How Electricity Regulators Can Accelerate the Energy Transition?

The world is facing an unprecedented challenge of climate change, which requires a rapid and radical transformation of the energy sector. The energy sector is responsible for about three-quarters of global greenhouse gas (GHG) emissions, and therefore plays a vital role in achieving the global climate goals. The burning of coal, natural gas, and oil for production of electricity and heat is the largest single source (around one quarter) of global GHG emissions.

Energy transition is the process of shifting from fossil fuels to renewable energy sources, such as solar, wind, hydro, and biomass. Energy transition is essential for reducing GHG emissions, enhancing energy security, and creating economic opportunities with affordable energy – highlighting three Es: Environment, Energy and Economics.?The energy transition also poses significant challenges for the existing power systems, such as grid integration, reliability, affordability, and equity. The regulators, planners and managers of power sector are therefore always busy in balancing the three dimensions of the energy trilemma. However, there are ways and tools that can be employed to align these apparently conflicting Es to achieve better outcomes than what were previously considered optimal.

Electricity regulatory authorities are the key actors that can enable and facilitate the energy transition by overseeing the operation and development of the power sector and ensuring that it meets the public interest objectives of safety, efficiency, reliability, affordability, and environmental sustainability. My experience in the energy sector highlights that the electricity regulators can adopt various roles or ways or priorities that align with these objectives and address the challenges and opportunities posed by the energy transition. These ways or tools can be grouped in four groups.

A. Promoting Investment in Grid Development and Operation

Grid is the backbone of the power system, connecting generation, transmission, distribution, and consumption. The grid needs to be upgraded and expanded to accommodate the increasing penetration of variable renewable energy sources, such as wind and solar. Energy regulators can promote investment in grid development and operation by providing clear and stable regulatory frameworks, setting appropriate incentives and tariffs, facilitating interconnection and access, and encouraging innovation and digitalization.

1. Providing clear and stable regulatory frameworks: Regulators can reduce uncertainty and risk for investors by establishing long-term planning processes that identify the future needs and opportunities for grid development and operation. They can also set clear rules and standards for grid connection, operation, maintenance, and security that ensure quality and reliability of service. One caution applies here: rules should be clear enough to provide certainty for recovery of capital investment with reasonable returns but not unduly prescriptive to limit necessary investment, flexibility and innovation.
2. Setting appropriate incentives and tariffs: Regulatory bodies can reflect the costs and benefits of grid services by implementing incentive regulation, performance-based regulation (PBR) or outcome based regulation (OBR) that rewards electric utilities for achieving certain outcomes or targets, such as reducing losses, improving reliability, or integrating renewables. They can also implement cost-reflective tariffs that recover the full efficient costs of grid services while avoiding cross-subsidies or distortions.
3. Facilitating interconnection and access: Regulatory authorities can ensure fair and non-discriminatory access to the grid for all market participants, such as generators, consumers, or third-party providers. They can implement open-access policies that allow any eligible entity to use the grid infrastructure for a reasonable fee. They can also implement interconnection standards that specify the technical requirements and procedures for connecting new generation or load to the grid. Grid interconnections and access are essential for managing variable, intermittent renewable energy in larger pooled areas, using all resources economically, and creating competitive electricity market – all of which contribute towards balancing rather aligning the three dimensions of the energy trilemma discussed earlier – environment, energy security, and economics.
4. Encouraging innovation and digitalization: Regulators can support the deployment of smart grid technologies that can enhance the efficiency, reliability, and resilience of the grid. They can provide regulatory incentives or funding mechanisms for utilities or other market players to invest in smart meters, smart grids, battery storage, electric vehicles, etc. They can also facilitate data sharing and interoperability among different grid actors by establishing common platforms, protocols, and formats.

B.?????? Strengthening Market Design and Regulation

Market design and regulation refer to the rules and mechanisms that govern the operation of the electricity market, such as pricing, dispatching, balancing, settling, etc. Market design and regulation need to be adapted to the changing characteristics and needs of the electricity sector, such as intermittency, variability, unpredictability, and decentralization. Energy regulatory authorities can strengthen market design and regulation in a number of ways, some of which are well established and others are new and evolving.

1. Introducing new market products or services: Regulators can reflect the value of different grid services or resources by implementing capacity mechanisms that provide payments to generators or demand-side resources for being available to meet peak demand. They can also implement ancillary services markets that provide payments to generators or demand-side resources for providing frequency control, voltage control, black start, etc.
2. Enhancing market competition or participation: Regulatory authorities can ensure equal access to market opportunities and information by implementing unbundling policies that separate the ownership or operation of generation, transmission, distribution, and retail activities to prevent conflicts of interest or market power abuse. They can also implement aggregation policies that allow small-scale generators or consumers to pool their resources and participate in the market as a single entity.
3. Improving market transparency or efficiency: Regulators can ensure that market prices reflect the true costs and benefits of electricity production and consumption by implementing scarcity pricing that increases the price of electricity when supply is scarce or demand is high to signal the need for more generation or demand response. They can also implement carbon pricing that internalizes the environmental costs of GHG emissions into the price of electricity to incentivize low-carbon generation or consumption.

C. Ensuring Consumer Protection and Empowerment

A key role ?of energy regulatory authorities is to ensure consumer protection and empowerment. This is perhaps the most critical role as I can argue all other roles must ultimately support or align with it. Here I am referring to the rights and responsibilities of electricity consumers, such as access, affordability, quality, choice, information, etc. These are essential for ensuring that consumers benefit from the energy transition and participate in the energy transition. Regulatory authorities can ensure consumer protection and empowerment by a number of proven as well as new tools.

1. Providing targeted subsidies or social tariffs: Electricity regulators can provide targeted subsidies or social tariffs for low-income or vulnerable consumers who may face difficulties in paying their electricity bills or accessing adequate electricity services. For example, regulators can implement lifeline tariffs that provide a certain amount of electricity at a discounted rate for eligible consumers. They can also implement cross-subsidies that transfer some of the costs of electricity services from one consumer group to another, such as from urban to rural consumers or from industrial to residential consumers. Subsidized or cross-subsidized tariffs may be used as a short-term support mechanism for vulnerable customers. However, I do not support such tariffs in principle as they do not enable consumers to value resources correctly and result in inefficient allocation and usage of resources. Better, the targeted consumers be given cash subsidy and be given the discretion to use cash as they see fit while using energy and other resources efficiently.
2. Implementing cost-reflective tariffs: Electric utility regulators can implement cost-reflective tariffs (CRTs) that recover the full costs of electricity services while avoiding cross-subsidies or distortions. CRTs can help balance the costs and benefits of electricity services for different stakeholders, such as generators, consumers, or grid operators. For example, regulators can implement time-of-use (TOU) pricing that varies the price of electricity according to the time of day or season to reflect the changes in supply and demand. They can also implement net metering or feed-in tariffs (FITs) that allow consumers who generate their own electricity from renewable sources to sell their excess electricity back to the grid or offset their electricity bills.
3. Encouraging energy efficiency and conservation: Regulatory authorities can encourage energy efficiency and conservation by providing incentives or information to consumers who reduce their energy consumption or peak demand. Energy efficiency and conservation can help lower the costs of electricity services for consumers and reduce the environmental impacts of electricity production. For example, regulators can implement demand response programs that provide payments or discounts to consumers who adjust their electricity consumption in response to grid conditions or price signals. They can also implement energy audits or labeling schemes that provide information or guidance to consumers on how to improve their energy efficiency or conservation.
4. Supporting rural electrification programs: Regulators can support rural electrification programs that provide electricity access to remote or rural areas that are not connected to the grid or have unreliable grid service. Rural electrification programs can improve the quality of life and economic opportunities for rural populations and contribute to social inclusion and development. For example, regulatory bodies can provide regulatory frameworks or funding mechanisms for off-grid renewable energy systems, such as solar home systems or mini-grids, that can provide electricity to rural households or communities. They can also facilitate the integration of off-grid renewable energy systems with the grid when feasible.

D. Fostering Innovation Promotion and Support

Another key role of energy regulatory authorities is to foster innovation promotion and support. Innovation promotion and support refer to the activities and measures that encourage and facilitate the development and deployment of new technologies, business models, and solutions that can improve the performance and competitiveness of renewable energy sources. They are essential for driving the energy transition forward and creating new value propositions and opportunities for the energy sector. In this regard, regulatory authorities can use a number of tools.

1. Providing regulatory incentives for innovation: Energy regulatory authorities can provide regulatory incentives for innovation by rewarding regulated utilities and other market players for investing in R&D, pilot projects, demonstration programs, and commercialization activities. Regulatory incentives for innovation can take various forms, such as grants, subsidies, tax credits, loans, guarantees, or preferential tariffs. For example, regulatory authorities can implement innovation funds that collect a small percentage of revenues from regulated utilities or market players and allocate them to support innovation projects. They can also implement innovation tariffs that allow regulated utilities to charge a higher rate of return for innovative investments. Flexibility in regulation is an important aspect for energy regulatory authorities to support energy transition with innovation. Flexibility in regulation allows energy regulatory authorities to adapt to the changing circumstances and needs of the energy sector, such as technological changes, market developments, policy objectives, and consumer preferences. Flexibility in regulation can be achieved by allowing use of technological changes, such as smart meters, smart grids, battery storage, electric vehicles, etc., that can enhance the efficiency, reliability, and resilience of the energy system. Flexibility in regulation can also be achieved by allowing opex-capex trade-off and setting targets, not specific methods. Opex-capex trade-off refers to the option for regulated utilities to choose between operating expenditures (opex) and capital expenditures (capex) to achieve a certain outcome. For example, a utility may opt for investing in a new power plant (capex) or contracting with a third-party provider for demand response services (opex) to meet peak demand. Setting targets, not specific methods refers to the approach of defining the desired results or performance indicators for regulated utilities without prescribing how they should achieve them. For example, a utility may be required to reduce its carbon emissions by a certain percentage without specifying which technologies or fuels it should use.
2. Engaging with stakeholders and fostering public participation: Regulatory authorities can engage with stakeholders and foster public participation by conducting consultations, hearings, surveys, or workshops with various actors involved or affected by the energy transition, such as generators, consumers, grid operators, utilities, regulators, policymakers, researchers, civil society, etc. This can help regulatory authorities gain insights, feedback, perspectives, ideas, or suggestions that can inform their regulatory decisions or actions. This can also help regulatory authorities build trust, legitimacy, and acceptance for the energy transition among the public and the market players.
3. Educating consumers and raising awareness: Regulators can educate consumers and raise awareness by providing information, guidance, or campaigns that inform consumers about the benefits and opportunities of the energy transition and how they can participate in it. Consumers can then make informed choices about their energy consumption or production and adopt more sustainable behaviors or practices. Consumers will also better understand their rights and responsibilities as electricity consumers and how they can protect themselves from potential risks or challenges.
4. Collaborating with other regulators or agencies: Energy regulatory authorities can collaborate with other regulators or agencies by sharing best practices, experiences, or data that can enhance their regulatory capacity or performance. By learning from each other’s successes or failures, regulators can adopt more effective or efficient regulatory approaches or solutions. Collaboration with other regulators or agencies can also help regulatory authorities coordinate their regulatory actions or policies to avoid duplication, inconsistency, or conflict.
5. Monitoring and evaluating the impacts of energy transition: It is very important for regulatory authorities to monitor and evaluate the impacts of energy transition by collecting indicators, metrics, or feedback that measure the progress and outcomes of the energy transition in terms of its objectives, such as safety, efficiency, reliability, affordability, and environmental sustainability. This can help regulatory authorities assess the effectiveness or impact of their regulatory actions or policies and identify the gaps or challenges that need to be addressed as well as report their achievements or challenges to the public or the policymakers and demonstrate their accountability or transparency.

Conclusion

Energy transition is a complex and dynamic process that requires the involvement and coordination of multiple actors, sectors, and levels. Electricity regulatory authorities are among the key actors that can enable and facilitate energy transition by adopting various roles, ways, priorities or tools that align with the public interest objectives of safety, efficiency, reliability, affordability, and environmental sustainability. The regulatory authorities need to balance these objectives while addressing the challenges and opportunities posed by energy transition. The regulators also need to be proactive, adaptive, and innovative in their regulatory approaches to cope with the changing circumstances and needs of the energy sector. By doing so, energy regulatory authorities can contribute to a smooth and successful energy transition that benefits all stakeholders especially customers, utilities and investors.