In the wake of the November election, the ground started shifting faster in the energy delivery sector.
Policies long protected by the Obama administration may give way as the President circles the wagons around his legacy Clean Power Plan. Long-sought Republican objectives, like a go-ahead on the Keystone XL pipeline, suddenly look almost inevitable.
“When utility and grid system planners look at improvements to the system, they need to identify projects and technologies that are justifiable on a cost benefit basis under a variety of market and regulatory conditions,” explained PA Consulting energy expert Ron Norman. “The best projects can be of value in a variety of circumstances.”
Norman says that in the face of the uncertainty confronting them, utility and transmission system planners’ investments must meet two key criteria:
By flexibility, Norman means that expenditures must have the ability to operate in the face of technological, market, and regulatory uncertainties.
By cost-justifiability, he means that cost-benefit analyses in varying technological, market, and regulatory scenarios must favor the expenditures.
How planners can use the criteria
The criteria, he said, will help planners do things like modernize their systems, improve their systems’ flexibility and reliability in meeting load, improve their systems’ rapid, predictable adaption to future change, and/or set the stage for capital investment.
“It is a way of thinking about where the value really comes from and insuring that your project makes sense, not based on one view of the world but based on multiple views of the world,” Norman explained.
Norman acknowledged that is difficult to put the concepts in concrete terms. “It is high-level. I am not saying a particular project or technology makes sense. The reality is it depends. It always depends.”
Norman said utility executives he has talked to have found his two criteria provide a new and useful way to assess expenditures. Traditionally, they would probably have applied a “single or limited set of scenarios and cost-benefit analyses,” he explained. “The notion of looking for flexibility or the robustness of a decision under a variety of policy and market and technology circumstances would not have entered into the equation."
An example in transmission
The 150-mile, $1.4 billion, 500-kilovolt alternating current (AC) Roseland-Susquehanna line, built by PSE&G and PPL and due online by spring 2015, exemplifies the complicated analysis embedded in his criteria, Norman said.
It met the demands of a set of rigorous cost-benefit analyses because it relieved real and long-standing transmission congestion in the region. But similar projects proposed at the same time now no longer warrant the same kind of investment because of the sharp drop in the price of the region’s natural gas resources.
“The real shift here is thinking about the dimensions of technology, markets, and policy and regulation, as opposed to simply thinking about cost-benefit in the world now or in a so-called normal future,” Norman said. “That changes the complexity of the planning process.”
Without linking himself to a specific description of the future, Norman pointed out that planners must think about things like climate change, increasing demands from an increasingly tech-savvy customer base, and the role of technologies like storage, distributed generation, micro-grids and smart capabilities in energy system operations.
There is an unprecedented number of technologies coming at utility and grid system planners from an unprecedented number of directions, Norman explained. “The future of utilities and the way they interact with their customers and the way they interact with their regulators and the way they implement technology will not look like it looks today. It will be pretty radically different.”
Even if the choices are beneficial according to the two criteria, they could be quite disruptive to the balance of the utility’s business. But a utility may not have the choice not to take them on. “The regulators may require it. Their customers may demand it,” he explained. The utility’s only option might be “to figure out a new approach to other parts of the business."
An example in solar
Change will come in different ways and at different rates around the country, Norman said.
A perfect example, he agreed, is what is happening in North Carolina. Duke Energy and state regulators have kept rooftop solar development to a minimum by blocking the third party ownership finance plans that have made residential solar affordable elsewhere.
But a demand for third party ownership is emerging that, solar advocates say, will eventually force legislators to legalize such financing. That will force regulators to implement it. And that will force Duke to accept rooftop solar.
It is a perfect example, Norman said, because customers are demanding changes and utilities will have to adapt.
The two criteria are useful in deciding which things to pursue. But with the number of changes coming at them, planners are going to have to be increasingly flexible. The way to do that, he explained, is “a portfolio notion as opposed to a rifle shot notion.”
That emerging trend will become apparent in utility and system planning very soon, he said.
No proposed expenditure is likely to satisfy a cost benefit analysis in every future scenario and not every proposal will succeed, Norman said. “But if you think about a portfolio of things and your regulators are on board with thinking about it as a portfolio, then you are in a position to try more things.”