Utility regulation must be modernized to address new costs to power grid

The new technologies being introduced to the grid have the potential to provide significant benefits

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The Electric Markets Research Foundation released a new study that found new business models and a panoply of emerging energy technologies such as rooftop solar, microgrids and distributed generation could imperil the availability of affordable electricity to all consumers and the reliability of the nation’s electric grid unless the harmful effects of ratemaking subsidies are addressed now.

The study, entitled “Changing Uses of the Electric Grid: Reliability Challenges and Concerns,” was prepared for EMRF by Build Energy America, a Washington, D.C., energy consulting firm, and released at the summer meeting of the National Association of Regulatory Utility Commissioners.

“The new technologies being introduced to the grid have the potential to provide significant benefits. However, it’s important to understand that the integration of these technologies into the grid will increase — not decrease — overall grid costs,” said Steve Mitnick of Build Energy America, the author of the study. “Success ultimately depends on the ability of the grid to accommodate these new uses while safeguarding affordable electric power,” Mitnick added.

The EMRF study compared the traditional grid-based electric utility service model based on the sharing of all electricity costs by all ratepayers with a new business model buttressed by subsidies and incentives that encourage residential and business consumers to shop for electricity deals that ignore the effects on the grid or other utility consumers.

Net metering, a way of pricing rooftop solar energy, provides an example of potential impacts. Most of the 600,000 households nationwide with net metering are paid the full retail price for the extra electricity sold to a utility. However, the utility’s purchase of the excess electricity covers only part of its costs. In fact, the full retail rate paid by utilities under net metering reflects a payment of more than twice what the utility actually saves by buying the power. Other customers must make up the difference, subsidizing homeowners with rooftop solar and net metering.

“Net metering is a double whammy to the utility,” the study noted. “It is an incentive for customers to leave the grid, thereby reducing their contribution to the fixed costs of maintaining the grid. And it imposes additional costs on other customers, most notably the increased costs of integrating customer-owned generation into grid operations,” such as the investment to accommodate two-way electrical flows needed for customer-owned generation, the study said.

Continuing the net metering subsidy is not sustainable. “Either the funds for continued investment in the grid will be impacted, resulting in concern over the degradation of the grid, or the costs of maintaining the grid to those still paying for it will become too great to withstand political scrutiny,” the study cautioned. “New ways must be found to ensure that everyone continues to pay their fair share for what the grid does for them.”

The study, while acknowledging the benefits of rooftop solar and other distributed renewables for the grid, firmly stated that the incentives provided by net metering are not the proper way to reflect the value of such benefits in customer rates. Net metering results in a cross-subsidy from non-generating customers to customers generating their own power, providing the wrong price signals to both sets of customers.

To the extent renewable customer-owned generation provides benefits to all customers, it should be paid for by all customers. Net metering allows the customer to escape any cost burdens on the grid associated with their decision to self-generate.

The combination of reduced revenue caused by customer solar installations and other new business models and increasing expenditures to ensure reliability poses major risks for utilities. “The changing use of the grid can risk the ability of utilities, under traditional regulation, to afford a prudent level of grid upkeep and expansion,” the study said. “If utilities are forced to cut back grid upkeep, for want of sufficient monies, there’s no one standing behind the utilities to step into the breach,” especially when the grid faces adversity such as the recent Polar Vortex and Superstorm Sandy, the study added.

Several ratemaking options exist to prevent a revenue shortfall by altering the traditional utility rate structure. Utilities could change the mix of variable and fixed charges in electricity bills. All end-users could be required to pay the same rate for electricity and the price utilities pay for the power it receives from third-parties would be based actual cost savings to the utility.

Another way to better reflect true costs is to change the mix of long-term and short-term charges in electric bills. Under the existing regulatory regime, utility costs for grid upkeep are long-term while electricity bills are short-term. The study did not recommend any specific option.

“But utility regulation must be modernized,” the study emphasized. “The current regulatory framework must be re-evaluated in light of the changes taking place in the supply and delivery of electricity and new competitive realities,” the study concluded.

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