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Washington’s Utilities and Transportation Commission Tackles the Conundrum of Distributed Energy, Part 2

Posted in Entrepreneurs, Legislation, Regulatory, Renewable Energy

As I tried to describe in part one of this article, Washington has some structural challenges that impair its ability to develop distributed energy as a significant alternative to fossil fuel-powered electrical power generation. The regulatory system that has been built up over the last 100 years has powerful constituencies that it must protect. Those are not only the regulated investor owned utilities (IOUs) that the system assures will earn a return on existing generation capacity that is less necessary when distributed energy sources replace fossil fuel generation. The constituency also includes residential consumers, and business and industrial customers, who have been assured that regulation will protect from unnecessary increases in rates. The regulatory system is ill-equipped to deal with disruptive technology, which is what distributed energy potentially is. So Germany, with a state-owned electrical system, or China, which is coming from a place of being desperately short of electricity, have real market advantages in supporting development of new distributed energy technology and driving down the cost of distributed energy.

But – that doesn’t mean we can’t do something. The Washington Utilities and Transportation Commission (WUTC) issued a report on October 7, 2011 on the potential for cost-effective distributed generation in areas served by investor-owned utilities in Washington State.  The WUTC report can be tough sledding – energy regulatory law is almost mind-bendingly complex, with state law, state regulations, decades of judicial precedent and an overlying body of federal statutes, regulations and case law all factoring into what can be done. And the WUTC proposals are at most going to nibble at the edges of the problem; they may not have any choice about that.

The WUTC found at least three things that it could do to encourage distributed energy.

     Allow larger standard contracts.  Stick with me here. The federal Public Utility Regulatory Policies Act (PURPA) of 1978 was adopted to encourage development of cogeneration and small power production facilities. It gives the states limited authority to set rates for distributed energy generators. The WUTC has by rule allowed generators of up to one megawatt to accept a standard contract issued by IOUs. The virtue of those standard offer contracts is that they create certainty from the beginning about what the owner of a distributed energy facility can expect. And certainty is one of the essentials of financing most new construction. So having larger standard contracts would permit financing of some projects that now struggle because of the lack of certainty over the pay-back period.

Potentially relax the interconnection rules. The WUTC adopted rules in 2007 concerning the interconnection requirements to connect distributed energy generators to the distribution system. In only four years, however, technology and the industry’s understanding of what is important appears to have changed enough so that those rules may be overly complex and contain requirements that add cost without adding benefit. The WUTC proposes to reconsider those rules to see if they can be simplified and their cost reduced.

Clarify ownership of RECs under PURPA contracts. Again, this one deals in the arcane reaches of federal and state laws. In a nutshell, distributed energy generation from renewable resources can have two values – the value of the energy generated and the value of Renewable Energy Credits – or RECs. RECs have their own market, and the ability to sell RECs separately from selling the power could significantly improve the return on distributed energy projects. But the PURPA contracts that the WUTC has approved make it unclear who owns the RECs. The WUTC will consider amending the PURPA contracts to clarify the ownership of the RECs – and potentially thereby increase the value of distributed energy development.

The WUTC also has suggestions for what the Legislature could do to encourage distributed energy. And perhaps the Legislature will make those changes. All of the WUTC proposals for legislative action, however, are also more in the nature of tweaking the system than making fundamental change.

What would make fundamental change? Since we are not going to be changing the basic rules of the regulated industry that have been built up over time, it is likely some key technology improvements that will make the biggest difference. Chief among those is development of better batteries. The economics of distributed energy would change radically if electricity could be effectively stored between when it was produced and when it was needed. Imagine a day when the solar panels on your roof generated the power that charged your electric car overnight. That is but one example – but a better, cost-effective battery, would make a huge difference in how electricity generated by distributed systems could be used. Better ability for IOUs to only send the power it needed to a particular substation would also make distributed energy far more valuable, because now they don’t necessarily save that much need to generate power just because there is a producer generating power on the far side of a substation.

Those are tough technological problems, and of course Washington State would love to deploy its considerable intellectual capital to solve them. Other parts of the world, with more immediate incentives to develop distributed energy, may have a critical advantage in leading on those technological advances, however, for the simple reason that they can deploy distributed energy more fully now.