Making the case for performance-based regulation
By: SGN Staff
By Matt Futch
I first bumped into Matt Futch when he was Senior Policy Manager for then Colorado Governor Bill Ritter. The two men were a primary reason Colorado became such a leader in renewable energy. Now Matt works for IBM setting global policy for the company's Energy & Utilities group.
We've run guest editorials before stressing the need to re-think the regulatory pact. I've written a few myself. What I like about Matt's version is that he doesn't just bemoan the problem, he suggests a specific solution â€“ namely, performance-based ratemaking. If you've read our coverage of ComEd's smart grid efforts, then you know I'm in favor of that concept as well. I'll be curious to read your opinions in the Comment section at the bottom. - Jesse Berst
The Bloomberg New Energy Finance Summit has two key words; â€œnewâ€ and â€œfinance.â€ These words help define the dilemma which U.S. energy regulators find themselves in now. From its inception, the legal foundation for energy regulation has been focused on reliability and low cost. However, new energy resources, policy demands, and industry dynamics are placing increasing stress on the financial model that supports our century-old regulatory charters. Addressing these stresses requires innovation in business models, technology, and â€“ perhaps most importantly â€“ regulation.
Simply put, the grid requires modernization, but the current regulatory/financial model often hinders modernization efforts. Today, energy regulation favors investment in traditional grid assets like power plants, sub-stations, and â€œstringing more copper.â€ These kinds of investments are still needed, but over time, they are woefully insufficient to meet new system challenges.
Letâ€™s take the explosion of solar PV as an example. It is generally more expensive to keep adding more â€œhardâ€ grid assets and additional backup power to compensate for the variability solar introduces to the mix on the grid. The solution is to develop smarter energy systems that can help monitor, predict, balance, and reduce the need for expensive traditional approaches to managing volatility, but traditional regulation may not support the necessary investment.