When asked to identify the priorities for procuring electricity, a client used the analogy of a three-legged stool:
- Reliability: We cannot manufacture our product unless the lights and machines can support a 24 x 7 operation.
- Affordability: We cannot afford to lose money to produce our product because high electricity costs “price us out of the competitive domestic/global marketplace.”
- Sustainability: We prefer electricity generated from cleaner energy sources to meet our corporate sustainability goals.
For the stool to properly function, there has to be balance. All three legs must be the same length, otherwise the stool will become unstable and eventually fail.
The stool analogy is particularly apt in the electric industry. While there is general (universal?) agreement that all three priorities are important, one priority (sustainability) is receiving far more attention than the reliability and affordability. In particular, policy makers continue to push decarbonization (i.e., replacing fossil-fuel capacity with intermittent wind and solar resources). The push for clean energy is so strong and pervasive that it is undermining the need to maintain a supply of electricity that is also reliable and affordable. Even before the recent projections revealing accelerated load growth, reliability has been diminished due to accelerated retirements of dispatchable generation that have outpaced new comparable resource additions. Electric utilities are now scrambling to expand generating capacity while keeping rates affordable. In other words, the emphasis on sustainability is threatening to upend the stool.
S&PGMI reports that utilities are concerned that accelerated load growth will place upward pressure on rates. In particular, raising rates (especially on residential customers) is always a difficult sell unless regulators (many of whom are elected) can be convinced that higher rates are necessary to keep the lights on.
Recognizing the rate pressures, S&PGMI also reports that utilities are considering new rate design strategies (i.e., longer-term commitments by new loads), multi-year rate plans, and securitization to ease the burdens on consumers. However, multi-year rate plans shift the higher costs to future rates while securitization spreads the costs over the longer term by irrevocably obligating consumers to pay the (considerable) securitized bond costs. New rate designs can mitigate (but may not completely immunize) the impact of load growth on future rates.
Another new strategy, colocation – locating a large load adjacent to generating station – is also receiving growing attention. Colocation can make sense if it would facilitate a more efficient use of existing resources and/or utilize already existing infrastructure. However, the opportunities are limited, and there are legitimate concerns about potential cost-shifting to existing customers depending on whether and how much co-located loads are required pay for the supporting grid infrastructure.
And, where new capacity is needed and soon, utilities are forgoing competitive solicitation – effectively short-circuiting (pun intended) the resource planning process. For example, in a recent filing, Entergy Texas requested expedited consideration of its pending “Dispatchable CCN” application before the Texas PUC (Docket No. 56693). In contrast to past filings, Entergy Texas did not procure the proposed dispatchable resources through a competitive solicitation. The lack of meaningful competition removes a key incentive for utilities to minimize costs, which in turn would increase affordability.
Regardless of how the future unfolds, once new investments have been made, consumers will ultimately be responsible for cost recovery, even if the projected growth does not materialize. A recent article posted by 3BL Media revealed that new cooling technology could reduce datacenter energy use by 40%. This could be very impactful, particularly the response to accelerated load growth results in excess capacity – as was the case in the 1980’s. If a lesson is to be learned, it should be never to under-estimate the power (pun intended) of new technology. If, as a result of evolving technology, the growth projections are too optimistic, rate increases will accelerate because there will less load over which to spread the fixed costs.
All of these recent developments reveal how the electric industry has come full circle in just four decades — it really is Back-to-the Future: Utility Edition.
US utilities devise strategies to keep rates affordable as datacenter load rises
Darren Sweeney Commodity Insights
Monday, November 18, 2024 6:04 AM CT
| A datacenter is being built in Ashburn, Virginia, in October 2023. Ashburn is located in Loudoun County, home to the nation’s largest concentration of datacenters. Source: Gerville/iStock/Getty Images Plus via Getty Images. |
The investment required to accommodate rising demand for electricity from datacenters and other industries has US electric utilities working to develop innovative cost structures to keep rates equitable and affordable.
Management teams and industry observers at the Edison Electric Institute Financial Conference underscored the importance of reducing the burden on residential ratepayers from the costs incurred to serve hyperscalers and other datacenter developers.
“We would like utilities to structure the tariffs for datacenters in such a way that they end up paying their fair share of infrastructure costs, stranded costs are minimized and there is net benefit to the existing retail customers,” Fitch Ratings analyst and Managing Director Shalini Mahajan said Nov. 11 at the conference in Hollywood, Florida.
Fitch analyst and Senior Director Barbara Chapman added, “In the last five years, the average price of electricity has increased significantly more than any other point in the last two-and-a-half decades.”
Severe weather events, natural disasters, power purchase cost increases, rate base growth and record capital spending levels have all pushed costs upward, Fitch analysts said in their sector outlook.
“Affordability is everyone’s problem,” Chapman said, noting that increased costs can contribute to a range of social, economic and political concerns.
“And it can result in unfavorable regulatory outcomes,” Chapman added. “We often see this expressed in rate freezes, lower [returns on equity] and reduced capital expenditures.”
Tools to help solve the issue include tiered rates based on income, multiyear rate plans, revenue decoupling, securitization and “appropriate rate design for datacenter load,” in Fitch’s view.
“It’s always good to have load growth,” Mahajan said. “You can spread your fixed costs across a larger customer base, helping to bring down bills or at least ease the pressure on the rest of your retail customers.”
Paying their fair share
American Electric Power Co. Inc. (AEP) subsidiary Ohio Power Co. filed a settlement agreement in late October with state regulators that will implement a new tariff structure for datacenters with a “load ramp period” and minimum demand charge.
The utility, known as AEP Ohio, filed the tariff to “avoid having our residential customers shoulder the cost” of the incremental spending needed to support the system and maintain reliability while serving the datacenter demand, AEP President and CEO Bill Fehrman said in a Nov. 10 interview on the sidelines of the conference.
The settlement, which also has been signed by the regulatory staff of the Public Utilities Commission of Ohio, the Office of the Ohio Consumers’ Counsel and other entities, was filed in response to a proposed tariff filing from potential energy-intensive users.
Several prominent hyperscalers petitioned for the creation of a new tariff on customers with monthly demand of at least 50 MW at a single location if AEP Ohio provided proof of a transmission capacity constraint in the service area.
“We’ll continue to try to come to an agreement,” Fehrman said, adding there is a hearing on the proposed tariffs set for Dec. 3.
“We’re adamantly opposed to just allowing our customer base to pay for all these improvements that have to occur as a result of the datacenter load coming on,” Fehrman said.
Chicago-headquartered Exelon Corp. is seeing strong demand growth in utility subsidiary Commonwealth Edison Co.‘s service territory.
“ComEd continues to be one of the top five places in terms of datacenter growth in the United States,” Exelon Executive Vice President and CFO Jeanne Jones told S&P Global Commodity Insights. “What we hear from our customers, the reason why they are coming to Illinois is because of ComEd’s strong reliability, because of our affordable rates, because of the access to land and talent, and good weather conditions.”
Exelon now expects about 11 GW of datacenter load growth in its service territories, up from the company’s 6-GW projection at the beginning of the year.
“When we give that number, this is what we believe to be high-certainty projects,” Jones said. “There’s another pipeline of low to medium, which is more like 17 GW.”
The additional load will help spread out the costs of the infrastructure needed to balance the grid, according to the CFO.
“What we are focused on is making sure that every one of those dollars that we invest goes as far as it can because we know affordability is top of mind for our states, for our customers,” Jones said. “We always say this energy transition, meeting the incremental demand, meeting the changing generation stack … investing to make a more resilient grid, all of that is going to be expensive.
“And we firmly believe … the companies that do it affordably, will do it sustainably.”
Diverging load forecasts
A critical question persists as to whether eye-popping datacenter load increase forecasts will actually materialize.
“The methodologies to estimate datacenter demand vary greatly,” Mahajan said. “Some utilities apply haircuts to interconnection requests they are receiving. Some others base their estimates on completed engineering studies, while others include only signed commercial contracts in their forecast.”
Fitch projects electricity demand in the US will “grow annually in the range of 2% to 2.5%, with more than one-third of that growth being driven by datacenters,” Mahajan said. “We expect datacenters to account for 9% of total power demand by 2030, which would be up from 4% today.”
Dominion Energy Inc. provided one of the most “comprehensive disclosures” of the capacity contracted to datacenters in its third-quarter earnings presentation Nov. 1, according to Fitch.
The datacenter projects in utility subsidiary Virginia Electric & Power Co.‘s service territory, which represent more than 21 GW of demand, are broken into three levels: substation engineering letter of authorization, construction letter of authorization and electric service agreement.
About 6 GW of datacenter capacity has progressed beyond the engineering planning phase to the second level, which involves entering into contracts that enable construction of the required distribution and substation electric infrastructure.
Meanwhile, about 8 GW of datacenter capacity has entered into an electric service agreement with Dominion. The service territory of the utility, known as Dominion Energy Virginia, includes Loudoun County, Virginia, which has the largest concentration of datacenters in the US.
“As customers move from [level] one to three, the cost commitment and obligation by the customer increases,” Dominion Chair, President and CEO Robert Blue told analysts and investors.
Customers in the second stage of a capacity contract must reimburse the company for its investments to date if they choose to discontinue their projects, Blue said.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
Integrated resource plans, rates under pressure from soaring demand
Tom Tiernan
Wednesday, November 13, 2024 9:40 AM CT
With electricity demand forecasts rising to unprecedented levels due to datacenters, electric vehicles and cryptocurrency, integrated resource plans and traditional rate design for electric utilities may need to be changed to account for the new dynamics, speakers said at an industry conference.
Large electricity users are seeking larger amounts of power in shorter time frames than before, and possibly colocating with generation assets. That is creating a challenge for utilities and regulators to sort out who pays for infrastructure investments, said Julie Fedorchak, a member of the North Dakota Public Service Commission and president of the National Association of Regulatory Utility Commissioners (NARUC).
The traditional approach to rate design, with costs spread among all utility customers, “is pretty ill-equipped for addressing some of the new challenges with large loads,” Fedorchak said Nov. 10 at NARUC’s annual meeting in Anaheim, California.
Fedorchak, a Republican who is leaving the PSC after being elected to serve in the US House of Representatives, said state regulators need to work with consumer advocates and others to see that electric utility rates do not skyrocket as infrastructure investments are made to meet new demand.
Utility rates need to stay affordable to avoid a so-called death spiral for utilities, where customers who can afford to add their own generation resources will “unplug from the grid” and impose higher costs on remaining utility customers, said Christopher Ayers, executive director of the North Carolina Utilities Commission Public Staff, which represents consumer interests at the agency. If utility rates are not kept in check, “the market will see an opportunity and the market will respond” by encouraging customers to leave the utility grid, Ayers said.
The trend of datacenter growth and soaring load forecasts, along with utility customers adding distributed energy resources behind their meter, is putting a lot of pressure on the regulatory structure and utility integrated resource plans, said David Owens, CEO of consulting firm Da’Vision & Strategies. “Should the IRP model be modified?” asked Owens, a former executive vice president at the Edison Electric Institute, the investor-owned utility advocacy group.
IRPs are long-term plans for utilities to have sufficient resources to meet future demand, and they are often guided by state laws that, in many places, encourage renewable resources and less reliance on fossil fuel generation. At Southern Co. subsidiary Georgia Power Co., the utility introduced an interim IRP to try to account for “all this radical growth” that might be added to the utility grid, said Noel Black, senior vice president of federal regulatory affairs at Southern.
Black, during a Nov. 11 panel discussion, said “a new world” of load forecasting can be aided by interim IRPs that can be adjusted more frequently than the regular annual or multiyear cycle.
With forecasts for rapidly increasing demand — particularly to serve datacenters and building electrification — load forecasting and resource planning approaches need to change, said Bruce Tsuchida, principal at consulting firm The Brattle Group, during a Nov. 10 panel.
In Virginia, which has more datacenters than any other state, the State Corporation Commission is holding a technical conference in December to explore issues around large power users and their effects on other utility customers, noted commission chairman Jehmal Hudson. One of the goals of the conference, Hudson said, is to ensure that whoever is creating the need for more utility assets, “they’re paying their fair share” and not foisting costs on other utility customers.
Tsuchida and others at the NARUC conference said utilities will need to use their existing assets better, such as through grid-enhancing technologies on transmission lines, and tap into energy efficiency and demand-side management more to try to keep consumer utility bills affordable.
A recent Michigan Public Service Commission report on efficiency found that for every dollar spent on efficiency and waste reduction efforts, consumers see benefits of roughly $2.50 through energy savings, said Michael Moody, a division chief with the Michigan Attorney General’s office.
Moody, who serves as a utility consumer advocate in the state, noted that efficiency and demand-side management efforts delay the need for utilities to add costly new generation resources.
The Michigan PSC report, released Oct. 25, found that electric and gas utilities spent about $551 million on energy waste reduction programs in 2023, with expected savings of $1.4 billion over the 12-year lifecycle of those programs.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
NEWS
What Could a 40% Reduction in Data Center Energy Use Mean for the Grid?
Nov 22, 2024 By: Andrea Rosenow
Source:
3BL Media
What Could a 40% Reduction in Data Center Energy Use Mean for the Grid? Adopting new technology can deliver energy efficiency gains while meeting AI and data center demands Type of Content Article Layout Standard Format Body
The ballooning energy demands of artificial intelligence (AI) and data centers are driving big plans to potentially triple nuclear power capacity in the U.S. by 2050. From discussions of restarting a reactor at Three Mile Island to the deployment of small modular reactors, data centers need certainty about how they’ll keep pace with data streaming and processing demands at a time when the grid is tapping out.
In the U.S. alone, Goldman Sachs has estimated that data centers, excluding cryptocurrency mining, will increase their power consumption from 3% to 8% of all power generated in the U.S. by 2030. Coupled with this massive growth is a near flatline in data center energy efficiency.
While the potential growth and restart of nuclear may offer a long-term solution to support energy demand, it does not address the root issue and is grabbing global headlines recently. Bloomberg reported that a calculation from RMI found that two-thirds of today’s energy supply is wasted. That equates to roughly 5% of global GDP or $4.6 trillion annually.
While strategies to build clean energy capacity are undoubtedly critical to address long-term energy demand, improving energy efficiency may be the low-hanging fruit that can drive meaningful impact now and into the future.
Two-phase immersion cooling – a new type of cooling technology that allows data centers to submerge whole server racks in a high-performance dielectric fluid – represents a huge opportunity to reduce energy consumption as chips run faster and hotter. Broad industry adoption of two-phase immersion cooling (2-PIC) in the U.S. has the potential to eliminate up to 21.6 terawatt hours (TWh) of future capacity according to estimates, the equivalent of powering over 2 million American homes1.
The potential energy efficiency gains are enormous – up to 40% of the energy data centers use today. Much of that efficiency is created by reducing the energy use associated with traditional data center cooling systems (e.g., air cooling), which, based on publicly available product roadmaps from major chip manufacturers, won’t be able to meet the cooling needs of most next-generation, high-performance computing chips by 2026.
Chemours is proud to be at the center of 2-PIC technology as the innovator of Opteon™ 2P50, a new developmental dielectric fluid designed specifically for data center needs. Through the activities and collaborations of our Immersion Cooling Growth Venture team, we’re working to expedite the commercialization of this fluid, elevate awareness, and drive the adoption of 2-PIC technologies.
As growing high-power computing and AI demands push the limits of what chips can deliver, 2-PIC can keep pace on the cooling side, establishing it as a technology for today and well into the future. So, while work continues to bring more energy capacity onto the grid, data center operators and hyperscalers can make meaningful progress on decreasing the total energy required through smart, sustainable technology adoption enabled by 2-PIC.
1Based on data and modeling by Chemours using information from the U.S. Energy Information Administration (EIA); The Green Grid, Liquid Cooling TCO Calculation Tool; assumes 2-PIC provides a 90% improvement over air cooled systems