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UTILITY OF THE FUTURE An MIT Energy Initiative response to an industry in transition In collaboration with IIT-Comillas Full report can be found at: energy.mit.edu/uof Copyright © 2016 Massachusetts Institute of Technology All rights reserved. Incorporated in the cover art is an image of a voltage tower. © iStock and an aerial view of buildings © Shutterstock ISBN (978-0-692-80824-5) UTILITY OF THE FUTURE An MIT Energy Initiative response to an industry in transition December 2016 Study Participants Principal Investigators IGNACIO PÉREZ-ARRIAGA CHRISTOPHER KNITTEL Professor, Electrical Engineering, Institute for Research George P. Shultz Professor of Applied Economics, in Technology, Comillas Pontifical University Sloan School of Management, MIT Visiting Professor, MIT Energy Initiative Director, Center for Energy and Environmental Policy Research, MIT Project Directors RAANAN MILLER RICHARD TABORS Executive Director, Utility of the Future Study, Visiting Scholar, MIT Energy Initiative MIT Energy Initiative Research Team ASHWINI BHARATKUMAR MAX LUKE PhD Student, Institute for Data, Systems, SM, Technology and Policy Program (’16), MIT and Society, MIT RAANAN MILLER MICHAEL BIRK Executive Director, Utility of the Future Study, SM, Technology and Policy Program (’16), MIT MIT Energy Initiative SCOTT BURGER PABLO RODILLA PhD Student, Institute for Data, Systems, Research Scientist, Institute for Research in Technology, and Society, MIT Comillas Pontifical University JOSÉ PABLO CHAVES RICHARD TABORS Research Scientist, Institute for Research in Technology, Visiting Scholar, MIT Energy Initiative Comillas Pontifical University KAREN TAPIA-AHUMADA PABLO DUENAS-MARTINEZ Research Scientist, MIT Energy Initiative Postdoctoral Associate, MIT Energy Initiative CLAUDIO VERGARA IGNACIO HERRERO Postdoctoral Associate, MIT Energy Initiative Research Assistant, Institute for Research in Technology, Comillas Pontifical University NORA XU SM, Technology and Policy Program (’16), MIT SAM HUNTINGTON SM, Technology and Policy Program (’16), MIT JESSE JENKINS PhD Candidate, Institute for Data, Systems and Society, MIT Faculty Committee ROBERT ARMSTRONG WILLIAM HOGAN Director, MIT Energy Initiative Raymond Plank Professor of Global Energy Policy, John F. Kennedy School of Government, Harvard University CARLOS BATLLE Research Scholar, MIT Energy Initiative STEVEN LEEB Professor, Institute for Research in Technology, Professor, Electrical Engineering & Computer Science and Comillas Pontifical University Mechanical Engineering, MIT MICHAEL CARAMANIS RICHARD LESTER Professor of Mechanical Engineering and Systems Associate Provost and Japan Steel Industry Professor Engineering, College of Engineering, Boston University of Nuclear Science and Engineering, Office of the Provost, MIT JOHN DEUTCH LESLIE NORFORD Institute Professor, Department of Chemistry, MIT Professor, Department of Architecture, MIT TOMÁS GÓMEZ JOHN PARSONS Professor, Institute for Research in Technology, Comillas Pontifical University Senior Lecturer, Sloan School of Management, MIT RICHARD SCHMALENSEE Howard W. Johnson Professor of Economics and Management, Emeritus Dean, Emeritus, Sloan School of Management, MIT Research and Project Advisors LOUIS CARRANZA ÁLVARO SÁNCHEZ MIRALLES Associate Director, MIT Energy Initiative Senior Associate Professor, Institute for Research in Technology, Comillas Pontifical University STEPHEN CONNORS Director, Analysis Group for Regional Energy Alternatives, FRANCIS O’SULLIVAN MIT Energy Initiative Research Director, MIT Energy Initiative CYRIL DRAFFIN ROBERT STONER Project Advisor, MIT Energy Initiative Deputy Director for Science and Technology, MIT Energy Initiative PAUL MCMANUS Master Lecturer, Questrom School of Business, Boston University Advisory Committee PHILIP SHARP CHRISTIANA LA MARCA Utility of the Future Advisory Committee Chair and Head of Innovation, Global Thermal Generation, Enel Retired President, Resources for the Future ALEX LASKEY RICHARD O’NEILL President & Founder, Opower* Utility of the Future Advisory Committee Vice Chair ANDREW LEVITT Chief Economic Advisor, Federal Energy Sr. Market Strategist, PJM Interconnection* Regulatory Commission BLANCA LOSADA MARTIN M. MASOOD AHMAD Chief Executive Officer, Gas Natural Fenosa Engineering. Division Head, Power Systems Planning Department, Saudi Aramco* Chief Technology Officer, Gas Natural Fenosa JANET GAIL BESSER LUCA LO SCHIAVO Executive Vice President, Northeast Clean Deputy Director, Infrastructure Regulation, AEEGSI — Energy Council Italian Regulatory Authority for Electricity, Gas, and Water ALAIN BURTIN Director, Energy Management, EDF R&D* GARY RAHL Executive Vice President, Booz Allen Hamilton PAUL CENTOLELLA President, Paul Centolella & Associates LLC MARK RUTH Principal Project Lead, Strategic Energy Analysis Center, Senior Consultant, Tabors Caramanis Rudkevich National Renewable Energy Laboratory MARTIN CROUCH MIGUEL SÁNCHEZ-FORNIE Head of Profession for Economists and Senior Partner, Director, Global Smart Grids, Iberdrola Improving Regulation, Ofgem MANUEL SÁNCHEZ-JIMÉNEZ, PHD ELIZABETH ENDLER Team Leader Smart Grids, European Commission Research Program Manager, Shell International Exploration & Production (US) Inc. LAURENT YANA PHIL GIUDICE Director Advisor of Global BUs, Group Strategy Division, Engie Chief Executive Officer, President and Board Member, Ambri Inc. AUDREY ZIBELMAN TIMOTHY HEALY Chair, New York State Public Service Commission Chief Executive Officer, Chairman and Co-Founder, EnerNOC * The MIT Energy Initiative also wishes to thank the following former Advisory Committee members: MARIANA HEINRICH Manager, Climate & Energy, World Business Council REGINE BELHOMME (EDF) for Sustainable Development SUSAN COVINO (PJM) PAUL JOSKOW JIM KAPSIS (Opower) President, Alfred P. Sloan Foundation WILLIAM LILLEY (Saudi Aramco) Elizabeth and James Killian Professor of Economics, Emeritus, MIT MELANIE KENDERDINE Director of the Office of Energy Policy and Systems Analysis and Energy Counselor to the Secretary, U.S. Department of Energy Contents VI Foreword and Acknowledgments VIII Executive Summary 1 Part 1: Understanding Electricity Services and How Distributed Energy Resources Affect the Design and Operation of Power Systems 1 Chapter 1: A Power Sector in Transition 19 Chapter 2: New Options for the Provision and Consumption of Electricity Services 35 Chapter 3: Envisioning a Future with Distributed Energy Resources 75 Part 2: A Framework for an Efficient and Evolving Power System 75 Chapter 4: A Comprehensive and Efficient System of Prices and Regulated Charges for Electricity Services 137 Chapter 5: The Future of the Regulated Network Utility Business Model 185 Chapter 6: Restructuring Revisited: Electricity Industry Structure in a More Distributed Future 227 Chapter 7: The Re-Evolution of Short- and Long-Term Electricity Market Design 265 Part 3: Insights on the Economics of Distributed Energy Resources and the Competition between Centralized and Distributed Resources 265 Chapter 8: Understanding the Value of Distributed Energy Resources 307 Part 4: A Policy and Regulatory Toolkit for the Future Power System 307 Chapter 9: A Toolkit for Regulators and Policy Makers 325 Appendix A 325 A Description of the Computational Models Used in This Study 339 Appendix B 339 A Review of Business Models for Distributed Energy Resources Full report and related working papers are available at: energy.mit.edu/uof Foreword and Acknowledgments An important evolution in the provision and consumption of electricity services is now under way, driven to a significant degree by a confluence of factors affecting the distribution side of the power system. A range of more distributed technologies — including flexible demand, distributed generation, energy storage, and advanced power electronics and control devices — is creating new options for the provision and consumption of electricity services. In many cases, these novel resources are enabled by increasingly affordable and ubiquitous information and communication technologies and by the growing digitalization of power systems. In light of these developments, the MIT Energy Initiative’s Utility of the Future study examines how the provision and consumption of electricity services is likely to evolve over the next 10 to 15 years in different parts of the world and under diverse regulatory regimes, with a focus on the United States and Europe. The Utility of the Future study is the first of a new series This study does not attempt to predict the future. We of reports that is being produced by the MIT Energy follow the dictum of poet and author Antoine de Saint Initiative (MITEI) to serve as balanced, fact-based, and Éxupéry: “As for the future, your task is not to foresee, analysis-driven guides to key topic areas in energy for but to enable it.” We identify key barriers and skewed a wide range of decision makers in government and incentives that presently impede the efficient evolution industry. This study specifically aims to serve as a guide of the power sector and offer a framework for regulatory for policy makers, regulators, utilities, existing and startup and market reform, based on a comprehensive system energy companies, and other power-sector stakeholders of efficient economic signals, that will enable an efficient to better understand the factors that are currently driving outcome, regardless of how technologies or policy change in power systems worldwide. The report distills objectives develop in the future. results and findings