Many U.S. states are looking to address these resilience threats while also pursuing a cleaner energy mix and fostering the electrification of transportation and buildings. Utilities are also taking proactive steps to plan for these impending changes and their impact on grid operations.
Yet there are two major challenges to achieving these goals. The first challenge is the cost of the transformation; the second is the slow nature of the current regulatory approach. The fastest way around these challenges: the widespread adoption of a performance metric that can measure grid resilience.
The importance of performance-based regulation
Studies tracking policy proposals and ratecase requests related to grid modernization show the approval of only a small fraction of proposals and requests. Utilities are charting pathways to the grid of the future, but there is a disconnect between proposed plans and realized ones. For this reason, several U.S. states are looking to address the challenges of cost and pace by altering their electric utility regulatory framework.
Performance-based regulation (PBR) replaces the traditional utility financial incentive of rate of return on infrastructure investment with financial rewards for utility performance across a variety of areas. These areas differ based on the policy priorities of the state; typically, they include attributes like:
- Enhanced reliability
- Improved customer satisfaction
- Decarbonizing the energy mix
- Facilitating the electrification of transportation (and sometimes heating)
Instead of authorizing rates and returns on a yearly basis, PBR typically allows for multi-year rate cases. This encourages utilities to make big investments that may take years to produce benefits or financial performance.
PBR has the potential to accelerate grid modernization if it gives companies flexibility in their approach. Multi-year rate plans and a focus on outcomes over investments would direct utility efforts toward activities most likely to yield long-term benefits for their customers.
The development of technologies and business models is currently moving too fast for already overburdened regulators to keep up with choosing winners and losers. Focusing on desired outcomes and giving utilities the flexibility to achieve those outcomes in ways that make the most sense for their grid could address some of the regulatory barriers to investments in grid resilience. While reliability and resilience are not identical, it’s telling that, after implementing widespread PBR in the form of their RIIO model, the British regulator Ofgem saw customer interruptions fall by 19% while the duration of interruptions was shortened by 15%.
Models for energy resilience metrics
Solving the challenge of funding resilience investments is more complex.
System resilience still must compete for dollars against traditional system maintenance, automation, efficiency programs, and other priorities. But remember, PBR schemes drive utility behavior through the key performance indicators (KPIs) used for financial compensation. If regulators include resilience as a KPI and include financial incentives to improve it, utilities will make investments that better prepare them to withstand and recover from major events.
The trick to making all this work is having performance metrics that can capture grid resilience.
Energy resilience metrics for electric utilities are a unique challenge, but some models do exist. Unlike reliability metrics like system average interruption duration and frequency (SAIDI and SAIFI), resilience metrics are not easily comparable across geographies. Reliance metrics need to account for the unique system threats and policy goals of each locality. Some metrics are focused on individual events—for example, comparing the magnitude of the event (e.g., wind speeds for hurricanes) to its impact on the system (e.g., customers who lose power for more than a certain period of time). Other metrics create an index of the steps utilities could take to improve resilience, and then prioritize these steps based on their potential to impact risks. Con Edison uses a model similar to this in their risk assessment and cost-value analysis approaches.
Metrics focused on individual events are outcome-based but harder to compare across regions. This makes it more difficult to compare utilities to national averages—or even against other utilities in the same state. Metrics that rely on the expected impact and prioritization of resilience measures are planning-based (and thus more comparable), but may be less accurate in predicting real-world results.
Finding the right yardstick
PBR is not a panacea for achieving society’s energy goals. There’s still only so much money to modernize the grid, and there are many ways policymakers could implement PBR in a way that doesn’t spur change or put too little focus on important aspects of grid operation, like resilience. Done in the right way, however, PBR could be the most direct policy route to empowering utilities to make resilience improvements that can protect our customers and economies as threats to both increase.
We just need the right yardstick.