Guide to the Grid: Level 1

What the hell is water?

For those interested in a history of the electric grid and how it came to be today, I highly recommend reading The Grid: The Fraying Wires Between Americans and Our Energy Future by Gretchen Bakke, PhD. I am going to skip the history of the grid for now and focus on how it is set up, the different market participants, and how it all works together.

Visualization of gird components and how they link together (Source)

Supply and Demand

The grid exists to generate and transport supply of electricity to sources of demand. Electricity can be supplied by any energy generating asset, such as the previously mentioned solar and wind, natural gas, coal nuclear, etc. Generation is usually the most expensive component of electricity supply, since the transmission and distribution lines and other maintenance costs are fixed costs spread across lots of paying end users and decades of service. Generation, by contrast, usually requires major capital investments up front that can take a long time to pay off. However, different types of generating assets supply electricity at different total costs (i.e. outside of infrastructure spend, wind and solar are free) and that makes a huge difference in the cost of energy. For example, parts of Texas saw negative electricity prices in 2015 as wind turbines generated more electricity than was demanded at the time (it was the middle of the night). Why couldn’t they just store all of the electricity produced in excess of the quantity demanded at the time? Because plants have to be sure to match electricity supply and demand every minute of every day of every year. This is a unique aspect of the electricity market — if supply and demand are not matched contemporaneously, the produced electricity is wasted. The only way around this is through large-scale battery storage (which I cover here), which can absorb and store the surplus electricity for later discharge to the grid. I’ll return to the need for utility-scale energy storage in the Grid Innovation section of this piece.

Managing the grid

The grid is a massive, interconnected system with lots of moving parts, which complicates the task of matching supply and demand across every hour of every day of ever year. Understanding ahead of time what demand might seems useful, and in its current state this practice is called load forecasting. Load forecasting is rigorous mathematical modelling that tries to predict electricity demand in order to more accurately match supply and demand on the grid. This is important because if there’s a mismatch, someone somewhere will not have power when they need it, which undermines everyday users’ trust in the system and negatively impacts the economy (the Department of Energy estimates power outages cost the US ~$150B per year). Load forecasting applies to three different time horizons:

  1. Short term: forecasts 1 hour — 1 week in advance and estimates the amount of electricity flowing through transmission equipment at a given time to prevent overload, thereby increasing grid reliability and reducing the chances of a blackout.
  2. Medium-term: forecasts1 week — 1 year in advance and estimates future demand to help plan new infrastructure and determine whether it will be sufficient to meet demand.
  3. Long-term: 1 year+; similar to medium-term forecasting, estimates future load demand to test whether infrastructure plans will be sufficient for expected future demand.

Market & Structure

The market for electricity breaks down into B2B and B2C components. Wholesale markets are where utilities and traders transact (B2B) and retail markets are where utilities sell to consumers (B2C), and both markets, though separate, heavily influence each other. FERC determines what pricing rules the wholesale market will be subject to, options for which include a cost-based approach (setting the price some % above cost to produce) and a more laissez-faire approach based on supply and demand curves. Wholesale market has shifted in the direction of market-based pricing over the last few years. Outside of the wholesale market, independent system operators (ISOs) and regional transmission organizations (RTOs) introduce a competitive element to electricity markets and act as the connective tissue between wholesale energy producers and downstream actors. ISOs and RTOs are conceptually the same thing, so I will refer to them collectively as ISO/RTO through the remainder of this piece.

Map of ISO/RTO coverage regions in North America (Source)

Grid Innovation

As mentioned previously, I highly recommend checking out The Grid: The Fraying Wires Between Americans and Our Energy Future by Gretchen Bakke, PhD for an excellent anthropomorphic accounting of the grid and how we arrived at today’s technology. Our current grid technology is aging, vulnerable to extreme weather, and its current state is considered a national security risk by the federal government. While there is plenty for policy to do here, I’d like to focus on the private sector innovation on the grid and how it may impact the decarbonization of electrification.



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