Navigant Research Blog

Utility Reform Takes Hold in the Rockies

— April 6, 2015

A new bill introduced in the Colorado General Assembly is intended to jump-start the state’s efforts to revise its traditional utility ratemaking models. In effect, the bill would contribute to substantial changes in how Colorado utilities plan, upgrade, and operate their grids. The end goal is to align the utility business model with state objectives to promote an environmentally friendly industry through increased adoption of clean/renewable generation and energy efficiency strategies.

Specifically, the bill would require the Colorado Public Utilities Commission to investigate and report its findings on potential measures to encourage customer energy efficiency and engagement, grid efficiency and reliability, technology innovation, and clean energy development and integration. This would guide the restructuring of the Centennial State’s practices around ratemaking, incentivizing, standards development, and approval processes in order to appropriately balance the good of the public, environmental benefits, and the utility business. It’s a tall order, but other states such as Hawaii, New York, and Massachusetts have already laid the groundwork for revising their energy regulation frameworks around similar goals.

For the Long Term

To date, utilities and other stakeholders both within Colorado and nationally have expressed concerns over the loss of revenue, increased grid instability, and cross-subsidizing that can occur in areas with high penetration rates of distributed generation. Notwithstanding the need to lower the greenhouse gas emissions associated with traditional forms of power generation, prices for distributed solar systems are declining, fueling adoption and raising awareness around policies that support growth. So, it’s imperative that regulators enable mechanisms that enable utilities to maintain profitability and provide good service.

One such mechanism that has commonly been discussed is performance-based ratemaking. A somewhat nebulous concept, a performance rate structure essentially rewards utilities based on the level of service they provide to their customers. In theory, utilities are more invested in pursuing long-term improvement strategies instead of squeezing revenue out of their current asset base to meet service requirements.

Past Due

Many observers believe that the traditional regulatory framework is overdue for reform, and I happen to agree. But others see the reform process as potentially over-hasty. This month in Public Utilities Fortnightly, Kenneth W. Costello, principal researcher at the National Regulatory Research Institute, warned readers of the uncertainty around the spread of new technologies and resources in North America. “Decisions that bank on the sureness of the future invite regrettable outcomes,” remarked Costello.

Keeping that in mind, perhaps the slow pace of regulatory reform might actually be a blessing in disguise for Coloradans. Realistically, the state is unlikely to implement any sort of large reform in the near future. HB 1250, the bill under question, was approved by the Energy and Transportation Committee in late March on a party line vote. It still has to pass through financial and appropriations committees before it gets to the GOP-dominated Colorado Senate, which will most likely kill the bill.

Max Tyler, the primary sponsor of the bill, told me that he holds no illusions that this legislation will sail through the Colorado Senate. Nevertheless, he maintains a sense of optimism in regard to state energy reform: “Ideas with big barriers and big changes will take a while.”


Congestion Charging Makes a Comeback in Major Cities

— March 31, 2015

Congestion charging—and similarly ambitious programs for traffic management—are once again on the agenda for the mayors of large cities struggling with traffic jams, rising pollution levels, and shortfalls in transport funding. The fact that a traffic pricing scheme is again under discussion in New York is a significant indicator of the changing mood, and there are reasonable grounds to believe that this time it might happen.

Other cities are also stepping up their programs to manage or reduce private vehicle use. The mayor of Paris is considering a series of restrictions on high-emission vehicle use in the city, starting with a ban on older diesel engine vehicles. Madrid—another city suffering from poor air quality caused mostly by diesel vehicles–has introduced intelligent parking meters that charge higher fees for more polluting vehicles (there is no charge for electric vehicles [EVs]), and there are plans to extend the current controlled areas for vehicle access to other parts of the city. Beijing’s city leaders are also considering a form of congestion charging, though public resistance continues to be a considerable barrier in the Chinese capital.


Singapore led the way on road user charging in cities in the 1970s, but it was the introduction of the London Congestion Charge in 2003 that seemed to herald the wider adoption of such schemes around the world. However, enthusiasm waned after similar projects were rejected in cities like New York, Manchester, and Edinburgh. For most city leaders, such large-scale projects were seen as politically risky. So although road charging is used on many highways around the world and is becoming more attractive as an alternative to general road or fuel taxes, the reference cases for urban congestion control remain relatively few. Alongside London and Singapore, Stockholm, Gothenburg, and Milan are still the most notable examples.  While many cities still grapple with basic arguments over congestion management, Singapore continues to evolve its approach and is now proposing a new system, which will give it almost total visibility on vehicle movements in the city.

Political Courage

Gaining acceptance for a congestion charging scheme requires strong, even brave, political leadership and the willingness to engage with citizen and business concerns. Apart from a common resistance to paying for something that was previously free, many citizens and businesses are wary of schemes that are not linked to improvements in the transport system. The London and Stockholm schemes, for example, were both linked to funding improvements in transport infrastructure, and this is a key part of the recent proposals for New York, as well.

It’s also important that a city can offer viable alternatives in terms of connected and reliable transit scheme. The growing acceptance of EVs in cities (which are excluded from many charging schemes) and the availability of electric car-sharing programs like Autolib’ Paris means that there are now ready alternatives to commuters who can’t or don’t wish to abandon their own vehicle.

Congestion charging schemes today are part of a much broader debate on the nature of urban mobility, with better information and more alternatives available for many city travelers. Once again, we are looking to see if New York will pick up the baton.


Doubts Surface About U.K. Smart Meter Rollout

— March 26, 2015

Serious doubts have surfaced about the rollout of smart meters in the United Kingdom, with a key government committee raising the issue to a new and alarming level. In its most recent report, the Energy and Climate Change (ECC) parliamentary committee concluded the program “runs the risk of falling far short of expectations. At worst it could prove to be a costly failure.”

The smart meter rollout is large, expensive, and complex. By 2020, a total of 53 million electric and gas meters are to be installed in some 30 million British homes and small businesses. The estimated cost is $16.2 billion, which is to be passed on to consumers. The cost is supposed to be offset by an estimated savings of $25.5 billion, in part from greater energy efficiency. One of the more complex features of the rollout is a communications infrastructure that aims to coordinate meter data among the energy suppliers, network operators, and authorized service providers. A government-appointed company called Smart DCC is charged with setting up this infrastructure.

Shaky Foundation  

The rollout is still in its early stage, called the foundation phase. The committee’s report expresses disappointment with several unresolved issues to this point: meters unable to communicate in multiple occupancy and tall buildings; interoperability issues among different types of meters and in-home displays; a shortage of installation engineers; network rollout delays by Smart DCC; and delays in public engagement around the program. So far, about 550,000 smart meters have been installed and are in use, which is about 1.2% of all domestic meters under management by the country’s largest energy suppliers.

The start of the next phase, called the mass rollout, has been delayed twice, as noted in a previous blog. As of now, the mass rollout is to begin in the fall of 2016. However, with this latest government report and the ongoing technical issues, that start date could slip once again.

Eventually, smart meters will be deployed widely in the United Kingdom. But given the complexities involved, it’s a good bet that the 2020 target will be missed—and perhaps by a wide margin.


Spanish Wind Industry Faces Subsidy Cuts

— March 24, 2015

In early 2014, the Spanish government reformed the electricity market by discontinuing the feed-in tariff (FIT) program entirely for all wind plants going forward. The government has also attempted to lower purchase prices retroactively for production from existing wind plants, which essentially means that wind producers who built wind plants counting on tariff-subsidized prices for the next 20 years now abruptly face major revenue shortfalls. A direct result of Europe’s ongoing fiscal crisis in the wake of the 2008 crash, this move is widely considered the most damaging change to renewable incentives in any country globally, and it could result in a permanent wind market collapse across the European Union (EU).

For Spanish wind plant developers, such as Iberdrola or Acciona (ranked as the No. 1 and No. 5 wind operators globally in 2013, respectively), 2014 was a rough year. In its 2014 annual report, Iberdrola announced that it installed only 157.7 MW during 2014. To put that into perspective, the No. 2 company on the list of top 15 global wind operators, Longyuan Power Group in China, installed 1632.7 MW in 2014, and is now likely to surpass Iberdrola as the leading global wind operator. Acciona added 98 MW in 2014, but was forced to sell off 150 MW—thus ending up with less net wind capacity in 2014 than in 2013.

Cash Crunch

The FIT cancellation affected the cash flow of these Spanish companies, as well. Iberdrola’s 2014 profits took a major hit, falling by almost 10% compared to 2013, to hit €2.33 billion ($2.65 billion). In its 2014 annual report, Acciona asserted that, despite the regulatory setback, the company is profitable again and has managed to reduce its debt by €746 million to a still-heavy €5.2 billion ($5.64 billion).

Even if the companies survive this hit, the prospects for domestic development of wind energy in Spain are dire. Companies like Iberdrola and Acciona have the option to go abroad to markets in the United Kingdom, the United States, and Brazil to install wind energy; but for wind development in Spain, there is nothing attractive to investors about joining a market where regulation is uncertain and government support withering. In 2014, Spain installed just 28 MW of wind power, far below the 175 MW installed in 2013. The tariff cut has imperiled the future of clean energy in Spain, unless the government can bring back wind incentives and restart the market.

For a more detailed analysis of Spain’s wind market, as well as the broader global market for wind power, see Navigant Research’s forthcoming World Market Update.


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