It’s become accepted wisdom in every country with an energy market that the coming energy transition is going to pose daunting challenges at several levels. Efficiently adding new types of assets to the system, re-organizing control systems to take advantage of vastly improved visibility, preparing for potential changes in who will own certain types of assets, all while protecting consumers and market integrity in the process, these are just some of the challenges. These complex and critical decisions will mostly be made in the private sector. Yet the public policy choices ahead, which are often overlooked, could be even more impactful. They will set the starting rules and conditions for emerging new features of the market, if not the entire system.
The International Energy Agency (IEA) underlined the significance in a recent report, saying, “Across the world, change is accelerating in power systems. Three main factors are driving this transformation. First, the advent of abundant, low-cost variable wind and solar energy resources. Second, the deployment of decentralised energy resources, including rooftop solar and smart loads such as electric vehicles and smart appliances. And third, the spread of digitalization, which is reaching across entire power systems to uncover new opportunities to reduce costs and improve resiliency, from generation all the way to customers. These changes are driving a structural shift in the way power systems are best planned and operated. They also have systemic implications for ensuring energy security, especially security of electricity supply. Hence, they require a co-ordinated and proactive response by policy makers and relevant stakeholders.”
While power producers and many others in the electricity sector are by nature prepared to focus great attention on the technical and business challenges ahead, there is one critical area over which they exercise little or no control: The governance choices that will set the context in which technical and business changes must operate.
Among the most crucial governance choices ahead, the following stand out:
a) The degree of reliance on markets as opposed to reliance on administrative decision-making and/or interventions to govern the sector.
b) The level of cost responsibility expected to be borne by residential consumers relative to industrial/commercial consumers (considering that the former vote in elections whereas the latter are responsible for much of the relevant investment).
c) The willingness to substantially and expeditiously resolve related policy issues such as the timelines for de-carbonization, in order to reduce uncertainty in energy markets.
d) The degree of independence provided to regulatory agencies.
e) Related to the residential/industrial cost split above, the readiness to provide transitional support to certain classes of customers when they experience cost increases resulting from changes in technology, industry structure, regulation and/or policy.
f) At a more general level, the priorization of consistency and stability in energy policy, in order to minimize costs related to policy uncertainty.
Although governance choices like these may appear relatively simple in comparison to some of the technical issues currently in play, no one should underestimate their significance.
There has been much talk of late on how to properly facilitate innovation, the best ways to integrate the head-spinning array of new technology options. (See “OEB innovation initiative faces tough questions” elsewhere in this issue.) Whatever path is chosen, aside from dogged adherence to the status quo, there will inevitably be some cost shifting, ultimately affecting certain classes of customers more negatively than others.
With this certainty in mind, on a personal basis I would offer the following advice: The single most crucial choice for public decision makers in the energy file during the coming business cycle is going to be defining the policy on providing transitional support to those classes of customers who experience relative cost increases during the energy transition ahead. Although average prices may be manageable and even falling in some cases, at some point, some sectors of society will see cost increases. The government’s position on which of these groups will qualify for any kind of relief or “rate smoothing”, transitional or otherwise, and on how it will be organized, will be much more crucial than it may appear at the outset. The availability of transitional assistance will determine not just the level of public support that exists for whatever energy policy is chosen, but which proposals for system reform are viable at all. Greater levels of transitional support will allow for more significant forms of restructured markets to pass the public acceptability test, potentially with much greater long term benefits. More precisely targeted types of transitional support will enable lower costs in the process, while likely prompting some debate over second-level policy issues.
A classic example of this problem is the potential installation of high-tech demand management equipment by one group of customers, reducing their use of the electricity system in both absolute and proportional terms. With the kind of smart technology now becoming available, such customers could remarket their unneeded grid services to other customers in a way that reduces LDC costs, possibly using digital ledgers, creating savings for everyone up and down the grid. Unfortunately the benefits will not be evenly distributed. No amount of rate design band-aids can effectively make up for the fact that some customers will have greater opportunities to profit from remarketed demand savings. There are countless other examples of potential cost shifting that could result from new technology combined with new business models. To complicate matters further, hardship assessments are not entirely objective. Relief from some cost increases will be more justifiable to the public than others. As a result, any policy on transitional support will need to start with a clear set of principles on what rate impacts are remediable and by how much.
There’s little point in pretending that there will be no need for any form of transitional relief. Governments from all parts of the political spectrum, over many decades, have used rate smoothing or handed out energy subsidies in one form or another, long before the current strain of populism. Fearing public backlash, Ontario’s conservative government froze consumer prices and collapsed the retail power market in 2001, when prices were considerably lower than they are today. With disruption-related inequities foreseeable, the case for transitional arrangements is as strong today as it ever was. The operative question is how to modulate retail prices efficiently and within which durable set of principles. With attention likely to turn to the structure of Ontario’s Global Adjustment, options with broad impact will likely be on the table for close scrutiny in the near future.
A few further words of wisdom from the IEA: “The need for retail price reform is urgent, especially in countries where behind-the-meter generation is developing quickly, in response to increasing retail prices and the declining cost of rooftop solar PV, and to a lesser extent storage. … Network tariffs have to be rebalanced from energy charges towards fixed and capacity components. Retail prices have to reflect as far as possible this cost structure and wholesale prices, so as to incentivise consumers to participate more actively in markets. … Retailers should be encouraged to reflect both real-time market pricing and local power production conditions in their tariffs, to convey the actual value of power production and system conditions to consumers.”
As has been pointed out by many others, timing in governance choices is critical. As the levels of potential cost shifting rise over time, the options for managing cost rebalancing become narrower and less attractive, partly because absorption options and short term fudge factors become scarce and run out. It’s much easier and less contentious to make these choices before the costs of underutilization and obsolescence rise, and the paths to preferred options become fewer and more difficult.
Transitional mechanisms may not ultimately be the most impactful of policy choices in the energy sector. But they could be the crucial supporting decisions that enable other more fundamental changes. In this way they could determine the ultimate destination in a planning sense.
Energy industry stakeholders and consumers need to appreciate the complexity of the governance choices facing energy ministers and decision makers the world over. While virtually everyone has an opinion on them, only a few people actually have to bear the responsibility of making these choices. It’s in everyone’s interest to provide decision makers the kind of input and advice they will need to properly resolve their positioning while it is still possible to do so in a reasoned, orderly fashion.
– Jake Brooks, Editor
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