Modernizing the U.S. Energy Grid

Author: James McBride, Senior Online Writer/Editor, Economics
Updated: January 26, 2016

Jason Reed/Reuters
Introduction

A vast network of power plants, transmission lines, and distribution centers together make up the U.S. electrical grid. The grid constantly balances the supply and demand for the energy that powers everything from industry to household appliances. Out of sight for most, the grid usually only comes to public attention due to large-scale failures, such as the blackout that struck the Northeast in 2003.

With the rise of renewable energy and so-called "distributed generation," or the ability of individual homes and businesses to produce their own power, the traditional grid is under increasing pressure. It is losing customers at the same time that its aging infrastructure requires major—and expensive—overhauls, and the EPA imposes unprecedented greenhouse gas regulation. Meanwhile, private and public investments in "smart grid" technologies are increasing the system's efficiency while accelerating trends that threaten to shrink the grid's customer base, increase consumer energy prices, threaten the reliable delivery of power, and raise questions about the network's vulnerability to cyberattacks.

How does the grid work?

The U.S. electric grid dates back to 1882, the year that Thomas Edison unveiled the country's first power plant at the Pearl Street Station in lower Manhattan. While the grid has expanded from Edison's original fifty-nine customers to hundreds of millions of users, for decades its basic structure has remained much the same. According to the Energy Information Administration, fossil fuel-based power plants—burning coal, oil, or natural gas—create nearly 70 percent of the nation's power, while nuclear power accounts for about 20 percent. Electricity is sent across long distances using high-voltage transmission lines, and local facilities, known as substations, convert that high-voltage power to a lower voltage (a process called "stepping down") and distribute it to nearby homes and businesses.

Taken together, the grid has been called the largest machine in the world, comprising 5,800 power plants, 3,200 utilities, and over 2.7 million miles of power lines. In practice, however, there are three separate U.S. grids, or self-contained interconnections of power production and transmission. These are the Eastern, Western, and Texas interconnections.

Watch: How the Grid Works

Due to the high costs of constructing all of this infrastructure, electricity transmission and distribution is considered a "natural monopoly," meaning that only a company large enough to control an entire market will generally be able to afford the necessary investments. As a result, most energy utilities are granted monopoly control over a local market with the mandate to provide low-cost, reliable energy as a public good. To enforce this mandate, utilities are either publicly owned or, more commonly, heavily regulated by state regulatory commissions that set the prices that utilities are permitted to charge consumers. 

How is the grid regulated?

Local grid systems arose with little national oversight. But after the 1965 New York blackout left thirty million people without power, utilities created a voluntary association, the North American Electric Reliability Council (NERC), to improve grid coordination and apply higher standards for operation across the continent.

Historically, most utilities controlled everything from the power plant all the way to the household electrical outlet. In 1978, Congress passed legislation to partially deregulate the sector, allowing for non-utility power generators to enter the market. The 1992 Energy Policy Act provided for further deregulation, especially the separation of power generation (wholesale markets) from transmission and distribution (retail markets). The ostensible purpose of these efforts was to promote competition and lower energy prices. However, the California energy crisis of 2000–2001 raised questions about such restructurings after the state's reforms led to rising prices, energy shortages, and near-bankruptcy of major utilities.

Today, oversight of the grid is the responsibility of a patchwork of federal and state authorities. The 2005 Energy Policy Act designated the Department of Energy's Federal Energy Regulatory Commission (FERC) as the primary authority over power generation and transmission across the United States. However, jurisdiction of local-level retail power distribution, which actually delivers that power to end-users, remains in the hands of state and municipal governments. 

How are renewable energy sources affecting the grid?

In contrast with the grid's original, highly centralized economic model, decentralized forms of energy production—known as “distributed generation”—are on the rise. According to GTM Research, the market analysis division of the energy news site Greentech Media, solar energy usage has more than tripled since 2010, with more than 45,000 businesses and nearly 600,000 homes across the United States now using solar photovoltaic (PV) panels to produce their own energy. In 2015 alone, the number of solar power installations grew more than 19 percent, to exceed 25 gigawatts (GW) of total capacity, compared with 18 GW in 2014.

Solar combined with wind, biomass, and geothermal sources still make up only a small fraction of U.S. electricity production—around 7 percent nationwide. And as CFR Fellow Varun Sivaram has written, solar power had a paradoxical year in 2015. Even as solar installation expanded, solar industry stocks plummeted, raising questions about the sector's financial viability. This can in part be attributed to investors fleeing all energy stocks as oil prices plunged from over $100 a barrel in mid-2014 to less than $30 by 2016. But other analysts argue that the structure of the solar industry itself is to blame, as falling solar prices depress revenues and high debt loads spook investors, creating a downward cycle.

Still, utilities worry that distributed generation will undermine the grid, particularly through the policy of “net metering.” Under net metering, first adopted by Minnesota in 1983, regulators require that utilities buy any excess power back from solar users at the full retail rate of electricity. Utilities argue that by receiving the full retail price of electricity, those users effectively avoid paying for grid upkeep.

However, the vast majority of homes and businesses that use distributed generation still rely on the grid, using it at times when the sun isn’t shining or the wind isn’t blowing. Those customers should still have to contribute, says David K. Owens, executive vice president of the Edison Electric Institute (EEI), which as the largest U.S. utility association reflects a broad consensus within the industry.

Figure 1: The Growth of Renewable Electricity Sources

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Utilities warn that as solar use spreads, they will lose customers, forcing them to raise prices, which in turn will push more people to go "off grid"—a process known in industry terms as the "utility death spiral." It is unclear how much of this cost-shifting has actually been happening, but one major study by the California Public Utilities Commission found that by 2020, distributed generation could cost the state's non-solar users over $370 million annually.

This increasing pressure on the grid comes at a time when, as energy expert Brian Warshay points out, the U.S. economy is more dependent on reliable, affordable electricity than ever before. Rising prices would hurt consumers and businesses, while utilities that are unable to make the billions of dollars worth of needed investments could lead to increasing power outages—which already cost the U.S. economy up to $33 billion between 2003 and 2012. The Global Smart Grid Federation, a coalition of national "smart grid" initiatives, describes the worldwide push to improve grid networks, and, thus, competitiveness. The European Commission has invested $300 million over the past decade in EU grid networks, while Japan's largest utility, the Tokyo Electric Power Co., began a massive upgrade in 2013.

Sivaram says concern over the death spiral is overblown. He points to a recent analaysis by the Lawrence Berkeley National Lab (PDF) finding that solar penetration will likely be limited. A bigger challenge, Sivaram says, is that increased energy efficiency has weakened overall energy demand, with electricity consumption leveling off after a century of near-constant expansion. As Bloomberg's 2015 New Energy Finance report found, there was zero net electricity demand growth between 2007 and 2015. The problem is that “utilities rely on demand growth to increase the amount of money they can collect [as authorized by state regulators] to cover infrastructure maintenance,” Sivaram says. “Now, with stagnant demand, they can’t cover that maintenance.” 

How have utilities attempted to adapt?

To make up for lost revenue, some utilities have sought to impose new fees or restrictions on PV users. An Arizona utility has asked for a $50 per month charge for solar users, and similar efforts are underway in at least twenty-three states. In Hawaii, the local utility implemented a ban on additional solar installations in some service areas, which was overturned by regulators.

Another option is for utilities to get into the renewable business themselves. The largest U.S. utility, North Carolina's Duke Energy, began integrating wind and solar into its network in 2007. EEI's Owens estimates that about 60 percent of all installed solar capacity now belongs to utilities. However, regulators in many jurisdictions currently ban utilities from such efforts out of concern that their monopoly position gives them an unfair advantage in the market.

In contrast with the grid's original, highly centralized economic model, decentralized forms of energy production—known as "distributed generation"—are on the rise.

It is uncertain how quickly distributed generation will reach "grid parity," the point at which it becomes cheaper than the traditional grid. In 2015, Bloomberg's annual New Energy Outlook forecast found that rooftop solar will be cheaper than the grid in every major world economy by 2040, while energy analysts at Rocky Mountain Institute (RMI) argued in 2014 that grid parity will arrive for consumers in New York, California, and other U.S. states as early as 2020.

Other analysts, including CFR Senior Fellow Michael Levi, say that those models are likely over-optimistic, since a growing renewables sector will simultaneously lower the demand, and thus the price, for fossil fuels. Energy expert Michael Kline has estimated that even with quickly falling solar costs and improving battery technology, the costs of going off the grid are likely to remain prohibitive for decades to come.

What is the "smart grid"?

The so-called "smart grid" refers to a suite of technologies that allow for greater real-time responsiveness in connecting power producers and consumers. The U.S. Department of Energy, which has made supporting the smart grid a national policy goal, describes it as "a fully automated power delivery network that monitors and controls every customer and node, ensuring a two-way flow of electricity and information."

A “smart grid” system can increase reliability and reduce power outages. Special meters on houses and businesses and sensors along transmission lines can constantly monitor demand and supply, while mailbox-sized devices known as "synchrophasors" measure the flow of electricity through the grid in real time, allowing operators to foresee and avoid disruptions. Smart appliances can "talk" to the grid and shift electricity use to off-peak times, which eases the burden on the grid, lowering prices and helping to avoid blackouts. Decentralized "microgrids" can be paired with new battery technology to allow for power to continue flowing to local communities even when severe weather or other outages afflict the broader power system.

Watch: What Is the Smart Grid?

Since 2010, the Department of Energy has invested $4.5 billion in smart grid infrastructure, including installing more than fifteen million smart meters. At the state level, New York regulators have launched the Reforming the Energy Vision (REV) initiative to develop a marketplace for distributed energy resources and incentivize renewable energy. Meanwhile, consumer products like Google Nest's smart thermostats and Tesla Motors' household lithium ion batteries are speeding public adoption of smart grid technologies. Energy consultancy Navigant Research estimates that the use of smart thermostats will increase to sixteen million households by 2020 from 700,000 in 2013.

What are the grid's vulnerabilities?

Extreme weather is a top concern, as hurricanes, blizzards, floods, heat waves, and even solar flares can overwhelm aging power lines—the average age of power plants is over thirty years old, while power transformers are, on average, more than forty years old. In addition, most of the grid infrastructure is built above ground, which is cheaper to construct but more vulnerable.

These factors combined in the 2003 Northeast blackout, the largest in U.S. history, which left some fifty million people without power for several days. The incident began in rural Ohio, where hot temperatures led an overloaded transmission line to sag and strike an overgrown tree, causing a local outage which then cascaded throughout the system. The federal task force charged with investigating blamed (PDF) both human error and a deteriorating transmission system for the massive failure.

The smart grid, which relies on digital sytems, also makes the system more vulnerable to hacking and malware, raising concerns over cyber attacks.

Many experts are alarmed by an increasing number of such power interruptions. Adding to the pressure for grid changes is the Environmental Protection Agency's Clean Power Plan, a series of state-by-state regulations, whose final form was announced in August 2015, which aim to sharply restrict greenhouse gas emissions from power plants. An analysis by NERC says the EPA's new regulations will accelerate the shift away from traditional coal-fired power plants, presenting a "significant planning and operational challenge."

The smart grid, which relies on digital sytems, also raises concerns over cyberattacks. The National Security Agency reports growing cyber intrusions by groups capable of "tak[ing] down control systems that operate U.S. power grids, water systems and other critical infrastructure." Since the 1970s, grid operators have relied on electronic industrial control, or IC, centers that are generally unsecured against malware like the Stuxnet virus that targeted Iranian nuclear facilities in 2010.

Meanwhile, the Energy Department's 2015 Quadrennial Energy Review (QER), the first-ever comprehensive review of the nation's energy systems, highlights the uncertainty over how federal and local governments divide responsibility for managing the grid. "Fragmented and overlapping jurisdications," the QER says, "threaten to impede development of the grid of the future."

Additional Resources

This NPR series on Visualizing the U.S. Electric Grid provides an interactive guide to the structure and ongoing development of the energy grid.

The Edison Electric Institute's report Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business (PDF) delves into the perspective of the U.S. utility industry on distributed energy.

The Financial Times provides an in-depth investigation into the economic implications of renewable energy sources for the electric grid in Off the Grid.

This Congressional Research Service policy brief on "The Smart Grid and Cybersecurity (PDF)" provides an overview of the security challenges facing a more interconnected grid.

In this 2015 Foreign Affairs essay, energy expert Brian Warshay argues that the United States must commit to major reinvestment in modernizing its energy grid.

The Global Smart Grid Federation outlines the state international efforts to update grid networks in this 2012 report (PDF).

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