Upstream Net Metering

The rationale of net-metering rooftop solar from utility bills is debatable but it has certainly helped decarbonize our homes and businesses by bringing zero carbon generation to the load. If we are to decarbonize our industry, we will need to consider bringing the loads to our zero carbon generation and let them share in the same net-metering treatment…

Problem

Problem 1: The grid is in greater need of flexibility to match load with supply as more intermittent generation enters the system. There are four ways to fulfill this flexibility: 1) energy storage; 2) transmission build-out; 3) zero carbon economic dispatchable generation; or 4) dispatchable load. Which of these four approaches gets deployed for a particular need depends on a complex mix of technical, practical, and economic constraints. For relatively frequent, short duration flexibility needs, energy storage can be a good option (e.g. frequency regulations, intra-day solar generation shifting). For major structural, long-lasting congestion issues in the grid, transmission build-out may be the only option. However, when the flexibility need is relatively infrequent (~once per month), very deep (10s - 100s of MWs), somewhat long in duration (>8 hours), or hard to forecast (as many grid phenomena are across a whole year), then the most economically rational thing to do is either turn a generator up or down or turn a load on or off. However, all generators are expensive capital assets that financiers would prefer be utilized as much as possible during their lifespans to keep their cost per MWh low. Additionally, as we build more wind and solar generation, we have less and less control over when the low cost MWhs are being produced, putting more pressure on our remaining dispatchable generators to operate more sporadically (reducing both the efficiency of the equipment and the efficiency of the capital financing the equipment). Many have talked about aggregating home and office loads (smart thermostats, smart lighting, smart appliances, etc.) but the communications, incentive, and regulatory infrastructure necessary to extract significant flexible capacity from such distributed resources has been slow to materialize. The grid needs big, flexible loads to compliment intermittent renewable generation.

Problem 2: One of the most difficult sectors of the economy to decarbonize is the industrial sector. It is made up of many diverse, highly tuned and efficient processes that are often operating on razer-thin commodity margins. Industrial systems are similar to power plants, in that they require large up-front capital investment and need to be operated as much as possible during the lifetime of their equipment to keep the costs of their output low (however, unlike power plants, their outputs can often be stored and inventoried much more easily than electricity). Technologies exist for electrifying and decarbonizing several major industrial supply chains (ammonia/fertilizer, hydrogen for petrochemical refining, steel, agriculture, data centers/crypto-mining, etc.), but few (with the exception of data centers) have the profit margins to tolerate retail electricity prices as inputs. The only way to make many industrial processes electrify and decarbonize is by giving them direct access to the cheapest wholesale electricity available. This would mean avoiding the transmission and distribution charges utilities typically charge as well as the various ancillary and service charges ISOs typically charge. Natural gas co-generation plants (often seen on university and some industrial campuses) are one way to accomplish this but they do not offer a zero carbon solution.

Solution Vision

Develop a standardized power contract that would enable curtailable industrial loads to interconnect directly with large power plants "upstream” of the wholesale meter so that they could get access to the lowest electricity prices and avoid use of the grid entirely. The power contract would be designed such that the power plant could turn-off the industrial load with little or no notice so that the power plant could meet its capacity and other service obligations to the ISO. Further, if the power plant was not producing power for any reason, the industrial load would not be powered. In other words, the industrial load would not be connected to the “grid” it would only be connected to the generation plant. This would allow the industrial load to receive the lowest electricity price per MWh anywhere on the grid. Industrial loads would need to be designed to handle short-notice power shutoffs and would need to be sited at generation sites that could provide sufficient assurance of power enough hours of the year to amortize the industrial load’s capital costs. This would not work for all industrial loads, but for many like crypto mining, hydrogen electrolysis, steel production, indoor containerized agriculture, and many more, this would be an economic path towards decarbonization. The technology exists to make this a reality today, what is needed is a clear contracting framework with the proper legal blessing from power market authorities.

Business Model

It is not unreasonable in ERCOT and PJM to find generators producing $15-$25 per MWh electricity. In fact, many of the nuclear generators that operate with 92% capacity factors are only averaging $20-$25 per MWh in the day-ahead and real-time markets for many of their MWhs sold. Certain nodes in CAISO even see over 1,000 hours of negative pricing in a year. A dynamic industrial load sited at these nodes could see an average power price as low as $13/MWh if it only operated for the cheapest 70% of the hours in a year. Rather than install a battery and attempt to forecast when to buy and sell power, a broker should help industrial businesses site their containerized loads at these generators and convert that cheap energy into a higher value industrial product that is easier to store.

Power plant owners need to focus on operating their plants and industrial businesses need to focus on producing product for their own markets; a new type of electricity broker is needed to identify the sites, design the interconnection and controls equipment, and structure the power contracts. Each containerized load sited at the generation facility could be financed similar to a real estate investment trust, creating a new LLC for each container to manage liability between assets and leverage significant collateralized debt financing to fund the capital equipment and infrastructure (if the loads are containerized and reasonably mobile, banks should be confident salvaging them). Two industrial loads deserve immediate consideration:

1. Crytpocurrency Mining: Bitcoin mining is perhaps the perfect example of an industrial load that would eagerly sign-up for such a power contract. It is power dense so it does not require much space; it is nearly autonomous with its only input cost being electricity; it can store and transport its output product, Bitcoin, for free, and it is relatively indifferent to being turned on/off with little notice. Under the proper conditions, a dynamically operated upstream net-metered crypto miner could see a simple payback in less than 1 year and remain protected if Bitcoin prices collapsed. Greenidge Generation, a private equity backed natural gas co-generation plant in upstate NY has already started to deploy this service using FERC’s qualifying facility rules, but this limits the application to generators that are <80MW or co-produce steam (having the unintended effect of excluding most clean generators and thus dramatically reducing scalability).

2. Hydrogen Electrolysis: Hydrogen is a critical chemical feedstock to decarbonize and has been the subject significant focus for many industries and policymakers for decades. However, hydrogen needs very low cost electricity to have any practical hope of decarbonizing. If sited near the right offtakers (e.g. refineries, steel mills, ammonia plants, pipelines, etc.), dynamically operated electrolyzers receiving net-metered electricity at a nuclear plant or appropriate combination of wind/solar/batteries could finally see clean hydrogen reach industrial scale.

Further opportunities include: containerized agriculture (more interesting in a post-COVID world) and Boston Metal’s steel process.