Finally there’s evidence that we’re embracing energy innovation

Advancements in distributed and clean energy technologies are redefining the provision of safe, reliable, and cost-effective service within the electric utility industry. New business models are emerging to challenge the utility-dominated archetype of the past century.
But the debate over how to manage the transition to a new normal is just beginning. It is going to take a combination of political will and smart policy to avoid stifling innovation and progress.
At the end of last month, President Obama announced an energy plan that included sweeping initiatives to manage carbon emissions, accelerate the deployment of renewable energy, and strengthen energy efficiency goals. That announcement came on the heels of a motion issued a few weeks earlier by California Public Utility Commissioner Carla J. Peterman that set energy storage procurement targets for the state’s investor owned electric utilities (IOUs).
While it is, unfortunately, likely that these proposals will be watered down over time, they are still notable for their scope and tone. Together they represent the kind of inspired thinking that the industry needs – and ultimately will benefit us all.

California backs energy storage initiatives

In brief, the California ruling proposes to eliminate the market barriers that plague emerging storage resources – nascent technologies such as large batteries that can collect and discharge energy on command in order to capitalize on price arbitrage, stabilize short-term fluctuations in the grid, and provide a host of ancillary benefits (including backup power in an emergency). By standardizing the procurement and evaluation of these resources, the Commission hopes to transform how the California electric market is “conceived, designed, and operated.”
In contrast to previous energy storage legislation such as Assembly Bill 2514 – which declined to give specific storage capacity targets – the latest announcement is explicit. If adopted as written, it would require each utility to procure specific amounts of storage in transmission, distribution, and customer-cited applications that are an order of magnitude increase in the storage available today.
As with any standard, the design of the California proposal is critical to its ultimate success. First, the ruling requires the IOUs to apply their best efforts to build or obtain viable and cost-effective storage resources via competitive auction mechanisms. And notably, the commission deliberately left room for interpretation, and expects to refine the process over time. At the same time, the ruling allows existing storage projects that meet certain criteria to count towards the targets. Finally, the outcome of the ruling is meant to complement and inform ongoing long-term planning and resource proceedings. These may seem like trivial points, but in an industry as regulated as energy, the details are often the difference between success and failure.

Heavy skepticism

So, how will stakeholders respond? In the past, opponents of such legislation have advocated for a market-based approach to the commercialization of energy storage technologies. In their eyes, targets are blunt and arbitrary instruments destined to result in sub-optimal projects and stranded assets. Many have acknowledged the threat of intermittency that is often associated with renewable energy and the need to reduce carbon emissions, only to point out that storage is but one of many suitable solutions. They view is that they would rather learn from existing initiatives than risk investing in and installing what may end up as zombie projects.
The critics make some great points and there are certainly some fair reasons to be skeptical of such targets. But consider the following:

  • The energy industry is not a free market. It is also incapable of valuing externalities such as environmental and health considerations.
  • New technologies such as solar and PV are enabling choice for consumers, but reducing demand. As demand erodes, utilities must raise prices across the base of ratepayers to maintain the backbone of the distribution grid, which is still needed to ensure service in most cases. This then incentivizes customers to adopt increasingly cost-competitive technologies, further reducing demand. It’s a vicious spiral.
  • Existing regulatory schemes are not designed to manage this disruption. The cost recovery and rate design process must be rethought to halt the death spiral described previously, account for hidden costs (such as managing intermittency), and avoid subsidizing the demand destruction of early-adopters by charging the entire customer base.

Change creates confusion

The energy industry is encountering a classic Innovator’s Dilemma. In this case, cost-competitive renewable and demand-side technologies are now destroying the paradigm of the last century. The centralized, static, and unidirectional grid is giving way to a distributed, dynamic, and bidirectional system. Demand is decreasing, while costs are increasing. The patchwork of capital investment recovery models, planning proceedings, and other processes that comprise our regulatory scheme is increasingly inadequate. As a result, it is extremely difficult to evaluate nascent business models and technologies. Thankfully, the industry and regulators are beginning to realize the gravity of the situation.Proper execution demands inspired leadership and legislators. If we are lucky, we might get both.
Hanns Anders is an associate at seed and early stage firm Claremont Creek Ventures, where he focuses on energy technology investing.
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