A New Framework for Strategic Planning

REGULATIONS AND BUSINESS MODELS

Published In: EnergyBiz Magazine November/December 2013

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States will see more changes in their electricity systems over the next 15 years than they have in the past half century. And leading states, such as California, are embarking on an unprecedented effort to rapidly and fundamentally change their electricity supply and delivery systems. New systems that are driven by renewable and distributed power of all sizes and technologies, owned by customers, utilities, and third parties alike, are being put in place. An overlay of demand-side resources and new information technology is likewise expanding.

Although much commentary has focused on the technological and economic aspects of these changes, little attention has been paid to a fundamental question: Are the traditional electric system regulatory and utility institutional structures sufficient to support this transformation? And, if not, what changes are needed?

Last year, I co-authored a paper, “Renewable and Distributed Power in California: Simplifying the Regulatory Maze — Making the Path for the Future,” for the Shultz-Stephenson Task Force on Energy Policy at Stanford University’s Hoover Institution that addressed these questions, specifically in the context of California. We focused on California because of its aggressive renewable and distributed generation goals, its multitude of programs to achieve those goals, its complex regulatory structure, its outdated rate design and its largely non-incentivized utility business model. Our paper concluded that an ambitious scale-up of utility-scale renewables and distributed power systems requires an equally ambitious structural reform in the existing regulatory framework and the traditional regulated utility business model.

Subsequent discussions have confirmed that the challenges extend beyond renewables, are faced by many states and are increasing as stakeholders grapple with planning beyond 2020. I am now working with Stanford University’s Task Force on Energy Policy on a paper that will propose an updated framework for strategic electricity planning. The focus of these efforts is to encourage policymakers, utilities, consumers and stakeholders to address the need to update and streamline the regulatory planning and decision-making framework.

Institutional change is as challenging as physical change. However, without an update to the institutional policymaking framework, efforts for the physical and digital transformation of the electric grid will falter and possibly fail.

Our work recommends an updated policy and governance framework so that state policymakers can more effectively address the transformational changes needed for their states’ electricity systems. Although our approach is tailored for California, the proposals summarized below can be used wherever the energy system is moving forward.

Proposal 1 // Use an integrated framework focused on reliability, affordability and sustainability. The transformation of states’ electric systems requires billions of dollars of investment, partially governmental but mostly private. To achieve a successful outcome, we propose an integrated planning framework that analyzes policies, programs and scenarios using consistent and comprehensive criteria focused on the most important features of a viable electric system: reliability, affordability, and sustainability.

Proposal 2 // Integrate climate, water and transportation goals and programs with the state’s electricity future.

Until recently, electricity regulation occurred in relative isolation, focusing on developing and delivering power at reasonable rates. Climate change and many states’ commitments to reducing GHG emissions, however, have dramatically changed this historical approach. Legally and practically, energy, climate, water and transportation are intertwined. Although this linkage is recognized, a stronger approach is necessary, one in which the state’s climate, energy, water and transportation programs are developed within an integrated framework.

Proposal 3 // Develop three key tools for strategic energy planning: advanced analytical modeling; an integrated electricity, climate, water and transportation vision and action plan; and regulatory harmonization and streamlining.

Major advances are needed in state level energy modeling capabilities. States need the capability to examine future scenarios across a range of assumptions. This analysis can explicitly optimize reliability, sustainability and affordability objectives in the energy sector and cross-sectors, and identify trade-offs and synergies. Absent such tools, states may pursue policies and programs that will waste money or not provide needed results.

Using this scenario planning capability, a state can develop a single road map that integrates policies and programs within and between agencies. The road map should present a plan for the state’s electricity transition using a framework focusing on reliability, affordability and sustainability. It should include specific links for integrating the state’s electricity future with climate, water and transportation goals.

Looking at the challenges of developing a strategic electricity planning framework, it’s apparent that there needs to be a harmonized and streamlined regulatory structure in order to avoid balkanized energy governance and policies. Integrating programs on the demand side with those for renewables, natural gas and storage is essential. Work must also focus on updating the key tools of regulation: rates, cost allocation and utility business models.

We don’t know what issues may come up in the next 30 to 50 years. But if the regulatory process and the tools used by state policymakers are implemented so that issues can be addressed quickly with coordination, with adequate analytical tools and within a consistent framework, then the United States will be able to achieve the electric future it needs.

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