a16z: Decentralized power grid

Author: Ryan McEnrush, partner of a16z; Translation: 0xjs@Bitchain Vision

The power grid is a huge and complex system composed of wires and power plants, which is crucial to our economy and the foundation of our industrial strength.Currently, the United States faces severe challenges: U.S. electricity demand is expected to increase by 2040 due to factors such as artificial intelligence computing, reflow and “electrification”.Nearly doubled, but our grid infrastructure and operations are difficult to keep up.

To seize the energy-rich future, we must simplify the production, transmission and consumption of electricity;Decentralized power grid.The construction of large power plants and long-distance transmission lines is very cumbersome, but technologies such as solar energy, batteries and advanced nuclear reactors have brought new possibilities.It is these and other more “local” technologies that can avoid expensive long-distance cabling and deploy directly on site,This will help support significant growth in load over the next few decades.

While historical industrial expansion relies on large centralized power plants, the 21st century marks a shift to decentralized and intermittent energy, from a “central radiation” model to a distributed network.Of course, this evolution brings new challenges and we need innovation to bridge the gap.

Troubles of growth

The U.S. grid consists of three major Internet networks: East, West and Texas, managed by 17 NERC coordinators, and ISO (Independent System Operator) and RTO (Regional Transmission Operator) oversee the regional economy and infrastructure..However, actual power generation and transmission are handled by local utility companies or cooperatives.This structure has played a role in an era of low load growth, but expanding the grid infrastructure to meet today’s demands have becomeMore and more challenging and expensive.

Access issues

Used by power grid operatorsAccess queueto manage new asset access, assess whether the grid can support new power in the location without imbalance, and determine the cost of necessary upgrades.Nowadays, more than2000 GWWaiting for access to the grid, more than 700 GW of projects will be in the queue in 2022 alone.This isoneA big number: The installed capacity of the entire U.S. power grid is only 1200 GW.

But in reality, many projects have been withdrawn due to the cost of connecting to the grid.Historically, only 10-20% of the queued projects have been achieved, often requiring more than 5 years after application to finally connect – and those times will only get longer and longer.E-generators often submit multiple speculative proposals to identify the cheapest access points and then withdraw unfavorable proposals after the cost is known, thus complicating feasibility studies.California grid operator CAISO was forced to stop accepting any new requests in 2022 and plans to do so again in 2024 due to the surge in applications.

This is a key rate limiting factor and cost driver in our energy transition.A recent U.S. Department of Energy report found that to meet high load growth by 2035, intraregional transmission that integrates new assets must increase by 128% and interregional transmission must increase by 412%.More optimistic forecasts are expected to grow at 64% and 34% respectively.

The proposed reforms help alleviate this development backlog.The Federal Energy Management Commission (FERC) is implementing a “first-ready, first-serve” policy that filters proposals and speeds up reviews by increasing fees.Texas Electricity Reliability Commission (ERCOT) adopts an “access and management” approach that enables faster access, but disconnects the project if it threatens grid reliability – this is adding new quicklyGrid assets have achieved great success.While these policies mark progress, simplifying other regulations such as NEPA is also crucial to speeding up construction.

But even with approval, grid construction still faces supply chain obstacles, including more than 12 months of delivery time, soaring 400% in price for large power transformers, and a shortage of specialty steels.Achieving the federal goal of developing transformer manufacturing also depends on support for the electrical steel industry, especially the upcoming 2027 energy efficiency standards.All of this happens when the grid blackout (mainly weather-related) reaches its highest level in 20 years, requiring hardware replacement.

This does not include delivery

Ultimately, the cost reform of building power grid infrastructure is manifested in the rise in consumer prices.The “retail price” that consumers pay is a combination of wholesale price (the cost of generating electricity) and delivery charges (the cost of delivering electricity to the infrastructure you need).Crucially, while cheap renewable energy and natural gas power generation prices have declined, the prices of power transmission have risen sharply.

This incident is caused by many reasons.Utilities use distribution bills to offset losses from customers’ power generation, aiming to ensure revenue from fixed returns infrastructure investments (similar to cost-plus defense contracting).The development of renewable energy requires the extension of power lines to remote areas, which are less used due to intermittentity.Furthermore, with the increase in electrification and self-generating, loads become more unstable, and infrastructure designed for peak demand becomes inefficient and costly.

Policy and market adjustments are addressing these rising transportation costs, and the massive adoption of distributed power systems such as rooftop solar is a notable example.

California’s Net Energy Metering (NEM) program initially allowed homeowners to sell excess solar back to the grid at retail prices, ignoring the utility’s distribution costs.Recent changes now essentially repurchase electricity at variable wholesale prices, reducing revenue for solar panel owners during peak generation periods, which are often consistent with the lowest electricity price.The adjustment extends the payback period for solar installations, prompting homeowners and businesses to invest in electricity storage to sell energy when it is more profitable.

California utilities also proposed a billing model where fixed fees depend on income levels and usage fees depend on consumption.The move aims to allow wealthy customers to bear more grid infrastructure costs and protect low-income individuals from rising retail electricity prices.While this specific policy has been put on hold recently for similar but less extreme versions, such an idea could lead to wealthy users being completely off the grid.Betrayal may cause the remaining users to pay higher costs and trigger a “death spiral.”Some believe this has happened in the Hawaiian power market, with some regions rapidly turning to electric heat pumps.

Keep the light on

Electricity is not magic; the power grid operates in complex ways.At any time,The power generated must be related to the power demandor “load” matches; this is what people mean by “balanced power grid”.At a higher level, grid stability relies on maintaining a constant frequency—60 Hz in the United States.

Congestion caused by excessive power line capacity (dumping of electricity into the grid) can lead to power limits and local price differences.Any frequency deviation can also cause damage to the generator and motor equipment.Wind, solar and batteries—reverse resources lacking inertia—complex frequency stability as they proliferate.In extreme cases, deviations can lead to power outages and even damage to grid-connected equipment.

Due to the inherent vulnerability of the grid, the assets connected to it must be carefully considered to align reliable supply with predicted demand.The growth of intermittent power supplies (unreliable supply) combined with the rise of “electrification” (surge in demand) is bringingsevereThe challenge.

When is it enough, enough?

About two-thirds of the load is balanced by the wholesale market through (mostly) a few days ago auctions, where the price is determined by the cost of the last unit of electricity required.Renewable energy has no marginal cost and is usually bid higher than other energy sources when active, resulting in price fluctuations – prices are extremely low when renewable energy meets demand, prices soar when more expensive energy is needed (Note: bids are different fromLevelling energy costsLCOE.)

Unpredictability of solar and wind power, as well as the closure of aging fossil fuel power plants, puts pressure on grid stability.This can lead to power outages (underproduction) and power limits (overproduction), such as the 2400 GWh waste in California in 2022.Addressing this problem requires investment in energy storage and transmission improvements (described below).

Furthermore, as electricity supply becomes more unpredictable, natural gas plays an increasingly important role due to its cost-effectiveness and flexibility.Natural gas usually supports renewable energy through “peak power plants” that are only started when needed.Generally speaking, the intermittent nature of solar and wind energy makes gas power plants and other types of power plants intermittently profitable, sometimes even running at continuous losses due to technical reasons.Therefore, when a “peak power plant” sets wholesale prices when renewable energy outages will lead to higher costs, which will cause volatility to consumers.

The demand for electricity is also changing.Although technologies such as heat pumps are energy-saving, they may lead to peak loads in winter when renewable energy generation is low.This requires grid operators to retain a certain buffer of power assets and often ignore renewable energy in resource adequacy planning.Grid operators usually follow the “one-tenth” rule, accepting power shortages every ten years, but the actual calculations are more complex.In ERCOT, due to the lack of traditional capacity markets to replace price increase incentives, we have seen “emergency reserves” continue to grow as renewable energy enters the grid.

Areas like California also face a “duck curve” that requires grid operators to rapidly increase more than 20 GW of electricity as daylight dips and demand increases.This is technically and economically challenging for factories that aim to sustain output.

The intermittent nature of renewable energy can incur hidden costs, forcing grid operators to take risks or invest in new assets.While energy leveling costs assess the economic viability of the project, it oversimplifies the true value of assets to the wider grid.However, LCOE does highlight the economic challenges facing construction of new assets such as nuclear power plants.Although nuclear power is more expensive than today’s natural gas, it provides a compelling and reliable pathway to decarbonize electricity.We just need to expand the scale of reactor construction.

But we can’t rely solely on nuclear energy.Relying on a single energy source alone is risky, as demonstrated by the nuclear challenges faced by France during Russian energy sanctions and the gas problem in the cold weather in the southern United States, not to mention commodity prices fluctuations.Areas with large amounts of renewable energy, such as California, also face uncertainty due to their daily dependence on imports.Even places like Iceland or Scandinavia that use almost 100% clean energy will maintain reliable backup or import options during a crisis.

Become smart

As electricity demand grows, the grid has struggled to cope with increasingly complex situations due to decentralized and intermittent renewable energy sources.We cannot force this transformation with brute force; if we are to do so,We really need to be smart.

The current grid is aging and “stupid” and relies on power plants to adjust production based on forecast demand while making small real-time adjustments to ensure stability.The grid was originally designed for one-way flow of large power plants, but it was challenged by the concept of multiple small power supplies providing power in all directions, such as your rooftop solar charging your neighbor’s electric car.Furthermore, the lack of real visibility into real-time trends poses imminent problems, especially at the distribution level.

Residential solar, batteries, advanced nuclear and (possibly) geothermal energy provide dispersed electricity, reducing the need for infrastructure construction.However, integrating a changing, unstable grid still requires innovative solutions.Additionally, through local storage and demand-side response (such as turning off the thermostat when the grid is tight), effective use of utility-scale power systems can even be significantly improved, thereby reducing the peak period of need to build underutilized assets that are only briefly online.

The “smart grid” aims to achieve all these and more and can be divided into three main technical groups:

• Front end of the meter

• Dynamic line ratings, solid-state transformers, voltage management and trend systems, better conductors, infrastructure monitoring, grid-scale power generation, grid-scale storage, etc.

• Meter backend

• Heat pumps, electrical appliances, residential solar energy, home energy storage, electric vehicle chargers, smart thermostats, smart meters, micro reactors and small modular reactors, microgrids, etc.

• Grid software

• Virtual power plants, better forecasting, equipment management, energy data infrastructure, cybersecurity, ADMS, interconnection planning, power financial tools, bilateral protocol automation, etc.

Specifically, there are two major trends that are crucial to the future of “smart grid”.

First, we need to build a large number of energy storage facilities to smooth local peak loads and stabilize intermittent power supply to the entire power grid.Energy storage batteries are already crucial to small-scale power outbreaks, and can even cover longer as prices continue to decline.But expanding the battery size of hundreds of GWh also requires expanding the supply chain.Fortunately, a strong economic situation may continue to accelerate deployment; entrepreneurs should seek access to batteries wherever possible.

The second is to accelerate the deployment and integration of distributed energy asset networks.Everything that can be used to power will be powered.Allowing these systems to interact with energy systems at home and grid-scale will require a variety of new solutions.A collection of “smart” devices such as electric vehicles or thermostats can even form virtual power plants that mimic the behavior of larger energy assets.

What is the future?

A core challenge in grid expansion is to carefully balance the transition between centralized and decentralized systems while taking into account economic and reliability issues.While simple and (usually) reliable, centralized grids also face complex demand fluctuations and high fixed costs – for example, most large nuclear power plants around the world are funded by the government, and decentralized grids are still being deployed.Early stages, but cheap, but not automatically ensure reliable electricity, as the preferences of some rural communities in India suggest.

It should be clear that the centralized grid we have today will certainly not disappear—in fact, it needs to be expanded—but it will beConsumed by the growing network of decentralized assets around.Taxpayers will increasingly adopt self-generating and storage, challenging traditional power monopolies and promoting regulatory and market reforms.This self-generating trend will reach its peak in energy-intensive industries that place special emphasis on reliability – Amazon and Microsoft havePursuing Nuclear Powered Data Center, We should make every effort to accelerate the development and deployment of new reactors.

More broadly, taxpayers need reliable, affordable and clean electricity, usually in this order.ERCOT’s unique geographical location, an easy-to-innovate “pure energy” market and loose interconnection policies will be the key to the focus to understand whether, when and how this can be achieved through a decentralized grid.There is no doubt that successfully navigating this transformation will lead to significant economic growth.

Crucially, building this decentralized grid requires our most talented entrepreneurs and engineers:We need a “smart grid” that seriously innovates in front of users, behind users and grid software technology and conducts serious innovations in terms of grid software technology..Policy and economic trends will accelerate this power development, but the responsibility to ensure that such a decentralized grid operates better than the old grid will fall on the private sector.

The future of the U.S. power grid is to use new technologies and embrace free markets to overcome our nation’s challenges and pave the way for a more efficient and dynamic energy landscape.This is one of the great causes of the 21st century, but we must face the challenges.

The world is changing rapidly, and the power grid must change accordingly.