DOE Advocates for Regulatory Innovation in the Utility Industry
Image courtesy of Bill Smith under Creative Commons License Attribution 2.0 Generic, resized to 700 x 391 pixels.
A new research paper published by the Lawrence Berkeley National Laboratory of the Department of Energy (DOE) states that regulatory innovation and better pilot designs are needed to accelerate utilities’ ability to deal with climate change. Simply put, the increasing speed of the industry’s transition necessitates a more agile approach to implementing change. Litigated multi-year rate cases no longer fit the bill.
The Pursuit of Regulatory Innovation
The DOE paper, published April 2022 and entitled The Role of Innovation in the Electric Utility Sector, has received many positive responses. In fact, most industry stakeholders agree with the narrative. And industry statistics seem to back up the need for regulatory innovation as well.
For example, according to a 2020 McKinsey paper, about 3% of utility profits are invested in R&D, versus 40% for competitive industries. The reason for this discrepancy is that the traditional rate case methodology in essence discourages utilities from investing in innovative approaches.
By using the phrase “innovative approaches,” we’re talking about advancements needed to not only address climate change, but also racial inequality, economic disparity, employee rights, community stability, environmental concerns, etc. In a nutshell, wholesale changes to the process would be beneficial because the historical approach does not meet the evolving needs and expectations of customers…or society.
Sounds pretty straightforward, right? Wrong! Even though industry pundits agree that the need for change exists, how the future state should look is anybody’s guess. There will need to be widespread collaboration across the industry to make it happen, and finding common ground on the many nuances involved will be challenging to say the least.
My guess is that real regulatory innovation in the utility industry won’t happen for at least another 8-10 years. And even this might be an aggressive target. We’ll see. All I know is that regulatory innovation must happen, but determining how and when will likely take a lot of dialogue and compromise to determine.
