RMI Report Finds Challenges as PG&E and its Customers Move Toward Reinventing Fire in California

The U.S. electricity system is characterized by centralized power plants that mostly burn fossil fuels, an inefficient delivery system, and a complex regulatory and rate structure developed over the past century. Today, it faces both a clash with 21st century technology and huge costs in the next 40 years because of new environmental rules and the need to replace aging power plants.

This inflection point, which presents an opportunity for a shift toward a clean, customer-centric energy future, is playing out in California, where the state is accelerating change toward high levels of energy efficiency, distributed renewable resources (particularly solar panels installed on customer rooftops), and growing numbers of zero net energy buildings. California is moving toward a future described in Reinventing Fire, RMI’s vision and blueprint for a 2050 U.S. economy powered by efficiency and renewable energy sources.

Not surprisingly, at a time of profound change, challenges are emerging. Among them, according to a report released this week by Rocky Mountain Institute, is that “existing utility rate structures and business models … are poorly adapted to this new environment.”

The report, Net Energy Metering, Zero Net Energy And The Distributed Energy Resource Future: Adapting Electric Utility Business Models For The 21st Century, based on a collaboration with Pacific Gas & Electric (PG&E), discusses critical steps needed to find common ground among utilities, regulators, and technology providers to:

  • Create incentives for customers to better integrate their renewable resources into the system for broad benefit.
  • Build rate structures and utility business models that are fair to all customers and encourage adoption of clean, distributed resources.
  • Build trust among stakeholders with competing interests.

As part of the project, RMI convened a roundtable of PG&E staff and executives, and outside experts to explore and analyze options for future business and customer relationships.

“PG&E is excited to work with Rocky Mountain Institute to begin a dialogue on how to make today’s evolving electricity system more sustainable,” said Steve Kline, the utility’s vice president of corporate environmental and federal affairs and the company’s chief sustainability officer. “This work will help put vital information into the hands of customers and policymakers alike, so they can better understand the relationship between distributed generation and California’s electric grid.”

That understanding is needed. As the report states, “Already, there are signs of growing tensions and conflicts among stakeholders in the electricity system as distributed resources are more widely deployed. New technologies and design practices call for new approaches to managing utility operations and pricing electricity services to accurately reflect benefits and costs of distributed resources and provide a sustainable path for the increased deployment of these resources. …

“The generation of onsite power is not in itself flawed; rather, the problem is rooted in the underlying rate structure,” the report said.

The combination of traditional rates and net energy metering (NEM) incentives, which credit customers for electricity they export to the grid, typically at retail rates, are not structured to encourage customers’ on-site generation to provide the greatest possible value to the electricity system. Under current arrangements, net metering allows customers to bypass some of the costs associated with their use of the utility’s network.

These policies “obscure the costs and benefits of distributed resources to the grid and limit the ability to add smarter integration technologies, which could add value,” the report said. “These limitations restrict the utility’s ability to direct behavior in a way that is mutually beneficial. These misalignments may be negligible at low penetrations of DG, but as the share of distributed generation increases they become significant..”

Installed DG capacity in California has grown exponentially, approaching the program cap of 5% peak load. If installed PV capacity in California continues on its current growth trajectory (38% per year average over the last two years) capacity will approach the net energy metering cap in approximately 2014.

For any revised rate structure addressing these and other misalignments to gain PUC approval, “it must strike a balance between the interests of traditional customers and customer-generators, while remaining simple enough to be understood by customers,” the report said.

Said Virginia Lacy, senior consultant with RMI’s electricity practice and project manager, “This effort sets the framework for a discussion of longer-term approaches that meet the needs of electricity stakeholders: electric utility customers, solar owners, and electricity service providers. We view it as a step forward in RMI’s key strategic focus in the electricity system—accelerating innovation to make a transition to a more renewable, efficient, distributed, customer-centric electricity system.”

Over the coming months, RMI’s electricity practice will partner with stakeholders to incubate a new approach to innovation and experimentation in the electric industry, said James Newcomb, program director of RMI’s electricity practice.

“Without coordination among stakeholders in tackling some of these challenging issues, the transformation will be neither fast nor smooth, resulting in economic inefficiencies, misaligned incentives, and wasted energy,” Lacy said.

California’s goals

Among the state’s renewable energy and efficiency goals:

  • A renewable portfolio standard that calls for 33 percent of power generation to come from renewable sources by 2020.
  • All new residential construction will be net zero by 2020
  • All new commercial construction will be net zero by 2030
  • 20 percent reduction in the business-as-usual forecast for residential electricity consumption by 2015, and 40 percent by 2020