The revolution in energy technologies has the potential to deliver incredible benefits to consumers. These technologies promise to make our electric system cleaner, cheaper and more reliable. However, the deployment of those technologies is likely to be uneven – both geographically and demographically – without a societal commitment to ensuring that the benefits are shared broadly. Broadbased benefits require regulators to commit to both getting the maximum value out of the new technologies and to ensuring that the value is available to all consumers.
The only way to achieve this equitable outcome is for regulators to make a commitment to “integrated innovation”. Without a regulatory commitment to sharing the benefits of innovation across all customers, they will continue to be deployed unevenly. Regulators can change this, though, by ensuring that utility operations are set up to capture the full benefits of innovative technology and by including the benefits of innovation in a modern definition of universal service. In this short article, we’ll describe why using the regulated utility model is the only viable way to provide “integrated innovation”.
Universal service-DER nexus
The nexus between universal service and distributed energy resources (DERs) — a term that can include anything at the edge of the grid from demand response to storage to distributed generation — lies in integrated innovation. Integrated innovation aims to ensure that DERs are a core part of both the energy system’s operations and the mission of the grid managers and owners.
Let’s consider operational integration first. Again, integrated innovation is based on the premise of maximizing the value of new technologies, so that investment in new technologies provides value to all users of the electric system, not just those who install the technologies. For DERs, integrated innovation requires an updated distribution system, with communications and controls that allow real-time operations in response to price signals, along with a regulatory regime that incorporates the full value of innovative technologies into the grid.
This type of system is not a foregone conclusion. It’s easy to imagine two legitimate paths for DERs: 1) self-sufficient off-grid or micro-grid applications, and 2) integrated innovation where DERs become trusted sources that benefit the grid (this could include the ability to island if needed), and all electric customers, as a whole. We focus here on integrating DERs, where myriad edge-of-grid technologies become as trusted and valuable as central station generation and improve the utility’s ability to provide reliable, affordable, universal service better and cleaner.
DERs have been deployed to date often with little to no regard for how they integrate into the overall system. Instead, the deployment has been driven mainly by consumer interest. A study of DERs in the California Independent System Operator (ISO) System, for example, found that, “Currently, the [Distribution Operator] and the ISO do not have visibility and situational awareness about the location, status, and output of DERs, and their overall impact to power flows along each distribution circuit, sufficient to accurately predict the impact DERs have on the grid.” Some DERs with unknown locations and impacts were compensated in the wholesale markets or through distribution payments for grid services that they may or may not have provided.
Implications of new technologies
Next, let’s consider implications of new technologies for universal service. Again, the premise of integrated innovation is that all consumers should be able to access the benefits of new technologies. As background, remember that universal service stands for the idea that everyone in America should have access to high-quality electric service. The concept underpins the “obligation to serve” that is imposed on utilities — that in exchange for a monopoly in a given service territory, utilities must provide electricity to all customers in that service territory.
DERs can provide many benefits, but without being sufficiently integrated into the mission of universal service, those benefits won’t necessarily be spread evenly across all energy consumers. Just like electricity was deployed unevenly — with rural Americans the last to get service — and broadband internet is still not fully available, without proper policy frameworks, the benefits of DERs may be realized by only some households.
Some people who could miss out on the benefits of non-integrated energy innovation include well-known examples of hard-to-reach customers like renters, low-income families and apartment-dwellers, as well as newer examples, such as people without centralized air conditioning, who are ineligible for many demand response programs that pay customers to reduce their air conditioning usage. Uneven adoption of DERs, and a lack of integration into the system creates the threat of an “electrical divide”, similar to the digital divide.
This would be detrimental to consumers, and may lead to consumer and policy backlash. For example, if new technologies live up to their promise of providing cleaner, cheaper and more reliable electric service, then people without access to those technologies will inherently have inferior service. And even worse, the people without the means or ability to deploy DERs, under certain policies, could end up subsidizing those who do install and reap the benefits of DERs. Indeed, this is likely happening today in some places with net energy metering.
Integration is the best option
The challenge, then, is to figure out a structure that is most likely to provide universal access to new technologies. To answer this, go back to the two different paths for deploying DERs described above: off-grid and micro-grid; or integrated into the grid. Again, integration is the best option.
Historically, regulators and utilities were tasked with allocating the costs and benefits of the electric system equitably so that each class of utility customers (industrial, commercial, residential) received comparable service at comparable prices. This was quite easy to justify, since all customers were also using the same technologies for their energy needs. This reasoning is being challenged by the influx of DERs, because there are now more differentiating elements in this universal service construct. However, if regulators are committed to the premise of maximizing the value derived from DERs and ensuring that all customers have access to that value, there is no other option than to include access to the benefits of new technologies in a modern view of universal service.
Integrated innovation, facilitated by utilities and regulators, can unlock the potential of these new technologies to provide benefits across the system and ensure that the technologies deliver on their promise rather than balkanizing the system into a series of redundant assets and infrastructure. This does not require everyone to install DERs, but it does require that DERs installed and integrated offer value for the system as a whole, including those who do not install the new technology. This can be done through careful regulatory rate design and disciplined allocation of the costs and benefits of new technology.
There is good news on the integrated innovation front. For example, there is a strong trend toward integrated innovation with the proliferation of “internet of things” tools for providing information on the status of DERs — thus making them a reliable and accountable resource. And state regulators across the country are looking to encourage innovation in the electric sector, including examining ways to reform regulatory constructs and encourage utility innovation. In addition to individual state initiatives, the National Association of Regulatory Utility Commissioners has convened a Task Force on Innovation to examine and promote innovation.
Finally, putting utilities at the center of integrated innovation will take real work and commitment from regulators. This requires a shift in regulatory approaches to ensure that regulatory requirements, profit incentives and obligations to shareholders align with integrating innovation.
Some may be impatient for dramatic change, especially when considering sustainability goals and climate imperatives. It is tempting to promote new technology for its own sake, or to look to competitive providers to jumpstart innovation. We recognize that there are challenges to integrating innovation into standard utility service. For example, utilities’ protected monopoly status and regulated rate of return give them an advantage in the marketplace, but that advantage is tempered by the obligation to provide universal service at just and reasonable rates.
Recognizing that arguments about whether utilities have an unfair advantage or not are likely to be a wash, regulators should focus on what really matters: benefits to customers. On this issue there’s no doubt that utilities are in the best position to integrate innovation (which may arise from and be incubated in small companies) and spread the benefits of technology, including DERs, far and wide.
Robin Lunt is an attorney and advisor in the law firm of Wilkinson, Barker, Knauer, LLC; Richard Caperton is the Director of National Policy and Regulatory Affairs at Oracle Utilities.These views are the authors’ own and not those of their employers or clients.