The U.S. electrical grid has hardly changed since the 1880s, and its reliability, effectiveness, and affordability are increasingly being brought into question. To prevent disaster, regulators must abandon outdated electrical architecture and redesign the grid. Bloomberg Analyst Brian Warshay discusses his recent article "Upgrading the Grid" with Foreign Affairs Deputy Managing Editor Stuart Reid.

This interview has been edited and condensed. A transcript is below:

REID: I'm Stuart Reid.  I'm an editor at Foreign Affairs and I'm joined today with -- by Brian Warshay who is an analyst at Bloomberg New Energy Finance.  He's also the author of an excellent new article in our latest issue about the electrical grid. 

Brian, it's something we take for granted, we use it every day.  How old is it?

WARSHAY: The U.S. power grid was first constructed in the late 1800s, started by Thomas Edison.  And -- but most of the infrastructure that we use today hasn't changed much since then.  In fact, a -- nearly 80 percent of the infrastructure on the U.S. power grid today was build 30, 40, 50 years ago.

REID:  And is that a problem?

WARSHAY:  Yes, it is a problem and we need to modernize the grid.  The U.S. power grid is old and it's vulnerable.  It's vulnerable to natural disasters, such as when the East Coast here experienced Hurricane Sandy a few years ago.  And it's increasingly vulnerable to the increasing penetration of renewable energy on the system, mainly wind and solar power.

REID:  So explain that to me.  Why are wind and solar power so problematic when it comes to integrating them into the current grid?        

WARSHAY:  Well, the wind does not always blow and the sun does not always shine.  And this is a different paradigm than the way utilities have operated the grid for the last century.  Traditionally, most of our power generation comes from fossil fuel power plants that can be turned on and off on an as-needed basis.  With the increase in wind and solar power on the grid, power operators, or utility operators, actually have to control and flex ramping up and down fossil fuel power plants to accommodate for the often unpredictable power supply coming from wind and solar power plants.

It's an issue because the grid ends up becoming significantly oversized and, therefore, inefficient.  What power grids are designed for is to meet peak demand.  And peak demand is basically what happens on a hot summer day in the northeast when everybody turns on their air conditioning.  It's the most -- the point of the day when the most power output is required by customers, by you and me. 

The -- over the last few decades, the peakiness on the grid -- and we measure peakiness by taking the ratio of the highest peak demand to the average demand on the grid.  That ratio has actually been increasing noticeably over the last 20 or 30 years, and is expected to continue to increase over the next few years. 

Now this has happened for a few reasons.  One has been the increase in the abundance of air conditioning throughout the country.  It certainly means that more people can turn on air conditioning all at the same time.  There's also an increase in penetration of renewable energy, which we've talked about.  And also energy efficiency has played a role, bringing down the average demand overall as we have more efficient appliances but not necessarily impacting that peak demand that occurs on those worst days.  And the last contributing factor is really climate change.  As weather patterns and temperatures get more and more extreme, the extremely hot and the extremely cold days end up driving the most significant peaks that utilities have to manage.

REID: What are some sorts of fixes and innovations that could change the way the grid operates and fix some of these problems you're talking about?

WARSHAY:  So one of the big innovations that's happened is largely encompassed under the term smart grid.  What this really means is that utilities will have greater insight into the way the grid is operating on a real-time basis.  The way the grid was traditionally designed was that electricity would flow from centralized power plant down to customers.  And even when a power line would get knocked down, the utility might not even know that until a customer actually calls them up on the phone and says there's a power line down. 

What the smart grid does is mainly -- the technology is mainly sensors and communication devices that allow the utility to see in real time, in real operation -- in an operational strategy where and at what status level all of its grid assets are.  So that includes power lines.  That includes customers' homes, what their real-time usage is, and also other grid infrastructure along the grid.

REID:  And they're also gaining the ability to change what rate of electricity a user pays, depending on the time, right?

WARSHAY:  Correct.  So one of the other innovations that utilities are looking to take advantage of is called time-of-use pricing.  Currently, residential customers pay a flat rate for electricity at any time of the day, whenever they use it.  What the time-of-use pricing approach is to have different pricing for electricity used at different times of day.  So there's an electricity rate called the peak rate, which would be during that time period of day when utility expects peak demand to be highest, and an off-peak rate.  What this does is provides an economic incentive for customers to shift their behavior and shift demand from the electricity grid to better manage electricity for the utility.

REID:  So running their dishwasher at night, for instance.

WARSHAY:  Absolutely right.

REID: All right, Brian, so tomorrow you wake up and you've gained dictatorial powers and an infinite budget to do whatever you want with -- for the U.S. electrical grid.  What would be your priorities?

WARSHAY: I would, first off, continue to facilitate the deployment of renewable energy technologies, especially wind and solar, despite some of the issues on the grid that they cause. 

Now to manage those issues, there's a couple ways to do it.  One is economic incentives and the other is technological.  So I think the economic incentives that I would put into place would be to incorporate things like time-of-use pricing, demand response, which is paying large end users, large industrial customers to lower demand during these times of peak demand.  And I would also look into technologies such as large-scale energy storage, namely batteries.  By deploying these throughout the grid, they can help buffer the unpredictability and uncertainly associated with a large penetration of wind and solar power. 

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