A report authored by Brattle economists reviews the business case and cost recovery mechanisms for grid modernization investments in the U.S.
Prepared for the National Electrical Manufacturers Association (NEMA), the Brattle report reviewed 21 recent grid modernization investments and conducted 10 case studies to assess how grid modernization technologies have benefitted customers and utilities, and document cost recovery mechanisms and business cases related to investments. The grid modernization projects reviewed spanned five key areas: 1.) distribution infrastructure hardening and resiliency; 2.) transmission infrastructure hardening and modernization; 3.) smart grid and distribution system modernization; 4.) advanced metering infrastructure (AMI); and 5.) distributed energy resources (DERs).
“Contrary to popular belief, grid modernization efforts are not limited to those conducted in a few states, such as California, Illinois, and New York, but are taking place in many states across the country, each starting with its own priorities, such as improved resilience or AMI infrastructure,” noted Brattle Principal Sanem Sergici, lead author of the study. “Most utilities are willing to undertake grid modernization projects, provided they achieve timely cost recovery and an increasing number of regulators are willing to consider alternative regulatory models to enable these projects and broader utility innovation.”
Based on the review, the Brattle study showed that:
- Most grid modernization efforts were initiated in response to local or state policy requirements; some were based on utility initiatives. Grid modernization projects driven by state initiatives face just as many hurdles in the regulatory process as others not necessarily led by state policies.
- In most cases, regulatory approvals were contingent on meeting the required threshold in a typical benefit-cost test, such as the Total Resource Cost (TRC) test. Some notable examples received approvals based on other approaches, such as break-even analysis, proof-of-cost prudency, and foundational nature of investments for enabling other utility initiatives.
- Obtaining regulatory approvals took approximately 13 months on average. Delays were associated with presentations of incomplete benefit-cost analysis and strong stakeholder oppositions.
- The majority of cases relied on cost recovery through general rate case filings, but some cost recovery mechanisms also rely on formula rates and rate riders to address regulatory lag.
The Brattle study further notes that the need for cost recovery of grid modernization investments has prompted some jurisdictions to consider broader application of alternative regulatory models, such as “performance-based regulation” that rewards meeting certain performance targets such as increased utilization of DERs, beneficial electrification, and increased system utilization. The Brattle authors expect this trend to continue with more jurisdictions moving towards performance-based regulation as the urgency of grid modernization, DER integration, and electrification increases.
The report, “Reviewing the Business Case and Cost Recovery for Grid Modernization Investments: Summary of Recent Methods and Projects,” is authored by Sanem Sergici, Michelle Li, and Rebecca Carroll. The report is also available on NEMA’s website.