5 Regulatory and Policy Questions Keeping Utility Leaders Awake at Night

Energy regulations and policy have long been a source of uncertainty and worry for the leaders of electric utilities—but never more so than today. Here are five key regulatory and policy questions that may be keeping utility professionals awake at night.

1. Is My Fleet Fit Enough to Compete?

Starting in the 1980s and 1990s, utilities in several industrialized countries—notably the UK and the US—have faced increasing pressures from policy makers and regulators who've wanted to bring competition to what were previously national or regional monopolies. The aim of these energy regulations has been to make electricity supply affordable and secure.

These pressures have intensified as the push toward competition has gained momentum—in the UK, the rest of the EU, North America, parts of Asia, and elsewhere. In the US, for example, two-thirds of demand today is served by wholesale markets facilitated by regional transmission organizations (RTOs) and independent system operators (ISOs), according to the 2018 State of the Electric Utility Survey report recently published by Utility Dive.

The survey canvassed the views of nearly 700 electric utility employees from the US and Canada. Highlighting concerns that arise from competitive pressures, it concludes that a key challenge facing utilities is how to transform from "a regulated, cost-of-service utility to a business model that is more flexible and responsive to performance incentives and market forces."

Consider the example of the UK. In 2001, the then-Labour government was able to credibly claim in its election manifesto that: "We have brought full competition to the gas and electricity markets." Seventeen years later, the Conservative government has just introduced legislation into Parliament for a price cap on the tariffs paid by residential consumers—because the industry is no longer deemed to be competitive.

The cap is an interim measure while the government considers fundamental reforms to fix what one analysis describes as "a broken market." A review commissioned by the government from Professor Dieter Helm of Oxford University has proposed reforms so radical that they would transform the entire industry. The government is still considering its response.

2. What's the Best Path to Decarbonization?

The report prepared by Helm identifies a decade of interventionist climate change policy as a major reason for the industry having become less competitive.

He asserts: "The cost of energy is too high, and higher than necessary to meet the Climate Change Act target and the carbon budgets." He adds: "The sheer number of interventions in the UK energy market is so great that few if any participants in the markets, few regulators, ministers, or civil servants, can have grasped them all." While not everyone agrees with Helm's prescribed treatments for the malaise afflicting the UK power market, even the government has chosen not to argue with his diagnosis.

The UK's situation highlights the challenges that policy makers and regulators have faced in trying to reduce the carbon intensity of vital energy supplies. The need for sustainability underpins the international consensus that gave birth to the Paris Agreement on Climate. But implementing appropriate measures in an optimal way has proved extraordinarily difficult.

Germany, for example, has spent the better part of a decade promoting renewable energy as part of its energy transition, or Energiewende, yet the new grand coalition government led by Angela Merkel has acknowledged that the 2020 target for carbon emissions reduction will be missed. Why? Because Germany remains heavily dependent on coal for its electricity.

On the other side of the Atlantic, Utility Dive reports that the current situation in the US is complicated by the administration's moves to "review or rescind major power sector rules on carbon, methane, coal ash, and other pollutants, as well as proposing new power market subsidies for coal and nuclear facilities that federal energy regulators denied."

The survey continues: "Utilities list regulatory policy uncertainty as the top issue regarding their changing fuel mixes, which may reflect the uncertain future of many power sector rules."

3. How Do I Deal With Renewables, DG, and Storage?

Fuel mixes are unquestionably changing in favor of energy sources that contribute toward decarbonization. Driven initially by subsidies and mandates, the growth of renewables today is as much, if not more, about economics as anything else. But renewables also bring new challenges for conventional generators, network owners, system operators, regulators, and ultimately policy makers.

Their intermittency presents challenges for system integration. They add impetus to the trend toward distributed energy resources (DERs), increasing the need for grid modernization so that power can flow through grids in more than one direction. And they present regulators with challenges regarding how to remunerate investments and set rates.

In the US, the Utility Dive survey reports that: "The trend to a cleaner, more distributed system is occurring despite federal efforts to support fossil fuel production and generation . . . DER policy and justifying investments in emerging grid technologies all ranked high on the list of concerns for industry professionals."

Still to be seen is how the rise of storage, both distributed and at utility scale, will change the intermittency dynamics of renewables and overall system balancing.

4. What's My Plant's Role in Resilience?

The resilience of power systems everywhere has been a priority since such systems became widespread, but threats are multiplying and concerns are rising.

"Cybersecurity fears are stronger than ever," reports Utility Dive, adding its voice to the growing chorus whose members include the International Energy Agency and many governments. The report continues: "For the second year running, cybersecurity concerns topped the list of the sector's most pressing issues . . . Prior to 2017, security consistently ranked about fifth or sixth among overall utility concerns."

The US Federal Energy Regulatory Commission (FERC) is examining the issue of resilience, "because affordable and reliable electricity is vital to the country's economic and national security." It initiated a new proceeding on grid resilience in January to examine the impact and likelihood of resilience challenges, such as "physical and cyber attacks, accidents, extended fuel supply disruptions, or extreme weather events." Recent history—in the US, Puerto Rico, Mexico, and the Caribbean—confirms that these threats can become the stuff of nightmares.

5. Digitalization—Is the Force With Me?

It's not just about doom and gloom, however. Technology advances promise a brighter energy future—if potential threats can be warded off—especially from the trend toward digitalization of all parts of the electricity system, from generation to consumption.

In his UK market review, Helm says his reform proposals are urgent not just because of market failures but also because of the exciting challenges of digitalization, electric transport, storage, demand-side opportunities, and decentralized energy systems.

This is as much a challenge for policy makers and regulators as it is for utilities. Interestingly, however, the survey finds that almost all utilities see the need to transform. It adds: "Updating the utility business model requires tackling thorny issues like internal company culture, changing regulatory priorities and growing customer sentiment for clean energy."

Utility leaders may not get a lot of sleep while the sector undergoes these massive transitions. However, these five questions, when answered, will position the global power industry for a brighter, cleaner future—once the kinks are worked out.