Successfully Shaping the Clean Energy Transition

Outlook and Questions for 2019

The year 2018 was transformational in the energy system, marked by several milestones that revealed the powerful forces now emerging and exerting their influence across the electricity landscape.

Several states, including New York, New Jersey, and Washington, advanced proposals to achieve 100 percent clean energy in different timeframes. Xcel Energy became the first multistate investor-owned utility committed to 100 percent carbon-free electricity, with others announcing plans to rapidly move in that direction. Americans elected governors in several states who campaigned on clean energy platforms, several of whom seek 100 percent renewable energy portfolio standards. And commercial and industrial buyers set a new record in 2018 for total capacity of announced corporate renewable energy purchases.

These events are harbingers of the potential scale of change awaiting energy users and industry leaders across the country. But complex challenges remain, which is why in 2019, leaders working at the cutting edge of the electricity system transformation are collaborating to address complex problems and structural barriers that still stand in the way. Here we list the key issues that can further accelerate the transformation of the electricity industry, and the questions that still need to be addressed.

Revising Grid and Resource Planning

 Driven by the rapidly declining price of renewable energy, power producers and suppliers are acting boldly and embracing new strategies to serve their customers’ needs. Xcel Energy, which operates across eight states, became the first large investor-owned utility to commit to 100 percent carbon-free energy by 2050. Michigan’s Consumers Energy is embarking on a large transformation of its generation portfolio. And others, including Northern Indiana Public Service Company and PacifiCorp, are looking hard at the economics of their existing fossil fleets.

As these utilities and others seek to capture the benefits of increasingly affordable, clean, and distributed energy technologies, new questions and challenges are emerging about current grid and resource planning processes:

• Do current integrated resource planning processes sufficiently take new technologies and their capabilities into account?
• The new capabilities offered by distributed energy resource (DER) technologies will be underutilized without reciprocal investments in the grid. How do we determine the right investments, who should be making them, and the correct price to pay for grid modernization?
• As we pursue a more modern and cleaner energy system, how do grid and resource planning processes need to evolve to be more transparent and more inclusive so as to ensure we are actually building the grid of the future that everyone wants?

Reforming Utility Business Models

As utilities and their regulators face tough questions about how to plan and build the grid of the future, they are also under pressure to evaluate how well they are operating their current systems and whether the conventional utility business model is ready for a transformed energy landscape. In the face of flat energy demand and the obligation to provide safe, reliable, and affordable service, utility players face new challenges. These include demands for improved environmental performance, the expansion of customer-sited energy technologies like rooftop solar and battery storage, a growing need for resiliency, new options to improve the performance of the grid, and new expectations for customer choice.

Readying utilities’ business models is imperative to build a clean, safe, reliable, and affordable energy economy. In several states, regulators are moving to manage and shape the scale, speed, and complexity of this systemic transformation. Some efforts, like Hawaii’s clean energy transition, are creating a new regulatory compact between the energy industry and customers. Increasingly, state lawmakers and utility regulators are attuned to the need for these reforms but wrestle with questions such as:

• What is the best way to initiate comprehensive regulatory reform of a state’s utility industry?
• Who owns or shares the responsibility to lead such an effort?
• Given existing and anticipated policy changes, like a 100 percent renewable portfolio standard, which utility business model reforms are most urgent to address?

Emergence of Beneficial Electrification

One emerging trend that is specifically testing utility business models, as well as grid planning processes, is the use of electricity to heat and cool homes. Seventy million American homes and businesses burn natural gas, oil, or propane on-site to heat their space and water.

Now, nearly all our buildings’ energy needs can be met with electricity from an increasingly low-carbon electric grid, eliminating direct fossil fuel use in buildings and making obsolete much of the gas distribution system—along with its costs and safety challenges. Supported by demand flexibility strategies—the ability to shift some energy use in time—electrification of building heating and cooling is becoming more cost-competitive compared to traditional means, and it can provide a unique opportunity for utilities to increase market demand through customer-sited technologies.

As electric utilities and other stakeholders pursue the opportunity for beneficial electrification, the following questions emerge:

• Can and should we integrate electricity and gas resource planning processes to make sure we are optimizing long-term infrastructure investments across resource types?
• What are the options to transition hybrid—gas and electric—utilities to become electric-only?
• Can we create pathways for natural gas utilities to be productive partners in this transition and ensure that customers are protected along the way?

How to Properly Value Distributed Energy Resources

A key means to get all of these smart electrified devices onto the system is identifying and properly compensating the value streams and services they provide to the grid. Two big questions are being wrestled with in boardrooms and commissions across the country:

• As the grid moves away from a bulk power system composed of centralized generation sources to become more distributed and customer-focused, which value streams and services provide the greatest opportunity for the integration of DERs, and how can they be combined to provide even greater value to customers, utilities, and grid operators?
• Will value stacking be elusive if we don’t see market rules come out for DER participation, beyond battery storage, in organized markets in 2019?

Ensuring Equity in the Energy Ecosystem

As we consider the many opportunities to modernize the grid, it is more important now than ever to ensure that we don’t forget about meeting the needs of all customers. Low- and moderate-income (LMI) customers represent a large group, with roughly a quarter of US households qualifying for federal energy assistance. Many LMI customers suffer inequities of elevated energy burdens and detrimental health and environmental impacts from power generation.

While technology and business model changes are creating new opportunities for utilities to collaborate with LMI customers to create value for both groups, regulators across the country now face the task of making the process of utility regulation more accessible and inclusive. In the balance, as state lawmakers and regulators pursue comprehensive regulatory reforms to modernize the grid, we risk that these voices will be underrepresented or unrepresented.

 Dealing with Assets That Are No Longer Economic

Ensuring no customer groups bear unnecessary or disproportionate costs as the system transforms requires us to design and implement financial solutions that keep energy costs stable and protect the interests of all ratepayer groups.

Front and center in the transformation of the electricity system is coal generation. For decades a foundational fuel source for the US grid, coal has never been more challenged and is rapidly losing market share. The US retired 16 gigawatts of coal-fired power plants in 2018, and US coal power capacity has fallen by one-third since 2010. This trend is expected to continue if not accelerate.

Many of those retired plants were old, dirty, inefficient, and simply no longer competitive in today’s lean and mean marketplace. The path from here gets more difficult and contentious:

• How do we minimize market disruption and efficiently manage capital exit from coal and other uneconomic assets in line with their waning economic competitiveness?

One approach is securitization, the pooling of assets that generate a future revenue stream that can be sold to the public market as a private security. The proceeds from these ratepayer-backed bond pools could then be deployed by utilities to retire plants, invest in new clean energy, and provide transition assistance to affected communities. Securitization proposals are now under consideration in some state legislatures, including New Mexico’s, with bill introductions in additional states likely this year. While securitization is one option, we know that it won’t be the solution that works for every state and every utility. This leaves us to search for other financial innovations to address the costs to retire and replace uneconomic fossil generators.

Looking Ahead

As we can see, for all of 2018’s progress, each industry breakthrough yields a new array of questions we must answer. The forces pushing this transition are growing in strength. As a growing number of US citizens, states, municipalities, and businesses prioritize carbon reduction and sustainability goals—alongside global efforts to meet the commitments of the Paris Agreement to combat climate change—we must reduce blockages and friction points on this transition pathway.

As we’ve laid out, numerous big opportunities raise important questions that remain to be answered, and in many instances, there will be no single right answer—but many paths forward.

Not only do we need more individuals and organizations to put their shoulder to the wheel if we’re going to keep temperature rise below 1.5°C (which is necessary according to the most recent Intergovernmental Panel on Climate Change report). We also need places and processes where we can tackle these next critical questions. Rocky Mountain Institute’s Electricity Innovation Lab (e^–Lab) offers a space where leaders are coming together to do exactly this.

Our energy system is now clearly hearing the demand for change. Let’s chart our course and get to work.