Transforming the Electricity Sector to Meet Our Clean Energy Goals

Electric and natural gas utilities account for more than half of all global- warming pollution associated with fossil fuel consumption in the United States so if we are to meet the ambitious carbon reduction goals from the Paris meeting of the United Nation's Conference on Climate Change (COP21), we must significantly transform America's electric and natural gas sectors. NRDC's new Issue Brief, "A Vision for the Future of the Electric Industry," lays out some important steps in that process.

Utilities are a critical part of the solution and remain the most important - although not the only - investors, long-term system planners, and resource integrators of our electric and natural gas system. Key changes in how they are regulated - some already underway - could significantly change the way they do business and speed up decarbonization of our energy system. And these changes must help customers get the cleaner energy, lower bills, and access to innovative technologies like rooftop solar and electric vehicles (EVs) they want.

Change is underway

The electricity sector is already transforming - led by both technology innovation and policy trends. Our electricity consumption has grown at only half the rate of the U.S. population since 2000 - largely because of energy efficiency (which reduces our need for dirty power plants); over that same period, wind and solar production have grown at a record pace, while their costs continue falling. Other technologies such as advanced energy meters in our buildings, electric vehicles, and demand response (compensating customers for altering the times of their energy use) are changing how the electric grid operates, too.

Meanwhile, new players are entering the marketplace to offer customers alternative energy services and technology options. States are increasingly taking action to curb harmful carbon pollution and the U.S. Environmental Protection Agency's Clean Power Plan to limit power plant emissions is expected to accelerate the trend toward cleaner, more efficient electricity. But these trends, at their current pace, will not get us far enough, fast enough.

All of these positive trends can be significantly accelerated and scaled up if utilities are properly motivated. And the best way to do that?

Diversity in Models with Common Elements

There is no single answer because America's electric utilities come in many different sizes and shapes: public (municipals, cooperatives) and private (investor-owned); vertically integrated (they own their system from generation to wires going into the home) or not; cold and warm weather and everything in between.

However, there are common elements that are necessary to ensure the cleanest and most efficient, equitable, and affordable electric system possible. These components--which establish incentives for action by utilities, customers, operators of the grid, and regulators-- along with NRDC's vision for the future of the electric industry are here.

On the right track...

We have already made significant progress with one of the most fundamental reforms - changing the utility's principal focus from primarily selling electricity to instead focusing on meeting customers' service needs and our energy and carbon reduction goals. A regulatory rate structure known as revenue decoupling makes utilities indifferent to retail energy sales by using modest annual adjustments in rates to ensure the utility recovers its authorized costs - no more, no less. This helps remove the disincentive for utilities to promote energy efficiency programs like weatherization, which save customers money but reduce utility energy sales. As of December 2015, 15 states had revenue decoupling in place for electric utilities and 22 for natural gas utilities; the number of utilities covered stood at 34 and 55, respectively (three time more than five years earlier).

Solar rooftop systems and EVs are gaining traction due to improved and cheaper technologies and supportive policies. Forty-four states (plus D.C.) have net metering policies in place that compensate customers with rooftop solar panels for sending the excess electricity they generate back to the grid, and this has contributed to a new solar project being installed every two minutes in the first half of 2015 and costs decreasing more than 73 percent from 2006. A new law in California makes replacing oil as the dominant transportation fuel a core mission of the electric industry, recognizing the expanded role utilities should play in supporting public EV charging infrastructure and ensuring EVs provide benefits to the electricity grid. Other utilities across the country are also moving forward with EV investments, including Southern Company and Kansas City Power and Light.

While most transformations are occurring one policy or rate design at a time, a few processes are tackling regulatory reform in a more comprehensive manner, looking at rate design, planning processes and performance-based incentives as a package. New York's Reforming the Energy Vision (REV), Minnesota's E21 Initiative, and California's closely coordinated proceedings are examples.

...with a couple threatened derailments

This past year has seen a threat to our transition to a clean energy future, with a proliferation of utility proposals to institute large fixed charges on customers' monthly utility bills, meaning they'll pay a specific amount no matter how much energy they use. Utilities are looking at these charges to ensure they recover adequate revenues to maintain the electric system, but there are better solutions. Fixed charges reduce rewards to customers for investing in energy efficiency and rooftop solar that can reduce their consumption and bills. At least 35 utilities requested significant increases in fixed charges in 2015, drawing widespread and vehement opposition. But at least 75 percent of the commission decisions in these cases substantially reduced or rejected those increases outright - a very good sign. These rejections are changing the conversation. NRDC's issue brief discusses some of the preferred alternatives that will better incentivize the efficient use and deployment of utility investments in clean energy.

There is good news in our efforts to decarbonize the electricity and natural gas sectors, but we need more, faster. Transforming the electric industry will help us kick it up a few notches.

About the Authors

Sheryl Carter

Codirector, Energy program

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