Opportunity, or what happens when utilities and regulators get serious about decarbonization

For me, one of the more compelling moments at North America Smart Energy Week — which includes Solar Power International (SPI) and Energy Storage International — last month came when I asked a panel of utility executives what industry issues keep them up at night. Without hesitation, Mary Kipp, CEO of El Paso Electric Company, gave me a six-word answer.

“Climate change,” she told the audience of attendees from solar, storage and other clean energy businesses and organizations. “Specifically, anthropogenic climate change.”

Utilities across the country are increasingly taking a proactive role on initiatives to advance clean energy and grid modernization. But to hear a utility CEO like Kipp focus unequivocally on one of the most critical drivers for the growth of solar and storage was striking — and yet another sign of the sector’s ongoing transformation.

The educational nonprofit I lead — the Smart Electric Power Alliance (SEPA) — has long supported a collaborative and incremental approach to energy industry change. Bringing our 100-year-old electric power system into the 21st century will take time, particularly to ensure we have an economically robust industry that provides clean, safe, reliable and affordable power for all customers.

However, “incremental” can be a purposefully imprecise word. The challenge before us now is whether and how much we can accelerate the speed at which different steps in the transformation are achieved.

The urgency behind this question is mounting. Recently, both the International Panel on Climate Change and the International Energy Agency (IEA) issued reports warning, respectively, of the dire impacts of climate change ahead and the need for a much faster ramp-up of renewable energy in response. Indeed, the IEA predicts that renewables will make up only 14 percent of the world’s total energy use by 2040, about half of what the agency says will be needed to curb the more catastrophic impacts of climate change.

How can we bridge that gap?  Technology transitions, such as the ones currently underway in both the energy and transport sectors in the U.S., are enormous economic opportunities for both the startups that often drive initial disruption and the larger, existing firms that can adapt to fast-changing conditions. Recent history shows us that cycles of innovation and new technology adoption by consumers almost invariably occur faster than expected — the solar booms in Hawaii and California being a case in point.

What we see in these states and elsewhere is that what most effectively drives change is often a combination of policy, economics and cross-industry collaboration between utilities, clean tech developers and other key stakeholders. For U.S. utilities, part of this process is shifting from thinking about renewables as a threat to seeing them as multifaceted, complex opportunities — with all the risks and challenges such complexity implies.

The UK model: RIIO

In early October, SEPA led a group of about two dozen U.S. energy industry executives on a fact-finding mission to the United Kingdom (UK), where one of our main objectives was to study that country’s adoption of performance-based regulation. In the past four years, the energy industry there has undergone a major shift, from the traditional utility business model, to what is called RIIO, which stands for Revenue = Incentives + Innovation + Output.

Essentially, what this means is that utilities in the UK make their money not from investing in large, capital projects such as power plants and transmission, the model for investor-owned utilities in the U.S. Rather, revenue is based on achieving specific performance-based outcomes related to customer service, system efficiency and innovation, including the growth of renewables. Capital and operational expenses are effectively capped.

Such changes do not come without problems, as we heard from UK energy officials. Debates have arisen about how utilities are measuring outcomes and what a reasonable rate of return should be, and reforms to the next iteration of RIIO are in the works.

Obviously, the UK is a much smaller and more homogenous market than the United States, where energy policy is shaped to a large degree by state-level policy and market conditions. However, the UK does provide a significant model for accelerated change driven by a cohesive energy policy focused on rapid decarbonization in response to climate change. In addition to performance-based regulation, electrification of transportation is another top issue in the UK.

Is this model, or parts of it, replicable in the U.S., and how might it be done?

SEPA is not an advocacy organization; we do not take positions on any energy policy issues, state or local. However, we know the U.S. energy system is changing — once again, faster than anticipated. The lack of a national energy policy has left a vacuum where states and industry — including the electric power sector — can provide leadership and momentum. We see four issues, or pathways, as critical to accelerating the energy transition, and the opportunities it creates, across the diverse state markets in the U.S. We will be focusing our work on these issues in the coming year:

• Regulatory innovation: Regulation must keep pace with technological change and foster innovation.
• Grid integration: Continued growth of large-scale renewables and DERs, whether behind or in front of the meter, will require new tools and business processes.
• Utility business models: Rather than relying on capital investments, utilities will need to look at new programs and business models that provide value to customers and the grid.
• Transportation electrification: Electrification represents new power demand for utilities, while also driving innovation and rapid decarbonization.

The last day of the fact-finding mission, we visited the Rampion Offshore Wind Farm, 116 turbines in the English Channel, marveling at the technology, which now provides the UK with a growing amount of its power. Seeing such large-scale renewable energy projects — wind or solar — I always feel a bit awed, but also an enormous sense of possibility.

Like any issue, climate change can be seen in a number of ways. Certainly one of the most beneficial  — for utilities and society as a whole — is to use it as engine for change, innovation and opportunity.