The utility industry needs clearer incentive-based rules from government to transition to more clean energy with lower emissions, according to a new report.
http://www.edisonfoundation.net/iei/Documents/IEI_KeyTrendsDrivingChange_FINAL.pdf
The report shows that the electric grid will transition to a cleaner energy system by continued investment in renewable energy, shifting from coal to natural gas and pursuing energy efficiency.
But the speed of those changes will depend a lot on what policymakers and regulators do to promote the transition over the next decade, with greater clarity on what the incentives are, as well as the penalties, according to the report by the Edison Foundation’s Institute for Electric Innovation.
“Regulation will have to provide a glide path for utilities to achieve corporate and policy goals, while also setting incentives and penalties for utilities based on meeting agreed-upon performance objectives,” according to the report, which is the first in a series on the changing grid and utility business model.
Ron Binz, long-time state utility regulator and consultant, writes in the report that the form of regulation is called “incentive regulations,” which “rewards utilities for achieving desirable policy goals, or penalizes them for failing to do so.”
“This approach will provide adequate or even increased earnings, while encouraging utilities to embrace and excel in fundamentally new roles — providing energy services and being the ‘orchestra conductor’ for all the instruments in the new electric grid,” Binz says.
He admits that to some, “this may be an unsatisfying vision. It predicts profound changes for consumer electric service, but offers few details or assurances.” He says the best analogy for the transition is the breakup of the large phone and telecom monopolies in the 1990s “that have been transformed by information technology.”
In 1980, for example, “few could foresee the profound changes the Internet would bring to so many aspects of our lives today,” Binz says.
“Although these mega-trends are driving change,” such as the transition from coal to natural gas, “it’s important to recognize that the speed of transformation will depend to a great extent on whether regulation evolves to accommodate these changes,” the report says.
Although the report touches on the Obama administration’s climate regulations as a part of that transition, it does not dwell on the rules. Instead, the report suggests that the federal government may not be doing enough to match the steps industry has taken to make the transition to clean energy, and must develop rules that fit its business model and direction.
“Just as the business model of electric utilities must change because the power mix is undergoing transformation, the grid is more complex, and customers have different expectations, so too must the regulatory model change,” the report says.
Much of that change will occur in the next decade, with the rise of more digital interconnection of the grid into what some refer to as the “Internet of things,” while utilities switch from centralized power plants to more distributed power such as solar panels, the report says. But the biggest issue undergirding the changes will be cost.
“Ultimately, as this transition unfolds in the regulated electric power industry, it is about balancing affordability, reliability, clean energy and individualized customer services,” the report reads. “This is largely the job of regulators and other policy makers. But the ultimate challenge is to make this transition of the electric power industry affordable to all Americans. And this is the job of all stakeholders.”
