Opinion: Utilities need a business model that’s aligned with the needs of society
|Published: 01-28-2024 7:00 AM
Sam Evans-Brown is the executive director of Clean Energy NH.
For nearly twenty years electricity consumption has been pancake flat in the United States, but that era is about to end. Electrification is coming.
Electric vehicles are hitting the road much faster than we ever anticipated. There are currently just over 10,000 EVs registered in New Hampshire, but by 2032 there are forecast to be more than 165,000. Across all of New England, there are expected to be 2.2 million vehicles by 2032, with even more in Canada. Electric heat pumps are growing in popularity too. This partial electrification of building and transportation sectors will add nearly 6,400 additional MW to the winter peak demand, which is nearly the equivalent of five new Seabrook stations, the nuclear plant that is the largest electric generator in New Hampshire.
Electrification is efficiency. Electric vehicles and heat pumps use two to four times less energy to move people or heat homes than their fossil-fueled counterparts, so this trend will reduce the total energy consumed by society. However, it will increase the total demand for electricity, which will create challenges. Choices we make now regarding how electric utilities set goals and manage their operations will determine how expensive this energy transition is.
Meeting this rising demand won’t be easy, but it is doable through comprehensive planning and coordinated investment. At a recent industry conference, I heard one grid engineer remark that the last time the United States saw demand growth of this magnitude, electric utilities had to run new, thicker wires down nearly every street in America, and replace nearly every pole-mounted transformer.
It was an enormous generational investment; one that we have been benefiting from ever since. But that hard infrastructure was also the only tool that the electric utilities and government officials had in their toolbox at that time, and in 2024 it’s a completely different story.
Electric utilities are “natural monopolies” in that it does not make economic sense for companies to compete to connect wires to homes. However, in exchange for having been granted the right to be a monopoly, the electric sector has agreed to be subject to heavy regulation. The NH Public Utilities Commission (PUC) is charged with approving the various utility investments, rates and programs. This entails an exhaustive review of the finances of every utility every few years. The biggest review occurs during a “rate case” during which the PUC must determine whether the utility’s investments in their systems are “used and useful” and “reasonable and prudent,” which is to say that the company is working in the best interests of their electric customers.
Assuming those investments meet the PUC’s criteria, the utility gets paid back, plus some. And the key feature of that “plus some,” which is where a lot of the utilities’ profits come from, is that it’s a percentage on top of whatever the utilities spent to build their infrastructure.
As long as the utilities think the regulators will say “yes,” the incentives of the system are for them to use the same old solutions as before, no matter the cost.
This creates a powerful bias towards building and owning stuff.
This means that utility shareholders would rather the company build a new multi-million dollar substation to handle increased peak demand than invest in targeted demand reduction measures. It also means they’d rather own the battery in your basement, instead of letting you buy one and pay you to use it.
So how do we get this right? How do we effectively and affordably build out the electric grid to handle the impending tidal wave of electrification?
There are many individual strategies and technologies I can point to — energy efficiency, advanced rate structures, energy storage, local generation to defray local consumption, electric vehicles that can discharge back into the grid — but the reality is that until we change how the utilities make their profit we will struggle to get their leadership fully bought into these strategies.
That is why this year Clean Energy New Hampshire supports NH Senate Bill 320, which would direct the PUC to open a docket to chart a new course for our utilities. This docket would begin to move our utilities away from our current model and towards one in which the utilities earn their profit by achieving goals that state policymakers set out for them. This new model is called performance-based ratemaking.
Those policy goals can be whatever we decide they are: reliability, keeping electricity rate growth below the rate of inflation, customer satisfaction, reducing the number of individuals who can’t pay their electricity bills, speed with which the utilities are connecting new clean generation resources to the grid. Performanced-based rates can look completely different depending on the state in which they are put into place, but offer the tantalizing goal of creating a new business model in which the interests of utility shareholders are aligned with the interests of New Hampshire policy-makers and ratepayers.
At Clean Energy New Hampshire, we envision a future in which abundant, affordable, clean energy powers an innovative and thriving economy. Until New Hampshire begins to take steps away from the current utility model, we’ll continue to get the results we’ve been getting so far: rates will rise, and innovation will be slow.
Unfortunately, this bill appears to be doomed to interim study largely due to the opposition of the state’s Department of Energy, which argued that performance-based ratemaking is too new, too untested, or too risky. While it’s true that this innovative new framework would be a change from the current regulatory compact, this much is clear: doing nothing has its own risks. We risk not being able to rise to meet the moment and build the next generational investment that will be needed to meet rising electric demand at an affordable cost. We risk seeing our electric rates rise even further, which will hamper the clean energy transition. We risk being left even further behind.