Blockchain in Energy: Regulatory Sandboxes and the Clean Peak Standard
On September 20, 2019, the Massachusetts Department of Energy Resources (DOER) filed a Notice of Public Review of the proposed 225 CMR 21.00, the Clean Peak Energy Portfolio Standard regulation. DOER seeks public comment on the proposed regulation. Originally part of An Act to Advance Clean Energy, which was signed into law in 2018, the Clean Peak Energy Portfolio Standard, or Clean Peak Standard (CPS), is designed to reduce demand at peak times and to shift energy use at these times to clean energy sources. As investment in clean energy grows, the CPS would align the use of clean energy resources with peak demand, lowering costs and emissions and allowing the Commonwealth to become less dependent on gas and oil.
The CPS regulation applies to Retail Electricity Suppliers. The bill defines Retail Electricity Supplier as “a person or entity that sells electrical energy to End-use Customers in Massachusetts, including but not limited to electric utility distribution companies supplying basic service or any successor service to End-use Customers.” Under this definition, Municipal Light Plants (MLPs) are not Retail Electricity Suppliers by virtual of language that explicitly exempts them. MLPs are regulated differently than investor-owned utilities (IOUs) are, leading to the conspicuous absence of MLPs from this proposed regulation. Should the regulation become effective as proposed, IOUs would be required to meet a minimum percentage of annual electrical energy sales with Clean Peak Certificates that would grow annually by 1.5%, reaching 48% in 2051.
The different regulatory requirements for IOUs and MLPs has led to different outcomes with regard to total use of renewable energy sources, and now, possibly the use of clean energy at peak hours. The Massachusetts Climate Action Network issued a report that was critical of MLPs, explaining that MLPs have not kept pace with IOUs with regard to the Commonwealth’s clean energy policies and goals. The report supports the conclusion that the differing regulatory regimes has led to a gap in clean energy delivered to ratepayers between MLPs and IOUs.
However, MLPs would be quick to point out that this gap is due not to lack of effort or desire. Rather, it is due in large part to the business models created as a result of their regulatory requirements. MLPs, unlike IOUs, can own their own energy generation sources and enter into longer-term contracts with suppliers. This business model leaves MLPs with less flexibility to change their fuel generation sources. As explained in a previous article, Blockchain in Energy: An Argument for a Regulatory Sandbox, MLPs also suffer from a serious lack of capital investment, which would be necessary to comply with the standards proposed by the CPS regulation.
The unique nature of MLPs brought about by different regulatory regimes has caused MLPs to fall behind IOUs in use of renewable energy. Because the CPS regulation does not apply to MLPs, they will also likely fall behind IOUs in the use of clean energy at peak hours, making them more dependent on gas and oil at a time when industry trends are moving in the opposite, greener direction. MLPs are exempt from the CPS for a variety of factors, both economic and political, but a potential issue looms: at some point in several decades, MLPs will likely need to play catch-up – they cannot lag forever. Before this problem compounds, MLPs should be given an avenue to overcome barriers unique to their size and funding sources.
One such avenue would be a regulatory sandbox. As discussed previously, a regulatory sandbox would allow MLPs to work directly with regulators to create solutions that would align the goals of both MLPs and regulators and ultimately benefit ratepayers, who are becoming increasingly interested in the use of clean energy and by extension would benefit from compliance with the CPS. Regulatory sandboxes would present opportunities for MLPs with regard to the CPS. MLPs need to reduce energy use at peak hours and to shift to clean energy sources for the same time periods. Forced compliance with the CPS regulation is likely not the best means for MLPs to accomplish this goal, however. A regulatory sandbox could provide an alternate path that recognizes and works with the limitations facing MLPs.
The current regulatory regime for the Massachusetts electricity market was built around the traditional hub-and-spoke model and did not anticipate the grid edge technologies that are now envisioned for the future of the grid. Helping MLPs to take steps towards meeting the CPS via regulatory sandboxes in an effort to get them to leapfrog into full compliance is an opportunity to experiment with grid edge technology and benefit the grid as a whole. Inherently, MLPs’ experimentation with these technologies will come with risks, but a regulatory sandbox would isolate those risks and allow MLPs to develop proof-of-concepts.