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Easing the Transition to a More Distributed Electricity System

Posted by Content Coordinator on Friday, March 6th, 2015


Executive Summary

In recent years, new technologies have emerged on the customer side of the electric system, including distributed energy resources (DER) such as distributed generation, energy efficiency, electric vehicles, energy storage and demand response technologies, among others. These technologies are allowing growing numbers of energy consumers to decrease their electricity demand, act as energy producers and otherwise manage their energy usage. At the same time, the public has become increasingly concerned about the environmental impacts of electricity generation, especially its contribution to climate change, and negative air and water quality impacts. Consumers and regulators are also looking for ways to improve the resiliency of the electric system during severe weather events, which are becoming more common as a result of climate change.

Together, these compounding factors have driven the movement toward a more modern grid that enables significant increases in the amount of clean energy produced; universal consumer access and facilitation of consumer choice, including the adoption of DER; integrated resource planning; two-way flow of energy and information; and increased reliability, security and resiliency. Some of the changes necessary to achieve the visions of the future grid—including the development and adoption of new DER and energy services—will likely continue to happen on their own, due to market forces and increasing demand.

The relative ease of transition for utilities and the electricity grid as a whole, however, will depend largely on the changes to the “regulatory compact,” the concept that underlies the laws, regulations and rules that govern the entire electricity system and electric utilities. Realizing these ambitious goals holistically and expediently will require further revisions to the regulatory compact, to take into account the new roles for utilities and energy consumers going forward.

To this end, utility regulators will play a central role in moving toward this modern grid vision, where local, distributed resources will play a greater part. By reevaluating the regulatory compact and reconsidering their approach to overseeing it, regulators can help to ensure a smooth transition to a new, more modern grid and can help define the role for electric utilities in this new era.

The primary purpose of this paper is to outline the rationale for updating the regulatory compact, looking at its historic legal and economic roots, and the major shifts that have occurred in the electricity market that have impacted the roles of utilities and consumers. The authors offer five approaches for state utility regulators to consider as they evaluate and implement an updated  regulatory compact. In alignment with the Interstate Renewable Energy Council’s (IREC) emphasis on consumer empowerment and access to renewable energy generation, the paper concentrates on changes to the regulatory compact that respond to the increasing prevalence of DER and consumers’ growing interest in energy management and energy impacts.

1. 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.

2. Rate Design: Customer rate design 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. Rate design is a powerful tool and therefore should be based on a transparent and thorough evaluation of the desired functionalities of the products and services that utilities and customers are providing and using, respectively. One potential way to send clearer price signals to customers would be to break out the various components of rates and offer customers a menu of service options. Since many consumers are accustomed to paying for communications services in bundled packages, putting the unbundled rate elements and options in attractive, convenient packages might be of consumer interest.

3. 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.

4. Access to Data: As the communications infrastructure associated with the electricity grid becomes increasingly sophisticated, utilities will collect more and 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 also ensuring cyber-security and protection of consumer privacy.

5. Grid Access: Many regulators are experienced with issues related to third party access to the electricity grid. As DER become increasingly prevalent, however, both regulators’ understanding of these issues and policies addressing them will need to evolve. In particular, the effective integration of DER 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.

The issues discussed in this paper are merely a subset of the various forces currently affecting the electricity system and industry. For example, also putting pressure on the traditional regulatory compact, and utility regulation and business models, are restructuring and competitive wholesale markets, and policies that support carbon reduction and promote renewable energy more broadly.

Similarly, while the authors focus on investor-owned utilities and their regulators, municipal and cooperative utilities face their own distinct sets of opportunities and challenges in this arena, given their particular structures. Although some of the suggestions offered here may provide regulators with tools to address these concerns more comprehensively, this paper is intended to be a piece of what will ultimately be a larger conversation regarding the evolution of the regulatory compact.

Download full version (PDF): Easing the Transition to a More Distributed Electricity System

About the Interstate Renewable Energy Council
Today, IREC is a nationally recognized thought leader, stakeholder coordinator, expert resource and facilitator of regulatory reform. Our work expands consumer access to clean energy; generates information and objective analysis grounded in best practices and standards; and leads national efforts to build a quality-trained clean energy workforce, including a unique credentialing program for training programs and instructors.

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