Grid modernization investments must be made in alignment with and support of the distribution companies’ core responsibility to provide reliable and safe service to their customers, according to the July 2 final report by the Massachusetts Electric Grid Modernization Stakeholder Steering Committee.
The state Department of Public Utilities (DPU) said in an October 2012 order that it would examine its policies to ensure that companies adopt grid modernization technologies and practices in order to enhance the reliability of electricity service, reduce electricity costs and empower customers to adopt new electricity technologies and better manage their use.
According to the report, submitted to the DPU, the DPU established a grid modernization stakeholder working group to discuss “grid-facing and customer-facing issues, including the questions posed in the [notice of investigation (NOI)], and to develop recommendations to the department.”
Environment Northeast (ENE), a steering committee member, provided recommendations aimed at expanding the utilities’ toolbox of grid reliability tools to include clean energy resources such as distributed generation, energy storage, time-varying rates, demand response and combined heat and power, in addition to traditional solutions like new circuits, new substations or larger conductors.
ENE also said in its July 3 statement that it provided principles and recommendations for evaluating the costs and benefits of grid modernization investments, and submitted a proposal for a Grid Modernization Advisory Council intended to provide a forum for ongoing stakeholder engagement in the state’s grid modernization process. ENE further provided principles for integrating electric vehicles into the grid in a manner that ensures system reliability and maximizes consumer and environmental benefits.
“Massachusetts ratepayers pay billions of dollars every year to support a reliable electric power grid,” Abigail Anthony, director of ENE’s Utility and Grid Modernization Project, said in the statement. “Modernizing the grid so it takes advantage of up to date technologies will be essential to managing consumer costs and meeting the commonwealth’s clean energy and climate goals.”
According to ENE, the report includes recommendations on consumer-focused technologies such as “smart meters,” and grid resources and technologies that allow utilities to optimize the performance and utilization of the distribution system. The steering committee also provided principles and recommendations on planning and investment criteria related to those technologies.
The report will help the DPU establish regulatory policies and a roadmap that will enable Massachusetts electric distribution companies, their customers, and other market participants to take advantage of grid modernization opportunities, ENE added.
High-level barriers include regulatory framework
According to the report, high-level barriers to grid modernization in the state include cost effectiveness, regulatory framework, balancing safety and reliability, customer education, affordability and balancing grid modernization investments and competitive energy markets.
A framework for assessing cost-effectiveness must be defined, and a framework for regulatory review and cost recovery must be established, according to the report.
Furthermore, certain grid modernization investments may require considerable customer education to inform and engage customers on various attributes of grid modernization programs.
The report also noted that affordability of electricity service is a concern for many customers, and in making future grid modernization investments that may deliver benefits to the system, the issue of affordability must be addressed.
The report called on the DPU to develop policies and objectives to establish grid modernization programs that achieve the best outcomes for customers at the lowest cost.
The report included details on several regulatory model options, including the “enhanced regulatory model,” which would ensure maximum flexibility in addressing cost recovery for individual, targeted programs, and would provide five submodels.
The enhanced regulatory model would retain the existing structure for rate recovery, and utilities would continue to recover prudently incurred costs for grid modernization investments that are used and useful through base distribution rates, after accounting for bill impacts and affordability.
One of the submodels, the “grid-facing reliability investment submodel,” contemplates that the utilities will file annual grid modernization status reports, which should include a description of all significant new initiatives and investments intended to maintain and improve reliability as well as a description of significant changes to existing initiatives intended to do the same, the report said.
Another submodel, the “distributed generation submodel,” addresses integration of distributed generation through specific project-related investments and recognizes the cost recovery process in place under the existing DPU-approved interconnection tariffs.
Utilities should be required to seek DPU approval in a base rate case proceeding for enhancements or changes to existing interconnection tariffs or establishment of new tariffs that pertain to cost recovery, cost allocation and cost assignment so that those provisions of the tariff are cost-based, the report added.
Another option, “grid modernization expansion – pre-approval process,” will allow for distribution company-specific proposals to satisfy the DPU’s grid modernization objectives while providing certain regulatory process benefits, such as allowing each distribution company to achieve grid modernization objectives in a way that is suitable for the unique characteristics of each system and rate plan
The report also noted that the option, “expansion of investment caps,” would allow a utility with a capital investment recovery mechanism, such as National Grid USA’s annual mechanism for in-service capital investments up to $170m made in a preceding calendar year, to request an increase to its capital investment budget cap outside of a base rate proceeding for additional investment that a utility has determined is needed to modernize the grid while maintaining safe and reliable service.
National Grid is a subsidiary of National Grid plc.
Regulatory oversight would come in two places, the report said. For instance, at the time that the company submits its proposal to increase the spending cap for the upcoming year, the scope of the review would be limited to the company’s broad rationale for increasing its capital investment budget.
Regarding the option, “utility of the future, today,” the report said, “To address the fundamental shortcoming in the incentive structure of traditional utility ratemaking practice, which imposes a barrier to cost-effective [grid modernization (GM)] we propose that a new regulatory model be adopted by the DPU – one that requires the utility to analyze GM investments from a broader societal point of view, gives the utility a degree of certainty regarding GM cost-recovery before it makes GM investments, and evaluates and rewards good GM plan implementation and performance on an ongoing basis.”
The regulatory model that will encourage cost-effective grid modernization efforts includes pre-approval and performance-based ratemaking (PBR) elements, the report said, noting that under the pre-approval element, the utility files its grid modernization plan, which may be comprehensive, separate or filed in phases, depending on the utility’s circumstances.
If the grid modernization plan includes deployment of more advanced metering that accommodates time-based rates, an analysis and, if appropriate, a proposal for time-varying rates for each customer class that addresses each function of service – including distribution, transmission and generation – including a plan for low-income customer protection, should be filed as well.
If the DPU approves the plan, capital cost recovery associated with the plan would also be approved.
Perhaps most notably, the report added, this model adds a substantive element of performance measurement to traditional cost recovery. A utility that performs well relative to its performance metrics would have its return on equity (ROE) raised above its standard or baseline ROE – likewise, a utility that performs poorly relative to its performance metrics would have its ROE reduced below the baseline ROE.
The report also included details on complementary or targeted regulatory policies.
For instance, a proposed model involving regulatory approval for time varying rates and direct load control, is complementary to the comprehensive regulatory models that discuss cost recovery for grid modernization investments. The proposal provides greater detail regarding the ability to design and receive approval for time varying rates and direct load control proposals, the report added.
Adopting these types of pricing options, the report added, would provide opportunities for customers to save money on their electric bills by using fewer kilowatt-hours when the cost to generate electricity is most expensive, particularly capacity costs.
The rate design options may be filed for approval included as part of a rate case or apart from a formal rate case. The rate options could include time-of-use rates such as fixed period critical peak pricing, the report added.
As for next steps for the regulatory process, the report noted that the steering committee members did not reach agreement on a single recommendation for next step
National Grid and others said the DPU should provide guidance to utilities as soon as possible, preferably by Oct. 1, and encourage utilities to include a grid modernization investment proposal consistent with the DPU’s directives.
The state Office of the Attorney General, for instance, said the DPU should establish a comment period to solicit comments on the report.