The U.S. electric power industry is changing fast. For a century, vertically integrated monopolies built power plants, strung transmission and distribution lines, billed customers, and were rewarded with a predictable return on investment. But now, consumers and businesses are demanding more control over the energy they use, and surveys show they are demanding cleaner sources. But under the current regulatory system, these market trends constitute a considerable threat to traditional utility business models. Utilities are facing declining sales and increasing competition at a time of increasing costs.
These market trends require new business models and new regulatory models that spur innovation instead of stifling it. America’s Power Plan collects solutions designed to help utilities work with state and local decision makers to meet consumer demand, harness innovation and overcome barriers to a more efficient clean energy future. Our goal is to ensure that consumers and producers alike thrive as our country undergoes profound shifts in the electricity sector.
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New Utility Business and Regulatory Models
New Utility Business Models: Utility and Regulatory Models for the Modern Era, by Ronald Lehr – Western Grid Group; former Colorado Public Utilities Commissioner
“Utility and Regulatory Models for the Modern Era” examines the evolving relationship between utilities and public utility commissions (PUCs).This paper offers recommendations for several types of utilities, but focuses mostly on vertically-integrated and regulated utilities. It outlines three future scenarios for utilities: minimum utility involvement, medium involvement as a “smart integrator” or “orchestrator,” or maximum role as an “energy services utility.”
You Get What You Pay For: Moving Toward Value in Utility Compensation, Part 1 – Revenue & Profit, by Steve Kihm – Seventhwave, Ronald Lehr – Western Grid Group, Sonia Aggarwal – America’s Power Plan, & Edward Burgess – the Utility of the Future Center
This paper corrects two widely held notions in the regulatory community: that the utility’s rate of return is the sole value driver for utility shareholders and that rates of return are set at the cost of equity. Neither of these perceptions is correct. Instead, the financial “value engine”—the difference between a utility’s return on investment and its cost of capital—drives shareholder returns. The authors argue that regulators should use this value engine to align utilities’ financial motivations with delivering value to customers and society. They can offer utilities opportunities to earn increased revenues when they provide value-based products and services.
This paper applies the utility shareholder “value engine” framework from part one to explore which regulatory models align utility profit with societal value under scenarios in which traditional, utility-owned, capital solutions may not be optimal for customers. The cases in this paper draw on simplified financial models designed to provide high-level insights into whether and to what extent cost of service, rate of return regulation and its alternatives, including performance incentive mechanisms and revenue-caps, can align utility shareholder value creation with societal value creation. Read the Executive Summary.
“New Regulatory Models” builds on “New Utility and Regulatory Models for the Modern Era” to propose new policy and regulatory opportunities for utilities, with particular focus on performance-based ratemaking. The paper includes seven case studies to demonstrate lessons from experience with performance-oriented utility compensation mechanisms, and draws out some principles for policy design. See also this presentation to the National Governors Association from September 2014.
This paper presents case studies about performance management in publicly-owned utilities, drawing out concrete steps that can support municipal utilities, public utility districts, and cooperatives to adapt to changing technology and market trends. These steps – which involve taking “no regrets” actions, exploring evolutions in government, and considering more drastic action if performance lags – can enable POUs to deliver greater value to their customers.
Utility Performance Incentive Mechanisms: A Handbook for Regulators, by Melissa Whited, Tim Woolf, & Alice Napoleon – Synapse Energy (Mar. 2015)
This is the second phase of a research effort with the Western Interstate Energy Board exploring performance-based regulation, the first of which was New Regulatory Models by America’s Power Plan and the Utility of the Future Center. Synapse’s handbook suggests dozens of metrics that policymakers can use to measure performance, and discusses in detail how to calibrate these metrics to align utility performance with desired outcomes. The handbook proposes steps that start with “articulate goals” and guides regulators through each step of measurement, goal-setting, implementation of performance incentives, and continuous improvement.
Lower Spending, Higher Returns, by Peter Kind – Energy Infrastructure Advocates & Doug Lewin – CLEAResult (Dec. 2016)
This report helps answer the question “how large should EE incentives be to motivate utilities?” Based on informal interviews with investment analysts, authors Doug Lewin and Peter Kind found even a small increase in earned returns (about 1 percent of return on equity), would positively impact shareholder value. Given the huge potential for additional cost-effective efficiency investment, the paper provides additional evidence supporting a move to a new utility business model that provides incentives for optimizing supply and demand.
Considering Risk and Investor Value in Energy Efficiency Business Models by Steven Kihm – Seventhwave, Peter Cappers – LBNL, & Andrew Satchwell – LBNL
Three utility finance experts explain what factors drive utility stock price valuation. While most regulators focus on the return on equity to understand utility motivation, Kihm explains two more variables affect valuation: scale and risk. The paper applies financial analysis to show how to link utility shareholder value to promote outcomes like energy efficiency—regulators must understand the interaction between return, risk, and scale. For a shorter explanation, try author Steve Kihm’s youtube page.
Going Deep on Performance-based Regulation: Incentive Mechanism Design, by the experts of America’s Power Plan (April 2016)
Given the momentum toward performance-based regulation in several commissions across the country, these briefs provide perspective on how regulators might decide to design performance incentive mechanisms for success:
Designing a Performance Incentive Mechanism for Peak Load Reduction: A Straw Proposal, by Michael O’Boyle – Peak electricity demand is a driver of investment in the electricity system, including many of the most carbon-intensive generators called “peaker” units. Peak demand growth also drives utility investment, a key component of utility profits. In this white paper, we examine a straw proposal for a new performance incentive that would motivate utilities to reduce peak demand, improving the affordability and environmental performance of the electricity system.
Metrics for Energy Efficiency: Options and Adjustment Mechanisms, by Robbie Orvis, Sonia Aggarwal, & Michael O’Boyle – A key outcome for an affordable, reliable, clean electricity system is the adoption of energy efficient technologies across the economy. In many states, utility revenue is linked to energy efficiency, but the programs are bogged down in tedious and controversial evaluation, measurement, and verification requirements. In this white paper, we explore different approaches to simplify the measurement of energy efficiency savings to better align utility incentives with efficiency outcomes.
Avoiding Counterfactuals in Performance Incentive Mechanisms: California as a Case Study, by Robbie Orvis – When designing performance incentive mechanisms, regulators may consider using counterfactuals to measure utility savings. While counterfactuals may be appropriate as an adjustment mechanism, they can also lead to unfair outcomes and unnecessary regulatory conflict. This white paper examines California’s Risk-Reward Incentive Mechanism (RRIM) as a case study, and distills lessons for incentive design.
Pathway to a 21st Century Electric Utility Model, by Peter Kind & Ceres (Nov. 2015)
In this paper, Peter Kind updates his 2013 paper on “disruptive challenges” facing utilities. The new paper lays out forward-looking approaches to state policy, regulatory reform, rate structures, and accountability of holding companies. Changing course from the 2013 recommendation for fixed charges as a potential solution to utility challenges, this new piece of work highlights the flaws associated with fixed charges and instead suggests alternatives like time-of-use rates, bidirectional meters, accountability incentives, and more
Performance-Based Regulation in a High Distributed Energy Resources Future, by Tim Woolf – Synapse Energy Economics & Mark Lowry – PEG Research (Jan. 2016)
Part of LBNL’s Future Electric Utility Regulation Series, this report explore key elements and variations of such regulation and its advantages and disadvantages from the perspectives of utilities and customers. A unique feature of the report is its treatment of comprehensive, performance-based approaches to regulation in the context of a potential future with a high reliance on energy efficiency, peak load management, distributed generation and storage. The report proposes different changes to utility revenue based on regulator and stakeholder appetite for change, from Performance Incentive Mechanisms, to Multi-year Rate Plans, to a full combination of the two in Britain’s RIIO model.
e21 Initiative – Phase I Report: Charting a Path to a 21st Century System in Minnesota, by Jennifer Christensen & Rolf Nordstrom, Great Plains Institute, and e21 Members (Dec. 2014)
Recognizing the “fundamental misalignment” between regulatory structures of the past and customer values in the present, e21 Phase I advocates for performance-based regulation in Minnesota. Among the consensus-based concrete proposals are: an opt-in performance-based regulatory framework, replacing the rate case with a five-year Business Plan and 15-year integrated resource analysis, encouraging pilot programs, promoting market development and competition, and increasing the accuracy of time-varying rates. Along with appeals directly to the Minnesota PUC, the report is intended to be a framework for other states considering movement toward performance-based regulatory models.
Xcel Energy endorsed the recommendations of e21 in a letter to the PUC that also incorporated Rethinking Policy to Deliver a Clean Energy Future.
Phase II of its e21 project provides more detailed implementation options for performance-based compensation, integrated systems planning, and grid modernization. Though it does not reach consensus recommendations, the document fills in detail to the principles articulated in phase I, providing a model for other states interested in adopting Minnesota’s consensus-based approach to rethinking utility regulation.
The Future of the Grid: Evolving to Meet America’s Needs, by GridWise Alliance and U.S. Department of Energy (Dec. 2014)
This report provides a comprehensive vision for the future of utility business models that reflects wide stakeholder agreement on the role of the grid and the changing relationship between customers, distributors, and transmission operators. Participants agreed that the grid of the future will enable a two-way power system, require more coordination between bulk and distribution systems, and use information technologies to optimize operations across supply and increasingly responsive demand.
The Economics of Grid Defection, by P. Bronski et al. – Rocky Mountain Institute (Feb. 2014)
As distributed solar and battery storage come down in price, electricity customers may become less reliant on utility services. The authors of this paper refer to this phenomenon as “grid defection”. This report analyzes five representative states to estimate when solar-plus-battery systems will achieve parity with retail prices. It concludes that retail parity has already arrived in Hawaii and is likely to happen in several other parts of the country within the next decade or two. This has major implications for utility planning, as many electricity sector assets have lifetimes longer than that.
In April 2015, RMI followed up with The Economics of Load Defection, which projects deployment of grid-connected distributed solar-plus-battery systems and effects on revenue in four regions. The report encourages utilities to be proactive about providing value for grid-connected solar-plus-battery systems so their owners choose to stay connected and provide benefits to the grid. For utilities that do not make changes, the authors warn of a potential death-spiral, but under a smart regulatory framework, the authors see potential for distribution utilities to continue to prosper and play an important role in system optimization.
This paper describes three factors that will drive a change in the utility business model: new technology, declining electricity demand, and U.S. climate policies. Together, these forces result in a bleak financial picture for utilities under traditional regulatory structures; they demand a new business model. The piece argues for a new business model that rewards utilities for reliability, affordability, and environmental performance. It recommends a time-scale for performance objectives (5-7 years), a method for rolling out these changes, and it points to opportunities for utilities to win in the power grid transformation.
Designing a New Utility Business Model? Better Understand the Traditional One First – by Steve Kihm – Energy Center of Wisconsin, and Jim Barrett & Casey J. Bell, American Council for an Energy-Efficient Economy (July 2014)
This paper aims to describe the existing utility business model at a fundamental level, showing that a simplified model can successfully explain past utility performance and behavior. The paper then draws inferences about how current and potential future market conditions are likely to impact utilities’ performance and behavior.
UtilityVision, by Acadia Center (Feb. 2015)
UtilityVision is a regulatory framework showing how the parts of a modern energy system can be aligned to put the consumer at the system’s center. UtilityVision is organized around five key areas for reform: empowering the consumer, planning a consumer-focused power grid, aligning utility incentives with consumer and environmental goals, helping consumers pay for the power they use, and paying customers for power they produce. These recommendations are consonant with Utility and Regulatory Models for the Modern Era and Policy Implications of Decentralization, two reports from America’s Power Plan.
ACEEE report series: How to Make the Utility of the Future an Energy Efficient One, by American Council for an Energy-Efficient Economy (June 2015)
The first white paper, Policies Matter: Creating a Foundation for an Energy-Efficient Utility of the Future updates ACEEE’s 2011 report about utilities’ conflicting objectives under traditional regulation—namely, to help their customers save energy and at the same time to earn profits—as well as state policy options to resolve this conflict. It draws together findings regarding several regulatory tools that many states have used to encourage utility energy efficiency efforts. The analysis concludes that a comprehensive strategy—getting the business model right and setting specific efficiency targets—is most closely associated with achieving high savings.
The second report, Valuing Efficiency: A Review of Lost Revenue Adjustment Mechanisms (LRAM), examines one mechanism meant to deal with a utility’s disincentives to invest in energy efficiency. An analysis of 17 states found that while LRAMs drive some investment in energy efficiency, the LRAM produces inferior savings when compared to energy efficiency targets and full revenue decoupling.
The third study is Beyond Carrots for Utilities: A National Review of Performance Incentives for Energy Efficiency. After examining the 25 states that have energy efficiency performance incentives for utilities or statewide program implementers, it finds that performance incentives are working well to elevate utilities’ interest in investing in energy efficiency and to encourage them to meet or exceed their energy savings targets.
Electric Industry Structure and Regulatory Responses in a High Distributed Energy Resources Future, by Steve Corneli & Steve Kihm (Nov. 2015)
Part of LBNL’s Future Electric Utility Regulation Series, this report lays out a framework for assessing market failures and related dynamics in the power sector, designed to help evaluate possible policy responses. Unsurprisingly, the authors see continued value in a shared grid system and a continued role for utilities—albeit with some substantial changes. The paper concludes that evolutions in utility business models as either smart integrators or expanded service offerings will be needed to maintain a viable business model as the “natural monopoly” characteristics of electricity service are eroded by distributed energy resources.
Reforming the Energy Vision, Staff Report – New York State Department of Public Service (Apr. 2014)
In April 2014, New York’s utility commission came out with a staff document describing a fundamentally new vision for the state’s utilities. In the plan, the DPS staff proposed to create a Distributed System Platform Provider (DSPP), a new energy services company that co-optimizes distributed energy resources with variable supply by creating a marketplace for those resources. In February of 2015, the DPS approved a regulatory framework and implementation plan that requires utilities to take concrete steps toward becoming DSPPs.
In July of 2015, the DPS staff proposed changes to utility compensation and retail rates to accomplish the goals of the REV. The “Track Two” proposal (.pdf download) recommends that the Commission link utility compensation to both DSP services and utility performance metrics. The staff also recommends movement toward more granular retail rates that vary with time, location, and attributes to more accurately value distributed energy resources.
Revenue Regulation and Decoupling: A Guide to Theory and Application, by Regulatory Assistance Project (updated Nov. 2016)
This guide was prepared to assist anyone who needs to understand both the mechanics of a regulatory tool known as decoupling and the policy issues associated with its use. This includes public utility commissioners and staff, utility management, advocates, and others with a stake in the regulated energy system. The Report is appended by Six Case Studies, which examines the revenue regulation practices of six utilities in different states and distills key elements for state utility regulators to consider when designing these mechanisms.
Decoupling Design: Customizing Revenue Regulation to Your State’s Priorities by Rich Sedano & Janine Migden-Ostrander – Regulatory Assistance Project (Nov. 2016)
This report identifies the key questions regulators face when considering decoupling, and provides substantive discussion to sort out the pros and cons of each approach. The report allows regulators to pick design aspects that best fit their goals and resources for utility regulation. It covers distribution-only utility or a vertically integrated electric utility that has adopted decoupling for distribution services only.
Ratemaking & Rate Design
An Adaptive Approach to Promote System Optimization, by Michael O’Boyle – America’s Power Plan, prepared for SEPA 51st State Challenge (Apr. 2015)
This paper was selected as one of three papers to be featured at the Solar Electric Power Association’s (SEPA) 51st State Summit on April 27 in San Diego in conjunction with its 2015 Utility Solar Conference. The 51st State Challenge asked authors to re-imagine our energy future in a hypothetical 51st State with no existing regulations or market structures. Rather than focusing on specific policy recommendations, the paper returns to first principles of rate design and market structure that can guide regulatory policy in any state, no matter the constituency, resource availability, or regional market structure.
Distributed Energy Resources: Policy Implications of Decentralization, by James Newcomb, Virginia Lacy, Lena Hansen, & Mathias Bell – Rocky Mountain Institute
Distributed energy resources can help deliver an efficient power system that is cleaner, more affordable, and more reliable. But these disruptive technologies are encountering a regulatory system designed for centralized power plants, monopoly utilities, and passive consumers. To incorporate distributed energy resources, policymakers must first quantify the full range of costs and benefits, analyze tradeoffs, and incorporate distributed energy and services into resource planning. New market mechanisms and business models are needed for both utilities and new companies in order to drive innovation while preserving reliability. This paper lays out recommendations for taking advantage of distributed resources.
Distributed Generation: Supporting Generation on Both Sides of the Meter, by Joseph Wiedman – Interstate Renewable Energy Council, Inc., & Tom Beach – Crossborder Energy
Consumers are demanding increased control over their own energy production, especially through distributed generation. This paper provides recommendations for policymakers aiming to maximize the benefits of distributed generation. It details several policies that can support distributed generation.
A Review of Alternative Rate Designs, by Aman Chitkara, Dan Cross-Call, Becky Li, & James Sherwood – Rocky Mountain Institute (May 2016).
A new comprehensive meta-analysis of utility programs and industry research on time-based and demand charge rates. The research identifies key design decisions and their effects on outcomes (peak reduction, total load reduction, customer acceptance), recommending best practices for both. On time-based rates, the Review provides detailed, broad empirical evidence to guide conversations as different regulators consider changes to net energy metering (NEM) or other peak reduction programs. The report concludes that more testing is needed to understand the effects of demand charges, which are not nearly as common.
Distributed Energy Resources Rate Design and Compensation Manual by National Association of Regulatory Utility Commissioners Staff Subcommittee on Rate Design (Nov. 2016)
This document identifies key questions for valuing DERs and leaves it to state commissioners to provide solutions that best align with their unique public policy objectives and circumstances. The manual thoroughly covers diverse perspectives on different rate designs and their effects on DER deployment and utility revenue. These include demand charges, fixed charges and minimum bills, standby and backup charges, and interconnection fees and metering charges.
Economic Concerns about High Fixed Charge Pricing for Electric Service, by Steve Kihm (May 2015)
The author argues against high fixed charges, and instead argues that long-run marginal costs should be allocated to volumetric charges. This ensures customers retain incentives to manage their energy use efficiently, reducing long-run capacity needs. High fixed charges would remove these incentives, and along with unfair burdens on low-income customers would result in higher energy consumption and higher system costs.
Value of Solar: Program Design and Implementation Considerations, by M. Taylor et al. – Solar Electric Power Association, & J. McClaren, K. Cory – National Renewable Energy Laboratory (Mar. 2015)
This report posits four factors for policymakers to consider when designing VOST: transparency, predictability, a standardized calculation methodology, and a levelized cost for solar. Each of these factors addresses perceived shortcomings of the net energy metering and fixed charge structures that have been unable to accomplish sustainable compensation for the costs and value of rooftop solar and the grid.
Beyond the Meter: Addressing the Locational Valuation Challenge for Distributed Energy Resources by Josh Bode, Josh Schellenberg, & Alana Lemarchand – Nextant (Nov. 2016)
Nextant, commissioned by the Smart Electric Power Association, provides a methodology for quantifying the locational value of DERs for distribution capacity. The method allows utilities to compare the value of different DERs based on how well their location and time of production match the local need. The report shows how to calculate the value metric, Load Carrying Capacity Factor (LCCF), by mapping the hourly capacity contribution of each DER on to the times when it’s needed most.
Demand Response: The Road Ahead, by Dan Delurey – Wedgemere Group (Feb. 2016)
This report is a comprehensive overview of the challenges and opportunities demand response (DR) provides to the electricity system. The report identifies objectives for DR, explains the challenges in addressing them, and makes recommendations to policymakers, practitioners, and stakeholders for accelerating the achievement of the objectives. These include: expanding understanding of DR’s dual role as a supply resource and load reduction, increasing retail-wholesale coordination, improving planning, optimizing rates, valuing location, and improving verification.
Recovery of Utility Fixed Costs: Utility, Consumer, Environmental, and Economist Perspectives, by Lisa Wood – Institute for Electric Innovation, John Howat – National Consumer Law Center, Ralph Cavanagh – National Resource Defense Council, & Severin Borenstein, UC Berkeley (June 2016)
Part of the Future of Utility Regulation Series, LBNL solicits the utility, consumer, environmental, and economic perspectives on recovering fixed costs in an era of shrinking demand. Utility representatives advocate for more stakeholder-utility collaboration to find common ground; the consumer advocate argues for revenue decoupling to deal with utility efficiency incentives and argues the status quo is least likely to unduly burden customers; the environmental perspective advocates for minimum bills, time-varying rates, and inclining block rates to promote efficiency; and the economic perspective advocates for pricing at the societal marginal cost, but highlights “least bad” alternatives to this ideal such as time-varying rates.
Electric Utility Residential Customer Charges and Minimum Bills, Jim Lazar – Regulatory Assistance Project (Nov. 2014)
Increased deployment of rooftop solar PV has created renewed debate over how utilities can recover fixed costs from these customers while fairly compensating them for the electricity they produce. This paper proposes minimum bills over fixed charges as the more optimal and equitable solution for covering distribution costs. RAP’s analysis shows that a minimum bill option ensures that all customers contribute to distribution costs, without encouraging significantly more consumption by higher-use customers or increasing the bills of lower-income, low-use customers.
Rethinking Standby & Fixed Cost Charges, by Jim Kennerly, NC Clean Energy Center (Aug. 2014)
The report explores the way in which utility costs are classified and allocated, the areas in which stakeholders have expressed disagreement about the costs avoided by distributed solar, the ways in which utilities have designed solar-specific rates and charges, and why some proposed solutions are unduly burdensome and pose risks. It ends with suggestions for a more holistic and equitable utility cost recovery strategy.
Utility Regulatory and Business Model Reforms for Addressing the Financial Impacts of Distributed Solar on Utilities, by Galen Barbose et al. – National Renewable Energy Laboratory (May 2016).
Highlights some of the challenges and opportunities for the distributed solar PV (DPV) market arising from recent rate reform efforts, particularly demand charges and fixed charges. For example, NREL finds the immediate elimination of NEM in all states could reduce residential DPV deployment by 30 percent by 2050, while universal availability of NEM would increase residential deployment by roughly 40% compared to current policies. In contrast, other strategies such as broadening customer access to solar, and aligning utility earnings and profits with DPV adoption may ameliorate concerns about the utility financial impacts, but without severely constraining DPV market growth.
Financial Impacts of Net-Metered PV on Utilities and Ratepayers: A Scoping Study of Two Prototypical U.S. Utilities – by A. Satchwell et al., Lawrence Berkeley National Laboratory (Sept. 2014)
Researchers at LBNL analyzed the effects of distributed solar on two “prototypical” investor-owned utilities, with an eye toward how the operating environment and regulatory structure affect financial well-being. The authors then modeled several options for mitigating negative effects on utility profitability via regulatory and ratemaking measures. Mitigation measures analyzed include: revenue-per-customer decoupling, lost revenue adjustment mechanisms, shareholder incentives, no regulatory lag, future test years, increased demand- or fixed-charge, and others. The authors found that mitigation measures could be used in combination to take the pressure off utility revenue erosion, lost earnings opportunities, and increasing rates.
Microgrids: An Assessment of the Value, Opportunities and Barriers to Deployment in New York State, New York State Energy Research and Development Authority (NYSERDA) (Sept. 2010)
This report examines the potential value of microgrids, with a focus on the potential pathways and current barriers in New York State. It provides a typology of microgrid ownership and service structures and a series of case studies on existing and planned microgrid projects, explores the legal and regulatory framework that microgrids would be subject to in New York State, reviews the status of microgrids in other parts of the United States, and examines microgrid value streams.
A Tariff for Reactive Power, by C. Tufon, et al. (Mar. 2009)
This paper describes a suggested tariff or payment for the local supply of reactive power from distributed energy resources. It finds that reactive power for local voltage regulation could be supplied to the distribution system economically by customers when new inverters are installed. The inverter would be supplied with a power factor of 0.8, and would be capable of local voltage regulation to a schedule supplied by the utility. Inverters are now installed with photovoltaic systems, fuel cells and microturbines, and adjustable-speed motor drives.
Electric Vehicles as Distributed Energy Resources, by Garrett Fitzgerald, James Newcomb, & Chris Nelder – Rocky Mountain Institute (June 2016)
This comprehensive report examines electric vehicle (EV) charging as both an operational challenge and an opportunity to unlock demand-side flexibility. The report covers trends and drivers of EV deployment, best practices for charging infrastructure deployment, utility roles in a high-EV future, and best practices for managing EV demand as a grid resource and customer service. The report concludes with policy recommendations in each area, sorted by policymaker, much like the searchable recommendations from America’s Power Plan.