The Most Important Invention for Combating Climate Change: The Digital Rate Case
We need to take a more data-driven approach to the way we plan and finance infrastructure.
The full decarbonization of the global economy will involve a great number of new technologies and new businesses; new power plants, new ways of moving and storing energy, new way of efficiently using that energy to do useful things, new ways of delivering the services modern society has grown accustomed to without emitting carbon. In fact, most of those technologies already exist. Despite the failure of mainstream venture capital to substantially support clean tech after its 2008 debacle, targeted funding programs and incubators (like ARPA-e, Breakthrough Energy Ventures, Elemental Accelerator, Powerhouse, Cyclotron Road, The Engine, Volta Energy Technologies, and many more) have helped a large number of passionate innovators to make-ready commercial solutions for most decarbonization needs. Yet, we are still woefully behind our carbon reduction goals. We have most of the technologies but we are struggling to get them deployed quickly enough. In his recent essay, Marc Andreessen is now posing a new rallying cry for the innovation community: “IT’S TIME TO BUILD”, and prominent clean tech strategists like Shayle Kann have been quick to share their wish lists of “What to build”. But what is it going to take to build quickly enough?
Lower technology costs and a carbon price would certainly help but contrary to what many might think, economics is not the primary source of friction to rebuilding our energy system. The utility industry managing most of our public infrastructure is by its very nature made up of government-protected natural monopolies. The trade-off for being a monopoly is that these organizations must subject their spending and revenue to the independent review and approval of the publicly elected utility commissions via the rate case process. Most of the capital spending and incentives (like rebates, tariffs, and subsidies) that shape the grid must make it through this process regardless of standalone economics. In 2016, U.S. utilities spent over $70 billion on transmission and distribution infrastructure. Any deep decarbonization scenario that gave the globe a chance of meeting the 2 degree C global temperature rise goal set by COP21 would require 2.5X the annual capital expenditure in transmission and distribution infrastructure for 30 years just to support the additional generation and end-use demand (even with generous assumptions for demand-side response and energy efficiency). This does not even include the massive capital mobilization also needed to build generation and convert end-use equipment like transportation, industry, agriculture, and building heating. Such a massive increase in capital spending has never been processed by utility commissions and the rate case process. Regulators are specifically tasked with ensuring electricity rates do not increase without just cause, and when they must, in a manageable fashion for all ratepayers (particularly low income customers). Even in the most favorable conditions for capital expenditure (when wholesale energy prices are low), which the U.S. has experienced for the last 12 years thanks to low cost natural gas, utilities have only ever averaged a 3–4% compound annual growth rate. At that pace, it would take 25 years to reach the rate of annual capital deployment on the grid needed to begin a following 30 year electrification and decarbonization transition of the economy. To enable this growth rate to get any steeper will take a rethinking of the rate case process.
Further, precise decisions on the most efficient types and combinations of infrastructure (batteries vs transformers, distributed vs centralized) are critical to ensuring costs do not unnecessarily balloon and are fairly allocated across society. These decisions have only become more complex with the advent of new distributed energy resource (DER) technologies (e.g. smart thermostats, rooftop solar, batteries, electric vehicles, etc.) that are all partial substitutes with each other and traditional centralized infrastructure, introducing many possible combinations of traditional and non-wires alternatives (NWAs). Regulators and consumer advocacy groups are demanding deeper analysis before capital is spent and rates increase. The pressure from these groups will only increase as more of the economy electrifies and utilities are forced to ask for more and more capital expenditures to upgrade aging infrastructure.
Further still, all of these electrification decisions and installations of DER infrastructure exist outside the typical domain of utilities, downstream of the meter, inside people’s homes and businesses. The decision for a home or a business to convert to electric vehicles does not start with the utilities but it certainly impacts their future investment decisions. Getting DERs and NWAs built efficiently alongside upstream grid investments like substations and transformers requires a new type of coordination between regulated and non-regulated financiers, utility planners and solar panel marketers. It requires greater participation of building owners and occupants themselves, opting into providing data, installing smart building products, and subscribing to demand response programs. The availability and liquidity of energy data at all scales needs to dramatically improve from the regulatory standstill that exists today. The traditional utility planning and rate case process involving lawyers negotiating with politicians over stale and limited grid data is wholly incapable of enabling the decarbonization transition at the pace that is required.
Enter: The Digital Rate Case
What do I mean by a “digital rate case”? Rather than utilities generating static reports (with expensive consultants) of last year’s load patterns and costs to plan next year’s spending and rates, what if all stakeholders (utilities, regulatory commissions, and consumer advocacy groups) assessed proposals on a common representative data model of the utility region, a 1:1 map of every building, solar panel, electric vehicle, transformer, and substation and all the electrical connections between them. This platform would enable all stakeholders to see short and long term cost impacts, bill changes on low income versus high income customers, trade-offs between NWAs all in near-real time. This data platform would act as an independent arbiter of truth to help communities make the most capital efficient investment decisions in this ever more dynamically changing technology landscape.
How will a digital rate case help expedite building? Utilities’ “profits” (usually held to between 7–11%) are a function of the amount of capital they are approved to spend building infrastructure in their jurisdictions. Achieving higher profits means getting commission approval for more capital spending. So by design there exists this tension between a utility’s desire to build and their commission’s responsibility to ensure they are building prudently. This tension has been healthy and functional for the past 100 years of gradual traditional infrastructure expansion, but the combination of new choices (DERs and NWAs) and pressure to decarbonize are breaking down the trust necessary for expeditious decisions. A digital rate case presents a framework for restoring trust between stakeholders and confidence in investment decisions through appropriate data transparency. Rather than regulators, utilities, and advocacy groups conducting their own analysis using their own incomplete data, all grid data would be pooled onto a common platform that protects privacy and critical infrastructure but allows detailed queries and what-if analysis. Proposals for NWAs could be digitally submitted and results for cost impact and scenario performance could be shared with all. Trade-offs between different spending plans, tariffs, and incentives based on long term economic and end-user trends could be more easily weighed. Developing such a sophisticated orchestration framework from the incumbent players alone (utilities and regulators) would be politically wrought and slow. Neither incumbent is particularly well equipped for software engineering/data science and most don’t have the budget capacity or incentives to make such an innovative investment internally (since utility profits are capped, they cannot monetize new technology, particularly software, beyond their jurisdictions). To scale quickly across all utility regions, digital rate cases will need to borrow a growth strategy from some of fastest growing orchestration platforms in recent years (e.g. Uber and Airbnb): the platform business model. In their book “Platform Revolution,” the authors elaborate on the various techniques (e.g. network effects, openness, AI/ML) platform business models have used to rapidly achieve major market share in many industry segments. However, energy and infrastructure have largely remained unaffected by digital platforms to date (despite the authors even proposing an energy platform that has been attempted by New York’s REV initiative but largely fell flat). The reason for this comes down to understanding, respecting, and properly leveraging the relationship between utilities and regulators. Rather than attempt to break the existing business and political model (as has been the theme in New York and California), innovators need to partner with utilities and regulators to transition their many processes onto a single platform and then invite all of the new participants (NWA vendors, DER installers and aggregators, microgrid providers) to engage as well. Utilities benefit from an expanded domain of investment opportunities behind-the-meter, regulators benefit from greater confidence and accountability to their constituents, new participants benefit from appropriate market access, and society benefits from a more efficient and expeditious allocation of capital on their critical infrastructure.
So who is working on this? Many technologies that capture and aggregate our energy infrastructure data would need to come together to achieve this vision, and many of those technologies are under development by startups, large tech companies, and even the larger investor-owned utilities. Amongst the startups, a few key players standout:
Kevala Analytics: Developing a modular fintech platform for utilities and regulators (think g-suite for utilities) to conduct detailed analysis on their electrical infrastructure down to individual buildings
Mapdwell: Using machine vision and machine learning to engage customers and provide targeted marketing for DER/EE vendors
Station A: Aggregating data to help large commercial real estate identify and finance the best DER products for them.
Camus Energy: Offering a distribution system operator (DSO) as a service
Utility API: Developing a secure and legally compliant protocol to transmit smart meter data between customers, utilities, and 3rd party product vendors
WeaveGrid: Connecting utilities directly with electric vehicles to aggregate data for charge management and incentives.
Copper: Offers a relay box that homeowners can simply plug into the wall and receive much higher sampling data from their electricity, gas, and water meters
The right partnership between these early startups and utilities/regulators (as well as sufficient venture investment) would help bring this critical innovation into reality. Marc Andreessen posed a charge to build, Shayle Kann provided a list to build, now we need the digital rate case to help us build quickly enough.
Jake Jurewicz offers professional consulting at 1st Principles Consulting, LLC.
