Regulation and Smart Energy: Dealing with Uncertainty

Bart Thielbar | Dec 08, 2009

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Industry professionals are overwhelmed with calls for smart grid implementations and many utilities are moving in that direction. They are doing so, however, with much uncertainty regarding cost recovery and even more uncertainty regarding any potential return on their investments. For the most part, state regulators have been slow to provide meaningful answers or directions for utilities seeking to make investments that will make them more efficient and empower consumers. In fairness to the regulators, the issues require a thoughtful approach to the cost recovery issues and it seems reasonable that they will want to carefully consider potential impacts to consumers.

The premise is simple enough. A consumer-empowered, energy conserving, asset-optimizing, automated and self-healing transmission and distribution system that is more secure from, and responsive to, natural and man-made events and one that more easily assimilates electricity that has been generated from multiple and distributed sources, including renewable sources, is a better deal for our society. According to a Brattle Group estimate, this simple transformation will require an investment of approximately $1.5 trillion to achieve full realization by 2030. Decisions with trillion-dollar impacts should not be made quickly.

Recognizing this, the federal government has stepped forward to help. Through the American Recovery and Reinvestment Act, $3.4 billion has been allocated for smart grid funding. When compared with the $1.5-trillion price tag, it is readily apparent that the $3.4 billion offered as stimulus is insufficient to make any meaningful progress toward the achievement of a more intelligent utility. If the smart grid is to be pursued, the difference must be funded from sources other than the federal government.

In many cases, of course, the decisions about who will pay for it fall under the authority of state regulatory commissions. With few exceptions, the state commissions have been unable to develop a meaningful solution to this complex problem. A decision about who should pay for more than a trillion dollars of investment is not one that can be made quickly, or easily -- especially in difficult economic times.

The National Association of Regulatory Commissioners is familiar with this issue and in its May publication titled, "The Smart Grid: Frequently Asked Questions for State Commissions," encouraged state commissions to "consider two variables in valuing a smart grid proposal." Those variables are:

Direct Value, which "represents the quantifiable value of components that, when introduced, will immediately improve the efficiency of the system and create cost benefits..."

Option Value, which represents those "applications [that] rely on additional activities before their value can be fully realized." NARUC further explained that "it may make sense to prioritize distribution system automation components with immediate, demonstrable, and direct value over smart meters if the meters rely on components that have yet to be deployed on the distribution system or undeveloped on the customer side to bring value."

These approaches, and others like them, must be viewed in conjunction with existing rate design programs, as well as impacts on utilities and the consumers they serve. It is not an insignificant shift in rate design and must be undertaken carefully.

And, without meaningful solutions to the funding questions, utilities will be unwilling and unable to move forward. Indeed, the July Department of Energy Smart Grid System Report offered this statement on the issue: "Since the technology and value propositions are emerging, utility companies may be reluctant to expend the significant amount of capital required to move toward a smart grid, especially because the expected cost-recovery timelines are only theoretical and have no precedent. Currently, regulated utilities and their flat-rate customers have no risk or reward signal. Regulation makes it difficult for them to raise rates and recover costs, and makes them reluctant to change."

The DOE report clearly states that "new products and services depend on regulatory recovery for smart grid investments." The ARRA stimulus funding is a very small first step. Without a proper regulatory framework at the state level, we are left to wonder if it is a step in vain.

These are not new issues. Beginning with the energy act of 2005 and with the soon-to-follow act of 2007, state regulators have been on notice that the implementation of a more intelligent grid would require a review and reworking of the regulatory framework. As we prepare to close out 2009 and enter 2010, little meaningful progress has been made. Without addressing the cost recovery mechanisms and developing an environment that will encourage people and entities to invest over a trillion dollars over the next two decades, the promise of the smart grid and its many benefits may be on the slow path to implementation.

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EnergyBiz magazine is the thought-leading, award-winning publication of the emerging power industry. This article originally appeared in the November/December 2009 issue.

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Comments

Bart,

This article nicely describes and expands upon what I have been preaching in many articles on this website for many months now - how will deploying all aspects of a smart grid on a wide scale be paid for.

Right now there are no easy or quick ways to pay for wide-scale smart grid because under current regulatory regimes, the only options for utility cost recoveries are draconian rate increases for all customers, or massive government handouts that will boost public debts much higher. Needless to say neither approach will sit well with the public, for the former will destroy business models and ruin many of our commercial businesses and industries, not to mention impoverish many more consumers, and the latter could bankrupt governments beyond the point where no one will lend them money any more.

I have been saying that regulatory reforms should allow utility companies to make extra money over and above basic rate base income - by allowing them to participate in the commercialization of energy conservation products and technology, and participate in selling energy efficiency upgrades to consumers.

These new business activities would compete directly with businesses already doing or are poised to do so but I say utility companies have a big advantage to compete aggressively.

Firstly they have a direct marketing pipeline to every customer with a billing account already set up for every customer, and often communicate their accounts with secure website pages for each customer. They hence don't need to spend nearly as much on advertising in conventional media as say a Home Depot for selling smart-grid related or energy efficiency upgrade consumer products.

Secondly, utility companies will be privy to detailed energy consumption profile data of each and every customer that gets equipped with the new interval smart meters rolling out. This would empower utilities to do residential energy auditing, and measure and show in detail the financial savings consumers can realize when sold efficiency upgrades or new conservation products or technologies.

Utilities might even consider under new regulations charging consumers a monthly fee for grid data communication services between their smart grid and a consumer home automation system for the purpose of enabling the consumer to practice demand responses and save money on their energy bills. This would be similar to our cable-TV or telephone companies charging extra fees for optional extra services, and in many cases selling customers the in-home devices to use them.

Sadly most utility companies are likely not interested in becoming the next Home Depot of consumer products, or becoming the next energy auditing or energy monitoring company. Most are probably quite content to remain as they are living off their monopoly rate base income, supplying energy and nothing else to consumers.

I for one do not see much hope for any timely wide-scale smart grid deployment other than some additional transmission and distribution automation, and perhaps better outage management, since utilities can more easily directly recover their implementation costs. Recovering the costs of equipping consumers with smart appliances or energy auditing or home automation and monitoring devices is a completely different matter.

The author has fallen victim to the major oxymoron of the smart grid. First he notes that, “Decisions with trillion-dollar impacts should not be made quickly.” Then he celebrates that, “Through the American Recovery and Reinvestment Act, $3.4 billion has been allocated for smart grid funding.” No thought about what the smart grid can be or should be. Instead, its FIRE, no time to bother with ready, or aim. We desperately need better.

Dick,

Good point, the "decision" to allocate $3.4billion of the public's money should not have happened so quickly, nor should it necessarily be celebrated.

My whole point is many cost/benefit results of smart grid technologies are still unknown, i.e. there are substantial risks involved yet, so by no means should that risk be shoveled onto all taxpayers without taxpayers having any say in the matter. The answer lies in what I have been suggesting - allow utilities to raise some of the money for smart grid by selling it to those customers that can afford to and are willing to buy into it. Any other way is essentially forcing everyone to pay for it willing or not.

Besides it is very likely some facets of smart grid technology, particularly anything behind the meter in the hands of customers, may not need to be deployed and used by absolutely every customer to have significant benefits to the grid. It may turn out that only 10% of customers using it for example will be enough in some cases. This subject is largely uncharted territory, but at least by giving consumers the choice whether to buy into it would separate those that do from those that don't. And if some technologies don’t turn out to be very beneficial, so what, the risk is taken by the buyers only and not the public as a whole.

Bob,

You are advocating the steps in ready, aim, fire a few rounds, refine the aim, etc. Very smart. I wish others were half as smart.

Hi Bart, Bob and Dick,

The author is right when he writes that "Without a proper regulatory framework at the state level, we are left to wonder if it is a step in vain." To learn about such a proper framework, to actually deal with the uncertainty, please consider the EWPC article Electricity Without Price Controls Architecture Framework.

However, the responsible party is not the state regulator as it seems the author is calling for. Instead, we need state legislatures to set the framework. As a result, please also consider the EWPC post States that Implement a Heterogeneous Grid are Poised to be the Winners, which evolved from the debate on the above mentioned EWPC article.