The Next Big Energy Innovation May Not Be A Gadget

Posted by Malcolm Woolf on Nov 7, 2018 12:15:00 PM

powerlines-sunset-Tom-Burke-cropped-730

Photo by Tom Burke, used under a Creative Commons license

The most important innovation coming along in electricity may not be a cutting-edge technology or a first-in-the-nation government policy. Rather, it might be a subtle, yet transformative, change in the way utilities meet their resource needs. Instead of prescribing specific technologies to meet future demand – typically, power plants of a particular type – and buying it or building it themselves, utilities are increasingly defining their needs and allowing all technologies and services that can meet those needs to slug it out. It’s an approach that can save money for customers, relieve regulators of unnecessary risk, and open up opportunities for advanced energy companies of all kinds.

“All-source bidding” is emerging as a powerful practice that enables utilities to navigate the ever-increasing array of cost-competitive options for meeting their customers’ needs.

By allowing all technologies to compete – including advanced energy products that might not qualify when utilities specify particular technologies – this variation on competitive procurement promises a more affordable electricity grid, and one which is also more clean and secure. A range of utilities either have instituted or are currently experimenting with this promising technique, including Xcel Energy, El Paso Electric, Public Service Co. of New Mexico, Con Edison, Arizona Public Service, San Diego Gas & Electric, Southern California Edison, and Salt River Project.

All-source bidding is a technology-neutral, competitive procurement framework. Rather than a utility seeking bids and approval to bid a 600 MW combined cycle natural gas plant, for example, the utility would seek competitive bids to serve 600 MW of load. Interested bidders could include utility-scale generators (including coal, natural gas, nuclear, wind or solar), storage providers, aggregators of distributed generation resources (such as residential solar or fuel cells) or demand-side resources (such as energy efficiency or demand reduction); or combinations thereof. The key is to let the market identify optimal solutions by establishing and letting all technologies compete on transparent, performance-based criteria.

All-source bidding becomes particularly useful in an era of rapid technology and service innovation and declining costs. Rather than relying on consultants and other industry experts to predict the least-cost technology to meet their system needs, utilities can rely on the wisdom of the competitive market.

This approach should earn them praise from customers and regulators alike. For businesses and residential consumers, competition drives down costs. For regulators, the competitive process provides a solid record on which to approve a utility’s investment decisions without having to accept (or second guess) the utility’s assumptions about future technology costs. A well-designed all-source bidding process promises lower prices, less regulatory risk, and greater community support. It also ensures that advanced energy resources that don’t look like traditional power generators but can meet the defined need just as well get a chance to compete.

That said, all-source competitive bidding isn’t a simple process. The utility needs to conduct and make available a detailed assessment of its resource needs, in terms that don’t prejudge the manner of meeting it. For example, where on their transmission and distribution system is the power needed – and for how long? Once the utility’s resource needs assessment is complete, the utility issues a request for offers and/or proposals and selects the winning bid or bids based on a clear set of criteria. The utility is then well positioned to defend – to regulators and the community – the choices it has made.

Some have expressed concerns that all-source bidding could force apples-to-oranges comparisons between fundamentally different technologies. To address these challenges, utilities have been encouraged to publish clear performance-based criteria as part of their RFP – criteria that precisely define the need that must be met. Utilities are also establishing other conditions to reduce their risk, such as requiring performance guarantees, minimum financial strength, and commercial operation and completion security. Other practical recommendations for all-source utility resource procurement can be found in an Electricity Journal article published earlier this year.

Notwithstanding the upfront challenges, this innovative approach to procurement may usher in a new era for utility investment – and new opportunity for all advanced energy technologies to compete with traditional power sources on a level playing field. In the end, the added competition generated by all-source bidding offers the promise of a more affordable, clean, and secure grid.

 

AEE has published a set of seven issue briefs on key topics in utility regulation in a changing electric power system: advanced metering, access to data, optimizing capital and service expenditures, energy efficiency as a resource, performance-based regulation, rate design for a DER future, and distribution system planning. 

Download the Issue Briefs

Topics: 21st Century Electricity System, Utility, Regulatory