Spring and fall represent perhaps the quietest time for the energy sector – after the threat of harsh winter storms quiets and the intense summer heat is still in the distance. But this year, spring has brought with it the urgent call for transformation in the regulatory landscape. Like seeds patiently waiting for warmth and light to spur their growth, regulators have typically operated within the confines of slow, conservative regulation. But now, as we envision a clean energy future, the rich, fertile soil of innovation beckons.
The Department of Energy (DOE)’s recently released Pathways to Commercial Liftoff: Innovative Grid Deployment encourages regulatory bodies to ramp up the speed of innovation. Innovation holds significant potential for improving utility services, lowering costs, enhancing reliability, and achieving regulatory objectives. Regulatory policies play a crucial role in either discouraging or stimulating a utility's commitment to innovation. They help address risk mitigation, balanced regulation, and fair allocation of costs and benefits among customers and shareholders. There has already been a lot of discussion around why regulators should approve utility business cases for advanced metering infrastructure (AMI) in its most advanced form (AMI 2.0) and how regulators might evaluate the costs and benefits of this investment.
The DOE Liftoff Report lists four priorities to encourage the ramping up of grid enhancing technologies, including AMI 2.0. Regulatory innovation is the key to the fourth priority: aligning economic models and incentives. There are three specific regulatory actions that would help to scale these blossoming technologies.
Software costs, especially those associated with hardware investments, should be considered for capital cost recovery.
The DOE’s Liftoff Report notes that liftoff for grid-enhancing technologies “will be achieved when utilities, regulators, and other stakeholders comprehensively value and integrate advanced grid solutions as part of core grid planning, investment, and operations.” This suggests that software solutions should be considered alongside more traditional, typically hardware-based, solutions. But for utilities to truly value grid-enhancing technologies, cost recovery needs to be similar between software- and hardware-based solutions.
The software embedded in next-generation smart meters is dependent on the utility investment in the metering infrastructure. Meters themselves represent core utility infrastructure and thus capitalization of meter infrastructure costs is rarely controversial. However, the related software investment is and is typically treated as an operational expense on which a utility does not earn a return.
The reality is the two are interdependent – the software is dependent on the meter being installed to collect the data necessary to be useful, and the meter is dependent on the software to meet the expectations of the business case made for its implementation. Cost recovery for the two investments should also be linked. Software costs that provide long-term benefits over the life of the meter and that are foundational to delivering the benefits of AMI should be allowed as capital costs. This allows utilities to spread the expense over the useful life of the meter on which it is dependent and aligns cost recovery with the expected benefits.
Elements of performance-based regulatory frameworks should be used to encourage specific outcomes.
Performance-based regulation (PBR) already represents an innovation in energy regulatory frameworks by aligning utility incentives with policy goals. As defined in the DOE’s Liftoff Report, “performance-based regulations are a regulatory tool that realigns utility incentives around goals such as energy efficiency and DER penetration, which the traditional cost of service model does not fully motivate.” Several states, notably Hawaii and Connecticut, have made evolutions in their regulatory construct to include elements of performance-based ratemaking.
One element of PBR becoming particularly common is the adoption of performance incentive mechanisms (PIMs). New York and Massachusetts, for example, have implemented PIMs as a means of aligning utility earnings with state energy policy goals. PIMs and performance-based ratemaking generally allows for utility flexibility in achieving the outcomes without prescribing the means for doing so. That flexibility encourages utilities to not only adopt new technologies but allows them to tailor those solutions to their specific needs.
In the context of AMI with embedded software, such software can enable analytics across a variety of uses. Utilities can leverage existing software investments as a first solution in achieving specific outcomes as new energy priorities and PIMs are developed. This level of flexibility to balance these solutions to meet dynamic energy priorities is made possible by the PBR framework.
PBR frameworks should consider how well utilities account for an increase in DER penetration.
FERC Order 2222 will require that utilities adapt their grid management practices to accommodate the increased integration of DERs. This may involve upgrading grid infrastructure, implementing advanced grid monitoring and control systems, and developing new operational strategies to ensure grid reliability and stability. Utilities should be rewarded for their preparedness for this dynamic on their system, and a PBR framework is particularly well suited for this.
Because FERC Order 2222 encourages aggregation of small DER resources, residential customer engagement in particular will be critical. Utilities will need to empower consumers to actively participate in DER programs and maximize the value of their distributed energy resources. Regulators should define customer engagement as a general outcome through a PIM as a means of encouraging utilities to prioritize actions needed to support small-resource DER aggregation.
AMI with embedded software like Sense, for example, can support FERC 2222 readiness, both on the grid side with advanced analytics to be integrated with utility system planning, and consumer side with in-app engagement and insights. In an innovative regulatory environment that supports next-generation AMI with software and that sets well-defined outcomes under a PBR framework, the utility may already be making investments in solutions that support FERC 2222 compliance. In this way, utility customers benefit not only from access to new technologies, engagement, and insight opportunities, but also from lower rates derived from software cost savings. This helps to balance affordability with the priorities of reliability and decarbonization.
The DOE Liftoff Report identifies specific actions for regulators and policymakers that can accelerate deployment of advanced grid solutions. And while some states are leaders in recognizing that regulatory constructs must evolve as the market does, others should sow the seeds planted by the DOE to build towards the clean energy future. Just as spring breathes life into the world after the cold, dark months, regulatory innovation offers the foundation for building a brighter, greener tomorrow.
