CPUC Moves to Align Utility Revenues with Distributed Energy Resources

Last week the California Public Utilities Commission issued a ruling that proposed taking the first step at reforming the utility business model – a position Vote Solar has been advocating for some time now. The ruling proposes a pilot program that would allow utilities to earn a profit for procuring third-party owned Distributed Energy Resources (DERs) through a competitive bidding process, an important step toward better aligning utility revenues with the distributed and participatory clean energy system we want.

Utilities traditionally earn a profit, or rate of return, from investing in grid infrastructure. So when a utility builds a substation, adds a transformer, builds a generator, or makes any capital investment in the grid, it earns a rate of return on these investments so long as the Commission agrees it was a prudent and necessary investment. Under this model, if the utility signs a contract with a solar developer, energy storage provider or any other third party, it cannot earn a rate of return on that contract and loses out on the chance to invest in profit-driving infrastructure of its own. You can see how this creates a real barrier to utilities embracing innovative consumer-driven clean technologies like solar, storage, and demand response.

Commissioner Florio’s ruling proposes to allow utilities to earn a profit on contracts for distributed energy resources for the first time. This marks an important first step in rethinking utility revenue structures, and we’d like to see it go even further.

For one thing, it’s not clear whether the incentive proposed will be enough to overcome the significant motive for utilities’ to invest in grid upgrades. Also, it does not explore other sourcing mechanisms, such as more traditional tariffs, market mechanisms, or other forms of procurement, which might result in more robust third-party participation. In order to more fully unleash the kind of innovation and new thinking necessary for a transition to clean energy, we’d like to see more valuation options piloted. Finally, the ruling doesn’t provide a comprehensive vision for what might come next – is this the first step on the road to much-needed reforms of the utility business model, or just minor tweaking of how utilities evaluate grid upgrades? We’d like to see this process firmly aligned with related dockets in working toward a low-carbon, decentralized new energy system.

Despite these concerns, this proposal really is a watershed moment for California and we thank the Commission for their leadership. Taking on major changes to the utilities’ century-old revenue model requires tremendous vision and leadership. It’s not easy, but without such changes, we will be missing out on a huge opportunity to meet the state’s ambitious climate change and renewable energy goals while keeping costs low for consumers.