Annie Koch, DNV, 10/12/2021
Here at DNV, we have a unique understanding of the energy transition, which is of strategic importance to us as well as our customers. It is our fervent belief that the energy industry can and must take the lead in driving the energy transition. We discussed the hurdles with a diverse group of experts across the DNV Energy Systems teams and issued a challenge: Convince me that the energy transition is possible.
Energy regulations hold the key to utility-sector electrification. Find out what needs to change to accelerate the energy transition.
In a market-driven economy, the utility sector plays a unique role. Rather than being shaped by competition and innovation, state and federal policies and regulations define how utilities operate. This structure impacts consumer rates, infrastructure investments, clean energy rebate programs, and financial incentives. Meanwhile, as highlighted in the recent IPCC report, the need to achieve the energy transition grows increasingly urgent, energy regulations lag, which means that utilities’ electrification and decarbonization efforts also lag.
Energy regulation has a direct impact on the economics of decarbonization and electrification. As such, to accelerate the energy transition, utilities must engage with policy makers to reconsider a regulatory structure that creates pathways for public investment in decarbonization. Energy regulation must broaden its scope to incorporate more diverse stakeholders. It must consider both intended and unintended consequences and have the agility to course correct. It must weigh the costs of inaction (which is not really an alternative) and improve equity. Finally, policies and regulations must evolve to become clear, consistent, and certain to empower utilities to accelerate decarbonization on a massive scale
Creating pathways for public investment in electrification
When it comes to decarbonization, energy regulation enables pathways for public investment in renewable technologies, ultimately creating self-sustaining economic opportunity. As a rule, technology typically gets less expensive and more advanced over time. What we used to do on a desktop PC can now be done on a simple smartphone. The same concept applies to clean energy technologies. Back in 2008, it cost around $50 to manufacture an LED lightbulb. Today, you can go to any hardware store and pick one up for $3. Thanks to innovation investments, the market has shifted to favor LED lighting, because it performs better and costs less to operate.
In the state of California, renewable energy incentive programs around photovoltaics were a huge driver in innovation and ultimately reducing production costs. The same thing is happening in Europe around electric vehicles and all over the world around wind and solar. Public investment reduces product development costs around clean technology, eventually, eliminating the need for the incentive.
Meanwhile, as clean energy technologies decrease in cost, commodities like oil and coal continue to get more expensive, especially when social and environmental impacts are considered. The cost curve has changed, which is why today, we build fewer coal- and gas-powered plants. The innovation to support decarbonization in the utility industry is readily available. We just need to create investment pathways for market solutions.
Regulating with clarity, consistency, and certainty
In addition to forging investment pathways, energy regulations must evolve to unfetter utilities to commit the capital needed to advance electrification. Yet oftentimes, policies can be ambiguous, with inadequate timeframes and murky goals, providing little incentive for utilities to expand electrification efforts. However, when implemented with clarity, consistency, and certainty, policies and regulations play a critical role in priming the market for transformation by providing a transparent and predictable ruleset for utilities to follow.
For starters, goals and expectations must be crystal clear. Adequate timelines must be specified. Clean energy definitions must be precise. For example, while nuclear and hydro power are technically clean, they have their own sets of environmental and societal impacts.
Secondly, policies and regulations must be applied consistently across states to provide a regional approach. The costly infrastructure investments that utilities must make can run hundreds of billions of dollars. Utilities cannot invest this kind of capital if policies might change a few years later, potentially leaving them with stranded assets.
Finally, regulations must be certain. For any business to assume financial risk, there must be guarantees that goals and timelines will not fluctuate with political cycles or other factors. Timelines must cover retooling of services and the life of equipment.
If we go back to the example of LED lighting, regulatory guidelines set clear expectations: phase out incandescent lighting. From a consistency standpoint, this goal did not shift. And from a certainty standpoint, the policy horizon provided ample time to recoup investments in innovation and generate market demand for LED lighting. Markets can work when given the right targets. Another example of this is the reduction in technology costs that have made solar photovoltaic and energy storage technologies more affordable and viable.
Reflecting true social benefits and costs of energy policies
Energy policies need to account for both intended outcomes and unintended consequences when designing regulatory frameworks. To do this, policy makers need to expand diversity of thought and perspective. When more diverse stakeholders help set the rules, energy regulations often look very different.
California leads the US in utility-sector clean energy programs. The California Energy Commission recently revamped building codes to mandate solar panels for all new homes and has laid out new incentives to encourage developers to choose electric heating over natural gas. But even California has had to contend with occasional unintended consequences. In one instance, an energy storage incentive designed to reduce emissions was being used by customers and manufacturers to lower power bills, ultimately leading to increased emissions. Regulators solved for this unintended consequence mid-course by implementing a performance-based approach to energy storage incentives.
Thornier issues around equity and cost shifting make the need for demand-side action ever more valuable. Climate change is rapidly altering our environment, and there are populations who are losing out. Policies must reflect the true social and environmental costs of delayed decarbonization. Policies must answer questions such as:
- Who benefits and who suffers from the outcome of pollution?
- Who gets access to public subsidies and investments and who pays the bill?
- What are the long-term health impacts?
Combatting climate change depends on utility-sector decarbonization. And the sooner energy regulations evolve, the sooner utilities can do their part in accelerating the energy transition. Our fervent hope is that utilities and regulators work together to push for clear, consistent, and certain policies that forge future-looking investment pathways for affordable clean energy for everyone. Because climate change waits for no one.