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Inflation Reduction Act Requires Electric Utilities to Update to the 4Ge Power Grid

Updated: Sep 28, 2023

Signed into law on August 16, 2022, the Inflation Reduction Act (IRA) requires electric utilities to develop next generation standards and practices. New stipulations in the IRA meant to address climate change, such as tax credits and rebate programs to incentivize rooftop solar, electric vehicles, and electrification of homes, will require electric utilities to change their understanding of energy generation and transmission, as well as peak load times.

One year in, the White House released an update on the accomplishments of the IRA so far, stating on their fact sheet, "The Inflation Reduction Act is a transformative law that is helping the United States meet its climate goals and strengthen energy security, investing in America to create good-paying jobs, reducing energy and healthcare costs for families, and making the tax code fairer."

Electric utilities face many challenges as consumers act on the incentives included in the IRA. Let’s take a closer look at some of those challenges and potential solutions.

Today’s Electric Utility Paradigms Must Shift

The existing electric power grid has been designed, built, and operated assuming:

  1. Demand for electric energy will increase every year.

  2. Large, centralized, remote power generating plants are the most cost effective power sources.

  3. Power generating capacity must be at least 10% greater than peak load.

The Inflation Reduction Act challenges these paradigms. The IRA creates multiple avenues of change, as outlined in a summary released by Senate Democrats. Some changes include:

  1. Tax credits for homeowners seeking to install rooftop solar panels, which will increase distributed renewable energy generation.

  2. Home energy rebate programs meant to electrify homes via increased use of heat pumps and energy efficient, electric appliances.

  3. Tax credits for purchasing new and used electric vehicles (EVs).

These and other stipulations included in the IRA will mean that utilities can no longer operate under the historic assumptions outlined above. Instead, utilities must prepare for changes to electric energy demand times, peak load days, and energy generation and transmission norms.

Challenges of Increased Distributed Renewables

Increased distributed renewable energy generation will lead to multiple challenges for electric utilities. One challenge is the decrease in revenue due to lower demand for electric energy during the day, when rooftop solar is most productive. With increased rooftop solar, centralized generating stations will transition to supplying standby power during the day.

Despite a change in demand times and a decrease in revenue, electric utilities will still have comparable infrastructure maintenance costs to those of today. To address this, electric utilities must update their billing structure to demand-based billing, in which customers are charged an infrastructure fee and a KWH fee based on their energy usage, or risk losing significant revenue.

Another challenge is that the grid will need to support the distribution of energy generated throughout the system, where rooftop solar panels are located. This is especially challenging because the current electric power grid is built around the concept of centralized generating stations. The current grid is designed to transmit energy from a central location to end users; however, increased rooftop solar means that energy will be produced near end users, and will enter the grid from new locations.

To transmit energy from distributed sources, existing substations, transmission lines, and distribution lines will need to be retrofitted to become electric energy warehouses, electric powerways, and electric serviceways. New infrastructure will also need to be constructed.

Electric Vehicles Change Energy Demand Times

While solar panels decrease the electric energy demand during the day, EVs will increase the demand at night, when charging is scheduled. This will lead to electric utilities becoming the primary provider of electric energy at night when rooftop solar panels are inactive. Utilities must prepare to provide more electric energy at night than they ever have.

Increased energy demand at night may help to stabilize the revenue reductions that electric utilities face during the day only if utilities update their billing structure. This key change will determine those electric utilities that thrive, providing sufficient electric energy when it is needed, and those that fail due to lack of revenue.

Peak Load Concerns: A Closer Look

Let’s explore a specific example of how changes to electric energy generation and demand will impact electric utilities in New York State. With new incentives from the IRA, it is likely that 1 in 4 New York State residents will purchase an EV, leading to an increase of about 1 million EVs. Additionally, 1 in 10 homeowners will install rooftop solar panels, leading to about 600,000 additional homes with rooftop solar.

It's important to note here that in the U.S., peak load demand occurs for only a few days each year in the north, and a few weeks each year in the south. New York may only experience a few peak load days during the hottest days of summer or coldest days of winter; however, the grid is built to deliver peak load +10% capacity, so it is always prepared to support peak load when needed.

Customer load varies hourly, daily, and seasonally. Table 1 was developed using New York Independent System Operator (NYISO) data for the first Sunday and the first Wednesday of every month, beginning in September 2021 and continuing through August 2022. Table 1 illustrates how customer load varies by month, day, and hour. Currently, peak loads occur between 4 PM and 7 PM. Early morning loads occur between 3 AM and 5 AM.

Table 1 illustrates how customer load varies by month, day, and hour. Peak loads occur between 4 PM and 7 PM. Early morning loads occur between 3 AM and 5 AM.

Today, New York ISO expects peak demand of 32,327 MW will occur during a late afternoon in August. NYISO plans to have at least 37,000 MW of electric power generators available in case any power generating facilities trip offline. On the same day, nighttime load is expected to drop to 24,000 MW.

Once residents have invested in increased rooftop solar and EVs, the peak load supplied by electric power generators will drop to 30,000 MW during a summer day, while overnight load (EV charging) will increase to 28,000 MW. To address these changes, electric utilities need to quickly rethink their business models, their technology, and their relationships with regulators and consumers.

Table 1 provides a rear view of customer load profiles in 2021-2022. Innovative utilities need to develop forward looking load profiles that include the effects of the IRA.

Update to the Next Generation Power Grid

To address the issues posed by increased distributed renewable energy generation and changes in energy demand, electric utilities must update to the next generation electric power grid.

For more on the intersection of electric utilities and the Inflation Reduction Act, check out these articles:

Contact us to keep the conversation going.

This article was written in collaboration with Prescient's Lead Editor Alyssa Sleva-Horine.

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