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
·
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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