POWER SYSTEM TRANSFORMATION AND THE UTILITY OF THE FUTURE Pre-Read for Public ‒ Private Roundtable...

POWER SYSTEM TRANSFORMATION AND THE UTILITY OF THE FUTURE

Pre-Read for Public‒Private Roundtable

Sixth Clean Energy Ministerial27 May 2015

Mérida, Mexico

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Objective

Defining Power System Transformation

Power System Transformation Status, Trends & Innovations

“Key Principles” for Power System Transformation

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OUTLINE

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ROUNDTABLE OBJECTIVE

• Participants will consider and discuss:

• The drivers, enablers and importance of power system transformation

• Trends in wholesale and retail power system evolution

• Challenges and opportunities for current utility business and operational models

• The role of technology and finance innovation

• Ideas and lessons learned for policy and regulatory frameworks that can guide power system transformation

• Desired dialogue outcomes include the following:

• Identify high-value opportunities for international collaboration to support and accelerate power system transformation

• Identify points of engagement for public-private collaboration, particularly in relation to CEM initiative work

• Preview “Key Principles” of Power System Transformation

Objective

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Objective


Power System Transformation Status, Trends, and Innovations


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OUTLINE

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POWER SYSTEM TRANSFORMATION DEFINED A Definition of Power System Transformation

Power system transformation is the active process of creating the policy environments, and the planning and operating practices, that accelerate investment and innovation in power systems that maximize the use of sustainable energy and maximize delivered energy productivity, while also fostering the integration of power systems with transportation, heating and cooling, and broader resource management.

Defining PST

• A complex, active process, not an end-goal

• Taking place at different rates and in different forms around the world

• Multiple drivers and policy rationales(e.g., technological innovation, energy access, social change, environmental and public health concerns, customer preferences, national fiscal and energy security strategies)

• Multiple enablers (e.g., financial & business model innovation, policy and regulatory frameworks, improved grid sensors and controls, declining technology costs)

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STATEMENTS ON POWER SYSTEM TRANSFORMATION “The value chain in developed electricity markets will be turned upside down within the next 10-20 years...power is no longer something that is exclusively produced by huge, centralised units. By 2025, everybody will be able to produce and store power.”

~UBS Investor Note, August 2014

“The electric sector is facing changes that have not been witnessed in this industry for the past 100 years. If we do not act now to shape this transition, the changes will happen to us, rather than our industry leading the way to our future and that of the electric grid (system).”

~Future of the Grid Report, GridWise Alliance, 2014

Defining PST

"In the 100+ year history of the electric utility industry, there has never before been a truly cost-competitive substitute available for grid power…we believe solar + storage could reconfigure the organisation and regulation of the electric power business over the coming decade.”

~Barclays Credit Research, 2014

“Increasing power sector decarbonization through 2040 by about 25% is key to achieving climate goals and would take the world half-way towards limiting the temperature increase to 2 degrees C.”

~IEA World Energy Outlook, 2014

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SIGNPOSTS OF A TRANSFORMATION UNDERWAY

Source: Bloomberg New Energy Finance

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EXTENT AND SPEED OF TRANSFORMATION

• Different extent and speed of change implies different modes of transformation: Adaptation, Evolution, Reconstruction, and Revolution.

• Transformation is path-dependent.

• Technological, financial and institutional legacies have important bearing on the rate and extent of change

• Heavier legacies: cautious incrementalism

• Light legacies: more rapid change

Defining PST

Source: Power Systems of the Future (2015). A 21st Century Power Partnership Report: http://www.nrel.gov/docs/fy15osti/62611.pdf

http://www.nrel.gov/docs/fy15osti/62611.pdf


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MEASURING POWER SYSTEM TRANSFORMATION

How can progress in power system transformation be measured?

• Not as simple as measuring investment flows or gigawatts of capacity, but it can be measured, and therefore tracked, to assist in evaluation of policy and regulatory efficacy.

• Effective actions will increase the speed and scale of investment in power system assets.

• Effective actions will facilitate increases in “delivered energy productivity” by:

• Raising the economic output of every kilowatt-hour (kWh) generated (Energy Intensity of Economic Activity)

• Reducing the pollution of every kWh generated(Emissions Intensity of Energy)

Defining PST

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AN IMPLEMENTATION-BASED FRAMEWORK FOR TRANSFORMATION INDICATORS

Defining PST

• Progress can be approximated by the degree of emergence, mainstreaming, and effective impact of innovations in a particular power system jurisdiction.

• These degrees of emergence can be measured in three ways:

1. The degree to which the innovation is “in place” in a jurisdiction (e.g., do customers have the option of time-of-use1 rates?)

2. Quantifying the level of participation in the innovation (e.g., how many customers are enrolled in the time-of-use rate?)

3. Quantifying the effective impact of the innovation (e.g., what are the public benefits and power system impacts of the given level of time-of-use participation?)

1Time-of-use rates are only an illustrative example.

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Objective




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OUTLINE

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SCALE OF INVESTMENT REQUIRED

• Roughly $16‒$19 trillion cumulative investment in grids and power plants required through 2035 to meet power system policy targets

World cumulative investment in energy supply and energy efficiency Source: International Energy Agency

Trends & Innovations

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FALLING SUPPLY COSTS – ONE OF MANY DRIVERS

• Reduced renewable energy supply costs are one of many key drivers of the transformation Increasingly desirable solution for incremental capacity additions

Source: International Renewable Energy Agency. http://www.irena.org/REthinking/


http://www.irena.org/REthinking/

http://www.irena.org/REthinking/

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POWER SECTOR AT A FORK IN THE ROAD


Source: Rocky Mountain Institute

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POWER SYSTEM TRANSFORMATION IS HAPPENING TODAY• How countries envision, plan, and regulate

the power system is evolving.

• Long-held beliefs are evolving:

• Renewables are now a cost-effective resource in many locations and have been proven not to require 1-to-1 reserves.

• Distributed generation is not tantamount to the “utility death spiral.”

• Planning, operational, and regulatory strategies must evolve but do not necessarily cost more to implement.

• Networks can be cost-effectively expanded from the bottom up.

• Utilities can sell more than just electrons.


Source: GridWise Alliance, U.S. Department of Energy

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EVIDENCE OF POWER SYSTEM TRANSFORMATION

• Evidence from around the world highlights that power system transformation is already happening and is accelerating.

• Innovation is happening in 11 interrelated domains:

1. Environmental Stewardship

2. Transmission System

3. Distribution System

4. Transmission‒Distribution Boundary

5. Finance, Markets, Pricing, and Cost Allocation

6. Static and Dynamic Load

7. Flexible Generation

8. Integration with Heating and Cooling

9. Integration with Transport

10. Energy Storage

11. Microgrids

Publication: Status Report on Power System Transformation (2015), 21st Century Power Partnership


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ENVIRONMENTAL STEWARDSHIP

• Example Innovation: Diffusion of integrated resource and low-emission development planning

• Real-World Case: South Africa Department of Energy’s Integrated Resource Plan (IRP)

Illustration of South Africa IRP process (Source: Eskom)

Planning processes and policies are increasingly introduced to achieve emissions reduction targets, reduce water use, and meet environmental policy goals and regulations. Innovation from governments, regulators, utilities, and power producers is helping to transform traditional electricity planning and deploy innovative technologies and approaches to meet environmental goals.


Report Spotlight: The Socio-economic Benefits of Solar and Wind (2014)

A Multilateral Solar and Wind Working Group Report: http://www.cleanenergyministerial.org/Portals/2/pdfs/CEM5-econValue-solar_and_wind.pdf

http://www.cleanenergyministerial.org/Portals/2/pdfs/CEM5-econValue-solar_and_wind.pdf



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TRANSMISSION SYSTEMS

• Example Innovation: Transmission planning for concentrated areas of variable renewable energy

• Real-World Case: Mexico “Open Season” planning

Existing transmission network and new transmission needs in La Ventosa(Source: SENER)

Transmission system innovation is emerging in both planning and operation spheres. The addition of wind and solar has reinforced the value of larger balancing areas, not only because load diversity and generation reserves can help to balance larger amounts of variable generation, but also because the aggregate variability of these renewable energy sources declines as the balancing areas grow larger. Innovative methods of operating transmission systems, such as data rich “smart transmission” infrastructure, can also extract more value from investments in variable renewable energy.


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DISTRIBUTION SYSTEMS

• Example Innovation: Distribution system planning processes to better manage distributed energy resources

• Real-World Case: “Distributed resource planning” in California, USA

Identify DPA & Substations

Perform Planning Analyses

Calculate Locational Net Value

Rank Substations by Locational Net Value

The distribution system will eventually manage two-way power flows from distributed generation and storage and will engage in new forms of interaction and control both at the distribution system operator (DSO) level and with the bulk power system at the transmission system operator (TSO) level. DSOs will increasingly find value in collecting, analyzing, and using data in new ways, and will monitor and analytically model their distribution systems to a degree far beyond current practice.


Source: California Public Utility Commission

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TRANSMISSION AND DISTRIBUTION INTERFACE

• Example Innovation: DSO actions to self-supply reliability services or to provide reliability services to the TSO

• Real-World Case: Distribution system bidding in New York wholesale energy market

The transmission‒distribution boundary is becoming less physically distinct but more important as a juncture of economic value, as well as a more prominent focus for innovation and public policy debate.


TSO-DSO interaction (2014)

Available: http://www.cleanenergyministerial.org/Portals/2/pdfs/ISGAN-TSO-DSO-interaction.pdf

International Smart Grid Action Network (ISGAN) Report Spotlight

Transmission & Distribution Casebook (2015)

Available: http://www.iea-isgan.org/index.php?r=home&c=5/378

http://www.cleanenergyministerial.org/Portals/2/pdfs/ISGAN-TSO-DSO-interaction.pdf





http://www.iea-isgan.org/index.php?r=home&c=5/378



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MARKETS, TARIFFS, AND COST ALLOCATION

• Example Innovation: Customer pricing reform to unlock system behaviors

• Real-World Case: Value-of-solar ratemaking in Austin, Texas

Value-of-solar study results 2014: Austin, Texas(Source: Clean Power Research)

In transforming power systems, markets, tariffs, and cost allocation evolve in response to, and in support of, power system transformation. Many innovations are occurring to develop new mechanisms for power sector finance (e.g., RE auctions, Green Bonds), develop new pricing strategies (e.g., time-of-use pricing, tiered rate structures), and reform markets to accommodate new grid services (e.g., intra-hour market scheduling, demand response bidding).


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ASSESSING AND UNLOCKING THE VALUE OF EFFICIENCY AND DEMAND RESPONSE (STATIC AND DYNAMIC LOAD)

• Example Innovation: Inviting dynamic load bidding into wholesale markets

• Real-World Case: Demand response bidding as capacity ancillary services in PJM (USA)

Price reductions via integration of demand respond bids(Source: PJM, 2014)

Energy efficiency (static load) and intelligent demand (dynamic load) are both becoming more cost-effective to deploy and manage. Widespread deployment of advanced metering infrastructure and other enabling technologies can facilitate new pricing models, new patterns of demand and customer behavior, and new sources of load flexibility. This means that load can be adjusted in magnitude, or time-shifted to other periods in response to a variety of system conditions, opening significant new pathways for power system planning, operation, and investment.


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FLEXIBLE GENERATION

• Example Innovation: Flexibility from thermal generators

• Real-World Case: South Africa, Denmark and Ontario: coal ramping; France: nuclear ramping

Turbine floor of the Majuba Power Station, 16 m level(Source: Power Technology 2015)


The value of power system flexibility is growing dramatically, transforming the sources of flexibility. Thermal plants such as coal, combined cycle natural gas, and even nuclear are being designed and retrofitted to provide system flexibility. Variable wind and solar plants are increasingly being outfitted with active power controls to provide flexibility and grid services. In addition, emerging changes to wholesale power market designs in many jurisdictions now allow variable renewable generation and responsive demand to bid into markets, and to be dispatched similarly to conventional plants.

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FLEXIBILITY OPTIONS TO MANAGE VARIABLE GENERATION


• Sources of flexibility exist—and can be enhanced—across all of the physical and institutional elements of the power system, including system operations and markets, demand-side resources and storage; generation; and transmission networks.

• Accessing flexibility requires significant planning to optimize investments and ensure that both short- and long-time power system requirements are met.

Flexibility in 21st Century Power Systems. A 21st Century Power Partnership Report. Available: http://www.nrel.gov/docs/fy14osti/61721.pdf




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INTEGRATION WITH HEATING AND COOLING

• Example Innovation: Increasing delivered energy productivity with CHP

• Real-World Case: CHP for urban heating and cooling

CHP Application: Kitchener's City Hall, Ontario, Canada (Source: Urban Ziegler, NRCan)


Innovations at the interface between electricity and thermal systems can unlock system benefits. Combined heat-and-power plants have historically been one of the main points of intersection between these systems, and will continue to provide greater levels of flexibility as they will remain key elements of transformed power systems. As network intelligence capabilities grow, many innovations are emerging to use distributed heating and cooling loads plus thermal storage in new ways to increase system efficiency and flexibility.

CHP for Urban Heating and Cooling, Schematic Diagram. (Source: Environmental and Energy Study Institute [EESI])

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INTEGRATING WITH TRANSPORT

• Example Innovation: Electric vehicles for flexible demand

• Real-World Case: Integrated vehicle-to-home systems in the United States and Japan

Illustration of “Honda Smart Home” Energy Usage(Source: Honda Smart Home)

Two formerly separate sectors, power and transport are becoming increasingly connected through expanded deployment of hybrid and electric vehicles, and potentially also hydrogen fuel cell vehicles. Integrated transport and power infrastructure planning is supporting expansion of intelligent, data-driven systems that support flexibility, load balancing, and greater overall efficiency. The interface between these two sectors is becoming a key pillar of “smart city” planning that integrates electricity and transport systems.


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STORAGE

• Example Innovation: Storage for economic benefits to transmission and distribution utilities

• Real-World Case: Utility-scale batteries for grid balancing in Hawaii (USA)

Shipping containers filled with lithium batteries on Kauai(Source: Technology Review 2015)

Storage at the transmission, distribution, and end-user levels is beginning to provide clear economic and reliability value to transmission and distribution utilities and end-users, particularly with new innovations in business models. Also, enabled by innovations in energy storage and demand-side flexibility, power systems are becoming more flexible and better equipped to integrate variable renewables.


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MICROGRIDS

• Example Innovation: Increasing system resilience during grid outages

• Real-World Case: Hospitals in Northeast United States during Hurricane Sandy, 2012

Illustrative microgrid configurations at different scales(Source: US Department of Energy)

Selectively autonomous power systems—microgrids—that can operate either stand-alone or connected to the bulk grid are maturing as a viable component of power systems. The growth of microgrids is due to rapid technology cost declines, power system pricing models that allow microgrids to better capture the benefits of distributed resources (including integration of heating and cooling), improved interoperability and methods of control, and the emergence of new retail pricing policy frameworks and business models that can turn microgrids into profitable energy service providers, not just technology solutions.


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RETURNING TO INDICATORS – QUESTIONS DECISION MAKERS CAN ASK TO ASSESS PROGRESSWholesale Market Design and Bulk Power Grid Operation

• To what degree are wholesale design elements effectively applied in the power system to incentivize desired characteristics and behavior?

• To what degree are transmission grid operational strategies being effectively employed in the power system?

Retail Markets and Distribution System & Demand Side Operations

• To what degree are retail market designs effectively applied in the power system to incentivize desired behavior?

• To what degree are distribution-level and/or demand-side operational strategies being effectively employed to manage distribution networks?

Planning

• To what degree do planning frameworks account for the variety and interplay of power system trends?

• Do planning frameworks anticipate the emerging interplay between bulk system, distributed, and demand-side resources?

• Do planning frameworks adequately address both reliability and flexibility?

• Do planning frameworks explicitly account for resource conservation and emissions reductions?


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Technology

• To what degree are smart grid technologies being effectively deployed and integrated to serve as the foundation for other innovations?

• To what degree are new highly flexible technologies—such as demand response, storage, fast-ramping conventional generators, and controllable variable renewable energy generators—being adopted within power systems?

• To what degree are new resource-saving and emissions-reducing technologies being adopted within power systems?

Cross-Sectoral Integration

• To what degree are electric vehicles (both via charging and dynamic contributions to grid flexibility) explicitly included in market designs, planning frameworks, and operations?

• To what degree are heating and cooling loads and thermal storage mediums being incorporated within power system markets, planning, and operations?


RETURNING TO INDICATORS – QUESTIONS DECISION MAKERS CAN ASK TO ASSESS PROGRESS

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SPOTLIGHT ON POWER SYSTEM FINANCING• Nine variables influencing investment

trends in the power sector:

1. Regulations on Commercial Banking Risk

2. Risk Premium Environments for Investment

3. Interest Rates on Government Bonds

4. Capital Availability from Development Authorities

5. Tax Structures

6. Credit Rating and Financial Position of Electric Utilities

7. Price and Availability of Inputs

8. Market Structure and Valuation Constructs

9. Policy and Regulatory Environment


Illustrative impact of thermal plant mix on investment and plant utilization rates (Source: Hogan et al. 2015)

Many legacy “investability” issues still exist…

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SPOTLIGHT ON POWER SYSTEM REGULATION


The basic regulatory and policy challenge is to provide necessary market, incentive, and/or mandate-based regulation to ensure that power systems of the future meet given reliability standards at the least possible cost, given future levels of variable renewable energy generation, more flexibility in power demand, energy storage, and the plethora of new technical and operational opportunities to use smart grid technologies.

• Some regulators are taking proactive roles in leading power system transformation.

• This means envisioning a pathway of power system transformation and creating consensus among policymakers, utilities, stakeholders, and the public on this pathway, in time to manage the necessary transitions with the least amount of disruption.

• Thus such a leading role typically includes facilitating stakeholder dialogues involving the power industry, consumers, and technology providers or developers to envision and build a consensus on how to advance.

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SPOTLIGHT ON POWER SYSTEM REGULATION


Existing Objectives Emerging Objectives

Source: The Evolving Role of the Power Sector Regulator: A Clean Energy Regulators Initiative Report. Available: http://www.nrel.gov/docs/fy14osti/61570.pdf



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Objective




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OUTLINE

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THE CEM “POWER SYSTEM CHALLENGE”

• The massive climate change and public health impacts of power systems, and the importance of transforming them to secure a better future for their citizens, requires proactive leadership to define the future.

• At CEM6, Ministers will consider a proposal for a “Power System Challenge”’—a shared global vision for future power systems linked to commitments for domestic and international actions critical to achieving clean, reliable, resilient, affordable and accessible power.

• A series of challenges will be issued to CEM initiatives to facilitate implementation of these actions and to support better, more ambitious international collaboration.

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CORE PRINCIPLES OF CEM POWER SYSTEM CHALLENGE

Principles

1. Power system transformation is a strategic imperative.Power systems should provide clean, reliable, resilient, and affordable power to everyone, and power system transformation is a strategic imperative to achieve these goals. Different pathways will emerge in our different contexts, but all transformations will require innovations to increase energy efficiency and to reorient system planning and operation to take advantage of smart grid technologies and renewable resources such as wind and solar power.

2. Cleaner power systems will improve public health and combat climate change.Globally, power systems are one of the largest sources of emissions that significantly degrade public health and accelerate global climate change. Working together to innovate and implement clean energy solutions across the spectrum of energy supply, delivery, and demand will yield benefits locally and globally.

3. Markets, prices, and tariffs should be aligned to support power system transformation.Transforming power systems will require innovation in the design of energy markets, in pricing mechanisms that better represent energy costs, and in tariffs that incentivize investment in critical system assets. Alignment of these design elements will increase efficiency, flexibility, and other desired system characteristics, facilitate regional market integration, encourage system-friendly deployment of renewable and other clean energy resources, and unlock new business models.

37Principles

4. Smart grids are a key enabler for power system transformation. Smarter power grids, enhanced with information and communication technologies, provide strategic value by increasing consumer engagement, efficiency, resilience and reliability, and by facilitating the integration of clean energy resources. They also provide opportunities for business model and technology innovation, and they support regional electricity market integration.

5. Renewable energy is a strategic power system resource.As a sustainable, domestic, and cost-effective source of supply, renewable energy will constitute an important asset in transformed power systems. Policy and regulation should promote sustained, cost-efficient investment, and system-friendly deployment to maximize the benefits of renewable energy for the power system and society at large.

6. Innovation in finance and procurement is essential to accelerating transformation.Prices of clean energy supply and smart grid technologies are likely to continue to decline, yielding opportunities for accelerated investment with less reliance on subsidies. Innovation in financing and procurement will be critical in this objective. Effective policy and regulatory frameworks encourage this innovation by ensuring efficient procurement mechanisms, providing market-based price signals, and unlocking new financing business models.


38Principles

7. Power systems should be optimized to interface with other energy systems.Power systems are part of a larger energy system. Integrating electricity and thermal systems leads to improved efficiency, reduced emissions, and improved energy security. Integrating electricity and transport systems through vehicle electrification can result in significant improvements in air quality and system flexibility. Intelligent industrial and building energy management increases efficiency and supports advanced power system operation.

8. Skill and capacity development is critical to 21st century power systems. Planning and operating transformed power systems will require highly skilled workers in various fields. Proactive skill development in the areas outlined by these Principles will be crucial for realizing power system transformation.


POWER SYSTEM TRANSFORMATION AND THE UTILITY OF THE FUTURE Pre-Read for Public ‒ Private Roundtable...

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