Ratemaking and Utility Business Models

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The United States’ electric power industry is changing fast. For a century, vertically integrated monopoly utilities built power plants, strung transmission and distribution lines, billed customers, and were rewarded with a predictable return on investment. But now, consumers and businesses are demanding more control over the energy they use, and surveys show they prefer a 100% clean electricity supply. Options for reducing and modifying electricity consumption through community choice aggregation, self-supply, storage, and smart appliances keep proliferating – making customers more independent from utility service.

Under the current regulatory system, these market trends constitute a considerable threat to traditional business models. Utilities face declining sales and increasing competition from distributed energy resources and clean energy providers at a time of increasing need to invest in grid modernization and resilience.

To adapt, utilities require new business models and new regulatory models that spur innovation instead of stifling it. Energy Innovation provides and curates solutions to state and local decision makers’ work with utilities to meet consumer demand, harness innovation, and overcome barriers to the clean energy transition. Our goal is to ensure that electricity consumers and producers alike thrive as the U.S. undergoes profound shifts to a clean, affordable, resilient electricity sector.

 

Resources

Rewiring The U.S. For Economic Recovery

This report outlines policy recommendations for Congress, federal departments and agencies, national laboratories, governors and state legislators, public utility commissions, and wholesale electricity markets to reach 90 percent clean electricity by 2035 in the United States.

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Making The Most Of The Power Plant Market: Best Practices For All-Source Procurement Of Electric Generation

When utilities procure generation through non-ideal processes biased against clean energy, they result in portfolios with higher consumer costs and carbon emissions. This report outlines how “all-source” procurement allows technologies to fairly compete to meet utility needs, reducing costs and emissions, with detailed case studies from recent utility procurement processes.

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Natural Gas: A Bridge To Climate Breakdown

The rush to build more than 60 gigawatts of natural gas plants and pipelines risks tens of billions in investment and a trillion dollars in consumer costs by 2030. This report outlines these evolving risks for shareholders, lays out investor strategies to accelerate the clean energy transition, and shows how clean energy cuts utility investment risks from over-reliance on natural gas while providing new growth opportunities supporting decarbonization.

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Performance Incentive Mechanisms for Strategic Demand Reduction

EI partnered with ACEEE to identify states using performance incentive mechanisms (PIMs) for strategic demand reduction (SDR).

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Navigating Utility Business Model Reform: A Practical Guide to Regulatory Design

Navigating Utility Business Model Reform seeks to establish foundational elements of different reform options, poses key questions to explore their applicability, identifies illustrative experiences for ideas and concepts, and explores policy implementation options to help spur action. Navigating Utility Business Model…

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Solutions to the Utility Information Problem

On the one hand, utilities need to collect and convey data about where value lies on their distribution systems – focusing on integrated distribution planning as a means to get the most out of DERs and grid modernization investments.  As…

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Utility Models: Questions For Regulators And Stakeholders To Ask And Answer As Utilities Evolve

Every utility regulatory model has embedded incentives. This list is intended to help state policymakers and other stakeholders pinpoint questions they can ask and answer to explore how incentives from cost of service regulation and performance regulation relate to today’s power system goals.

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Getting the Most out of Grid Modernization

The prospect of large grid modernization investment triggers a key question – is it worth it? As different states consider upfront investments in modernizing the grid, regulators need ways to ensure utilities maximize the potential benefits of grid modernization. This white paper provides program design considerations and metrics that can guide utility investment and increase the chances that customers get the most out of grid modernization efforts. A version of the paper was also published in Electricity Policy, and can be found here.

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You Get What You Pay For: Moving Toward Value in Utility Compensation, Part 2 – Regulatory Alternatives

This paper explores which regulatory models align utility profit with societal value under scenarios in which traditional, utility-owned solutions may not be optimal for customers. The cases in this paper offer insight into whether and how cost-of-service regulation and its alternatives (performance incentive mechanisms and revenue caps) can align utility shareholder values with societal values.

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Going Deep on Performance-Based Regulation: Incentive Mechanism Design

Given the momentum toward performance-based regulation across the country, these briefs provide perspective on how regulators might decide to design performance incentive mechanisms for success.

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Designing a Performance Incentive Mechanism for Peak Load Reduction: A Straw Proposal

This white paper is the first in our Incentive Mechanism Design, series, which offers perspective on how regulators might decide to design performance incentive mechanisms for success. The paper examines a straw proposal for a new performance incentive to motivate utilities to reduce peak demand–a driver of investment in the electricity system–improving the affordability and environmental performance of the electricity system.

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Metrics for Energy Efficiency: Options and Adjustment Mechanisms

This white paper is the first in our Incentive Mechanism Design series, which offers perspective on how regulators might decide to design performance incentive mechanisms for success. The paper explores different approaches to simplify the measurement of energy efficiency savings to better align utility incentives with efficiency outcomes. These metrics can be helpful for many states where utility revenue is linked to energy efficiency, but their programs are bogged down in tedious and controversial evaluation, measurement, and verification requirements.

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Avoiding Counterfactuals in Performance Incentive Mechanisms: California as a Case Study

This white paper is the first in our Incentive Mechanism Design series, which offers perspective on how regulators might decide to design performance incentive mechanisms for success. The paper examines California’s Risk-Reward Incentive Mechanism (RRIM) as a case study to show that, while counterfactuals may be appropriate as an adjustment mechanism, they can also lead to unfair outcomes and unnecessary regulatory conflict.

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Improving Performance in Publicly-Owned Utilities

This paper presents case studies about performance management in publicly-owned utilities, drawing out concrete steps that can support municipal utilities, public utility districts, and cooperatives to adapt to changing technology and market trends. These steps – which involve taking “no regrets” actions, exploring evolutions in government, and considering more drastic action if performance lags – can enable POUs to deliver greater value to their customers.

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Who Should Own and Operate Distributed Energy Resources?

This paper, an addendum to An Adaptive Approach to System Optimization, presents a series of case studies on various ways to integrate cost-effective distributed technologies that have run into outdated regulatory models. It identifies strengths and weaknesses associated with utility-owned and operated DERs, third-party-operated DERs, and customer-operated DERs.

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You Get What You Pay For: Moving Toward Value in Utility Compensation, Part 1 – Revenue & Profit

This paper argues that the financial “value engine”—the difference between a utility’s return on investment and its cost of capital—drives shareholder returns. Regulators should use this value engine to align utilities’ financial motivations with delivering value to customers and society.

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An Adaptive Approach to Promote System Optimization

This paper, a submission for the Solar Electric Power Association’s (SEPA) 51st State Challenge, synthesizes current thinking on system optimization by returning to first principles of rate design and market structure. By starting from first principles, the recommendations can be widely applied across jurisdictions with different market structures, resources, and demographics, including but not limited to a hypothetical 51st State.

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The Great Reinvention of the Electric Utility

Electric utilities have great potential to reinvent themselves in order to stay relevant throughout the power sector’s imminent transformation. A confluence of factors – new and cheap technologies, declining electricity demand, and increased action against climate change – are driving this change. To account for these factors, utilities must evolve from electron suppliers to system optimizers, and they ought to be rewarded based on performance rather than sales.

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New Regulatory Models

This report discusses the future for electric utility companies as ‘disruptive’ technologies, flattening energy load, and environmental regulations all potentially threaten their traditional business model. It proposes new business opportunities for utilities, giving special attention to performance-based ratemaking. Several case studies are included to demonstrate various elements of performance-based ratemaking, followed by best practice principles and recommendations. A version of this paper was published in the July 2014 issue of the Electricity Journal.

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Policy for Distributed Generation: Supporting Generation on Both Sides of the Meter

This whitepaper, written as part of America’s Power Plan, discusses the growth of distributed generation by end-use consumers and how this threatens traditional utility business structures. It argues that customers and utilities must forge new relationships that account for these changing conditions. The paper states that this future relationship between centralized and distributed resources will depend primarily on financial structures and how both types of electricity services are priced to reflect their true values.

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Distributed Energy Resources: Policy Implications of Decentralization

This whitepaper, written as part of America’s Power Plan, describes the role of distributed energy resources, also known as ‘the internet of electricity,’in the electricity sector and how its emergence alters the sector’s traditional centralized structure. It recommends three options for expanding distributed energy resources so that a renewable electricity future can be achieved. These recommendations include 1) analyzing the costs, benefits, and trade-offs associated with distributed energy resources; 2) level the playing field between new distributed resources and traditional centralized energy by adapting utility business models and wholesale market structures to become more competitive, and 3) encourage innovation in technology and services to expedite the adoption of distributed and renewable resources.

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New Utility Business Models: Utility and Regulatory Models for the Modern Era

This whitepaper, written as part of America’s Power Plan, describes the changing role of electric utility companies as new technologies for energy efficiency and distributed generation pose threats to their traditional business models. Aging infrastructure, changing customer demands, and stricter environmental and climate regulations additionally incite the need for evolution of utility structures. This paper offers recommendations for several types of utility structures, but focuses mostly on vertically-integrated and regulated utilities. It outlines three future scenarios for utilities; minimum utility involvement, medium involvement as smart integrator; or orchestrator; or maximum role as energy services utility.

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Articles

Overcoming Barriers To 100% Clean Energy, Part One: The Electricity Distribution Network

EI’s Eric Gimon outlines how smart policy can overcome barriers on the grid to 100% clean energy targets to achieve a paradigm shift in the US power system.

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U.S. Utilities Face Dramatic Change: Here’s How To Succeed At Utility Business Model Reform

EI’s Amanda Myers outlines how policymakers and utilities can align profit with public policy objectives to succeed at utility business model reform.

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How Dumb Distribution Spending Crowds Out A Smart Clean Energy Future

An America’s Power Plan contributor outlines how utility distribution grid spending could help add distributed clean energy and improve grid resilience.

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Can A ‘DER Authority’ Fix The Utility Information Problem To Boost Clean Energy?

EI’s Mike O’Boyle says a new type of performance-based regulation, the “DER Authority”, could fix utility information problems while boosting clean energy.

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America’s Utility Of The Future Forms Around Performance-Based Regulation

EI’s Sonia Aggarwal says America’s utility business model has changed but performance-based regulation is helping regulators and forward-looking utilities build an affordable, reliable, clean grid.

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How To Build A Foundation For New Utility Business Models

EI’s Mike O’Boyle discusses how utility regulatory reforms are becoming increasingly important for state policymakers, but regulatory processes can constrain the ability to design policies well.

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After Investing Billions, Is Illinois Grid Modernization Paying Off For Utilities And Customers?

Illinois has invested billions in energy infrastructure, and ranks 2nd in the U.S. on grid modernization, but is this effort paying off? Expanding real-time electricity pricing could save customers money, reduce demand, and ensure the state gets the most out of grid modernization.

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Emerging Lessons On Performance-Based Regulation From The United Kingdom

Many states are considering a utility regulatory structure that incentivizes efficient fleet turnover, incorporates clean energy and other cost-effective technologies, and stimulates smarter build-or-buy decisions. EI’s Sonia Aggarwal says the UK’s effort to combine utility operating and capital expenses into a capped revenue bucket shows promising early results.

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Three Ways Electric Utilities Can Avoid A Death Spiral

Rumors of the “utility death spiral” abound, but they have been greatly exaggerated. Three major opportunities – new utility regulations and business models, electric vehicle growth, and grid modernization efforts – mean utilities can beat their death spiral prognosis.

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Energy Efficiency’s Existential Crisis Is Also an Opportunity

A guest contributor for America’s Power Plan says creating portfolios of energy efficiency projects to deliver demand reductions where and when utilities need them can help keep pace with grid demand.

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Electric Grid Modernization: We Don’t Really Need You, Mr. President

Proactive states and utilities can manage modernize the grid system without the White House, taking advantage of new technologies and a diverse portfolio of electricity sources. If states work together and get rules right, market forces can deliver a modern electric grid.

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How A Smart Grid Relies On Customer Demand Response To Manage Wind And Solar

While wind and solar’s growth creates financial opportunity, they also open the door for new investment and customer savings from power use itself – a resource called demand response (DR). DR is a key market opportunity to save customers money and offer cost-competitive flexibility. 

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Harnessing The Power Of The People Through “Value Of Solar”… And Beyond

Many states are examining a “value of solar” rate to resolve net energy metering disputes. However, by valuing only solar, they are missing the opportunity to take advantage of other growing distributed energy resources (DER) like energy efficiency, demand response, or energy storage.

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Four Reasons 30% Wind and Solar is Technically No Big Deal

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How Utilities Can Become Efficiency Innovators

With future federal clean energy policies in doubt, proactive clean energy policy will likely be left largely to states in the next few years. Fortunately, a New York policy proposal could show the way forward on energy efficiency for utilities. An outcome-oriented metric would focus on the policy goal of reduced energy use overall, putting a smaller emphasis on the administratively intensive business of attributing savings to specific actions.

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Alternatives to Conventional Utility Compensation Can Unlock Untapped Value

Like any corporation, investor-owned electric utilities have a duty to maximize shareholder profits. There’s no problem with this in principle – as long as what maximizes profits also maximizes benefits in the public interest, given their regulatory monopoly status. But today, how utilities make money must change to adapt to new grid needs, customer demands and technological realities.

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Utilities in the Information Age: Moving From Construction to Optimization

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New York REV shows utilities and regulators how to manage change

Eleanor Stein, a former REV project manager, offers insight on how coordination between utilities, regulators, and the public can boost trust in the regulatory process

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After Paris: The State of America’s Electricity Sector Emissions Headed Into 2016

As we move into 2016 with an international climate agreement and policymakers thinking about how to meet national commitments, it’s time to review the current status of U.S. power sector emissions and preview the energy trends shaping the next decade.

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3 Ways Public Power Providers Can Prepare for Technology and Market Changes

A new set of case studies and lessons, titled Maximizing Performance of Public Power Utilities, illuminates examples of how publicly-owned utilities can deliver the outcomes desired by their customer-owners through high-level performance management.

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Skin in the Game: New Case Studies Illuminate Best Practices for DER Ownership and Operation

A new report from America’s Power Plan investigates the question, “who should own and operate distributed energy resources?” It turns out there there are many options for who can own and operate DERs—and any of them can work, as long as the revenue streams are designed or adjusted appropriately.

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From Old to New: How Rethinking Regulation Can Deliver a Smarter Electricity System

As with any investor-owned company, managers of investor-owned utilities are obligated to maximize shareholder value. So how can regulators help to align shareholder value creation with the public interest? Enter performance-based regulation.

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Should Utilities Own Distributed Battery Storage?

Price declines in residential solar and battery systems like Tesla’s Powerwall mean solar-plus-battery systems will soon be found in homes and businesses at the grid’s edge around the country. But what role will utilities play in the fast-approaching storage shift?

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