Governments and regulators intervene in markets all the time. In fact, it is rare to find a market in which government does not have a say – in the form of price and service regulation, market monitoring, or tax policy. This intervention is particularly characteristic of the electric market. Of the many efforts underway to transform the electric grid from an industrial era-centralised radial system to a twenty- first-century distributed and networked system, none will succeed fully until regulators clearly define the rules. The industry is very capital-intensive, with billions needed in new investment for this transformation and investors need certainty.
Fostering competition in regulated markets
Promoting competition in a regulated market requires clear rules, well-defined, regulatory oversight, and behavioral expectations for market participants. A fundamental principle of regulation is that prices and services, as a result of regulation, will approximate what they would have provided in a fully competitive market environment.
What is the current challenge? New technologies are providing the opportunity to reconsider the electric grid and its core services. Further, as electricity demand continues to grow with increasing electrification of our economy and infrastructure continues to age, more grid investment is required. Add to this the prospect of an electrified transportation system and it becomes clear that we are at the precipice for transformative change.
Such change will not happen without investment, and no single investment strategy will suffice. For example, as electric utilities and technology providers deploy more sensors, digital communications controls and data management systems, they begin to change grid dynamics. These investments allow for two-way power flows with associated pricing schemes and provide new revenue streams for market participants. Identification of these new revenue streams is giving rise to discussions of new business models and new regulatory paradigms.
Finding ways to incentive desired investments and to encourage market behaviours that are consistent with public policy goals is more important now than ever. Infrastructure investments made today will define the grid for decades to come. This is especially true in the US where, while many noteworthy efforts are taking place at the federal and state levels to guide investment decisions, utilities and third parties are reluctant to invest too much too soon without clear guidance from federal and state regulators.
Utilities face a challenge in this new world. Obviously they want assurances that their customer base will not be eroded and that cost recovery of prudent investments will be allowed over reasonable time periods; it is no easy feat to balance low rates with the needed investments, to introduce the new technologies to foster development of a twenty-first-century grid, and support more non-utility participation in markets
Reading the compass
Understanding the need for grid system improvements, and the role that new technologies can play in unlocking new value for customers, utilities and third parties are fuelling the call for change. With responsibility for ensuring just and reasonable rates and preventing undue discrimination by transmission providers, in the US, the Federal Energy Regulatory Commission (FERC) defined a framework for planning large-scale transmission projects, including those providing a market for renewable electricity across large geographic regions.
The Federal Energy Regulatory Commission is an independent agency that regulates the interstate transmission of electricity, natural gas, and oil. FERC also reviews proposals to build liquefied natural gas (LNG) terminals and interstate natural gas pipelines as well as licensing hydro-power projects.
FERC’s framework establishes that the beneficiary pays for projects proportionally, based on the estimated proportional benefit to the payer. While states do not regulate rates over interstate transmission projects or interstate transmission projects that cross several utility franchise areas, states have tended to support the concept.
Allocating costs to reflect proportional benefits can be determined and locked in. However, realisation of such benefits and costs is not static and will change over time as new transmission projects are built and as new controls and distributed energy resources are added to the grid. More sensors and controls to optimise management of the distribution system will also change the benefits realised by customers. Add to this the fact that many state regulators are looking to increase penetration of distributed energy resources, load response, and other technologies designed to empower customers to be more involved in electricity markets, and it becomes clear how complicated such a onetime formulaic approach to cost allocation becomes.
Incorporating state public policy requirements into local and regional transmission planning processes, while at the same time creating market rules to support competition in transmission infrastructure projects and customer choice, points to a need for federal and state regulators to establish clear rules and boundaries to guide investment decisions.
Challenge to Regulators
The challenge to FERC is to work collaboratively at the federal and state levels to set rules, communicate rules, and provide longer-term certainty to utilities or third parties, so that they can recover investments and costs.
The industry remains capital-intensive, and whether the grid is centralised or distributed, capital intensity does not change, nor does the need for a reliable and resilient grid. When contemplating new investments, the policy makers need to consider the new role of utilities and nonutility providers, customers’ willingness to accept it, and the long-term economic needs of the economy.
To date, much has been done at the federal and state levels to advance technology and transform the electric industry. What is not clear yet is who is responsible for what and what the rules are to guide market participant behaviours.If you’ve found this blog helpful and would like other topics covered, please feel free to drop me an email with suggestions. You’re welcome to subscribe using ‘Subscribe to Blog via Email’ section and this will get you the latest posts straight to your inbox before they’re available anywhere else