As distributed energy changes the relationship between regulators and electric utilities, California and New York are getting most of the attention.

But regulatory innovation is possible everywhere right now, and New York and California offer just two potential models, according to a new white paper from PA Consulting Group.

Given the unique market constructs of California and New York -- they both have their own independent system operators at the grid wholesale level -- some of the changes happening in these two states would look different elsewhere. But distributed energy is forcing utilities and regulators around the country to grapple with how to redesign rates to accommodate new technologies.

Utilities across the U.S. have a unique opportunity to work with regulators in more forward-looking ways, the paper authors argue. 

“Utilities should not only be planning for the most likely scenarios, such as continued cost decreases for distributedsolarand energy storage, but also high-impact, low-probability scenarios,” PA advises in the white paper.

It has to be a careful balancing act. There is a need to pay attention to fast-moving trends while avoiding policy that may favor one technology over another. There is also a need to guard against extreme downside risk, such as cost curves for emerging technologies moving far outside of industry projections.

Utilities should first define where they want to go and how they want to get there, says David Cherney, an energy and utilities expert at PA. But then they should assess the high and low bounds of a diverse range of forecasts.

“The exercise is not about trying to guess the future, but rather applying individual lenses for each future scenario, especially in the next five years,” the paper states. “Simply focusing on the near-term volatility and having strategies to adapt can be a challenge for utilities that have traditionally planned for assets on a decades-long scale.”

To increase the likelihood of a preferred outcome, incremental steps are needed on the regulatory and utility side. Utilities need to think more broadly about how technology can be integrated successfully into an evolving business model. And regulators could allow utilities to experiment more.

Pilots should be constructed with a focus on how they will fit into planned capital expenditures of the utility, or what regulatory innovation is needed to allow those projects to move forward. They should not be one-off experiments. Failure is an option -- but only as part of a larger vision. 

Eventually, incremental pilots will not be enough. Bold steps will be needed.

Southern Company, for example, is investing in distributed energy services. Earlier this year, it paid $431 million for microgrid provider PowerSecure. In March, Edison International launched its energy-as-a-service business to innovate faster in deregulated markets while regulated markets evolve. These are just a couple of examples of utilities taking a leap into the distributed energy future.

Within regulated environments, there is ample room for big thinking. PA Consulting Group offers three near-term applications to help utilities engage in far-reaching thinking:

  • Cutting-edge non-wires alternatives, such as Con Edison’s Brooklyn-Queens Demand Management project, can be a good way for utilities to implement new technology and build new relationships with customers across different classes. At the same time, it can breed a symbiotic relationship between regulators and utilities. Non-wires alternatives can also help inform new business models.
  • Community solar is another promising area. Utilities already manage more than 110 community solar projects across 26 states. By working with regulators, utilities can ensure the right project design is in place to bring community solar to areas where it benefits both customers and the utility. The lessons learned through community solar projects can inform future distributed energy projects. 
  • Energy efficiency is also poised for transformation. Whether pay-for-performance efficiency programs or more segmented and tailored demand response offerings through a marketplace, energy efficiency is one area with many options for innovation without major regulatory rule changes.

Regulatory foresight should be viewed as a strategy for embracing the future, rather than trying to preserve the status quo. “Utilities can map a future that will strengthen their business model and bottom line -- even while technology and market changes occur faster than ever before,” concludes PA. 

Check out the new white paper from PA Consulting as part of the Next Generation Utility series.