Bright ideas

There are many unanswered questions about the evolving energy transition. However, one thing is certain: designing, building, and operating electrical grids as we always have will jeopardize Canada’s net-zero carbon emissions ambition and negatively impact the affordability of energy for future generations.

Acknowledging this risk and evaluating how to mitigate it will be an important step for much greater collaboration between all stakeholders—governments, utilities, the private sector, and individual customers—to make energy transition a reality.

From the dawn of the electrical grid, with few exceptions, utilities have planned for peak load: calculating peak demand and designing the grid to deliver it, so that customers are not impacted by any shortfall. This approach has served society well, providing a very robust system, but this was based on energy consumption that was growing steadily and predictably. As we move through the energy transition, electrification is adding many new sources of less predictable demand (e.g., electric vehicles). Simultaneously, decentralization and the addition of distributed energy sources mean that peak demands may become even more unpredictable. Applying traditional methods to predict and accommodate this more dynamic supply-demand scenario is likely to lead us along a costly path, which may still fail to deliver the outcomes we’ve come to expect from the grid.

On December 15, 2022, the Independent Electricity System Operator (IESO) issued a landmark report, Pathways to Decarbonization. As well as describing the leadership style needed to achieve ambitious climate change goals, the report outlines the size of the system and investment required to enable the energy transition and lays out different scenarios. Pathways focuses on the bulk power system and the need to set the wheels of large infrastructure projects with long lead times into motion to meet growing demand.

Much of the risk for suboptimizing the overall system will be borne by this distribution system, and will stem from the potential to increase demand flexibility through controls, energy storage, and harnessing distributed energy sources. To optimize desirable outcomes, all players will need to use a systems-based thinking approach. The stakes are high not only for meeting the climate change targets for the planet, but also for maintaining or reducing overall energy costs for its inhabitants.

The good news is that there are ways to move forward when considering the design, construction, and operation of the grid in new, innovative, and cost-equitable ways.

This is the first article in this year’s Bright Ideas, a series that seeks to shed light on a range of heart-of-business issues that organizations in the power, utilities, and renewables (PU&R) sector face. Past years’ articles can be found here.

Understanding where we stand

Designing, building, and running the power system as we have for the last 100 years or so has served us well. Much of the system’s performance and reliability to date stems from the operational safety margins that were designed during its development. In some areas, reduced regional loads due to economic circumstances, such as manufacturing centres moving abroad or energy-efficiency improvements have often boosted local system capacity. Meanwhile, utility operators have improved their maintenance practices and assets to outlive their expected lives, which has helped keep costs low.

Over time, as a society, we’ve taken the grid and the work of its highly skilled planners and operators for granted. More recently, investments for improving and maintaining the infrastructure have become highly politicized, with many recent rate-increase processes being interrupted or derailed by political intervention. This may score points for politicians, but it has only exacerbated risks to the system by delaying its increasingly necessary upkeep and development.

Now, with one of humanity’s greatest predicaments, climate change, we’re imposing huge expectations on this critical infrastructure. We want to simultaneously expand system capacity and transition away from fossil fuel-based sources in some regions. For a system that took over 100 years to develop into its current state, this process will require the mobilization of many industries at a scale not seen since World War II.

While this transformation has many implications nationally, few will put pressure on the grid and its operators like the electrification of transportation. However, due to the nature of energy storage, electric vehicles (EVs) may be both part of the problem and the solution. Although pairing EVs with clean generation should help lower greenhouse gas emissions and provide power back to the grid, predicting their power demands will be challenging. The development and operation of a system dealing with such unprecedented dynamic and unpredictable demands is a significant adjustment from the established way of operating the power grid.

No time to lose

The energy transition must move fast. The IESO’s Pathways to Decarbonization report lays out the timeline and complications of the transition, along with the need for policy certainty, and the cutting of red tape to attract more investment opportunities and progress acceleration. The auto industry, for one, is not sitting back. Backed by government incentives and regulations, large automakers have pledged to phase out their gas-fuelled models by 2035.

To help meet customer expectations and encourage sales, EVs are being designed in the image of their internal combustion predecessors, with fast-charging being a huge focus; after all, drivers are conditioned to spend only a few minutes at the pump to refill. The perplexing part is that while fast-charging and long-range batteries may please the customer, they may also generate significantly more strain on the grid than required. Most EVs are used to travel short distances and don’t require charging after every use. To minimize the strain on the grid, owners must be educated to charge their vehicles less frequently and at different times of the day.

There are two challenges, one is the current system wasn’t built to support the mass adoption of EVs, and two, the fact that innovation in the grid hasn’t kept pace with technology development. However, this is not due to a lack of willingness to innovate. Rather, this is a constraint posed by the regulations put in place to protect the current system.

Expanding capacity throughout the grid for loads that may or may not materialize isn’t the only risk that might drive out investment. Power utilities must also contend with the fact that they’ll have to build out the grid for people who may only use it occasionally, if at all. As more consumers and businesses adopt their own energy generation and storage systems, they’ll be able to reduce their reliance on the grid or remove themselves from it entirely. If given the option, they may also choose to contribute their excess stored energy power back to the grid—potentially rendering some of those large-capacity expansion projects away from their original business cases.

Considering what we have seen so far with EV adoption, only more affluent consumers will have the financial ability to reduce their demand or leave the grid, adding more cost for those who have no choice but to remain plugged in. This will put even more pressure on utilities to reduce costs and maintain affordability, while simultaneously attempting to cater to the needs of all customer segments.

The current rate-based model typically limits innovation by attracting investments meant to sustain the established system rather than transform it. It’s a missed opportunity since those who are investing have a large amount of data that can be used creatively to better plan for future electricity provision under a more encouraging regulatory regime. Key stakeholders do already recognize that these looming pressures may compromise the stability and resiliency of the grid, and that while new capacity will be needed, especially in our transition to becoming a more electricity dependent nation, adding capacity alone won’t solve this problem.

The way forward: Employing systems-based thinking

A paradigm shift to a systems-based view is needed, looking at electricity supply and demand from both ends and exploring options to optimize the system instead of merely scaling it as is. We can reduce costs and accomplish more with the grid by looking closely at energy use with respect to its demand profile over time, flexibility in time of use, and local options for supply and storage.

In essence, the new models to consider for the future of the electrical grid may look more like those seen in telecom—operating with common backbones, but also locally and with controls (e.g., direct, such as demand management, or indirect, such as strong price signals).

Figuring out which tools to use and how to best use them and then scaling them under time constraints will require a supreme degree of investment confidence and swift action. To achieve this, a few things must happen. Industry leaders need to employ a lean startup-type approach across the electricity ecosystem, with parties willing and able to accept reasonable risk allocations for reasonable rewards while testing key changes quickly. Governments should encourage this type of “think big, test small, and scale fast” approach, fanning the flames of innovation in promising pockets of clean technology and other critical market segments.

A recent Deloitte report outlines how to implement scaling solutions in cleantech for this purpose. A great example is energy storage, where technology is segmented by use case and technology and each sub-segment plays a role in the transition. Instead of over-investing in just a few solutions, like lithium-ion batteries, a more strategic approach is required to drive progress in innovative solutions. Knowing exactly where to focus investments will require thoughtful analysis. The capacity of human minds to do this type of analysis well and to unite stakeholders with the number of variables involved is limited. We need to apply new digital tools to plan and analyze different scenarios and solution sets to augment the capabilities.

Powering the journey

With digitalization, the PU&R sector can explore ways to optimize its existing infrastructure in a lab. For instance, it can test the effects on the system and its financial outcomes when using a more distributed model that combines intelligent energy management and energy storage.

Heading down the path of a more dynamic demand-controlled system is something planners need to account for when making the right asset investment decisions. This comes back to our original point: energy transition is fundamentally changing demand forecasting, modelling, and designing. Electrical utility planners need digital tools to provide insights about what’s happening within several layers of data and in different scenarios to understand demand and capacity both temporally and geospatially. For transportation electrification, for example, they need access to the same kinds of information that city transportation planners need, such as traffic flows, EV adoption projections, and mobility trends.

Being able to model and simulate the system to explore a variety of solutions digitally would enable planners to work more effectively with the relevant stakeholders, including different layers of government, regulators, policymakers, other ecosystem partners, and financers.

There will be issues of trust in the adoption of the new models, for example in any increased use of more automated grid edge control, but the biggest challenges will likely be regulatory and customer adoption. Pricing mechanisms and market incentives help shape demand curves—such as encouraging the charging of vehicles at optimal times, which may shift—will need to be further explored and carefully balanced with the power system and societal objectives. Reconditioning consumer habits will take time and should begin early. Similarly, exploring different market mechanisms that would provide the appropriate market signals for energy stakeholders, such as marginal location-based dynamic pricing, will require collaboration between multiple stakeholders, particularly with energy regulators.

Convening stakeholders begins with having a common point of truth and frame of reference. Digital tools are the solution here—they provide a single, data-based view of the potential impacts of energy transition.

Getting started

The energy transition in Canada is projected to be an investment opportunity in the hundreds of billions of dollars over the next 20 years. But where the investment flows from and to, and whether it ultimately creates or limits value, will depend on our collective foresight. To attract private partners, governments must help utilities by striking the right policy balance to spur innovation and investment.

As mentioned earlier, a good place to accelerate progress everywhere is with digital innovation. Developing tools such as digital twin models would help ease the uncertainty surrounding the energy transition because they enable organizations to run scenarios in a low-risk environment. Such a push will catalyze long-overdue efforts to improve the data quality in utilities organizations. This should not be seen as a hurdle but as an expected part of the process for maturing digital capabilities, something that’s been seen in other sectors. It would also be beneficial for stakeholders to make ongoing strategic investments in energy and cleantech innovation, and to promote fast testing and learning within utility regulatory frameworks.

Without governments offsetting the risks, the energy transition could become an undue burden on consumers. Among the key stakeholders, there is a broad consensus about who should bear the primary cost. In a 2022 Reuters report prepared in collaboration with Deloitte , almost half (45%) of the 2,800 professionals surveyed in energy production, analysis, and consulting said public finance should foot the bill, followed by energy companies. When the question was reframed to ask who will ultimately bear that cost, more than 45% acknowledged that consumers would likely pay for it through taxes and higher energy bills. And, as is often the case, it will disproportionately affect remote communities, particularly Indigenous communities, where these effects are magnified despite the efforts of their power providers. Lower socio-economic class groups in urban centres will also shoulder a heavier share.

Our perspective is that it doesn’t need to be this way. Government and industry must start investing today in new models, tools, and ideas to help achieve a successful and more equitable transition faster, cheaper, and with less risk.

Contributors

Adriaan Davidse
Director, Strategy and Business Design
Future of Energy Leader
adavidse@deloitte.ca

Rob Saunders
Senior Manager, Strategy and Transformation
Canada Renewable Energy and Energy Storage Lead
rsaunders@deloitte.ca