In a post here last week, we detailed why the utility industry’s proposed legislation mandating utility long-term solar energy contract procurement in place of the current competitive customer driven market won’t work. What we didn’t get to then was why the industry proposed it in the first place.
It’s clear from the utility’s explanation supporting their proposal that their focus isn’t the overall consumer cost of solar but the allocation of costs avoided by customers who are contracting for solar energy. It’s an equity issue and one that poses a big problem for the utilities because it can send them into a classic “death spiral” of ever-increasing costs which must be recovered from an ever-smaller group of customers. The matter has already grabbed the attention of the mainstream media and was featured this week by the Boston Business Journal.
Funny how cost equity wasn’t a concern for the utilities when it came to spending on energy efficiency and combined heat and power (CHP) projects under the Green Communities Act. These programs have the same effect. Indeed, the utilities pressed for decoupling of revenue to ensure that they fully recovered these stranded costs as a result of reduced volumes of electricity going into the design of electric rates. What’s the difference now?
There are two differences.
One is that the utilities finally woke up to the fact that decoupling doesn’t solve the death spiral problem, it exacerbates it. If left unaddressed, the situation could become a political and customer relations disaster with ever increasing delivery charges. In fact, it already has. The drop in electricity prices from the shale gas revolution has highlighted how much more the delivery charges are now than the cost of supply. We all know that by reading our bills.
The second difference from the cost recovery situation for energy efficiency and renewable energy is that the utilities don’t make money on the solar program. They earn a financial incentive from performing well as administrator of the efficiency and CHP programs. Their proposal on solar procurement opens the door to the same kind of financial kicker that they now receive on the long-term renewable contracts they have signed, including the 4 percent they will earn on the revenues paid to Cape Wind. That raises this obvious question: Is there a hidden agenda here?
Further, the myriad of cost trackers and automatic adjustment clauses to collect the revenues related to energy efficiency, decoupling, etc. have wreaked havoc on customers’ bills. The problem is much bigger than cost recovery of the effects of the state’s solar program. The problem is that the current rate structure of the utility distribution system is broken. This has profound implications for customers as well as the utilities.
The solution is a complete restructuring of the distribution business – not just rates – but the whole business. The Grid Modernization docket, with hearings just completed last week at the Department of Public Utilities, is examining new paths for the business. The distribution company of the future should become the hub of open technology architecture, opening doors to all sorts of opportunities – many we probably can’t even imagine now. This, combined with the clean technology revolution already well underway in Massachusetts, makes the timing of restructuring the utility business all the more imperative.
Fifteen years ago, when the electric generation function of the electric industry was restructured, many knew that it was only a matter of time before the distribution side would follow. Senior utility management knew instantly that they had to do something to replace the lost shareholder value and income from selling off half their business (generation stations) to the competitive market. The immediate solution was mergers, which yielded value from operational synergies. But that was just a stopgap measure in the face of the changes that occurred with the advancement of technology, such as distributed generation, more energy efficiency and on-site renewables.
It’s time to take on restructuring anew, just as we did more than 15 years ago.
Let’s help the utilities figure out how to make money other than squashing the robust competitive market for solar so they can get paid to enter into long term contracts with renewable energy developers. Let’s help them opt out of an arcane and antiquated cost recovery regime that no longer fits the world we all live in. It’s time to be creative and preserve the successful competitive trajectory we’re on by making distribution system cost recovery recognize the costs and benefits of technology – including the distribution infrastructure – and the role technology plays in the energy consumption world of the future.