Four Energy Regulatory Trends to Drive Grid Improvements in 2023

This year’s top energy regulatory trends will include an emphasis on improving grid flexibility, reliability and resiliency to better handle extreme weather and demand peaks. Stakeholders want to maintain access to affordable, reliable electricity as the industry transitions to intermittent renewable resources and adapts to evolving consumption and demand patterns that strain the grid.

“Energy systems and the electricity grid are undergoing unprecedented change on a scope, scale, and speed that challenges the ability to foresee—and design for—their future states,” North American Electric Reliability Corp. (NERC) researchers wrote in NERC’s 2022 Long-Term Reliability Assessment.

“The energy and capacity risks identified in this assessment underscore the need for reliability to be a top priority for the resource and system planning community of stakeholders. Planning and operating the grid must increasingly account for different characteristics and performance in electricity resources as the energy transition continues,” according to NERC.

NERC’s recommendations to industry and policymakers for addressing the reliability risks described in its assessment include:

• • Incorporating extreme weather scenarios in resource and system planning
  • Increasing focus on distributed energy resources (DERs) as they are deployed at increasingly impactful levels
  • Considering electrification’s impact on future electricity demand and infrastructure

Like NERC, regulators ranging from the local to federal levels have recognized the need to prioritize grid improvements and have responded accordingly. The following efforts will be among the top energy regulatory trends in 2023.

1. Leveraging Demand Response Aggregators in Traditionally Regulated States

About a decade ago, regulators in several traditionally regulated states restricted DR aggregators from representing customers’ demand response resources in wholesale electricity markets for a variety of reasons. Several states are reevaluating the restriction and considering how to leverage DR aggregator participation consistent with state regulatory policies and practices.

The restriction has served to limit participation of highly flexible demand resources due to constraints on regulated utilities’ ability to offer custom arrangements. Among the reasons regulators are revisiting the restrictions is a desire to increase DR participation to reduce costs, improve reliability and leverage flexible demand resources as a tool to help reduce carbon emissions.

Other drivers include rising costs of capacity to meet resource adequacy needs, and concerns about capacity shortfalls during extreme conditions or emergencies. In addition, the concerns about incompatibility with traditional regulatory models that prompted adoption of the restrictions have proven unfounded in several traditionally regulated states that allow DR aggregators.

In recent examples of states removing restrictions, Minnesota and Michigan have recently adopted proposals to permit DR aggregators to work with utilities to offer customers more options. Missouri is also reviewing its policies toward DR aggregators, and other states can be expected to follow suit.

2. Acknowledging the Importance of Capacity/Availability

Within the last couple of years, several reliability events have demonstrated the need for capacity markets to keep the lights on during grid emergencies. Sky-high energy prices were not enough to curb demand.

Most recently, energy prices shot up during Winter Storm Elliott in late December as generation resources failed amidst surging demand, prompting PJM and ISO-NE to dispatch DR to get customers to curtail their loads and avoid grid failures during the holiday period. Winter Storm Uri in 2021 similarly strained the grid in Texas to being within minutes of going into rolling blackouts that would have kept the state in blackouts for weeks. Unprecedented DR participation helped prevent a catastrophe then as the load shed reached 20,000 MW during the event and lasted for 70 hours.

In both events, grid operators turned to DR when high energy prices alone were not enough to avoid emergencies. Even when energy prices reach multiple thousands of dollars, as they did during Winter Storm Uri, customers may not reduce loads because they do not see the prices.

Indeed, researchers for NERA Economic Consulting have found that merely hoping that energy prices alone will incentivize market users to curtail demand during peaks is not good enough, and that successful recruitment of demand-side resources for help is “substantially enhanced by the presence of availability payments.”

In analyzing participation rates for more than 900 demand-side programs, researchers concluded that there is a continued need for availability payments. Demand-side resources represent a potential source of cost-saving and reliability enhancement for any electric system and programs that make availability payments have “much higher participation rates” than dynamic pricing programs that depend on consumers to base their consumption on market prices, researchers noted.

However, low capacity prices can reduce participation rates, and, therefore, harm energy users and grid operators. In addition to reducing availability, if capacity prices are too low for too long, energy prices can rise, and investors may not build more capacity resources (including DR, generation and energy efficiency).

CPower experts expect stakeholders to look for ways to eliminate pricing and regulatory impediments to DR participation this year because increasing DR participation would improve grid flexibility and help create the Customer-Powered Grid™ that would enable a flexible, clean and dependable energy future.

3. Increasing Non-wires Alternatives for Grid Relief

Utilities, regulators, municipal cooperatives and public power utilities are seeking non-wires alternatives (NWAs) to expand their distribution networks because NWAs can reduce costs, decrease the reliance on traditional infrastructure investment and address the dual challenges of vehicle electrification and renewable resources. NWAs can also help the environment by using clean energy and can provide flexibility and resilience by deploying DERs locally.

In leveraging the flexibility of DERs, NWAs allow utilities to alleviate grid stress at peak times without building distribution wires. The benefits of this more cost-effective approach will multiply as utilities meet the surging demand brought about by the rapidly rising usage of electric vehicles.

NWAs also provide utilities with increased visibility into the presence and usage of behind-the-meter DERs. Furthermore, customers can help bring down energy costs and improve reliability and the environment in the communities where they work and live. Customers get the benefit of tapping additional revenue streams for their resources as well.

More states are likely to pursue the implementation of NWAs this year to help utilities achieve cost savings and improve reliability at low cost.

4. Accessing Federal Funding Programs for Utilities

Utilities may be able to implement NWAs with federal assistance. The U.S. Department of Energy’s Grid Deployment Office is administering a $10.5 billion Grid Resilience and Innovation Partnerships (GRIP) Program to “enhance grid flexibility and improve the resilience of the power system against growing threats of extreme weather and climate change,” as part of the Bipartisan Infrastructure Law.

“These programs will accelerate the deployment of transformative projects that will help to ensure the reliability of the power sector’s infrastructure, so all American communities have access to affordable, reliable, clean electricity anytime, anywhere,” according to the Grid Deployment Office.

There are three programs in all.

• • Grid Resilience Utility and Industry Grants ($2.5 billion) support grid modernization efforts to reduce impacts due to extreme weather and natural disasters.
  • Smart Grid Grants ($3 billion) focus on projects that increase the flexibility, efficiency, and reliability of the grid.
  • Grid Innovation Program ($5 billion) funding prioritizes projects that enhance grid resilience and reliability through innovative approaches to transmission, storage and distribution infrastructure.

The application process for the first round of funding for the GRIP Program, which totals $3.8 billion for federal fiscal years 2022 and 2023, is underway now.

Whether it’s at the federal, state or local level, stakeholders want to improve grid flexibility, reliability and resiliency. Therefore, preparing the grid to better handle extreme weather and demand peaks will be among this year’s top energy regulatory trends.

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Kenneth Schisler

Ken leads CPower’s regulatory and government affairs team, having previously served in similar roles at both Vicinity Energy and EnerNOC/Enel. He brings nearly three decades of policy leadership on innovation in clean and advanced energy technologies and collaborates with public officials, regulators, power exchange and system operators, academia and industry peers to unleash the potential of demand-side resources.