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Electric utility regulation under enhanced renewable energy integration and distributed generation

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Abstract

The economic environment for electric utilities is changing in the United States given increased penetration of distributed generation and limited rooms for sales growth. This paper reviews the recent development of relevant policies in the United States and their economic impacts. This review indicates both challenges and opportunities in improving the policies to enhance distributed generation, and in finding the directions in which electric utility regulation should be reformed.

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Fig. 1

Source: U.S. EIA Short-term Energy Outlook

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Notes

  1. Distributed generation refers to electricity generation at end users’ sites as opposed to centralized generation at traditional large-scale power plants.

  2. The description of US electricity generation comes from various issues of U.S. Energy Information Administration’s Annual Energy Review and Short-term Energy Outlook.

  3. In the final version announced in August 2015, this target is strengthened to 32%.

  4. See, for example, Moselle et al. (2010) and Schmalensee (2012) for a comprehensive review of the utility-scale renewables development in the United States.

  5. An “organized wholesale market” refers to a market for wholesale electricity, typically with a large number of electricity generators, conducted by a third-party independent operator of the transmission system (RTO, regional transmission organization, or ISO, independent system operator).

  6. Distribution of electricity refers to the delivery of electricity from the transmission system to end users through a network of power lines, and has natural monopoly characteristic even as electricity generation and retail sectors are deregulated.

  7. Exceptions include Hawaii and Vermont. A small number of utilities might explain the case of Hawaii with no RPS trading (where vertically integrated utilities own most of the generating capacity while each island has an isolated grid) though that does not explain Vermont’s case, where electric utilities own little generating capacity and rely on contracts with independent generators and power from neighboring states and Canada (EIA State Profile and Energy Estimates).

  8. Independent system operators and regional transmission organizations refer to third-party independent operators of the electric transmission system. Some states regulate geographic eligibility of RECs. States such as Colorado and Illinois had provisions to prioritize in-state renewables generation (Leon 2012, pp 35–36).

  9. Residential net-metered capacity is about 3.3GW while the total U.S. generation capacity is 1,055GW as of 2014 (EIA Form EIA-826 and EIA Annual Energy Review).

  10. State of California Energy Commission (2014) Summary of Renewable Energy Installations: Current and Planned in California (Revised December 31, 2014).

  11. http://www.energystar.gov/about/federal_tax_credits.

  12. There is a maximum limit on fuel cells ($500 per 0.5 kW).

  13. The states include Arizona (25%), Hawaii (35%), Idaho (40% first year, 20% per year for next three years), Iowa ($0.015/kWh or $0.01/kWh for 10 years after facility begins producing energy), Kentucky ($3/W DC), Louisiana, Maryland, Massachusetts (15%), Montana, Nebraska, New Mexico, New York, North Carolina, South Carolina, Oregon, Rhode Island, and Utah. Information about the state-level policies related to renewable energy is archived at http://www.dsireusa.org/.

  14. The majority of the Renewable Energy Technologies Income Tax Credit was applied for solar systems by individuals.

  15. Hawaiian Electric Companies News Release, “Hawaiian Electric Companies continue to move ahead with rooftop PV,” dated February 25, 2015.

  16. U.S. Energy Information Administration Form EIA-826.

  17. The discussion here is based on Borenstein, S. “Solar Initiative has a dark side,” http://www.mercurynews.com, posted on August 20, 2004, and “Hawaii leads the nation in electricity prices,” “Loss of tax credits might dim solar industry,” Star Advertiser, February 1 and 5, 2012.

  18. Baker et al. (2013) provides a comprehensive discussion about the pricing of solar output given the relative profiles of load and PV output.

  19. See, for example, Fowlie (2014) for a description of ramping demands due to PV integration and other challenges associated with renewable integration. A source of the “duck curve,” which describes how the load profile could change over time as renewable integration expands, is available at California ISO (2013).

  20. Decision and Order No. 33258, Public Utilities Commission, State of Hawaii, October 12, 2015.

  21. U.S. Energy Information Administration, Annual Energy Outlook 2013, Market Trends, April 15, 2013.

  22. Joskow (1974) documents in detail the traditional regulatory process of public utilities.

  23. Natural Resources Defense Council, http://www.nrdc.org/energy/decoupling/, accessed on August 3, 2015.

  24. See, for example, Brennan (2010, 2011), Chu and Sappington (2013), and American Council for an Energy Efficient Economy, http://aceee.org/sector/state-policy/toolkit/utility-programs/lost-margin-recovery (retrieved February 28, 2017) on theoretical concerns about revenue decoupling.

  25. Such concerns have been made by Kondo (2008) on Hawaii’s decoupling, Dismukes (2010) on Indiana’s, and by a consumer advocate on Nevada’s case (Las Vegas Sun “NV Energy stands to gain from late add in bill,” May 17, 2009).

  26. Morgan (2012) documents that, of 1244 decoupling adjustments made to the rates over the U.S. in 2005–2012, 64% are within plus or minus 2% of the retail rates. However, 20% of the adjustments involved rate increases exceeding 2%.

  27. The electric rate fluctuation is largely due to changes in the price of fuel oil and the associated fuel cost adjustments.

  28. In 2010, Hawaii’s Public Utilities Commission approved a decoupling mechanism, which entails: (1) a sales decoupling component, or Revenue Balancing Account, which is intended to break the link between the Hawaiian Electric Companies' sales and their total electric revenues; and (2) a Revenue Adjustment Mechanism, which is intended to compensate the Hawaiian Electric Companies for increases in utility costs and infrastructure investment.

  29. Hawaii Public Utilities Commission Docket No. 2013-141 (“Instituting an Investigation to Reexamine the Existing Decoupling Mechanisms for Hawaiian Electric Company, Inc., Hawaii Electric Light Company, Inc., and Maui Electric Company, Limited”).

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Acknowledgements

The author acknowledges financial support from the Center for Global Partnership, Japan Foundation (PI: Toshi Arimura). The author thanks Syed Khan and Arlan Brucal for their research assistance.

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Authors and Affiliations

  1. Department of Economics and University of Hawaii Economic Research Organization (UHERO), University of Hawaii at Manoa, 2424 Maile Way, Saunders 542, Honolulu, HI, 96822, USA

    Nori Tarui

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Correspondence to Nori Tarui.

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Submitted for the special issue “Sustainable Energy Policy in Japan and the U.S. and its implications to Asia: The Role of Renewable Energy and Energy Efficiency”.

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Tarui, N. Electric utility regulation under enhanced renewable energy integration and distributed generation. Environ Econ Policy Stud 19, 503–518 (2017). https://doi.org/10.1007/s10018-017-0183-8

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