The Need for a New Regulatory Model for Electricity Distribution

Electric utilities are taking steps to enable the integration of distributed energy resources (DERs) in their service territories in order to comply with low-carbon state regulatory policies. The presence of DER technologies, particularly rooftop solar generation, electric vehicles, energy storage and microgrids, reveal the limitations of traditional utility rates. Currently, residential rates in the United States are structured as a two-part tariff, containing a monthly fixed customer charge and an energy charge per kilowatt hour. The energy charge often includes a mark-up to recover not just the incremental costs of energy usage but also a share of the fixed costs of utility service. The rates also are not differentiated by time of day, thus they do not reflect the higher marginal costs of on-peak usage.

These overly simplified rate structures inappropriately compensate DERs for the services they provide to the grid. The lack of time-differentiation and the disconnect between the energy charge and the underlying marginal cost of service can create inefficient incentives for installation of DERs by electricity customers. Rooftop solar generation, in particular, often reduces the tariff revenue without a matching offset in costs, because most of the solar generation occurs outside of the peak hours. In addition, the standard rates are uniform across the service territory, hence they do not signal the higher cost of delivering power to areas where certain DERs like solar generation combined with battery storage could potentially work as a non-wire alternative.

Utilities and state regulators are now exploring new rate structures to allow for the efficient and sustainable integration of DERs, as well as potential revisions to the utility business model. Currently, profits of electric utilities are driven primarily by the state-authorized rate of return on utility plant. Enhanced regulatory models would permit variations around traditional rates of return to foster utility innovation in the transition to a modernized grid, while continuing to ensure reliability. Performance metrics tied to optimized grid planning and operations around DERs, owned either by the consumer, third parties or the utility, will be a critical component of these models. Any incentive mechanisms for adoption of new technologies will require a careful design to ensure benefits for the system and the customers as a whole.

EI Senior Vice President Amparo Nieto has provided expert advice to utilities around the world on energy rates reform and improved regulatory models.