By Maggie Alexander

In 2018, it is rare to find someone that has not had multiple generations of a smartphone, adopting newer technology as it improves — ultimately making users’ lives easier and more efficient. However, in the world of rapidly modernizing infrastructure, the U.S. electric transmission system — part of the greatest engineering achievement of the 20th century — remains largely unchanged.

In Australia and the U.K., the story is somewhat different. Regulatory bodies in these countries recognize the radical evolution occurring in the energy industry — such as the growth of distributed generation, the proliferation of electric vehicles and the electrification of heat — is creating unprecedented uncertainty in a historically stable industry. Regulators want electricity providers to engage more effectively with their customers and other stakeholders to understand their needs and how they may change in the future. By instituting innovative incentives and frameworks, Australian and U.K. regulators are rewarding utilities that anticipate and respond to future uncertainty by leveraging innovative tools and business practices. These regulatory bodies have set up structures that encourage utilities to develop a more flexible and forward-looking approach.

In the U.K., for example, the RIIO framework — that is “Revenue = Incentives + Innovation + Output” — is the British energy regulator’s (Ofgem) performance-based framework for setting price controls and ensuring consumers pay fair prices. The RIIO framework financially rewards companies that innovate and run their networks to better meet the needs of customers, specifically focusing on increasing transfer capacity in the most efficient way possible. For example, for National Grid Electricity Transmission (NGET), Ofgem established a baseline ($/MW) that they anticipate network companies having to pay to increase transfer capacity across a specific boundary. However, if network companies develop a more efficient or lower-cost way to provide that same system improvement, half of the savings go to consumers and half of the savings go to the network shareholders. In this way, RIIO is encouraging network companies to think about their business differently than just making investments to add to the rate base.

RIIO allocates incentives based on a utility’s ability to deliver specific, agreed-upon outputs in categories including safety, reliability, network availability, customer satisfaction, network connections and environmental. RIIO differs from past frameworks in that it establishes longer (eight-year) price controls and expands programs that encourage the growth of smart grids.

In Australia, the Network Capability Incentive Parameter Action Plan (NCIPAP) provides financial incentives to network businesses to improve usage of existing grid assets through low-cost projects. As a part of the plan, which is driven by the transmission owners, the Australian Energy Market Operator (AEMO) conducts independent analysis of network limitations, considering historical congestion, future network flows, and reliability and security implications — ultimately prioritizing the NCIPAP projects that deliver the best value for money for customers. NCIPAPs are intended to reduce congestion and drive reduced wholesale energy prices by alleviating existing transmission bottlenecks without investment in large infrastructure projects, and transmission companies earn 50% greater rate of return on these projects, which are capped at $6 million (AUD) capital spend.

Conversely, from a U.S. perspective, while a number of proven, advanced technologies exist that can help optimize the existing transmission grid, proliferation has not occurred as utilities are often reticent to adopt emerging technology. From a regulatory perspective, there is limited incentive to choose efficient, low-cost options instead of adding traditional large capital projects to the rate base. This ultimately contributes to the sluggish pace of innovation and propagation of new technology needed to modernize a 21st century grid.

According to the Working for Advanced Transmission Technologies (WATT) Coalition, many of the U.S.’ existing regulatory structures are designed to directly or indirectly incentivize bigger capital investments and projects. This can result in disincentivizing investment in more relatively low-cost technologies that offer significant operational benefits and consumer savings; this is what both RIIO and NCIPAP are trying to address. WATT estimates that if advanced transmission technologies were adopted and deployed broadly, customers could see the cost of electricity reduced by as much as $2 billion per year.

The Energy Policy Act of 2005 has made strides toward policies to progress grid modernization, but it has not necessarily resulted in regulations that encourage the deployment of proven, newer technologies that would benefit grid operations and reduce costs. Instead, incentives are offered for advanced technology only if it is part of a grid expansion proposal and has demonstrated that there is some risk to its deployment. This is a challenge for utilities to embrace, as they will always prioritize reliability and safety over innovation.

Perhaps American policymakers would benefit from looking to our friends in Australia and Europe and how they have established frameworks that incentivize innovation in the electric utility space. Many hardware and software products exist today that can help improve existing transmission grid infrastructure, such as those that uncover and utilize hidden transmission capacity, reduce or reroute power flow on overburdened lines, and reconfigure existing grid elements to optimize various operational scenarios. When adopted and implemented, these technologies will result in consumer savings and improvements to reliability and resiliency — something regulators around the world continue to strive for.

Maggie Alexander is Director of the Western Region at Smart Wires, a modular, scalable, redeployable powerflow control technology company based in Northern California.