De-prioritizing and De-regulating Reliability

Will reliability become less important in the future for electric utilities? A recent report by IEA “Re-powering Markets” raises the question – why regulate reliability? As we have seen in other asset heavy industries such as, airlines or telecom – following de-regulation, with robust price signals, markets can work reasonably well to balance demand and supply. Indeed there are some issues and many argue that customer service levels have gone down, but by and large the market has functioned well and reliability is no longer a regulated attribute. Safety yes, but not reliability or service levels.   

Utilities have historically focused on reliability as one of the most important requirements along with safe and affordable electricity. There are three principal components that serve in reliable grid operations – fuel security, system balancing, and resource adequacy. As long as the investments fall into one of these categories – there is a rationale for the regulators to fund and utilities allowed to include in their rate base.

Part of the reason why reliability is the dominant measure, is because there is no other measure or technology to dynamically know what is important for the customer. Barring large industrials who can communicate back to the utilities, the gross assumption is demand for electricity (or gas or water) is inelastic, so reliable supply is necessary to avoid rolling blackouts. Utilities therefore, are on the hook to make sure that they are supplying reliable power in the territory they are holding natural monopoly rights.

Digitization may change this paradigm. Reliability may be unbundled such that customers can choose plans that provide varying degrees of reliability based on utility, needs, and willingness to pay. In other words, if there is a way to balance the grid at all times, then with reliable price signals, demand and supply can be managed without a mandate for reliability. Technologies like micro-grids and other localized solutions can also play a big role in disaggregating reliable power. Controls at the customer level, such as smart meter controls can be used for the same purpose. This may lead to a fundamental shift in the industry. How soon will all these emerge? It all depends on how quickly technology can diffuse and enable these changes. For the near future, however, there is nothing much changing. Reliability will continue to be one of the important drivers. But that the question getting asked more and more means, that we should no longer take this granted.    

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