Tuesday, February 17, 2015

Another Call to Reform the Regulatory Compact: the Interstate Renewable Energy Council (IREC)’s Five Suggestions for How to Integrate Distributed Resources into the Electricity Grid

By Kyra Hill, Energy Fellow

Regulators, policymakers, and academics are increasingly calling for a reform of what is known as the regulatory compact. Traditionally, through this compact, regulated monopolistic utilities provide power to customers at just and reasonable rates and in return earn a return on their investment for necessary capital expenditures. The need for reform stems from the fact that this structure results in overinvestment in expensive generation and transmission and underinvestment in distributed resources that are not typically owned by the utility—including residential renewable energy, energy efficiency, electric vehicles, energy storage, and demand response. These resources are integral to a renewable energy-based, resilient electricity grid, so figuring out a way to integrate them into the grid is critical. 

The Interstate Renewable Energy Council (IREC) recently released a report entitled “Easing the Transition to a More Distributed Electricity System.” The report advocates reforming the regulatory compact in a way that provides customers with more choice and access to clean energy, while allowing utilities to earn a return on investments like integration of distributed resources. As customers desire more of these resources, the report argues, regulators and utilities need to rethink how best to navigate—and where possible, eliminate—persistent hurdles. Some states—most notably New York, in its Reforming the Energy Vision (REV)— have started to comprehensively address these issues (a topic my colleague, Nate Larsen, writes about). As other states look to “reform their energy visions” in order to incorporate more distributed resources, they will benefit from the lessons of those that have already started the process.

IREC’s report helps to further the conversation by drawing upon efforts that states like New York, Hawaii, and Massachusetts have already begun. The report breaks down into five suggestions for regulators to consider. Major highlights include:
·      Performance-Based Cost Recovery
o   Steer revenue away from large, capital investments and towards distributed resources by instituting ratemaking based on “forward-looking” performance-based standards. These could include diversification of generation, carbon reductions, and third-party provider satisfaction (as opposed to traditional cost-of-service ratemaking).
o   Draw from existing performance-based ratemaking experiences, such as Illinois’ Energy Infrastructure Modernization Act and the United Kingdom’s Revenue using Incentives to deliver Innovation and Outputs program.

·      Customer-Value Driven Rate Design
o   Unbundle rates and offer creative packages of unbundled rate components. These generally include generation, distribution, transmission, customer service, and ancillary services, but could grow to include public health, job, and environmental benefits.
o   Build clear price signals into rate design based on actual analysis of where (and to which customers) benefits accrue.
o   Look at existing valuation studies (the Value of Solar process in Minnesota, the integrated demand-side management study in California, and the IREC handbook on costs and benefits of distributed generation).

·      Transparent and Proactive Strategic Planning  
o   Incorporate innovative goals within existing utility planning procedures. These goals could include referring infrastructure upgrade needs to a third-party bidding process in order to determine whether incorporation of distributed resources is cost-effective replacements to costly upgrades.
o   Require grid modernization plans (as in Massachusetts) or distribution resource plans (as in California).

·      Use Data Effectively
o   Make data available to third parties in order to better provide customers with the services they want (for example, energy choice and energy savings), while recognizing the need to maintain customer data privacy
o   Draw from existing data usage decisions (California). 

·      Update Interconnection Procedures
o   Eliminate major hurdles that require the entrant to shoulder the full cost of a necessary upgrade by developing a mechanism for cost-sharing (as California and Massachusetts have done).  
o   Take a “proactive approach,” as Hawaii has, enabling the utility to plan for distributed resource integration and ideally schedule integration where the system can incorporate it at lowest cost.
o   Using forward-thinking integration planning to incorporate shared renewable energy programs, such as community solar, which could have the added benefit of providing renewable energy to renters and low-income communities.

In short, IREC’s report acknowledges the need for regulatory changes and offers some useful models and suggestions for regulators and utilities to consider. Some of the suggestions, including unbundled rate design and effective data usage, will become easier to navigate as the value of distributed resources receives further study and data-sharing practices become better defined. In the immediate future, regulators should begin to implement forward-thinking planning processes, including revising interconnection procedures, grid modernization, and performance-based cost recovery, as these practices have the potential to create better, cleaner, and more resilient electricity grids. 

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