How to unlock California innovation for the climate-change fight
By Rory Jones and Steve Malloy
California has set itself aggressive climate change goals, and in its efforts to reach them it has turned to using existing mechanisms, such as the CPUC’s management/control processes, to drive utility entities to implement energy demand reduction programs.
Unfortunately, traditional regulatory mechanisms and utility entities are likely not best suited to the challenge, which requires finding innovative solutions and changing the behavior of unregulated participants, like consumers. Without significant advances in such areas, change will continue to be painstakingly slow and immensely costly.
While this mismatch in approach versus desired outcome has become self-evident in recent years, witnessed slow progress, problems with risk/reward incentive mechanism, etc., California’s trajectory stands unaltered. Regulators are increasingly mired in ever deepening mechanisms controlling markets and services through the entities they regulate; mechanisms that are now seemingly at a level beyond regulator capabilities - including elaborate processes to select, configure and measure programs and vendors within one tight, state-wide framework that serves other existing, competing objectives (ratepayer protection, service quality, shareholder returns). It’s all bursting at the seams.
Further, it isn’t difficult to make the case that regulations are the antithesis of innovation, often resulting in counter-productive, evasive, unintended consumer and service provider behavior. For example, the timelines needed to ensure programs eliminate ratepayer risk extend across years, which typically result in innovation capital simply not being deployed. Small players, like service and technology vendors, invariably the sources of the most innovative and substantive advances, cannot survive without timely traction. Uncertain conditions, such as when programs are selected then discontinued (largely without substantive mid-course adjustments permitted), also retard capital investing.
Let’s make it easier, faster, AND better
Standard Offer programs have been implemented in many states around the nation, and have demonstrated how market innovation and competition can, within regulatory frameworks, deliver effective, rapid and scalable demand reduction action. In short, Standard Offer programs put a bounty on the elimination of demand, such as a dollar amount for each kWh, MW or therm eliminated. This dollar bounty may be uniform, or based on implementation approach (such as type of replacement equipment/load-shape).
The scheme should operate with five roles (Figure 1). The System Director, likely the CPUC, appoints Administrators to engage Implementers; who in turn, design and invest in programs they choose. Implementers are compensated with the bounty they earn from demand they eliminate; verification is by EM&Vers, who conduct pre-specified audits.