+ Interview: American Electric Power & The Grid – Part I

When an opportunity came up to interview George Bjelovuk, an experienced project manager for American Electric Power (AEP)-Ohio, I took it. I wanted to hear from their viewpoint how a major power company is approaching the seemingly divergent goals of growth versus energy savings. As noted on their website, AEP is:

"One of the largest electric utilities in the United States, delivering electricity to more than 5 million customers in 11 states. AEP ranks among the nation’s largest generators of electricity, owning more than 38,000 megawatts of generating capacity in the US. AEP also owns the nation’s largest electricity transmission system, a nearly 39,000 mile network."

Mr. Bjelovuk mentioned that he is working on the company’s gridSMARTsm initiative, so I started there. Can you tell me more about what the gridSMART program is?

"We’ve launched an initiative here, and service marked that name, gridSMART. It includes a family of initiatives that will result in the deployment of more than five million smart meters and related technology, among other things, to give customers more control over their electricity use."

Record Demand Growth
"If you’ve been watching the electric utility industry in the past few years, American’s demand for electricity continues to grow at a record pace. We’ve grown up in an environment where we try to predict when the next power plant needs to be built. We believe that if you go out twenty years from now, people will look back and see the inflection point we believe we’re in from a consumption of electricity standpoint.

While many appliances and machinery operate more efficiently today, there also is growing need for electricity in other items such as, broadband routers, computers, entertainment systems, and flat panel plasma TV’s that use electricity at a rate more than five times as much as the typical CRT set.. We believe there’s both a growing demand for more electricity from the residential consumer, but at the same time, an ever-growing demand from society in general regarding the environmental impacts of producing electricity, especially from fossil fuels. There’s this dichotomy in the industry that has a lot of our executives saying what do we do in the near term? How do we address both growing demand for electricity and growing concern for the environment?

Emerging Technology Solutions
If you’ve been at AEP’s website [http://www.aep.com/], you’ve seen that our chairman has been a very vocal advocate of producing electricity in an environmentally sound manner. He’s open to dialogue about carbon capture and initiated projects here at AEP that lead our company and the industry in a direction of continuing to produce electricity from fossil fuels, but doing it in an environmentally sound manner. One example of that is our interest in building Integrated Gasification Combined Cycle (IGCC) power plants, and capturing the CO2 produced by
generation."
[You can learn more about IGCC at http://www.aep.com/about/igcc/default.htm.]

A Regulated Monopoly
"We operate our business in most of our eleven-state territory as a regulated monopoly. Regulated companies like ours make money by earning a return on assets in a rate structure approved by a public utilities commission. The cost of running our business is reviewed by a panel of regulators, and those costs deemed to be prudent are allowed to be recovered in the rate structure. We’re allowed to earn a rate of return on our invested asset base [the power plants, transmission system, and the distribution system]. The industry challenge is that if we’re going to grow our earnings, that means building new power plants and transmission lines– growing our asset base – at the same time, we support initiatives to help reduce demand. That sets up a set of dynamics in our industry, and our chairman has tried to be a leader in this space. He’s initiated a dialogue among interested parties, and we have a corporate responsibility report that you can download from our website." [http://www.aep.com/citizenship/crreport/].

Change in a Regulated Environment
I looked through that report, and several of AEP’s public policy objectives (page 11) seemed like key points on this thread we were on:

• Meet the growing demand for electricity:
• Help our customers manage their consumption through energy efficiency programs as a means to balance the impact of rising costs of fuel, environmental compliance and infrastructure needs;
• Increase environmental protection through reasonable and voluntary efforts;
• Ensure regulatory cost recovery for generation, transmission and distribution investments as well as environmental compliance;

George added to this line of thought:
"We’ve also started to reach out to our regulators and say: is there something we can do differently on the distribution side of the business to allow us to meet this growing customer demand and expose the impacts of this growing demand to customers so they can make informed decisions about their use? That’s where the gridSMART project really starts to resonate…… We are evaluating the impact of emerging disruptive technologies that could re-shape the way this industry might work in the future. Think about fuel cells, large-scale energy storage, microturbines and renewable sources… generating electricity from all over our system. Think about moving away from this system of big central power plants, transmission lines, and distribution circuits to get the power to the neighborhoods. Maybe there’s an inverse that happens in the future. We have a group of folks looking at that to understand the impact of those kinds of technologies. Those studies have resulted in a set of findings that we’re now sharing with our operating companies to understand how it might affect our business. We’re right in the middle of this project right now.

Advanced Metering Infrastructure
One of those technologies is advanced metering infrastructure, or AMI. If you Google AMI
you’ll be taken down some links and learn some more about it." [I did:
http://en.wikipedia.org/wiki/Advanced_Metering_Infrastructure%20is%20a%20start is a start:]

‘AMI refers to systems that measure, collect and analyze energy usage, from advanced devices such as electricity meters, gas meters, and/or water meters, through various communication media on request or on a pre-defined schedule….By providing information to customers, the system assists a change in energy usage from their normal consumption patterns, either in response to changes in price or as incentives designed to encourage lower energy usage use at times of peak-demand periods or higher wholesale prices or during periods of low operational systems reliability."

Back to George:

"If you think about how we run this business today, you are using electricity at your home; how much energy you’re using, and what types, and what times of the day is an unknown to you. In general, we read your meter once a month, compare it to last month’s reading, subtract the two, come up with the total kilowatt-hours used, and send you a bill. How much electricity you’ve used is a mystery to you until that bill shows up in the mail [or online]. That’s all about to change.

Folks recognize that if our customers knew the time impact on the cost of electricity, in our case, let’s use 7 cents a kilowatt hour as an average, something might change. You know energy costs vary with the time of day and they vary seasonally. When we charge our customers 7 cents/kwhr, that’s the revenue we collect to be able to operate this system throughout the year. There are times during the year when electricity is ten times that cost, and times when it’s less expensive."

Knowledge = [less] Power

"There’s a school of thought that suggests if we expose our customers to the true nature of the time of day implication of the cost of electricity production, that changes in consumer behavior might now relieve the need to build new power plants. Customers may not now be aware of their peak power requirements. When those peak power requirements all align with one another, it drives our peak generating capacity upward, which requires us to build new power plants.

The deployment of these smart meters is designed to do a number of things. One, it will allow us to have a transformational impact on those parts of our business. Where we normally have to send someone out to house to read your meter, we’ll be able to read your meter remotely and have that reading anytime we want to. We can have that data in real or near-real time and host that data for you in a way that shows your consumption pattern. If we then link those real time usage pattern with a time-of-day pricing model, there are folks in the industry who think that will have the impact of re-shaping customers’ demand for electricity in a way that might mitigate the demand or need for construction of new power plants or at least delay that need.

There’s been a study done you might research from Pacific Northwest Laboratories where they put 200 customers on a time-of-use rate structure. The lowest tier was say half the lowest rate their customers were paying regularly, the 2nd tier was about the same price they were paying, the third tier was say 3 times what they were paying, and the fourth tier was say ten times. They equipped their homes with some monitoring capability. They also added some rudimentary household controls that for example would not run the sump pump at the same time as the clothes washer, and also might raise the A/C temperature a degree or two while an electric dryer or dishwasher was running.

They found that customers’ demand could be reduced by up to 50 percent at various times, and their total energy consumption could be reduced by 12-16 percent." [Check it out at: http://gridwise.pnl.gov/]

That’s a net energy consumption reduction for the home because you’ve now exposed that customer to the real time nature of their consumption. They look around their home and see that maybe their kids left the TV and all the lights in the basement on, and there’s no one down there. We recognize that with only 200 customers in the study, the results aren’t scaleable. But with the suggestion that simply by exposing the customers to their rate of consumption and load profile could have that kind of an impact, we think there can be a significant impact on this industry. There’s a significant amount of energy use and capacity reduction possible that can be attained by these smart-metering technologies."

Is that something that’s currently being rolled out?

"The utilities on the coasts, Southern California Edison, PG&E, San Diego G&E, and some of the utilities in the East have been moving in this direction for a number of years because their cost of electricity is significantly higher than in the Midwest. Their constraints, both transmission (think rolling blackouts in recent years), and their inability to build new power plants has really exacerbated this problem. Southern Cal Edison has a program called SmartConnect, and an awesome website where you can do a little research at and get a sense for what they’ve been doing. [Check it out at: http://www.sce.com/PowerandEnvironment/ami/default.htm?=from=redirect]

Midwestern utilities have not moved in this direction until recently. A number of our regulators have expressed some interest in avoiding or delaying new capacity additions until utilities have explored these technology options. We had a request into our regulators to build a new power plant in Oklahoma, and the regulators rejected that plan, partially because they said They said they’d like us to come back with a new generation plan that includes a plan to help customers reduce their need for electricity."

Reshaping the Traditional Business Model

Is this part of the demand-side management reduction program you mentioned when we first talked?

"In this package of programs and analysis we’ve done, the first phase is a base business case around each one of those projects. For example, what do we think it might cost to market improved insulation in new construction to residential home builders & owners? And the cost and incentives, what does that result in terms of lower energy costs and demands?

If you think about the traditional utility business model, these reductions in customer energy consumption and demand are destructive to our conventional revenue models. So we’re advocating rolling out programs that result in lower revenues to the company. The point we’ve made to our regulators is the cost of these reduction programs and providing incentives should be treated like any other generating asset. If that ends up being a lower-cost alternative to building the next power plant, then we need to come up with new business models for utilities to earn on that project just like they would earn on any other capital investment."

That’s an unusual situation; since you’re in the business of selling electricity, if you reduce the demand, that creates a business problem for you.

Yes, the quandary of the industry is that the regulatory model really needs to change. There have been some stakeholders around the country who have stepped out of the blocks and said ‘we recognize the impact that demand-side management reduction programs could have on the environment’. We need to figure out a way for utilities to be compensated or have their earnings not be negatively impacted by their desire to be a more environmentally friendly or consumeroriented utility. So there are a number of dialogues going on around the country.

Everything’s more complicated than it seems. As I’ve gotten older, I found that out. That’s an important idea, that there could be an impetus for positive change, but people have to accept that the electric company, like any other business, needs to stay in business. Maybe it’s a good thing that your rates go up if your demand goes down; did I get that right?

"Think about it, unfettered, your rates are going to go up anyway. With increasing demand today, it’s going to require us to build new power plants. Emerging environmental demands are going to require us to spend more capital dollars to make our existing fleet of power plants more compliant. So the alternative is to do nothing and just continue to build more capacity, more transmission lines, which will drive the costs up. If we can envision a model where utility investment in technology, smart meters, and other customer programs, that model can have a downward pressure on this growing demand and may cost less money ultimately. From a consumer standpoint, it’s a much better outcome. The challenge is how to create a business model for utilities to be in that space, rather than on the sidelines watching their loads grow, forecasting customer demand, and trying to anticipate when the next power plant needs to be built.

If I might draw a conclusion, is the best situation where the utility becomes a partner with either government or the consumer. We may raise your rates, but we’ll help you lower your demand?

"It’s both. At the end of the day, modifying customer behavior is what you people in the product design world do, and I think we’re going to need all the help we can get in this space. When I started driving my car, I pulled into a service station, and some guy would run out of the station, and fill up my car, and wash my windows, and offer to check the oil. Somehow over the years, I’ve found it acceptable to get out of my car in the freezing cold and pump my own gas. I used to have to go inside and pay my bill, until someone figured out a way I could pay with my credit card at the pump.

How did that behavior change occur over the few decades that I’ve been driving my car? It just kind of happened. Altering consumer behavior is long overdue in this country about how we consume energy, and how we can expose the true cost of operating an electric utility to our customers. That’s where we’re going to be challenged in the near term."

This portion of the interview really got me thinking about the whole issue of energy consumption in a regulated utility industry. In the second part of the interview, we’ll look at some technical avenues that are being studied that may change the typical cycle of new power plant construction.