Energy regulators will play a central role in ensuring a smooth transition to a more modern grid and the role of electric utilities within it, says a new paper released by the Interstate Renewable Energy Council, a US not-for-profit organization tasked with promoting clean energy.
The report ‘Easing the transition to a more distributed energy system’ aims to outline the rationale for reevaluating the regulatory compact and five approaches to consider when updating utility regulations.
Lead author Erica Schroeder McConnell said: “As states, utilities and regulators face new demands on an aging electricity system and regulatory framework, there is a strong rationale for updating the ‘regulatory compact’ – the theoretical concept that underlies the laws, regulations and rules that govern the electricity system and the utilities that power it.”
Ms McConnell adds: “The process and results will allow more innovative ideas to flourish, while accommodating technological innovation and modern policy goals.”
5 regulatory approaches to a modern utility
Cost Recovery: Adjusting traditional cost-of-service ratemaking affects which investments utilities have incentives to make. Regulators could consider a ratemaking framework that moves away from incentives primarily for large, capital investments, and toward incentives for investments that facilitate more distributed, dynamic, environmentally sustainable electricity systems.
Two ratemaking mechanisms that could help regulators to achieve this goal are revenue decoupling and performance-based ratemaking.
Rate Design: Rate design is a powerful tool. Today it reflects regulators’ and utilities’ judgment regarding the appropriate allocation of costs across customers.
Rates can also serve to send price signals to customers to encourage desirable behaviors, such as using tiered rates to encourage energy efficiency and conservation.
Therefore they should be based on a transparent and thorough evaluation of the desired functionalities of the products and services utilities provide and customers use. One potential way to send clearer price signals to customers: break out the components of rates and offer customers a menu of service options. Putting the unbundled rate elements and options in attractive, convenient packages might be of consumer interest.
Utility Strategic Planning: Generally speaking, utilities’ strategic planning ought to evolve over time, as regulators use tools like ratemaking and rate design to better align utility incentives with the public interest.
Even so, requiring more explicit strategic plans from utilities is another way for regulators to monitor and encourage the evolution of utilities to meet their customers’ interests in a cost-effective way.
Access to Data: As the communications infrastructure associated with the electricity grid becomes increasingly sophisticated, utilities will collect more data, which has the potential to transform both management of their systems and their understanding of customer preferences and actions.
These data can also be valuable to third-party providers interested in offering consumer and grid services, as well as regulators and other entities interested in monitoring grid operations and evolution. Therefore, it will be important for regulators to consider how to allow appropriate access to grid and consumer data, while ensuring cybersecurity and protection of consumer privacy.
Grid Access: Many regulators are experienced with issues related to third-party access to the electricity grid. As distributed energy resources become increasingly prevalent, however, both regulators’ understanding of these issues and policies addressing them will need to evolve.
In particular, the effective integration of distributed generation into the grid – so the benefits of these technologies are maximized – as well as the appropriate allocation of benefits and costs of DER and associated grid upgrades will be important policy components. Similarly, expansion of access to the grid to a broader range of energy consumers, including renters and lower income consumers, will be a key equity consideration.