DOE’s Look at the Impact of Utility Regulation on Utility Innovation
Innovation is essential for future power systems to be safe and secure, clean and sustainable, affordable and equitable, and reliable and resilient, according to a new report, “The Role of Innovation in the Electric Utility Sector,” from the U.S. Department of Energy’s Lawrence Berkeley National Laboratory. The focus of the report is on the role that utility regulation can have on utility innovation, noting that regulation can either suppress, or promote, innovation by utilities.
The report addressed a number of questions, such as:
- How are consumer advocate views evolving with respect to innovative regulatory and ratemaking approaches?
- How can utility decarbonization and grid modernization initiatives provide opportunities for local communities and workers to receive tangible benefits and facilitate community support for siting electricity infrastructure?
- How are electric utilities partnering with technology companies to provide innovative energy management services and sustainable energy solutions for utility customers?
- What regulatory innovations are public utility commissions exploring to enable third-party providers to participate in the transition to a modern electric system?
- What regulatory changes are needed to enable innovative solutions from utilities and third parties at the necessary speed and scale to meet state decarbonization goals?
What regulatory changes are needed to enable innovative solutions from utilities and third parties at the necessary speed and scale to meet state decarbonization goals?
The report evaluated energy technologies, grid operations, business practices, electricity demand, and other developments that could support beneficial evolution of the nation’s power systems across a wide range of futures.
The report emphasized the importance of utility regulatory advances in order to speed socially-beneficial innovation for investor-owned electric companies. Among them is accelerating investigations into changes in electric industry structure, services, security, pricing, and market design in order to align with significant deployment of behind-the-meter technologies and other distributed energy resources (DERs), and address equity issues for energy access and clean energy.
In addition, the authors asserted that “[A]chieving greater deployment of advanced electrical technologies will require states to implement regulatory reforms that allow utilities to recover the costs of larger research and development (R&D) budgets alongside other forms of regulatory approval that encourage more adoption of new technologies.”
Overall, the report explained, state regulation can slow utility innovation, in large part because the risks for utilities may be too high relative to the rewards. In addition, consumer advocates would rather have R&D funded in ways that are not on consumer electricity bills. As a result, electric company innovations tend to be reactive to initiatives by regulators and the utility’s corporate customers. In contrast to firms that put money at risk in order to provide solutions that customers did not even know they wanted, such as the smart phone, electric companies often are not financially motivated to change the status quo. As a result, said the report, it is not surprising that energy utilities on average invest a low percent of net revenues in R&D compared to similarly situated industries.
The report also noted that, in order to achieve state targets for clean energy and greenhouse gas emissions, some state regulatory utility commissions are exploring new approaches to spur innovation. For utilities, these include regulatory and marketing flexibility, increased funding for demonstration projects, and performance-based ratemaking including multi-year rate plans. For third parties, these include ways to provide utility customers with innovative products and services directly.