Posted by: nialljmcshane | August 29, 2010

Smart Grid Politics is Local: But That Doesn’t Mean the Solutions Should Be.

The late Tip O’Neill is credited with making the statement that “All Politics is Local” and to a large degree that is true.  As I have before on this blog, utilities that ignore the local concerns of their rate payers and try to implement radical changes to the way electric power is distributed and paid for without addressing those concerns do so at their own risk.  Around the country we are seeing various groups raising objections to Smart Grid implementation projects, smart meter deployments, time of use pricing and other developments in the electric supply industry.  Some of these objections are broad based but many more are intensely local like the objections in Fairfax, CA claiming a health impact from the wireless communication employed by smart meters and the objections to paying around $500,000 to a consultant to ensure that the residents of Naperville IL get the maximum benefit out of the $22,000,000 Smart Grid Investment Project that city is implementing. While the problems cited may be specific to a certain locale, and the stakeholders who need to be mollified are local consumers of a specific utility, it doesn’t necessarily follow that the solutions should be localized.

The Environmental Law and Policy Center (ELPC) is an environmental advocacy organization with offices in several Midwest states.  ELPC works with state and local governments to promote clean energy, sustainable development and environmental protection in an economically sensitive manner.  ELPC was contracted by the City of Chicago to co-chair the Renewable Energy Working Group (REWG) which was chartered with evaluating and refining the targets in the clean and renewable energy portion of the Chicago Climate Action Plan and making recommendations for new policies and programs.  The goal of the Chicago Climate Action Plan is to reduce greenhouse gas emissions from the city by 25% below 1990 levels by 2020 as a first step toward a more ambitious goal of achieving a reduction to 80% below 1990 levels by 2050.  The clean and renewable energy portion of the plan is tasked with achieving 32% of the total goal.  Other portions of the plan address energy efficient buildings, improved transportation options, reduced waste and industrial pollution, and adaptation.  Last week, at the monthly meeting of the Green Technology Organization of Greater Chicago, Madeleine Weil of the ELPC spoke about this work.  In a wide ranging and stimulating talk that generated much discussion, Ms Weil laid out the policy and program recommendations for the clean and renewable energy portion of the plan.

Despite the size and influence of the city of Chicago, Ms Weil noted that one of the first tasks of the REWG was to ensure that Chicago became a strong advocate for state policy changes.  She noted that, without the proper regulatory framework at the state level, it would be impossible for Chicago or other cities to achieve their local objectives.  A key target of Chicago’s advocacy at the state level has been the state’s Renewable Energy Standard (RES).  The RES is a state law requiring that all Illinois utilities supply 25% of their power from renewable sources by 2020.  While this is not the most aggressive target in the country, it is a significant challenge and one that requires a lot of effort on the part of the utilities and a great deal of policy guidance on the part of the legislature to ensure that it is done in a way that maximizes the environmental and  economic benefits to the state of Illinois and its citizens.  Some of the specific changes advocated by the REWG include:

  • Extending the in-state preference to incentivize local renewable energy projects within the state
  • Emphasizing the use of long term contracts to create an environment that minimizes risk for investors in renewable energy  projects
  • Supporting a graduated ramp up of the solar portion of the RES to ensure that plans are developed and implemented now at reasonable cost to meet the goal of having 6% of energy generated from solar technologies by 2015
  • Securing an allocation of part of the solar portion of the RES for customer sited distributed generation to enable commercial, industrial and residential consumers to participate in the emerging market for solar energy

This last point is worth noting because it illustrates the complexity of regulation in this area.  Utilities meet their obligations to the RES, in part, through the purchase of Solar Renewable Energy Credits (SRECs) from producers of solar energy.  These SRECS are purchased in a reverse auction process which favors the large, utility scale suppliers who can afford to buy the market by under-pricing their SRECs.  Since the policy goal is to encourage consumer owned distributed generation, it is necessary to level the playing field by ensuring a specific allocation be set aside for this class of supplier.

Another significant policy recommendation advocated by the REWG concerns improvements to the state’s net metering rules.  Net metering is the practice whereby, if I have a residential solar installation, I can sell surplus energy back into the grid.  Under the current rules in Illinois, only facilities up to 40KW are eligible to participate fully in this scheme.  The REWG recommends raising this limit to 2 MW and Weil presented data showing a strong correlation between net metering best practices including high capacity ceilings and cumulative installed capacity.  In other words, allowing consumers to sell more power back into the grid incentivizes greater investment in distributed generation capacity within the state.  While this seems obvious, there is significant political pressure from the utilities to keep the lower limits in place and it is important to have advocates like ELPC to make the case for consumers and the overall interests of the community.

Another area of recommendations deals with enhanced market structures and regulations.  This covers a variety of areas but I want to comment on one in particular.  A renewable energy installation recoups its investment in three ways:

  • By reducing the amount of energy purchased from the utility through on-site generation
  • By generating revenue through the sale of energy back into the grid under net metering rules
  • By the sale of Renewable Energy Credits (RECs).

RECs are a way of incentivizing investment in renewable energy supplies.  Utilities which are mandated by Renewable Portfolio Standards in the states where they operate, purchase these RECs as a way of meeting their obligation to deliver energy from renewable sources.  Currently in Illinois, there is no market for Renewable Energy Credits.  These markets do exist in other states, most notably PA, NJ, MD and CA.  In accordance with the laws of supply and demand, Illinois based renewable energy producers are selling their RECs into these other states where mature REC markets exist because that is where they get the best return on their investment.

The cost of a REC depends on the regulations that are in force in a particular state.  For example, in NJ, the regulations allow utilities to opt out of compliance with the renewable portfolio standard but they are required to pay $675/MWh of non-compliance which drives the value of a REC in NJ close to that level.  In other states, the value of a MWh REC is much lower.  As a result of this, and the fact that there is no functioning REC market in Illinois, many Illinois based renewable energy projects, including the 10 MW solar PV plant built by Exelon on a brownfield site in Chicago’s West Pullman neighborhood are planning to sell their RECs into market outside the state but they are waiting to see what Illinois will do.

This is an example of how, even the state level is not necessarily the optimal level for setting regulations to ensure an efficient operation of a national asset like the US electric grid.  As Ms Weil noted, there is a need for a national energy policy to prevent such distortions in the market that produce unintended consequences in electricity markets which are increasingly organized across multiple states.  Some weeks ago, I blogged about another example of problems caused by regulations taking place at too local a level concerning the permitting process for transmission lines which can take much longer than the actual construction phase if and when permits are ever granted.

This is not to say that all regulation should occur at the highest level possible.  Some things are best regulated at the federal level, others at the state level and some are indeed best left to local governments.  The key differentiator is; at what level can the regulators and legislators strike the best balance between consistency and flexibility, between setting national or regional policy and being responsive to local needs.  At the local level, the REWG advocates:

  • Leveraging marquee projects like the West Pullman solar PV project to develop best practices for repeatable implementation of similar projects within the city.
  • Targeting high impact sectors to reduce greenhouse gas emissions at lower cost.  Commercial and Industrial users make up just 8% of the customer base in Chicago but are responsible for over 50% of all CO2 emissions within the city.
  • Implementing Property Assessed Clean Energy (PACE) which would allow local governments to provide upfront financing for renewable energy projects which is then repaid on the project owner’s property taxes.
  • Incorporating renewable energy requirements into new building standards.
  • Streamlining the permitting process for renewable energy projects.
  • Developing solar access rights to protect a project owner’s investment.  For example, if I install rooftop solar on my home but somebody then acquires permission to build a 4-storey building on the vacant lot next door, that may block the sun for a period of the day, limiting my ability to generate energy from my installation.

The whole area of energy policy, legislation and regulation is extremely complex.  Normal market rules do not apply in this sector because energy is an essential commodity that all of us depend on to live and work, and for transportation. As a result this area has been highly regulated for many years and there is no real correlation between the prices that most consumers pay for electricity and the monetary and environmental cost to produce that electricity.  While there may be controversy today about government investment in clean and renewable energy technologies, the fact is that government has always invested in the major infrastructure programs and technology breakthroughs that have allowed our societies to develop and improve the lives of all citizens.  Government invested in the existing coal and oil fired generating technologies and nuclear power.  Government invested in the national grid.  Energy is a national security issue as well as an issue of critical economic and social importance and it is too important to be left solely to the market.  Likewise, it is too important to be left to a patchwork of local regulations and legislation.  We urgently need a national energy policy that sets the overall direction and which is supplemented by appropriate legislation and regulation at the state and local level to adapt that national policy to the local conditions.  Local variations may determine the appropriate mix of generating technologies among coal oil and gas, nuclear, wind, solar, hydroelectric, geothermal, biomass etc but these variations should exist within a framework that addresses the national priority of preserving our environment, reducing our dependence on oil, whether foreign or domestic, and securing the national grid against obsolescence, load induced failure or deliberate attack.  In the politically polarized environment that exists in the US today, there is a tendency to believe that government can either solve everything or nothing.  The reality lies somewhere in between and I find it encouraging to see cities like Chicago working with representatives of industry, consumer groups, policy advocates like ELPC and state and federal governments to seek the right policies to ensure that we will continue to have access to the energy we need for our society to function, while protecting the environment and encouraging economic development.  This is a delicate balance and one that needs nuance and subtlety not political dogma.



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