Navigant Research Blog

Regulating the Energy Cloud

— April 8, 2015

As discussed previously on the Navigant Research blog (Offense and Defense and Open or Closed?), the electrical grid is evolving toward an energy cloud model in which two-way energy flows support distributed energy resource (DER) integration, transactive energy, and other complex market structures and transactions. Representing a platform on which stakeholders will engage to facilitate greater coordination and sophistication in selling and consuming energy, this network of networks has the potential to be far more flexible, dynamic, and resilient than the traditional grid. These changes are detailed in Navigant Research’s recent white paper, The Energy Cloud.

But ensuring reliable, safe, and cost-effective service—the core focus of utilities—is not guaranteed merely by the energy cloud’s emergence. An enforceable regulatory model will need to emerge that balances innovation and the economic benefits of open market competition with the need to maintain interoperability and coordination across a network made up of many layers of disparate elements.

Avant Garde

Today, we’re witnessing a period of rapid experimentation with respect to regulating utilities of the future in the energy cloud. The dramatic rise of DER on the grid has pressed regulators and utilities alike to respond.

Although many factors will determine how the energy cloud will evolve across different markets, states like New York, Hawaii, and California remain at the vanguard of regulatory experimentation in the United States.  In New York, for example, regulators have proposed initiatives to transform utilities into so-called distributed systems platform providers that would act as the interface between consumers and the bulk power system. Other states (e.g., Massachusetts, Minnesota, and the Carolinas) are beginning to explore alternative models as well, but have yet to challenge the utility’s role as the owner and operator of the distribution system.

The issue of who ultimately owns the distribution grid is at the heart of the energy cloud’s evolution. On one hand, the government and the public want to increase competition to achieve lower cost and additional service for customers. On the other hand, the increased complexity and cost to manage distributed intermittent resources across the grid could drive reregulation and consolidation.

Independent Operator

In the latter case, few challenge the need for a centralized authority to do so. Proponents of this approach, such as former Federal Energy Regulatory Commission (FERC) chairman Jon Wellinghoff, support the creation of an independent distribution system operator to manage the distribution grid even if utilities ultimately own the system.

This trend stands in direct opposition to a historic transition toward deregulation in the United States that is already underway. Deregulated markets are expected to allow for more experimentation with respect to business models, thus creating a competitive market for power generation and allowing retail customers to decide who supplies their electricity. However, a lack of standardization and coordination within these markets could make it much more difficult to ensure reliable, safe, and cost-effective operation due to a high level of market fragmentation. The growing footprint of DER, for example, requires much tighter integration and a stronger coordination of demand and supply across the energy value chain.

While it might seem that over-regulation or reregulation would stifle innovation, with respect to the energy cloud, the opposite may in fact prove true. Regulated markets, it turns out, may provide more stable platforms for a coordinated rollout of energy cloud infrastructure and capabilities.

Jan Vrins contributed to this 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.

Pioneers

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.

 

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