Big business should watch this tiny state's power transformation

Big business should watch this tiny state's power transformation

Rhode Island postcard
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One hope is for better relationships between utiliies and corporate customers.

The state of Rhode Island just released a report on a proposed new utility regulatory model that will unleash innovative clean energy solutions sought by a rapidly growing market.

The proposed regulatory approach, established through Rhode Island’s Power Sector Transformation initiative, has potentially broad-reaching implications. Because over 30 states are looking at modernizing their power grids, what happens in Rhode Island — which is relatively advanced in the regulatory conversation  has the potential to affect utilities, customers, businesses and innovative energy solutions providers across the country.

Businesses can't always get the solutions they want

In recent years, energy customers have become increasingly dissatisfied with their relationship with their utility. They no longer want to simply act as ratepayers, waiting for a complex bill that arrives five weeks after the first spin of their meter in the billing cycle. Instead, they want ways to manage costs, lower their carbon footprint and be active consumers in a vibrant marketplace. 

The good news is that numerous solutions providers are out there, offering a broad range of products and services, from solar panels, energy storage and fuel cells to electric vehicles, efficient lighting, smart building controls and much more. However, they often lack access to the information that they need (especially customer usage data) to develop customer-focused clean energy solutions. They are impatiently waiting for the regulatory walls to come down so that they can better serve prospective customers. 

The unfortunate fact is that under current regulatory models, today’s utility is neither incentivized nor empowered to help enable a market of innovative clean energy solutions and to connect customers to these solution providers. This situation simply has to change, for the good of the customer, the utility, the environment and for society at large.

Today's electric utility is under tremendous pressure to change

While the electricity grid is a technological marvel that historically has delivered levels of high reliability, it is largely an analog design in a now-digital world, and the product of an outdated regulatory framework. It is inefficiently used, creating upward price pressure for customers. In fact, the cost of supplying the top 1 percent of hours of demand in Rhode Island represents 9 percent of the total spend; supplying the top 10 percent of hours contributes to 26 percent of costs. This dynamic is similar in other parts of the country (PDF).

The electricity grid is also facing a mandate to decarbonize, while simultaneously failing to keep up with the tremendous potential of a rapidly evolving generation of smart, modular, decentralized clean energy technologies.

To make matters worse, newly updated regional forecasts show declining future kilowatt-hour sales coupled with increasingly "peaky" consumption. This means the grid may get even less efficient, while the utility may be forced to raise rates to sustain revenues. If things do not change, utilities soon may find their financial health in jeopardy. This does not bode well for businesses that need reliable and cost-effective electricity to run their enterprises.

Changing the regulatory rules can have a huge positive impact

Recognizing these facts, Rhode Island’s Division of Public Utilities and Carriers, Office of Energy Resource and Public Utilities Commission, at the behest of Gov. Gina Raimondo, recently launched a transparent and collaborative effort to redefine the critical rules of the regulatory sandbox as they affect the local distribution utility, National Grid. The process involved multiple stakeholders, including the Northeast Clean Energy Council  a coalition of clean energy businesses "creating a world-class clean energy hub" in the northeastern U.S.

While utilities serve all of society, the most critical "customers" who determine how and where the utilities invest  and how they get compensated — are the state regulators. It’s the regulators’ job to balance multiple issues related to reliability, investments, energy costs, fairness, public policy goals and utility compensation. Now the state of Rhode Island is seeking to significantly change the regulatory construct under which these decisions take place.

This transformation process has the potential to benefit commercial and industrial customers across the state, harness the entrepreneurial private sector, lower rates, create jobs and make the state more economically competitive. The development of a new and improved electricity regulatory model, a new role and platform for the utility operating a modernized digital power network, and the unleashing of a growth market for innovative clean energy solutions can also create ripple effects.

These are likely to first affect other northeastern states that are also undertaking grid modernization initiatives. Ultimately these ripples are likely to combine with initiatives in New York, California and elsewhere owing to one simple fact: whether located in Florida, Texas, or Ohio, no utility is immune to the market, technology and customer energy choice pressures that affect Rhode Island. Energy customers everywhere want more.

The issues being evaluated in Rhode Island

During the Power Sector Transformation process, a number of critical issues were evaluated, including: 

  • How will National Grid be compensated?  This issue is critical in setting direction for utility activities.
  • How will new assets (whether owned by the utility, customers or competitive vendors) connect to and interact with the power grid? The interconnection process with utilities is typically difficult and time-consuming. The goal is to make this easier and more transparent.
  • What information will customers and solutions providers have access to, and how will it be offered. Access to timely and accurate information allows customers and vendors to create solutions that better address customer needs.
  • How will the future electric distribution grid be planned and developed? Done correctly, this will increase efficiencies, facilitate technology innovation and lower overall costs.
  • What role will National Grid play in encouraging and supporting "beneficial" electric technologies, especially electric vehicles? Utilities and regulators across the U.S. are developing different ownership models for charging infrastructure.

Suggested remedies

Today, utilities generally are rewarded by regulators on an annual basis that enables utilities to earn rates of return on long-term system assets. To grossly oversimplify, utilities make investments to upgrade infrastructure and maintain reliability. They then justify those "rate-based" investments in an annual rate case and request a specific rate of return. What the utilities don’t currently do is evaluate other alternatives, particularly new technologies and business models implemented by the utility, customers or competitive vendors, or focus on achieving overall grid efficiencies.

The resulting infrastructure can be overbuilt and expensive. This year-to-year approach often results in inefficient and myopic approaches rather than a longer-term strategic vision. It leads to unnecessary costs borne by customers, and creates barriers to a market that adopts rapidly evolving clean energy innovations desired by customers.

The new regulatory construct would change this approach, creating a multi-year structure to align utility incentives with grid efficiencies. It would focus on outcomes rather than infrastructure, place increased emphasis on customer service metrics and encourage the creation of new utility revenue streams.

Recommendations to help customers and increase efficiencies

The report issued to the Rhode Island governor made numerous specific recommendations. The ones that most directly create new value for customers and businesses in the state include:

  • Paying the utility for performance and achievement of actual goals, rather than investments they make.
  • Investing in smart meters and creating an information platform that would allow innovative solutions providers to provide new services.
  • Allowing National Grid to develop new sources of revenue from its network, information and enabling services, which would reduce dependence on ratepayer funds.
  • Ensuring that information is cyber-secure, even as it is widely available to authorized parties.
  • Increasing the overall reliability, resiliency and cost-effectiveness of the grid while reducing emissions and reliance on fossil fuels.

Why businesses should care about Rhode Island

A whole host of new pressures and opportunities affect the electric utility and its customers. However, the regulatory model has been slow to keep up with both the challenges and the promise of change. Today’s 21st century enterprises want affordable, reliable and carbon-free power. Business owners want more information and control over their electricity spend, and they also want more options. At the same time, these third parties are poised to deliver a variety of creative and cost-effective solutions, but they need a modern grid and utility partnering business models to deliver these solutions to customers.

The Rhode Island Power Sector Transformation initiative represents perhaps the most complete assessment of the utility model and regulatory changes needed to transform the power sector in the right direction. It creates the potential to allow the entrepreneurial community to step in, address inefficiencies and develop solutions that have the potential to benefit the utility, businesses, customers and society.

As dozens of other states embark on similar grid modernization processes, the implications for utilities and businesses from this tiny state could be very large indeed.