Utilities Can Get a “LEG” Up with Beneficial Electrification—But Regulators Also Have to be Ready
In a series of blog posts over the last several weeks, RAP has spotlighted the opportunities associated with beneficial electrification—the practice of electrifying appliances and machines that are currently powered by fossil fuels. Embracing beneficial electrification provides a significant opportunity for utilities, making them more competitive by giving them a “LEG up”—where “L” stands for emerging revenue streams associated with new load, “E” for potential environmental benefits, and “G” for better grid management.
Utilities that embrace beneficial electrification opportunities, such as electric vehicles, space heating, and water heating, will set themselves up to sell electricity that is cleaner, manage their systems more cost-effectively, and offer services that customers increasingly want. Beneficial electrification promises significant environmental and public health benefits from both drawing upon a power sector with an improving emissions profile and replacing fossil-fueled energy end uses with electricity where the grid is comparatively clean (e.g., through miles driven in an electric vehicle instead of a gasoline vehicle). Finally, keeping in mind what Teaching the Duck to Fly teaches us about the changing power sector and customer loads—especially net loads—beneficial electrification offers a key to intelligently managing the grid and integrating distributed resources.
The opportunities that beneficial electrification can provide for utilities seem clear. But in today’s regulatory paradigm, utilities are regulated monopolies with respect to some or all of the “LEG up” benefits. Accordingly, some of these opportunities should also redound to the benefit of ratepayers. When, if, and how that happens, however, hinges on regulators’ understanding of beneficial electrification and its outcomes. This includes consideration of the extent to which any beneficial electrification services may be competitive and how revenue from such services should be treated. It could also include an examination of policy reasons why potentially competitive activities might be allowed for utilities and under what circumstances, how cost recovery for beneficial electrification investments occurs, and other issues.
What does beneficial electrification (or strategic electrification, or smart electrification, or other equally apt terms) mean for utility regulators?
First, this issue doesn’t rise above the noise of the routine regulatory agenda unless commissioners prioritize it. Why would they do that? They would, if they thought that beneficial electrification would position their states for a future with a higher share of renewable power on the grid (a priority that may be set by the executive or legislative branches, and may fall to the public utility commission (PUC) to implement). They also might prioritize it if customers clamor for cleaner choices. If beneficial electrification does become a priority in a state, a number of regulatory issues emerge.
Among the questions that might arise are:
- Does rate design motivate customers to buy and use an electric vehicle in a way that more fully uses utility assets?
- Does rate design motivate customers to control load in ways that more effectively use customers as a resource without reducing customer satisfaction?
- Does rate design meet tests of fairness to customers who choose to electrify end uses as well as other customers, while staying sufficiently simple?
- Should energy efficiency and demand response programs be overhauled, with an eye toward addressing market barriers to beneficial electrification?
- Does benefit/cost screening consider the benefits associated with beneficial electrification?
- How do distribution and resource planning and electric system operations change, and how does the role of the regulator overseeing them change?
- Should the role of the utility in deploying—and even owning—resources at customer premises, either through an affiliate or by the utility itself, be re-examined?
- Should utilities be motivated in some performance-oriented way to exceed electrification deployment goals?
- Are PUCs staffed to accept these challenges, given that these ideas, systems, and technologies may be unfamiliar?
We, at RAP, routinely talk with government officials about these sorts of questions. Because these issues are complicated, our discussions sometimes default to addressing the challenges. Answering tough questions also requires decision-makers to reconsider priorities, important cornerstones in and of themselves. Beneficial electrification provides a good reminder—for RAP as well as policymakers—that the flip side of challenge is opportunity. The real focus of our efforts together lies in creating greater value, helping to build the society that citizens want, and making it work better and cost less.