Regulation and Smart Energy: Dealing with Uncertainty
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.