cost of transmission, distribution, metering, retail, connection fees, and some times social and environmental levies. This is well illustrated in Figure 4.3 of “Plug-In”.

I hate pie charts, but lets look at this as a pie chart. If you want the US explanation of why electricity prices are complicated try this : https://www.eia.gov/energyexplained/electricity/prices-and-factors-affecting-prices.php

In Australia the distribution component is the largest cost. Generation is second, retail and connection fees are third.

In the US generation cost is the highest, followed by distribution, then connection and transmission. Data and models from NREL are here. I’d love to have this data state by state.

I suspect that the distribution cost is the biggest variable in the difference between say California and Idaho as exhibited in this chart of state by state costs compared to US national average.

The categories are not exactly the same, and I hate using national averages as the variations are so huge, but nevertheless it is illustrative to compare Australian and US retail electricity prices, even if we do the most naive conversion at today’s exchange rate.

And at the risk of too many (never?) graphs, comparing each component side by side shows a huge difference.

On most things the costs are similar, Australia’s generation costs average a little more, and transmission a little less, but the big difference is in distribution costs. Only some of this can be ascribed to the lower population density of Australia, and some of it is no doubt related to the Hilmer reforms which divided the vertical utility into the subcomponents of generation, transmission, distribution and retail. As these things were being privatized one theory of the resulting cost increase is the government had to guarantee returns and allow gold plating (over-investment) in the distribution component in order to sell off (privatize) those assetts. It made the price of electricity increase. This is easily observed in the long run average price of Australian electricity that trended strongly upwards after the reforms.

We can throw blame here in a few different directions, but the real point is figuring out how to lower the cost of electricity. The interesting thing we know about electrification, particularly household electrification, is that it cuts the total amount of energy a household uses by more than half, but it will very likely increase the amount of electricity any house uses by a factor of 2-3. I use a figure of 250% as a proxy, which is roughly true both in the USA and in AUS. I have dozens of graphs on this topic for various countries, and they are similar enough that you can generalize this phenomenon - I’ve chosen one at random to show below.

So here is the thing about electrification, we are going to deliver double or triple the electricity over the same wires. This is possible because currently the wires are not super highly utilized, in fact the capacity factor of distribution systems is typically 25-40%. This is because the systems are rated for a maximum amount of power, corresponding to the peak, typically either a summer peak with air conditioning loads at 6 pm when everyone also comes home and starts to cook and turn on the TV and lights. It some climates it might also be a winter peak when everyone comes home and heats the homes. The rest of the time the wires are only lightly used, and the total use averages out at 25-40%. But there is going to be a huge number of batteries in the near future, on homes, in cars, and even mounted in our distribution system. (It is an interesting question to think about where the cheapest batteries will be — the cars, the grid, or the home — but I’ll leave that for a future post). Anyway, with lots of batteries, and even by doing things like charging (heating) your hot water systems when the demand is low, we can increase the utilization of the wires, often at low or no cost. This can have a profound effect on the cost of electricity.

Keep the wires warm all day…

If you can distribute twice the electricity over the distribution network by “keeping the wires warm” as my colleague Francis Veirboom likes to say, it has multiple knock on effects. As a naive exercise I run this logic for the “average” American electricity price.

The first bar of this graph shows the current price of electricity, about 18c/kWh. I assume that we push 200% of electricity over the same wires to the same home, and that smart meters halve the cost of reading the meter. The metering cost goes down by 4X. The cost of retail and distribution goes down by 200%. I fudged a tiny decrease in generation cost of 1c/kWh because wind and solar is just that cheap now, and nuclear could be. About 6c/kWh is avoided (column 3) and you can see the average price falls to 12c/kWh. For shits and giggles I modeled the same house getting 25% of that 200% electricity from a rooftop solar array at a relatively expensive (by Australian standards) $1/W installed cost. That portion of the electricity finances out at about 5c/kWh. The average cost of that household’s electricity is now hovering around 10c/kWh. Bigger roof, more solar, 50% of the electricity is coming from rooftops, and we have just about 8c/kWh. It is already cost effective to electrify a US home in most places. If you halve the cost of electricity it is a screaming deal worth thousands of dollars per year to the average household.

In Australia if you deliver 280% of the electricity over the same wires with some rooftop solar you halve the distribution component of electricity and discount the retail cost of electricity by around 25%.

Electricity is becoming more digital and more fungible with batteries and smart meters and rooftop solar. We can utilize our transmission and distribution networks at far higher rates. An excellent study and follow up blogs by Energy Consumers Australia highlights this opportunity and calls for new methods by which we measure and incentivize network utilization.

The analysis here is coarse. There are likely some network costs in power electronics and storage (batteries) to enable all of this. The vision requires market reform and incentives for neighbors to share their electricity in peer-to-peer trading under the substation. In Australia this is sometimes called LUOS its tempting and being looked at in the context of community scale batteries.

But the implication is obvious, we can make electricity cheap, and network utilization is key, and increased electrification is a huge opportunity to lower electricity costs because of that increased utilization. Ballpark, this should represent the opportunity to lower the cost of electricity in the US by a quarter, and if coupled with high penetration of rooftop solar, by half.

Yes, let’s electrify everything, but let’s make electricity cheap. If we want to prove the case that energy can be cheap through electricfication so we can beat the climate deniers with an economic argument instead of a failing moral one, then we need to keep those wires warm.

Average electricity cost :

https://www.eia.gov/electricity/monthly/epm_table_grapher.php?t=epmt_5_6_a