In extremely disappointing news, the Public Utilities Commission of Ohio (PUCO) recently approved the AEP and FirstEnergy bailout cases. By keeping old, uneconomic coal and nuclear plants running for the next eight years, the bailouts are bad for customers, bad for the environment, and bad for the competitive electric market. Even worse, customers are forced […]

By John Finnigan

AEP Ohio has been busy. On the one hand, it has been trying to keep its outdated, uneconomic coal plants afloat at a hefty cost to Ohioans. And as of last week, the Public Utilities Commission of Ohio (PUCO) approved AEP’s requested subsidies to continue spewing pollution from dirty generators. This bailout is bad news for business, customers, and the environment – and the PUCO should have rejected it. Environmental Defense Fund (EDF) will continue to object to the income-guarantees at the state and federal level.

On the other hand, and in a separate regulatory case, AEP has been working with multiple parties – including EDF – to build a cleaner, smarter grid. Its recent grid modernization agreement is a step toward more efficient, reliable electricity that will help people reduce their energy usage, lower their electric bills, and breathe cleaner air.

These two concurrent cases show AEP needs to decide whether it will change for the future, or stay stuck in the past. And while EDF has been clear in our opposition to the subsidies, today we want to acknowledge AEP’s innovative, forward-looking grid modernization efforts.

New agreement results in a long list of benefits

Like many utilities in the U.S., AEP has operated its grid in the same way for the past hundred years. The grid was designed for power flows in one direction: from centralized power plants, to homes or businesses along a network of transmission and distribution lines. The system lacked monitoring and communication equipment, which provide significant opportunity for greater efficiency.

AEP has now committed to bringing its grid into the 21st century, with a slew of improvements:

• Voltage optimization: Since AEP couldn’t determine the voltage of electricity at various points along the grid, it was overpowering homes and businesses with more voltage than was needed, resulting in higher electricity bills. Grid modernization will allow AEP to use sensors to measure voltage and supply electricity at lower, right-sized voltage, resulting in less electricity use and lower customer bills, as well as fewer greenhouse gas emissions.
• Greater reliability: Until now, AEP could only determine the condition of its equipment through costly physical inspections (i.e. sending someone out to visually inspect whether everything was working properly). That made it difficult to spot problems and anticipate outages. After an electrical outage had occurred, AEP would then replace the faulty part, interrupting service to customers. Now AEP will be able to monitor its grid remotely, relying less on frequent physical inspections. AEP also will be able to detect problems before failures occur, preventing future power outages.
• Faster response times: When outages occurred, AEP had to manually inspect miles of transmission and distribution lines to find the cause. With the updates, AEP will be able to pinpoint the outage location immediately, leading to a quicker fix.
• Efficient operations: AEP will be able to read its meters remotely, instead of sending meter readers to manually read each meter every month. This will lower operating costs and reduce greenhouse gas emissions by eliminating all the monthly “truck rolls” to read meters.
• Data access: AEP will work with regulators and stakeholders to provide timely access to energy usage data for customers, energy suppliers, and third parties. Real-time access to information allows people to track their use through cellphone apps or in-home energy monitors, empowering customers to make smart choices that lower their bills. That’s because data opens the door for AEP to offer new, time-based rate plans, where the cost of electricity is higher during peak-use periods (when demand is highest) and lower during off-peak periods. AEP’s real-time data will also enable other energy suppliers to access that information, with permission, and offer time-variant pricing to their customers. Finally, data access opens the market to third-party companies that can offer energy efficiency programs directly to customers, enhancing competition and overall efficiency. Studies show that granting people access to their data, combined with time-variant pricing and data-enabled third-party programs, can save up to 15 percent on electricity, without negatively affecting convenience or comfort.
• Environmental metrics: AEP will measure the greenhouse gas emission reductions achieved through grid modernization. Defining and measuring performance is key to creating a new system that rewards utilities for delivering clean energy services, such as on-site renewable energy and home energy management, instead of simply delivering more electricity.

All of these elements mean AEP will run a significantly more efficient grid, with less wasted energy and less pollution.

With opponents to the recent bailout decision taking the battle to federal regulators, AEP’s place in the clean energy economy is still unclear. Trying to subsidize dirty coal plants signals a utility clinging to the past, but – at the same time – AEP is employing forward-looking efforts to modernize its grid. And there’s a lot more it could do to create a smarter, more efficient system, especially in terms of customer access to data. AEP will need to decide its path from here: utility dinosaur or purveyor of the clean energy future?

By John Finnigan

Ford launched the Edsel in the late 1950’s as a new, top-of-the-line luxury car. But the project was doomed from the start because the car’s design was outdated and shunned by customers. Ford closed production after only three years, losing nearly $3 billion as measured in today’s dollars. Today “Edsel” is synonymous for a project that is a total failure.

Fast forward to modern day Ohio, where utility giants FirstEnergy and AEP are trying to bail out several old, uneconomic power plants, some of which also were built in the late 1950s. They are asking the Public Utilities Commission of Ohio (PUCO) to guarantee the purchase of power from these outdated plants. The FirstEnergy and AEP bailouts are a bad idea, like the Edsel, yet if the PUCO approves the bailouts, why not subsidize and bring back the Edsel too?

The main rationale for keeping the power plants open is to have a diverse supply of energy resources in Ohio – regardless of whether they are cost-effective or profitable. The utilities’ definition of diversity seems to be having a mix of both modern and ancient generators. So why not bring back the Edsel in order to improve diversity? It would give car buyers more choices, even if it’s a slow, unattractive choice.

The other rationale for the bailouts is to protect jobs in Ohio, where most of the power plants are located. No doubt jobs are a critical component to consider, so why not build a new Edsel plant in Ohio that would protect Ohio jobs, too? Except that would be creating jobs in a factory that makes a car from the 1950s, rather than one with modern, forward-looking technology. By approving the bailouts and propping up outdated technology, the PUCO is severely limiting the creation of new jobs in the modern-grid economy. A new report shows Ohio had 100,782 jobs related to clean energy last year, up 13 percent from the prior year. It also predicts these type of jobs will increase five percent this year. Ohio should prioritize these types of jobs in a growing, thriving industry rather than those in a stagnant sector, which has been losing jobs in recent years.

Like the power plant bailouts, why not guarantee the Edsel’s success by forcing everyone to pay for the Edsel plant, even if they buy their cars from other dealers? FirstEnergy and AEP’s deals would make customers pay for this polluting energy in the form of rate increases, even when cheaper, cleaner electricity is available from newer, more efficient power plants. Utilities still have a monopoly on service territories, so FirstEnergy and AEP will deliver your electricity if you live in their territory – even if you buy your electricity from another supplier. Likewise, the Edsel plant would stay open, even if no one buys the cars.

Finally, the Edsel lost billions of dollars the first time around, and would probably do so again. The Ohio utility deals are set to cost Ohioans nearly $6 billion in higher costs.

Reintroducing the Edsel, and pumping billions of dollars into out-of-date technology, may seem completely unnecessary and irrational. But if the PUCO believes the bailouts are a good deal for customers, let’s bring back the Edsel.

By John Finnigan

Across the country, signs of a cleaner, more efficient, and more affordable U.S. energy system are emerging. But we can’t reach the clean energy future without updating the way utilities make money. Today, utilities earn revenue based on how much electricity they deliver. Companies earn less when they sell less electricity, so they have little incentive to provide energy efficiency programs for their customers.

To address this issue, the Pennsylvania Public Utilities Commission is considering changing how utilities are paid for the electricity they sell. The goal – determining whether new rate plans could eliminate the barriers to energy efficiency programs – is an admirable step toward the clean energy future. Environmental Defense Fund (EDF) has a number of ideas on how to design a more efficient grid, which we filed in comments today:

1. Performance-based regulation – Utilities have few incentives to help people adopt solar panels or energy efficiency, so the Commission should implement performance-based regulation plans. Rather than encouraging the sale of more electricity, a performance-based framework would reward utilities for meeting goals that benefit customers and the environment, like encouraging the use of rooftop solar or increasing the use of energy efficiency programs.

1. Transactive energy – In a transactive energy approach, the utility would operate as a neutral “platform” that provides price signals for self-generated energy and energy reduction programs. For example, if the grid were stressed, the utility would signal for people to reduce their usage or sell self-generated power, like from an electric vehicle battery or rooftop solar that’s not being used. This “open source” model encourages customers and third parties to provide services via the utility’s platform, instead of the traditional model where the utility has sole control over power and energy efficiency programs. This new approach opens the door for lower energy bills and cleaner energy resources, and the New York Public Service Commission is leading the way with its innovative Reforming Energy Vision.

1. Data access – Utilities should provide customers and third parties with real-time access to energy usage data. This would allow customers and entrepreneurs to use the data to save energy – like develop an app that sends recommendations via smart phone about how people can reduce their energy use and electricity bills. This type of innovation has the potential to cut energy bills by up to 15 percent. The Commission should adopt the Open Data Access Framework, a protocol for securely handling and maximizing data that EDF helped develop for Illinois.
   

   5 Ways Pennsylvania Can Build a Smarter, More Efficient Grid
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1. Using clean energy in distribution system planning – Pennsylvania should not routinely approve utility requests to keep expanding the grid. Instead, utilities should evaluate whether distributed energy – like rooftop solar or energy efficiency – could be used to delay the need for building a bigger grid. Other utilities, particularly in New York and California, are using this approach to lower their costs and deliver cleaner energy while delaying costly grid upgrades.

1. Voltage optimization – Voltage optimization is a proven, cost-effective technology that uses sensors and capacitors to “right-size” voltage, resulting in less energy use, pollution, and peak demand. In neighboring Ohio, the state's Public Utilities Commission estimated an average benefit of $35.87 annually per customer through continuous use of voltage optimization technology. Many utilities have already deployed this technology, but others, like FirstEnergy, are resisting because the increased efficiency erodes their revenues and profits. The Commission should require all Pennsylvania utilities to file plans for installing this important technology.

This discussion comes shortly after the Commission approved multiple utilities’ plans to reduce energy consumption and peak electric demand, which are a state requirement. Last year, Pennsylvania extended these energy efficiency and conservation programs for an additional five years.

“Increasing energy efficiency, encouraging conservation, and reducing the demand for electricity benefits Pennsylvania in many ways – including more affordable and reliable service, reduced need for new power generation, and lower emissions from power plants,” said Commission Chairman Gladys M. Brown.

Hats off to the Commission for thoughtfully considering how it can eliminate barriers to clean energy, while fulfilling its mission to make electricity safe, reliable, and affordable for everyone. We hope the Commission will incorporate the ideas EDF presented, and deliver a win-win for customers and the environment.

By John Finnigan

Help is on the way to reduce harmful pollution in Indiana, which has the seventh highest level of greenhouse gas emissions in the country.

Environmental Defense Fund (EDF) joined a settlement filed this week for Duke Energy’s grid modernization plan. The settlement calls for Duke – the largest utility in the country, which serves over 800,000 Indiana households – to invest $1.4 billion over the next seven years to improve its electric grid. Doing so will deliver major benefits for Duke’s customers.

Duke to make strides on “right sizing” voltage

As part of the investment agreed upon in the settlement, Duke agreed to spend $200 million on voltage optimization – a proven, cost-effective technology that enables utilities to operate the electric grid more efficiently. It is one of the lowest “low-hanging fruits” a utility can invest in to lower energy usage and greenhouse gas emissions.

Some utilities overpower homes and businesses with more voltage than they need. Voltage optimization technology gives utilities greater visibility of the state of the electric grid. With this information, they can adjust voltage to match the precise electricity needs of customers. People receive the right amount of energy to run their machines and appliances, resulting in energy savings, without having to lift a finger. These energy savings will, in turn, reduce greenhouse gas emissions throughout Duke’s territory.

Duke agreed to file monthly reports on its energy savings and greenhouse gas reductions, as well as file a business plan to expand this technology to the rest of its grid.

How Duke Energy’s Grid Modernization Effort Will Benefit Indiana Customers
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New smart meters will be put to full use

In addition to voltage optimization, Duke will install smart meters for its customers, enabling two-way communication between a customer’s meter and their utility. The smart meters will reduce operating costs, provide greater electricity reliability, and give customers exciting new opportunities to lower their energy bills. Duke did not add the smart grid costs to the current grid modernization plan.

Through the settlement negotiations, EDF aimed to ensure Duke delivers customer benefits. Too often, utilities install smart meters but don’t allow customers to unlock their full value. EDF advanced this goal by securing Duke’s agreement on two innovative energy efficiency pilot programs:

Cost-effective grid upgrades and energy efficiency programs, like the ones in Duke’s grid modernization program, are straightforward ways utilities can advance clean energy and reduce harmful pollution.

• The “bring your own thermostat” program will let customers link their smart meter to an existing thermostat. Customers can volunteer to receive an alert a few times a year when there is high demand for electricity, which can overwhelm the electric grid (also known as demand response).For example, Duke would then briefly shut off the compressor on the customer’s air conditioner, while keeping the fan on to circulate cool air so they receive the same level of comfort. With this program, customers can lower their energy bill and Duke can lower harmful pollution from power plants, which would otherwise be needed to provide that electricity.
• The “home energy monitor” program will give customers a device to monitor how much energy they are using in real-time. Studies have shown customers who have these devices experience energy savings of up to 18 percent. As with the “bring your own thermostat” program, these home energy monitors will significantly reduce harmful pollution by helping people curtail their overall energy use or shift their use to a lower-priced time period.

Cost-effective grid upgrades and energy efficiency programs, like the ones in Duke’s grid modernization program, are straightforward ways utilities can advance clean energy and reduce harmful pollution. Duke’s program will benefit customers and the environment, and help Indiana progress toward a 21st century electric grid, serving as a model for utilities throughout the country.

By John Finnigan

In his final State of the Union address last night, President Obama did not spend any time bragging about his signature environmental achievements, such as the Clean Power Plan or the Paris climate accord. Instead, he highlighted the need for a more flexible electric grid in order to accelerate America’s transition to a clean energy economy, noting that, “Rather than subsidize the past, we should invest in the future.”

But some climate deniers and industry leaders alike are stuck in the past, and do not share Obama’s enthusiasm for a clean energy future. They argue that this path will cost too much and have a devastating impact on our economy. We’ve heard this argument before, and it doesn’t hold true.

State of the Union recap: We can afford Obama’s clean energy legacy
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In a recent blog post by my colleague, Graham McCann, expands on this further, showing how past major environmental programs – like the life-saving Mercury and Air Toxics Standards, which are providing crucial reductions of toxic air pollutants including mercury, hydrochloric acid, and arsenic from our nation’s power plants – have encountered similar overblown economic arguments from industry, and how industry has almost always been wrong. How do we know this?  The numbers don’t lie:

Another way to look at this is argument is from the perspective of consumer spending. The U.S. Bureau of Commerce has collected data since 1959 showing what percentage of income consumers spend on electricity each year. This data shows that electricity prices today are near an all-time low as a portion of consumers’ budgets.

Time and time again, the benefits of environmental protections have greatly surpassed the costs. For the Clean Air Act, benefits exceeded costs by 30 to 1. Technological improvements such as more efficient power plants and appliances, and electric grid improvements, have greatly reduced the projected compliance costs.

The Clean Power Plan will actually save American families money – an average of $85 on annual energy bills by 2030, when it’s fully implemented. And, of course, we have to consider the rising costs of the damage caused by climate change. A recent Citibank study confirms that the comparative cost of transitioning to a clean energy economy is cheaper to implement than continuing down the self-destructive path of “business-as-usual.” By transitioning to a clean energy economy we will save an estimated $1.8 trillion by 2040 – and we’ll have a much cleaner, healthier planet to boot.

By John Finnigan

Utility-scale solar and distributed solar both have an important role to play in reducing greenhouse emissions, and both have made great strides in the past year.

Utility-scale solar, the focus of this article, is reaching “grid parity” (i.e., cost equivalency) with traditional generation in more areas across the country.  And solar received a major boost when the federal tax incentive was recently extended through 2021. The amount of the incentive decreases over time, but the solar industry may be able to offset the lower tax incentive if costs continue to decline.  New changes in policy and technology may further boost its prospects.

Record year for utility-scale solar

Some of the world’s largest solar plants came on-line in the U.S. during the past year, such as the 550-megawatt (MW) Topaz Solar plant in San Luis Obispo County, California and the 550MW Desert Sunlight plant in Desert Center, California. Last year saw a record increase in the amount of new utility-scale solar photovoltaic generation installed – about four gigawatts (GW), a whopping 38 percent increase over 2013, and enough solar power to supply electricity to 1.2 million homes.  This number is expected to increase in 2015 when the final numbers are in.

The first reported contract for solar power under five cents per kilowatt-hour (kWh) occurred in 2014: Austin Energy’s 25-year power purchase agreement (PPA) with SunEdison for 150 MW of solar power.  The trend continued in 2015, when Nevada Energy secured a 4.6 cent per kWh PPA with SunPower.

But perhaps the most impressive milestone for utility-scale solar in the past year is that it is increasingly reaching grid parity with traditional generation.

The industry uses a “levelized-cost analysis” to compare the cost of different power sources. The analysis reviews all the costs needed to produce power for each type of plant – such as construction costs, operation and maintenance expenses, and fuel costs – as well as the amount of power generated by each type of plant. Then the “levelized” cost to produce a single megawatt-hour (MWh) of power for each plant is calculated. This allows for an apples-to-apples comparison of how much it costs to produce a single unit of power.

A sunny future for utility-scale #solar
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A natural gas combined cycle plant has the lowest levelized cost for traditional power plants (including coal and nuclear), at $61/MWh to $87/MWh. The levelized cost for large solar, when including the federal tax incentive, has been reported as low as the $46/MW (see the Nevada Energy and SunPower PPA examples above).  When the cost of environmental externalities, including air pollution, greenhouse gas emissions, or water withdrawals, are fully accounted for, utility-scale solar provides even greater benefits.

Solar owes its gains to several factors. The cost for PV solar panels has decreased over 60 percent since 2010. A flurry of projects is coming on line now, before the tax incentive decrease takes effect. State policy is also a major driver of the increase in solar installations. But this growth is really expected to explode in the coming years.

Future outlook is bright

Future decreases in the tax incentive present a challenge. In addition, falling natural gas prices will make it more difficult for large solar plants to remain competitive with combined cycle plants unless policies can be put in place to recognize the cost of environmental externalities. But a number of factors point to a bright, long-term future for utility-scale solar plants:

• Changes to state and federal energy policy: We saw two historic advancements in 2015 that could result in big gains for utility-scale solar in coming years: the Paris climate accord, signed by 195 nations this month, and the Clean Power Plan, finalized this summer to limit carbon emissions from existing fossil-fuel power plants for the first time in history. As a result, many older, fossil-fueled plants will likely close and electricity from traditional power plants will become more costly. This will help large-scale solar plants remain cost-competitive. On the state level, policymakers are ratcheting up their renewables goals. For example, California passed SB 350 in September, raising the California renewable portfolio standard from 30 percent to 50 percent by 2030. This will create additional demand for solar over natural gas or other fossil fuel generation.

• Continuing price declines: The price for solar panels has decreased significantly during the past five years. To the extent that manufacturers can continue to decrease their price, this will lower the cost to build solar plants. The Topaz Solar and Desert Sunlight plants each have nine million solar panels, so even a small decrease in panel cost can result in major savings in the cost to build a plant. While natural gas prices appear to have bottomed out, the price decreases for PV solar panels have not shown any signs of stopping. This cost decline will also make solar an easier choice for utilities to include in their integrated resource plans.

• Technology improvements: Researchers have steadily increased the amount of electricity solar panels can generate. Crystalline silicon solar panels, the most prevalent type of panels, have become much more efficient in recent years and manufacturers keep reporting new efficiency records. Thin-film solar panels, which have a smaller market share, have increased their efficiency by over 20 percent in recent years. If these technology gains continue, the output from large solar plants will increase, making these plants more cost competitive with traditional generating plants.

• Advancements in energy storage: If energy storage can be developed on a commercial scale, this would increase the value of solar because it would allow grid operators to dispatch power when the grid needs it. This future may be sooner than we think. California has established an energy storage standard, requiring utilities to implement 1.325 GW of energy storage by 2020.  And earlier this year, Oregon passed HB 2193, establishing an energy storage standard. Finally, the largest U.S. battery storage project was announced earlier this year – a 200 MW project by Alveo Group for Customized Energy Solutions, an energy storage service provider.

Utility-scale solar has seen tremendous gains during the past few years. Achieving grid parity with traditional generation is a remarkable achievement. This resource will face headwinds when the federal tax incentive decreases in 2017, but a number of factors point to a sunny outlook for large-scale solar.

By John Finnigan

Last week, the Public Utilities Commission of Ohio (PUCO) staff endorsed a four billion dollar bailout for FirstEnergy’s coal and nuclear plants. The new deal modifies FirstEnergy’s original proposal and, if approved, would prop up the Akron-based utility giant’s uneconomic power plants for the next eight years – making its customers foot the huge bill. Many parties oppose the deal, because it is unfair to customers and interferes with the state’s competitive energy market.

Importantly, FirstEnergy’s bailout is not only bad policy, it also violates federal law.

Ohio restructured its electricity market several years ago, so FirstEnergy’s plants have been operating in a competitive wholesale energy market. The market covers 13 states and power plants bid into an auction to supply electricity to the region, ensuring customers get the lowest electricity prices possible FirstEnergy’s power plants are losing money because they are old and inefficient, and can’t compete with newer, cleaner natural gas and renewable energy that deliver electricity at a lower cost. As a result, FirstEnergy has asked the PUCO for a bailout.

But electricity is sold across several states in the wholesale market, and so is subject to federal law. And federal law bars states from erecting protectionist barriers that harm competition.

In this case, the bailout deal subsidizes FirstEnergy’s money-losing plants by forcing customers to pay for them, even when cheaper electricity is available from newer, more efficient power plants.  And since utilities still have a monopoly on service territories, FirstEnergy will deliver your electricity if you live in its territory – even if you buy your electricity from another supplier. That means the bailout will force everyone in the area to pay for these plants, regardless of their electricity provider. Moreover, the bailout guarantees payments for the plants’ electricity, so the utility will no longer be subject to competition.

Clearly, the FirstEnergy bailout runs counter to a competitive market – it harms competition.

FirstEnergy’s bailout isn’t just bad policy – It’s illegal.
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Two other states – New Jersey and Maryland – created similar schemes to subsidize plants located in their states. But in both cases, courts ruled that these subsidies were anti-competitive and therefore illegal. The wholesale market supervisor even filed sworn testimony before the PUCO on this point to show why FirstEnergy’s request was unlawful.

It’s a sad day when the PUCO staff – who are supposed to foster a competitive market – sides with large, highly-profitable utilities, rather than everyday Ohioans. The PUCO staff’s deal harms the environment too, because competition would have forced these outdated, polluting plants to close. But it’s even worse when the PUCO staff agrees to a deal that clearly violates federal law.

The PUCO commissioners still have a chance to reject the deal. If they do approve it, the federal court will likely overturn the ruling in order to uphold competition – even if the PUCO will not.

By John Finnigan

A recent study by the Lawrence Berkeley National Laboratory (LBNL) concludes that the way a utility charges customers can greatly influence whether they will install solar panels. It is a timely analysis because utilities across the country are redesigning their rate structures to accommodate our changing electricity system, which is becoming cleaner and more efficient than ever before.

What’s unfortunate is that some utilities are intentionally trying to destroy customers’ incentive to install solar panels. Why? Because rooftop solar reduces shareholder profits and revenue for utilities.

Solar Electric Power Association (SEPA), a solar industry trade group, reports that in 2014, residential customers installed solar panels at an astounding 36 percent growth rate compared to 2013. But the LBNL study says the rate design changes now being proposed by utilities across the country could slash solar panel growth up to 60 percent. Clearly, poorly designed rate changes could devastate the potential for solar panels to help transform the electricity sector. Regulators should not let this happen.

Utilities have the opportunity to change their rate design to provide incentives for more solar adoption while also recouping investments and properly balancing their books.

Rate design 101

Rate design sounds like a complex topic, but it’s really quite simple. The term refers to how the utility arranges or “designs” the monthly bill for using electricity. At one extreme, a utility could charge a flat amount, or “fixed charge,” for customers to use an unlimited amount of electricity during the month.

At the other extreme, the utility could charge a rate for each unit of electricity used, known as a “variable charge.” In this scenario, the cost per-unit doesn’t change each month, but the amount of electricity consumed can vary greatly – and so can the utility bill.

In reality, utilities don’t use either one of these extremes. Instead, they use a combination of a monthly fixed charge and a variable charge. In theory, the fixed charge is supposed to cover some portion of the utility’s fixed costs for serving the customer, like building transmission lines and maintaining other elements of the grid’s infrastructure. Although the variable charge doesn’t change very often, the amount of electricity we use each month can change dramatically – with the highest usage occurring when we crank up our air conditioning and heater to stay comfortable.

Today, utilities recover most of their costs through the variable charge. The utilities’ playbook for halting loss of revenue from the growth of solar is to switch to fixed charges. It’s easy to see how this would harm solar panel customers. 

If the bill is based almost entirely on a variable charge, then a customer can install solar panels to reduce the amount of electricity needed from the utility – greatly reducing the customer’s monthly electricity bill. But if the bill is entirely based on a fixed charge, then solar panels wouldn’t change the bill at all. Customers would pay the same monthly fixed charge regardless of how much electricity they saved by installing solar panels.

Utilities' rate designs can help or harm solar adoption
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The bottom line on rate design

Admittedly, the answer to a well-designed electricity rate requires more than simply looking at how much of the bill is recovered through a fixed charge versus a variable charge. Regulators should consider whether the utility offers net metering, which allows solar customers to get paid for providing excess electricity to the grid, and time-variant pricing, a rate structure that reflects the true price of electricity, which varies by time of day and year. Regulators are also experimenting with demand charges for residential customers – where the customer would pay a fee based on how much their usage contributes to the utility’s peak usage. One thing is clear: regulators need to reject the utilities’ knee-jerk approach of just raising the monthly fixed charge.

Instead, regulators must consider other rate design factors and develop a balanced solution that gives the utility a fair opportunity to recover its costs, while also providing both solar and non-solar customers a way to pay their fair share of using the electric grid. Utilities should not be allowed to discriminate against solar customers by including demand charges that other residential customers are not required to pay.

Regulatory officials must stop utilities from adopting rate designs that harm customers who own solar panels. This is the right path for transforming into a fair, modern, low-cost, clean electricity system.

Photo source: Wikimedia Commons/Gray Watson

Graph source: The Chippewa Herald/Power Shift: Utilities, Regulators Changing How Customers Pay for Power 

By John Finnigan

FirstEnergy isn’t the only utility trying to stick Ohioans with the cost of its poor business decisions.

AEP Ohio has also presented a similar proposal to bail out several old, uneconomic coal plants, asking the Public Utilities Commission of Ohio (PUCO) to guarantee the purchase of power produced by its coal plants. The utility tried the same tactic earlier this year and failed, but is now back with an updated proposal. Last week, Environmental Defense Fund (EDF) filed testimony opposing the deal and recommended that AEP Ohio should invest in grid upgrades if the PUCO decides to approve AEP Ohio’s proposal.

Ohio has a competitive retail electric market, meaning customers can buy electricity from many different sellers. But utilities still have a monopoly when it comes to service territories. So if you live in AEP Ohio’s territory, the company will deliver your electricity – even if you purchase it from a different provider. Since AEP Ohio’s bailout proposal applies to its entire service area, essentially the utility wants to force all of those customers to pay for its coal plants, including those who don’t buy their electricity from AEP Ohio.

Not only would the deal unfairly burden Ohioans with these costs, it would disrupt the competitive retail market. Why tamper with something that is working well? Competition has driven down the price of electricity for Ohio customers, and will continue to do so – if big utilities don’t get in the way.

AEP Ohio claims it might have to shut down these plants due to new environmental regulations, but this is how the market ought to work. If these old, dirty coal plants can no longer compete in the clean energy economy, the power demand will be met by newer, cleaner, cheaper sources like natural gas and renewable energy.

Another Ohio utility seeks a bailout when it should be upgrading the grid
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Moreover, there are other ways for AEP Ohio to lower operating costs and simultaneously reduce carbon emissions, like making its delivery system more efficient. For that reason, EDF also recommends that AEP Ohio invest in newer technology, such as Volt/VAR Optimization and Conservation Voltage Reduction. Many appliances work just as effectively, yet consume less energy, when the flow of electricity to them is reduced. Put another way, higher voltages generally make individuals and businesses needlessly use more energy, driving up electricity bills and air pollution. Therefore, if voltage was “right-sized” through Volt/VAR technology and Conservation Voltage Reduction, people would not get more electricity than needed. These resources are cost-effective and have the potential to reduce energy consumption by three percent, as evidenced by AEP's own gridSMART pilot program.

Instead of trying to prop up coal, which is already losing ground throughout the country, AEP Ohio should invest in the future and modernize the grid.

By John Finnigan

In a long-awaited hearing which began last week, Ohio’s largest utility is seeking approval for a rate hike of $3 billion. FirstEnegy is asking the Public Utilities Commission (PUCO) to force customers to pay for its old, dirty, uneconomic coal plants and a nearly-expired nuclear plant.

Although there are many reasons to oppose the bailout proposal, one key objection is that FirstEnergy’s sister company – FirstEnergy Solutions – owns these power plants. Rather than undertaking a competitive bid to find the best deal and most affordable prices available, FirstEnergy agreed to buy the power from FirstEnergy Solutions. Imagine if the owner of your company forced you and every employee to buy expensive health insurance from their cousin, even though you could easily get a better price if you shopped around.

If this sounds bad, it gets worse – this isn’t the first time FirstEnergy has tried this tactic. The utility did the same thing in 2013, and the PUCO slammed FirstEnergy for doing so. This is just a case of déjà vu all over again, and FirstEnergy should expect the same result.

In the 2013 case, FirstEnergy needed to buy renewable energy credits (RECs) because Ohio law required utilities to get a certain portion of their energy supply in the form of renewable energy. Other Ohio utilities shopped around for RECs and used competitive bidding to find the lowest available prices. Since all utilities pass these costs through to customers via their electricity rates, competitive bidding means lower prices for the utility’s customers.

FirstEnergy did not use competitive bidding to get its RECs – instead, it bought them directly from its sister company.   The PUCO investigated the deal and concluded that FirstEnergy overpaid for these RECs by $43 million, which it ordered FirstEnergy to refund to customers. The PUCO’s order had this to say:

“[t]he actual purchase price was not the result of a competitive bid but a negotiated purchase price (with its affiliated company). That negotiated purchase price was unsupported by any testimony in the record.”

Basically, FirstEnergy didn’t try to find the best price, instead settling on a high price that benefited its sister company. The PUCO determined this was highly unfair to FirstEnergy’s customers.

The PUCO’s rejection of a no-bid, self-dealing contract in 2013 should have taught FirstEnergy a lesson – especially since this lesson had a steep cost of $43 million. Hopefully, the PUCO will do the right thing once again and complete the déjà vu by rejecting this deal.

Sadly, FirstEnergy always seems to do the wrong thing. If you’d like to give your opinion to the PUCO and to state lawmakers about this new case, please click here.

By John Finnigan

How does a utility company structure charges for the electricity it sells? That depends on where you live, and across the country, utilities are filing for rate increases with state agencies and commissions. The utility’s charges may be some combination of a fixed monthly fee, a fee based on the volume of electricity used, and a fee connected to the customer’s peak energy use.

Westar Energy in Kansas is one example of a utility company filing for rate increases. The company recently asked the Kansas Corporation Commission for permission to increase the fixed monthly charge for residential customers. That’s not unusual in itself, but the amount of the fixed charge increase was shocking.

Westar also proposed a special rate structure squarely aimed at residential customers with solar panels, essentially penalizing them for using clean energy and discouraging more people from installing solar panels.

Environmental Defense Fund disagreed with Westar’s approach, and we filed expert testimony with Kansas regulators explaining why. Westar finally reached a settlement with the other stakeholders – and our recommendations were instrumental in eliminating the utility’s proposal to impose discriminatory rates on solar customers. Last week the Commission issued the order to approve the settlement.

The Westar case shows how utilities are grappling with the growing adoption of clean, distributed energy resources, like rooftop solar. As more people have begun owning and producing their own electricity on-site – but are not quite independent enough to go completely “off grid” – many non-solar-owning customers are asking: Are rooftop solar owners paying their fair share to build and maintain our central electric grid? And utilities are asking whether they will have an opportunity to recover their costs to serve solar customers. In many instances, the answer to these questions comes down to how well a utility’s rates are designed.

Residential demand charges: fair or unfair?

Electricity rates should be designed to give utilities a fair opportunity to recover their costs and to eliminate subsidies among different groups of customers. With that in mind, rates should also be designed to avoid harming or favoring one type of customer over another – including solar customers.

Westar claimed it needed a new rate plan because non-solar customers were subsidizing solar customers under the existing rates, and it wanted to impose a demand charge on customers with rooftop solar. EDF believes that if a utility is introducing demand charges, then all customers should receive the same options, without singling out solar customers.

A demand charge is a fixed monthly charge based on how much a customer’s peak electricity demand contributes to the utility’s peak demand during a given time period. Peak demand is typically during the hottest or coldest months of the year, depending on where you live, and when you crank up your AC and heating units. Utilities have used demand charges for commercial and industrial customers for many years, but applying them to residential customers is fairly new.

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Demand charges can be good policy, if done right. They can give the utility a better opportunity to recover its costs and provide an incentive for customers to manage their peak energy demand, which can lead to lower rates for all customers. Demand charges can also be more fair for smaller customers than a higher fixed monthly charge because the fixed charge eliminates the customers’ ability to lower their bills by managing their usage.

But demand charges can harm solar customers if not implemented or designed correctly. And if we are to avoid the most catastrophic effects of climate change, we need to scale clean energy technologies (like rooftop solar) faster and more efficiently than ever before. That’s why it’s imperative that we get rate designs right. They should provide incentives for clean energy deployment – not hinder it – while being fair toward the utility and non-solar customers.

Westar is a case study

 Westar originally proposed that solar customers would be required to choose between a plan with a demand charge and a $27 monthly fixed charge versus a plan with a $50 monthly fixed charge – both much higher than the current $12 monthly fixed charge. Also under Westar’s proposal: solar customers would not have the option, available to other customers, of remaining on the present plan with a low monthly fixed charge and no demand charge. Westar’s plan was unfair for solar customers. If demand charges are being used, then all customers should have the same rate options.

EDF efforts helped achieve a settlement in which Westar agreed to a very small fixed charge increase (from $12 per month to $14.50 per month) instead of the $27 monthly charge it originally sought. In addition, Westar agreed to give solar customers the same rate options other customers receive. We believe this is a much more balanced solution that considers the interests of the utility, solar customers, and non-solar customers.

While rate design may seem arcane and boring, it has an important impact on whether customers choose to install solar panels. A recent study by the Lawrence Berkeley National Laboratory shows that having the right rate design has a huge influence on a customer’s decision to add solar panels.

As utility leaders and policymakers from other states continue to explore the most equitable path toward a cleaner electric grid, the Westar case provides important lessons.

By John Finnigan

The new Apple Watch, which went on sale last Friday, is attracting huge attention. Among many other features, the watch will monitor your health by tracking fitness and activity, like the Fitbit. In its first day on the market, nearly one million were sold.

The popularity of this wearable device speaks to a larger trend happening in technology that one might call “life tracking”: the ability to track, analyze, and hone your personal activities through the use of connected devices. From fitness to finance, technology like the Apple Watch is enabling more choice and efficiency than ever before. And, just as fitness wearables monitor our personal activity, other devices can monitor our home energy activity – leading to an array of cost-saving and environmental benefits.

Home energy monitors

The Nest thermostat is one of the most well-known home energy monitors. It learns how you like to set your home temperature, and then automatically programs itself to follow your patterns.

For example, if you work an office job and are away from home nine to ten hours a day, the Nest thermostat may cycle the air conditioner down to increase the home temperature a couple of degrees during the day while you’re gone, and then automatically reduce the temperature an hour or so before you return to re-establish your preferred home temperature.

This process of automated, learned behavior by home energy devices has significant cost-savings potential. Nest users reduced their energy use from air conditioning by 11 percent in a recent California study, and lower energy use means lower electric bills.

Some home energy monitors can even allow us to see in real time how much energy we’re using – both for our entire house and on an appliance-by-appliance basis, which can encourage conservation. A 2012 study by the American Council for an Energy Efficiency Economy entitled “Results from Real-Time Feedback Studies” reported that customers reduced their energy consumption up to 12 percent when they received real-time feedback about their energy usage in the form of in-home displays, web portals, and prepaid metering programs.

Demand response moves in

Home energy management devices can also enable utility-sponsored, energy-savings programs like demand response.

Demand response pays people to save energy when electricity demand is high by integrating home energy monitors with smart meters, the interface that allows two-way communication between customers’ appliances and utilities. For example, when energy demands are up, households and businesses are notified by their utility – usually through a smart phone app, text, or display notification on a home energy device – so that customers can choose to switch off non-essential appliances like water heaters, washers, and dryers. Smart meters and programmable thermostats make demand response even easier by automating this process.

At the end of the month, customers will see a rebate on their electricity bill for participating in demand response, in addition to the amount they saved by using less energy. Many utilities offer this type of program, especially now that smart meters reach over 40 percent of U.S. households.

Electricity pricing can finally be dynamic

Time-variant pricing plans are also becoming more popular with the expansion of smart meters and home energy management devices. The idea is that utilities can offer customers different rates at different times of the day or throughout the month that better reflect the true cost of electricity, which varies depending on when it’s used. The varying cost of electricity can be communicated through home energy management devices’ display screens or accompanying smart phone apps.

For example, when a heat wave occurs on a weekend when most people are at home, demand skyrockets as people crank up their air conditioners, creating what is known as a “critical peak event.” In order to meet this increased demand, the most expensive power plants – which remain unused for most of the year and generally tend to emit more pollution – are turned on. Enabling customers to curb their electricity use during these heat waves could offset the need for these dirty, expensive plants, resulting in lower prices and less harmful pollution.

Home energy monitors can be programmed to receive price signals from the utility during these peak events, giving customers the choice to either manually adjust their appliances in response to these signals, or program their home energy monitor to automatically adjust appliances.

Utilities must deliver   

Apple created the Apple Watch to give people real-time feedback on – and thus greater control over – their lives. Similarly, there is great potential for home energy monitors to change people’s lives. And the market for home energy management is growing rapidly – in fact, it’s predicted to exceed $3 billion annually by 2020.

But, home energy monitors are just a piece of the energy savings puzzle, and combining them with utility programs like demand response and time-variant pricing can unlock even greater savings. However, utilities, and the regulators overseeing them, need to follow through with implementing these programs as part of their investment in a smarter grid. Then we can ensure customers have the opportunity to receive all the potential financial and environmental benefits “wearables” (or their energy management counterparts) can offer.

Photo source: Flickr/LWYang

By John Finnigan

Ohio’s clean energy economy celebrated a big win this week. The Public Utilities Commission of Ohio (PUCO) denied American Electric Power Company’s (AEP) request for guaranteed profits to operate its aging, uneconomic coal power plants. EDF, along with many other parties, opposed AEP’s proposal.

EDF applauds the Commission for recognizing AEP’s proposal would not benefit Ohio residents and businesses. These old coal plants cost more to operate than the value of power they generate. Plus, they produce harmful greenhouse gas emissions which, if the plants continue to operate, would make it more difficult for Ohio to comply with the Environmental Protection Agency’s (EPA) proposed Clean Power Plan, which would set the first-ever limits on carbon emissions from existing power plants.

The Public Utilities Commission’s decision sends a clear message: power companies can no longer rest on their laurels. Clean energy businesses, entrepreneurs, investors, and Ohioans are ready for a new era – one in which utility profits are not placed ahead of Ohio’s best interests.

With gas prices low, an increased use of renewable energy, and weak demand resulting from customer energy efficiency improvements, some utilities like AEP are now burdened by their heavy reliance on coal – and looking to their customers to bail out their uneconomic power plants. Thankfully, yesterday’s decision assures that the market will remain competitive, giving clean energy resources an equal opportunity to compete with legacy fossil fuel plants.

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AEP’s proposed plan would have guaranteed income for two of its oldest coal plants – Kyger Creek and Clifty Creek. AEP testified that the plants, built in the 1950’s, are currently operating at a loss and might need to be closed because the economics are not penciling out. This news also came prior to EPA’s announcement about the proposed Clean Power Plan, which will make the plants even more costly to operate.

The company claimed that, over the long term, the plants will become economic, and keeping the plants open could provide Ohioans a net benefit of $8.4 million. However, other parties challenged AEP’s calculations and showed the plants could cost Ohio residents and businesses over $100 million.

EDF has been vocal about AEP’s efforts to make Ohioans foot the bill for keeping these uneconomic power plants running. We also added our voice to those challenging AEP by joining a coalition to highlight how the utility’s proposal ran counter to market principles.

The PUCO’s ruling is particularly significant because Duke Energy and FirstEnergy also have pending similar proposals for guaranteed cost recovery for their coal plants. Yesterday’s decision shows the PUCO will do a reasonable review of the costs and benefits of keeping these old coal plants open, rather than simply accepting the utilities’ unsupported claims that their coal plants benefit Ohioans. EDF will continue to push for more transparency from Ohio power companies and work to ensure electricity is clean, reliable, and affordable for all.

By John Finnigan

New York opened its “Reforming the Energy Vision” (REV) proceeding earlier this year to re-examine the utility business model. As part of this proceeding, state regulators will also look into removing market barriers preventing greater deployment of distributed energy resources (DER), which are smaller-scale clean energy resources, such as energy efficiency, energy storage, and local, on-site generation.

In recent years, DERs have made great strides due to market reforms, advanced technologies, and declining costs. Despite these advances, DERs serve less than 1% of national electricity demand as the existing utility business model and regulatory policies still favor traditional electricity distribution from a centralized grid.

Though the REV proceeding is in its early stages, the Department of Public Service Staff (Staff) has provided guidance recommendations for eliminating these market barriers. Using the Staff’s filings, EDF has drafted a white paper that compiles a Top 20 list of the changes required before we will see greater use of DERs. If adopted, these recommendations would result in a sea change for incorporating DERs into New York’s electric system and would provide a template for other states to follow.

Among the Top 20 recommendations are a new regulatory paradigm that rewards utilities for the benefits they deliver rather than infrastructure investment, a new platform allowing DERs to compete on equal footing with traditional energy resources, and a market structure open to third-party energy service providers. Please read our white paper for more recommendations.

The REV proceeding has a long way to go before the policy recommendations are finalized, new laws are passed, and utility implementation plans are adopted. Yet it is already clear that REV will “REVolutionize” the use of DERs in the energy system.

By John Finnigan

Source: Tendril

The New York Public Service Commission (Commission) has embarked on the landmark Reforming Energy Vision (REV) proceeding to design a new business model for electric utilities. Today’s business model allows utilities to earn revenues based on how much money they spend to supply and deliver electricity. Under the new model, utilities will earn revenues based on the value of services they deliver to customers and the environment.

Currently, utilities dominate the electricity service market, limiting customer access to the full range of products and services otherwise available in a truly open market. One focus of the proceeding is to remove the barriers preventing third parties, such as retail electric suppliers, solar energy companies, or smart meter providers, from fully participating in the energy market. Allowing full participation by third parties would lead to increased innovation and fuel the development of new products and services.

Several barriers limit third-party participation

To be sure, non-utility companies currently do play a role in today’s electricity markets, but their participation is curbed by several barriers. The first is a limit on the type of revenues they can earn. For example, smart meter providers and open standards-based cloud platforms, like Tendril Connect, earn revenues today by enabling customers to more effectively conserve energy and thus lower their utility bills. Yet these companies provide other benefits to the electricity market as well, such as reduced carbon emissions, improved system efficiency from producing and delivering power locally, or lowering stress on the power grid during times of peak demand. As a result, utilities might be able to avoid or delay costly infrastructure investment, leading to lower electricity prices. These benefits are real, but non-utility players can’t earn revenues for these services under the current regulatory environment. A new utility business model should allow energy service companies to earn revenues from all the benefits they provide.

Another barrier arises from how electricity rates are developed. Electricity rates are set based on the average annual cost of serving a customer, and customers pay the same rate regardless of the time of day they use electricity despite the fact that electricity is more costly to produce during the middle of the day when usage is at its peak. A reformed business model would give customers the option of paying different rates based on their time of usage, allowing customers greater control over their electricity bill. Once electricity pricing gravitates away from a monolithic, one-size-fits-all structure to better reflecting consumer behavior and choices, customers will have greater incentive to adopt renewable energy or energy efficiency measures offered by third parties.

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Access to customers would help third parties compete

Lack of customer data is another barrier third parties must overcome. A new business model would give customers easy access to the detailed energy data they need to control their energy use and reduce their electricity bills, which in many cases they don’t have. Once customers are granted such access, they would be able to share their energy profiles with non-utility businesses that could then customize products and services, allowing customers to maximize their value. Indeed, granting third parties access to customer data drove many innovative services offered by telecommunications providers in the nineties, such as free night and weekend minutes and free friends and family minutes.

Finally, third parties also face a barrier of high customer acquisition costs. Currently, the monopoly utilities enjoy has translated into longstanding customer relationships. The REV proceeding will examine whether third parties should be allowed to access customers directly through the utility’s website or even on electricity bills, substantially reducing customer acquisition costs and making their products and services more competitive.

EDF believes removing the barriers to third-party participation in electricity markets would lead to more widespread use of clean energy solutions as they became more cost-effective. The ultimate beneficiaries would be customers who could see lower electricity prices, innovative products and services, and more reliable service as well as cleaner air and a safer climate.

Last month, EDF filed comments (Track 1 and Track 2) in New York State’s historic ‘Reforming the Energy Vision’ (REV) proceeding to re-evaluate the longstanding utility business model in light of a rapidly changing energy sector. We recommend: 1) transitioning from traditional rate of return regulation to performance-based regulation; 2) fully valuing all costs and benefits associated with distributed energy resources; 3) removing barriers to non-utility entities participating in energy service markets; and 4) requiring the utility to optimize the load it serves.

Over the coming weeks, we will devote a blog post to examining each of these recommendations in depth. This next blog post in our Utility 2.0 series will discuss requiring the utility to optimize the load it serves.

By John Finnigan

Source: Frank Edens Flickr

America’s electric grid has not been updated since World War II when telephones, dishwashers, and air conditioning were the cutting-edge technology innovations of the century.

Today, this same grid is struggling to cope with the technological advances of the last decade, a reality that hit home for New Yorkers in the wake of Superstorm Sandy when millions of people lost power for days and even weeks.

But New York is taking steps to change this. A proposal to overhaul the state’s utility business model could dramatically change how people interact with their power company.

It could bring in innovative technology to help homes and businesses better manage their own energy needs, while at the same time reduce carbon emissions – changes that would have national implications.

Humble beginnings

New York played a leading role in establishing today’s utility business model. Thomas Edison developed the first power plant on Pearl Street in Manhattan in 1882, serving 85 lighting customers.

The business model of Edison and his protégé, Samuel Insull, was simple:  Just keep adding more customers and building larger power plants – and the rest will come.

It was a win-win for Edison’s customers and for his utility companies. Customers won because the ever-larger power plants were more efficient, bringing the cost of electricity down each time he built a new plant.

Monopolies are born

As the price per kilowatt of electricity kept declining, customers used more power. To encourage growth in this new electricity infrastructure, New York, like all of the other states, protected the utilities’ investment by granting them an exclusive right to serve customers.

In exchange for being permitted to operate as a monopoly, New York set the price the utility could charge for electricity. The prices were structured to reward the utility for successfully building a bigger and more robust system.

Needless to say, Edison’s business model proved wildly successful.

We now have access to electricity 24/7, at the flip of a switch. The U.S. electric power industry fuels the world’s largest economy. We rely on our heating and air conditioning, appliances, televisions, computers, phones – all powered by electricity – to meet our daily needs.

The electrification of America was the greatest engineering feat of the 20th century, surpassing even the invention of the Internet and sending a man to the moon.

Consumers today want independence

This business model has worked well for the past 130 years because it used the right incentives for what society needed. But it is out of sync with our needs today.

We now know that when people are armed with the knowledge that the cost to produce electricity varies by time of day and year, they are willing to change well-worn patterns to bring down their electricity bill.

Price-conscious customers might run their dishwashers at night instead of during the day, yielding not just lower prices for themselves, but for the entire system.

Indeed, many people want to take advantage of new technologies and falling prices to enjoy on-site electricity options like rooftop solar panels and electric vehicles.

More efficient industries, buildings, homes, and appliances now allow customers to accomplish much more with far less energy. Advances in telecommunications and information systems create new opportunities for energy services we could not have imagined just a few years ago.

A smarter grid will cut emissions

It has also become increasingly evident that our reliance on fossil fuels burned in large centralized power plants has created an environmental burden for our children. We need a system that is less polluting.

Upgrading to a smarter grid will allow us to fully integrate distributed generation, such as rooftop solar and combined heat and power that can operate independent of the central grid and help move us toward a clean energy economy.

New York gave birth to the electric power industry 130 years ago, making it the perfect place to reinvent the utility business model for the 21st century.

By John Finnigan

Source: iStock

The U.S. electric grid has not been updated since World War II when telephones, dishwashers, and air conditioning were the cutting-edge technology innovations of the century. Today, this same grid is struggling to cope with the technological advances of the last decade, a reality that hit home for New Yorkers in the wake of Superstorm Sandy when millions of people lost power for days and even weeks.

But New York is taking steps to change this, first by initiating a proceeding in April to overhaul the state’s utility business model, and now by opening the proceeding to comments. EDF filed our comments (Track 1 and Track 2) in this case last Friday, July 18th, and commends the New York Public Service Commission for the opportunity to provide our input on this exceedingly important policy that will have national implications.

Humble beginnings

New York played a leading role in establishing today’s utility business model. Thomas Edison developed the first power plant on Pearl Street in Manhattan in 1882, serving 85 lighting customers.

The business model of Edison and his protégé, Samuel Insull, was simple – keep adding more customers and keep building larger power plants. This was a win-win model for Edison’s customers and for his utility companies. Customers won because the ever-larger power plants were more efficient, meaning Edison could sell electricity at a lower cost per unit every time he built a new plant.

As the price per kilowatt of electricity kept declining, customers used more electricity. To encourage growth in this new electricity infrastructure, New York, like all of the other states, protected the utilities’ investment by granting them an exclusive right to serve customers. In exchange for being permitted to operate as a monopoly, New York set the price the utility could charge for electricity. The prices were structured to reward the utility for successfully building a bigger and more robust system.

Needless to say, Edison’s business model proved wildly successful.

We now have access to electricity 24/7, at the flip of a switch. The U.S. electric power industry fuels the world’s largest economy. We rely on our heating and air conditioning, appliances, televisions, computers, phones – all powered by electricity – to provide our daily needs. The electrification of America was the greatest engineering feat of the 20th century, surpassing even the invention of the Internet and sending a man to the moon.

Out with the old, in with the new

This model has worked well for the past 130 years because it used the right incentives for what society needed. But today this business model is out of sync with what we need now.

Customer expectations have evolved beyond the relatively basic requirements of Edison’s time; they need and expect power quality and reliability to support the digital economy. We now know that when customers are armed with the knowledge that the cost to produce electricity varies by time of day and year, they are willing to change well-worn patterns to bring down their electricity bill. For example, price-conscious customers might run their dishwashers at night instead of during the day, yielding not just lower prices for themselves but the entire system at large.

Indeed, many customers want to take advantage of new technologies and falling prices to enjoy on-site electricity options, like rooftop solar panels and electric vehicles. More efficient industries, buildings, homes, and appliances now allow customers to accomplish much more with far less energy. Advances in telecommunications and information systems create new opportunities for energy services we could not have imagined just a few years ago.

It’s not just customer choice and technology, however, placing pressure on Edison’s outdated utility business model. It has also become increasingly evident that our reliance on fossil fuels burned in large centralized power plants has created an environmental burden for our children. We need a system that is less polluting. Climate change has increased the likelihood of extreme weather events, which could render large central plants useless in meeting our energy needs. Upgrading to a smarter grid will allow us to fully integrate distributed generation, like rooftop solar and combined heat and power, that can operate independent of the central grid.

The challenge

To meet the needs of today and tomorrow’s world, we must ask ourselves if the services are best delivered as they have been for the last 130 years. We must look to new opportunities that reward utilities for successfully furnishing a sustainable platform for our energy needs, not just for providing more power plants and equipment. The utilities will be our portal to energy services, but they do not necessarily have to be the provider of them.

To accomplish this, the New York Public Services Commission, in consultation with stakeholders, must identify the outcomes they want utilities to achieve – and tie the utilities’ revenues to their performance in meeting these outcomes. New York has a good start with performance-based ratemaking. It is time to build on that foundation to reward results, not utility spending.

This will be no easy task. The electric power industry has grown into a $300 billion/year industry using the old model. Over the last 130 years, regulators, utilities, investors, and customers have become entrenched in our ways. Any transition will require a shift in deeply-rooted practices and sufficient time to fully develop. Changing to a performance-based model will require detailed analysis to establish optimum outcomes and performance metrics.

The outcomes will still address traditional objectives of resource adequacy and reliability of service, while taking into account new elements such as clean energy, customer engagement, system efficiency, and openness to innovation. This will require fundamental changes in the reward system that go far beyond decoupling. New reward systems are needed to align the incentives for traditional utility companies, the clean tech industry, and customers. As always, regulators must be vigilant in monitoring the utilities’ performance, but it will mean developing new skills. Rather than judging prudency in retrospect, the Commission will be challenged to be more of a partner in envisioning the possibilities of the future utility.

EDF will bring to this proceeding its perspective and experience in solving environmental problems through innovative market-based solutions. Some strategies by which the Commission can achieve this objective in part include:

1. transitioning from traditional rate of return regulation to performance based regulation;
2. fully valuing all costs and benefits associated with distributed energy resources;
3. removing barriers to non-utility entities participating in energy service markets; and
4. requiring the utility to optimize the load it serves.

New York gave birth to the electric power industry 130 years ago, making it the perfect place to reinvent the utility business model for the 21st century. New York boldly proposes to take on this challenge.

By John Finnigan

According to the Electric Power Research Institute, the U.S. will need to invest $124 billion between now and 2030 to upgrade its electric distribution system, and these upgrades will require state utility commissions to thoughtfully plan for and oversee the investments. Last week, Massachusetts became one of the first states to begin this process by taking a bold step to modernize its electric grid, joining states like New York and Hawaii, which recently introduced similar measures.

On June 12, 2014, the Massachusetts Department of Public Utilities (DPU) ordered utilities to file ten-year grid modernization plans. These plans will spell out how utilities plan to incorporate modern technology to improve electric service and connect clean energy resources to the grid. This will provide customers access to cleaner and higher quality electricity service at a lower cost.

Massachusetts’s grid modernization plan as a model

The DPU’s carefully planned and inclusive process should serve as a model for other states considering how to modernize their grids. Almost two years in the making, the DPU opened its investigation into grid modernization on October 2, 2012 with a series of DPU-facilitated workshops. The DPU then formed a working group, inviting input from a variety of stakeholders through comments and public hearings. Environmental Defense Fund (EDF) provided input, along with many other groups, and the DPU issued its recommendations on July 2, 2013.

The DPU’s grid modernization plan and vision will be grounded in sound economic analysis and has four primary goals:

1. reducing the impacts of electric outages;
2. reducing the cost of electricity through better management of customers’ electricity usage;
3. integrating distributed and clean energy resources into the grid; and
4. better management of utility workforce and assets.

Utilities must file cost-benefit studies to support their grid modernization investments. The DPU will closely review whether the proposed investments will improve electric service to customers, and will use performance metrics to measure the progress made toward the DPU’s goals. Performance metrics are central to EDF’s advocacy on grid modernization because it provides the basis for measuring whether the utility actually delivers on the promised benefits.

Good for customers and utilities

Utilities will track their grid modernization expenditures and be allowed to recover costs associated with the investments as they are incurred, a departure from the traditional practice of cost recovery through  periodic requests and  lengthy reviews of all aspects of a utility’s operations. The DPU acknowledged that these changes are needed in order to incentivize utilities to make the sizable investments needed. Furthermore, the DPU will review and pre-approve investments, removing uncertainty about whether these investments would be approved after they have been made. Utilities will still be required to subsequently demonstrate that they implemented their projects cost-effectively.

The modernization plans may incorporate new technologies and strategies, if supported by a cost-benefit analysis. For example, volt/VAR optimization would allow utilities to better measure and balance the flow of electricity on the grid. By eliminating waste in the electric system, utilities would be able to serve customers more efficiently and cost-effectively. Additionally, advanced metering would provide customers energy consumption information which would enable them to shift their usage patterns to a time of day when electricity is less expensive. This would also encourage the adoption of clean energy by allowing customers to sign up for utility rate plans that provide favorable rates for owners of solar panels and electric vehicles. These advanced technologies could also lead to fewer and shorter-duration power outages.

EDF commends the Massachusetts DPU for its careful, thoughtful planning of grid modernization and its efforts to invite the diverse perspective of various stakeholders. The DPU has developed a framework to ensure customers will benefit from grid modernization without sacrificing utilities’ ability to remain financially sound. The DPU has provided an excellent example for other states to implement the significant grid upgrades our country needs.

By John Finnigan

By Jukka Isokoski via Wikimedia Commons

The recent Energy Strong settlement between New Jersey regulators and Public Service Electric & Gas (PSE&G), the state’s largest utility, should help reinforce vulnerable energy infrastructure ahead of future severe storms. Last month, the Board of Public Utilities (BPU) agreed that customers could fund $1.2 billion in PSE&G improvements to New Jersey’s electric grid to make it more resilient and efficient. As a participant in the case, EDF was encouraged that PSE&G agreed to necessary changes to its grid to protect against more extreme weather events.

PSE&G, which had originally asked for $2.6 billion in storm-related hardening funds, submitted its Energy Strong proposal to regulators in the wake of Superstorm Sandy, which knocked out electricity for a third of homes and businesses in the state for weeks.

The BPU denied EDF and other environmental organizations full intervener status, preventing us from mounting a full case that would have included expert witnesses on proven climate science and the increased likelihood of future superstorms, the pressing need to take aggressive action to make our existing electric and gas distribution grids more resilient, and the need to transition to a smarter, more decentralized energy system.  Although our status in the case was limited by the BPU’s decision, we managed to argue for and win some positives for the environment:

• PSE&G agreed to reduce methane emissions by replacing old natural gas mains in areas that have a history of leaks and will collaborate with EDF on a pilot to identify and replace the leakiest pipelines first. New Jersey leads the nation in the amount of old and potentially leaky cast iron pipes – over 5,000 miles in all – and roughly 80% of this is in PSE&G’s service territory.  PSE&G owns more than 4,000 miles of old cast iron pipe, the largest amount of any utility in the country. Natural gas is primarily methane, which is a powerful greenhouse gas, many times more potent than carbon dioxide over the short term. Finding and fixing leaks not only makes PSE&G’s natural gas system safer and more resilient, it helps reduce the pollution that is leading to events like Superstorm Sandy.
• PSE&G will invest $100 million in grid modernization, which will produce energy efficiency savings and avoid emissions from gas-fired power plants typically employed to serve this peak demand. PSE&G can save consumers additional money by bidding these energy savings into the region’s wholesale energy market, which pays PSE&G for using energy more efficiently. PSE&G would use these payments to reduce the cost of energy grid modernization improvements. EDF continues to urge PSE&G to bid energy savings into the wholesale energy market and rebate these revenues back to ratepayers.
• Due to the increasing likelihood of extreme weather events caused by climate change, PSE&G agreed to a higher level of flood protection for its substations than it originally proposed (though not as high as we believe it should be) and a performance metric in which no future outages will occur at these substations due to flooding.

EDF will monitor the implementation of this settlement and will continue to look for every opportunity to reduce methane emissions, increase electric and natural gas grid resiliency, and promote policies that accelerate deployment of renewables, energy efficiency, and other market-based approaches.