Editor's Note: The following is a guest post from Sonia Aggarwal, director of strategy at the research firm Energy Innovation. Aggarwal is the leader of America's Power Plan, an initiative focused on policies to transform the American energy grid into a clean, reliable and affordable system.
America’s power sector is undergoing a dramatic transformation, challenging regulators to make sure policy keeps up with technological innovation, often leaving utilities in a tumultuous position - but a new set of policies can put us on the path toward a cleaner, more affordable, and more reliable future.
Consider a few of the shifts underway: The price of renewables is plummeting, fueling a striking ramp-up of wind and solar. Coal-fired power plants are retiring while EPA’s proposed Clean Power Plan is forcing conversations about optimizing the grid to integrate higher shares of renewables and energy efficiency. Innovations like energy storage, demand response, and performance-based regulation are offering the power sector a new set of tools and changing customer relationships with utility companies.
The 150 electricity policy experts from America’s Power Plan (APP) forecasted many of these changes in 2013, and while America has come a long way in its transition toward a cleaner, more affordable, and more reliable grid, we’ve still got a long way to go. That’s why today, APP released an updated set of recommended policies to the Mid-Atlantic Conference of Regulatory Utilities Commissioners’ annual education conference.
Top Five Trends In America’s Energy System Transition
The APP policy blueprint was re-issued based on regional work, recent literature, and insight from some of America’s top voices on electricity policy. Here are the top five developments underway and new lessons to guide America’s energy system transition:
1. Regional energy markets are saving customers money
Coordinating regional grids and neighboring energy markets empowers system operators to integrate a higher share of solar, wind, and demand-side resources, while obviating the need to build expensive new peaking plants.
This trend is apparent in the development of a Western Energy Imbalance Market and the Southwest Power Pool’s evolution to a full day-ahead wholesale market. Both have already saved customers money and reduced barriers to integrating renewables.
In April, PacifiCorp and the California Independent System Operator (ISO) announced they would explore the feasibility and benefits of PacifiCorp joining the ISO. Arizona Public Service followed Pacificorp, NV Energy, and Puget Sound Energy by joining the Energy Imbalance Market after finding substantial benefits for customers.
While an Energy Imbalance Market isn’t the same as a fully integrated electricity market optimized across all available resources, this type of regional coordination is an encouraging development that boosts reliability, saves consumers money, eases renewable integration challenges, and reduces carbon emissions.
2. States are moving toward performance-based regulation
From coast to coast, emerging business models are changing the nature of relationships between customers, utilities, and regulators.
Minnesota, Illinois, and New York are all moving toward some form of performance-based regulation, in which power providers earn more by delivering on policy objectives such as energy efficiency or system resilience, rather than earning a profit based only on capital costs or volume of sales.
Regulators and utilities have been experimenting with performance-based regulation for decades, but as new technologies put pressure on the traditional cost-of-service model, more and more utility compensation will become tied to performance. Decision makers in several other states are watching the three leading states for signs of progress as they expand the use of performance-based regulation.
Compared to cost-of-service regulation, performance-based regulation is a forward-looking approach which starts by defining what value customers want the electricity system to provide, then shifts the system toward paying utilities for providing those services – requiring utilities to respond to changing customer needs while integrating new technologies and achieving policy goals.
3. Distributed resources are becoming much more important
With low-cost technologies allowing customers to generate their own power and control their energy use, several states are proactively planning for a future with more distributed resources. New York’s Reforming the Energy Vision and California’s Distribution Resource Plan show two methods—the first more market-oriented, and the second more planning-based—for integrating distributed energy resources (DERs) into system operation.
As rooftop solar costs continue to fall and battery storage technologies mature, customers won’t need to buy as much electricity, and some may not need the grid’s electricity at all. But a well-managed, integrated grid is more efficient at meeting customer needs than mass grid defection, and utilities proactively developing programs for distributed resources can find win-wins offering customers the choices they desire while sharing benefits with others.
4. Utilities and regulators are advancing rate designs and market structures to value flexibility
On the retail side, value-of-solar tariffs in California and Minnesota have moved beyond the net metering debate toward a more sustainable framework for distributed energy resources. More rational retail rate design allows utilities to cover costs while facilitating clean energy deployment. Successful rate reforms will fully account for the benefits provided by distributed energy resources, including often difficult-to-monetize flexibility services and public policy goals.
On the wholesale side, the Electric Reliability Corporation of Texas (ERCOT) is proceeding with market reforms designed to increase grid flexibility. Texas’ electricity market participants will now be able to trade flexibility services in real-time from both generators and aggregated demand-side resources. This exciting development exposes the value of flexibility in wholesale electricity markets, helping usher the grid into a much more dynamic era, taking advantage of new technologies to keep supply and demand in balance at lower costs.
5. Interstate transmission planning survives challenges
The Federal Energy Regulatory Commission’s (FERC) Order No. 1000 for transmission planning and cost allocation was passed just as APP’s initial recommendations were released in 2013. Order 1000 requires transmission providers to participate in and produce a regional transmission plan, and requires a hard look at DERs as a means to reduce capacity and avoid transmission expansion costs.
Since 2013, Order 1000 has survived legal challenges that could have limited its ability to guide transmission planning. The Clean Power Plan has also highlighted the need to develop more transmission to access high-quality renewable resources.
Looking Back To Look Ahead
America’s electric utilities developed as an always-expanding network of transmission lines, power plants, and increasing electricity demand, but that formula is no longer valid. Efficiency, renewables, and demand-side technology mean utilities must look toward the future.
This fast-changing system requires fast-changing policy guidance, and smart policy recommendations must reflect progress made in many states as well as new system realities.
Given the rapid changes on the ground, it is more important than ever for decision-makers and utilities alike to keep abreast of the best available information about how to manage change in the electricity sector.