Electrification: essential to decarbonisation but with major challenges ahead

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The building and transportation sectors account for 33% of global CO2 emissions, making the electrification of those sectors key to decarbonisation.

In countries with sufficiently decarbonised power sectors, electrification not only directly reduces emissions through reduced fuel carbon-intensity but offers an array of benefits that contribute to emissions-reduction, public health, and equity. While major emitters India and China have not weaned themselves from coal sufficiently to make electrification a net benefit, the levelised cost of utility solar has fallen below coal in both countries, justifying investment in electrification today.

The benefits of electrification: emissions reduction, public health, and equity

Beyond the declining carbon intensity of electricity, energy efficiency is a key benefit of electrification that reduces carbon emissions. In the case of space heating, heat pumps are three times more efficient than natural gas, oil, and propane furnaces, as their input energy is devoted to moving heat, rather than creating it. Electric motors are similarly three times as energy efficient as internal combustion engines (ICE), but use fewer components, which require 40% less maintenance by US government estimates.

Electrification has a public health equity benefit: it redistributes emissions away from tailpipes and building flues to the surroundings of thermal power plants.

Electrification also enables demand flexibility, one of the cheapest mechanisms for reducing carbon emissions. All major electrified loads across residential and commercial buildings and transportation are capable of cloud connectivity and grid-responsiveness, either through native networking software or retrofit solutions.

While significant challenges exist, ecosystems of software companies have developed to leverage these capabilities, connecting loads to wholesale and retail energy markets and optimising time-of-use and peak demand-based electricity rates. Shifting electricity consumption to times when renewable resources are producing – and, consequently, energy prices are low – enables larger renewable build-outs while reducing utility infrastructure costs, lowering consumer costs. 

Importantly, a megawatt of curtailed electricity demand is often more beneficial to the grid than a megawatt of incremental utility-scale renewable generation. The reason is twofold. Zero-emission power requires transmission and distribution (T&D) bandwidth to reach the end consumer, a resource that is getting scarcer as overall load and generation increase. T&D constraints limit renewable interconnection, elevate power prices, and pose risks to system stability, making it a resource preferable to avoid. Curtailed demand requires no T&D resources, reducing these constraints.

By the same token, curtailed demand does not suffer from power losses incurred by T&D, which requires more than one megawatt of long-distance clean generation to satisfy one megawatt of customer load. Distributed generation shares the same benefits with respect to utility-scale generation.

In addition to reducing the total energy required for an end use and the emission-intensity of that energy, electrification has a public health equity benefit: it redistributes emissions away from tailpipes and building flues to the surroundings of thermal power plants. This benefits the low-income families who live, work, and go to school near busy roads and commercial buildings, albeit at the expense of the much smaller population who live near thermal power plants. Many of those plants today are located near population centres due to T&D constraints, but those plants will run less often or even shutter if demand flexibility alleviates those constraints.

Transportation electrification is underway, but key infrastructure and grid service questions remain

Ground transportation is the largest market for electrification. As battery costs continue to decline, so will the upfront cost of electric vehicles (EVs), making them competitive with ICE absent subsidies. 10-year total cost of ownership is already closer than consumers realise due to EVs’ reduced maintenance, increased energy efficiency, and fuel costs, which are tied to renewables rather than oil. Additional regulatory and ESG tailwinds include ICE phase-out commitments, zero-emission vehicle credit programs – which generate revenue for EV manufacturers – and low carbon fuel standards.

Despite their environmental and health benefits, EVs pose significant risks to electric grids. EV charging within neighbourhoods can overload distribution transformers, and coincidence at the system level can exacerbate demand peaks, overloading the entire network. Smart charging software platforms are coming to market that can coordinate charging across a distribution network, however, preventing both peaks and local power congestion.

It is important that countries guess right regarding future vehicle ownership, so that customer and utility charging infrastructure is not built for the wrong model and then stranded.

Achieving this at scale will require identifying suitable financial and convenience incentives for customers while managing what is today a patchwork of charging hardware, software, communication protocols, and networks. A scaled solution will not only prevent EV charging from doing harm, but better align charging with clean energy production, reducing electricity prices as well as renewable curtailment.

Additional emissions and cost-related benefit from EVs can be unlocked through Vehicle-to-Grid (V2G) technology, whereby vehicles discharge power back to the grid to buoy supply at times of high demand.

This offers the possibility of future EV fleets acting as massive, short-duration storage resources for the grid, filling in when variable renewable production sags. This service will be fundamentally limited by vehicle availability – the fleet’s capacity factor – as well as the impact of the additional cycling on batteries, which affects asset lifetime as well as potentially its warranty. The billion-dollar question is whether V2G-enabled EV fleets will displace stationary batteries as providers of multi-hour-duration storage to electricity markets.

Why should society invest capital and battery raw materials in dedicated assets if the same flexible capacity is already present in passenger and commercial vehicles?

For passenger vehicles, the answer to this question depends on future vehicle driving and charging behaviour, as well as the opportunity trade-off between cycling and grid service revenue. These unknowns, in turn, rely on an even greater question regarding vehicle ownership. If consumers continue to own passenger cars, residential and workplace charging will dominate in countries with significant off-street parking. In this case, V2G flexibility is likely to concentrate during the evening and overnight periods, as commuters rely primarily on overnight residential charging.

If transportation-as-a-service dominates instead, with consumers forgoing vehicle ownership in favour of pervasive rideshare options, V2G economics could be quite different. Fleet owners, likely leveraging autonomous vehicle capabilities and fleet coordination software, would seek to meet service requirements while minimising capital and operating costs, charging vehicles at massive depots rather than in residential areas. It is hard to anticipate how V2G participation would fit into this picture, as it would emerge from holistic fleet management optimisation. One outcome that is likely in a fleet-dominated world is that there would be fewer vehicles per capita, each with a high utilisation factor and less idle time at a charger.

It is important that countries guess right regarding future vehicle ownership, so that customer and utility charging infrastructure is not built for the wrong model and then stranded.

Building electrification and grid-responsiveness will be harder to achieve

While not as large a source of emissions as the transportation sector, buildings are responsible for 10% of global CO2 emissions and therefore critical to decarbonise. Space and water heating are the prime targets, owing to their frequent dependence on oil or gas combustion. The story is similar to transportation: heat pump technology is more energy efficient than furnaces and boilers but has greater upfront cost. When replacing both an air conditioner and a furnace there can be cost savings, as the heat pump can perform both jobs, but retrofit replacement of a furnace alone requires a subsidy of on the order of US$6,000. Eliminating natural gas hook-up infrastructure is an additional cost-saver during new construction.

Utilities and resource aggregators must ensure that the value propositions to residential and commercial customers are compelling enough to earn their buy-in.

In the US, states frequently provide subsidies for heat pumps, and municipalities have stepped in with building codes that prevent gas hook-ups in new construction. This has prompted a severe political backlash, however, with 20 states passing laws pre-empting such bans. Building electrification has not been embraced as uniformly as the electrification of the transportation sector.

The biggest challenge for buildings is not the politics of electrification however, or even electrification itself, but converting electrified buildings into price and grid-responsive consumers. As electrification shifts an even greater share of building final energy consumption into electricity, it will become only more important for buildings to act like smart EV chargers, aligning their consumption with renewables and other clean energy production. There are two sets of challenges associated with this.

The first is economic: utilities and resource aggregators must ensure that the value propositions to residential and commercial customers are compelling enough to earn their buy-in. This often means upfront investment in smart technology and a willingness to change energy consumption behaviour.

The second challenge is technical: buildings are at once complex and non-standard, attributes which make them hard to orchestrate in a scalable way. Commercial load control is in many respects where residential load control was a decade ago, dependent on either manual occupant action or the installation of a retrofit device – in that case an air conditioner load switch.

What is needed are building energy management systems (BEMS) in commercial buildings and smart home platforms in homes that can leverage open standards to integrate widely across device type and technology. This type of interoperability will enable building-level orchestration, which must be paired with cloud connectivity in order for buildings to receive and act on to grid signals.

The smart home space is leading the way in this type of innovation, with major platform providers Google, Apple, Amazon, Comcast, and others having partnered to develop a shared in-home network communication protocol. BEMS providers will need to standardise similarly and adopt common demand response communication protocols such as OpenADR in order for commercial building flexibility to be enabled at scale.