• Energy Transformation
  • Energy Management
  • Blockchain
  • Regulations

Regulatory Sandboxes Expected to Accelerate the Energy Transformation

Johnathon de Villier
Nov 05, 2019

Data

In a recent Navigant Research, a Guidehouse company, report, I recommended that regulators in the US look to Ofgem’s regulatory sandbox as a leading example of how to test emerging technologies and business models in a real world setting. In October, energy blockchain startup LO3 Energy petitioned the New York City Governor’s Office to be designated as a sandbox. This would allow LO3 Energy to fully deploy its peer-to-peer trading solution. Projects like this provide exactly the opportunities that blockchain and other emerging technologies need to prove their worth. 

What Is a Regulatory Sandbox?

Ofgem launched the first phase of its regulatory sandbox project in February 2017. This project has served as a model for similar programs in the US. The project had the specific aim of partnering with innovators to identify regulatory barriers to new solutions and offerings that could benefit customers. To help stress-test proposed solutions in a time-limited, real world environment, Ofgem allowed innovators to deploy their solutions at a small scale while allowing them to operate under a relaxed set of rules.

French energy provider EDF, peer-to-peer trading startup Empowered, and smart home service provider OVO Energy were three of the first innovators selected to participate in the sandbox. Though Ofgem reports that a focus on end users was not required, a majority of the 30 plus applications for the "Window 1" application period were from innovators trialing solutions for residential customers.

Conferring sandbox status on a project turns it into a policy trial and a technology trial. Innovators and the regulators gain critical insights into how a new product and proposed policy change will affect customers, existing markets, and infrastructure without risking a permanent policy change. 

Energy-Specific Sandbox Legislation Can Build on Existing Models

Several states in the US have passed legislation that enables regulators to create sandboxes, generally with a focus on the financial industry. Utah and Arizona are two examples; both states had financial instruments in mind when the legislation was designed (and not everyone liked the idea). However, programs like these, as well as Ofgem's in the UK, provide models for legislation for the energy industry to build on.

Energy-specific sandboxes must be carefully and thoughtfully designed. The process should require innovators to identify a target customer group, a specific rule or ruleset that inhibits the proposed solution, and a timeframe over which the solution will be tested. Regulators and innovators should work together to identify metrics that will be used to evaluate the trial's success or failure, and to protect customers if failure occurs.

Sandboxes Can Help Regulators Keep Pace with the Energy Transformation

There are good arguments for similar legislation that targets the energy industry, particularly the power sector. The energy system is transforming toward a largely distributed and renewables-based future that will require an updated regulatory framework. Trialing some targeted policy changes now, at limited scale, will help ensure that the rules governing the system keep pace with the energy transformation. 

Though transactive energy and blockchain projects would be obvious beneficiaries of a sandbox program, they are not the only tools in the Energy Cloud toolbox. For example, the Public Utility Regulatory Policies Act's restrictions on and approval processes for qualifying facilities can be a barrier to microgrid deployment. As EVs become more common, efforts to aggregate plug-in vehicles as a novel grid resource will face their own challenges. 

It will be difficult to update existing policies, or to argue that changes should be made, without data from sandbox trials. The energy industry must take advantage of every tool it can to accelerate the transition to a resilient, clean, and reliable grid. Sandbox test beds can help.