Advisory Committee on Innovation

Sixth Meeting: July 17, 2018

Thanks to S&P Global for Hosting

For Committee’s use only

Not for further distribution

Agenda

8:30 – 9:00 am Continental breakfast (provided)

9:00 – 9:15 Review of Agenda, progress since last meeting

9:15 – 11:00 Roundtable discussion: Review Business Issues

11:00 – 11:15 Break

11:15 – 12:45 Roundtable discussion: Review Potential Actions

12:45 – 1:00Reflection & next steps

Outline of Committee Report

1:00 pm Adjourn

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Key Business Issues with Respect to Innovation

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Distributors

Reliability:

• At a certain level of DER penetration LDCs cannot reliably operate their system if they do not have visibility and control of the output of distributed energy resources that are connected to their system or the systems of their customers

• Innovative solutions are often not proven in terms of their certainty of delivering as advertised relative to traditional solutions

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DistributorsFinancial:

• LDC's earn a rate of return on capital but not on operating expenses which may be how many innovative solutions are financed; OM&A financed solutions may also be constrained by price cap (i-x)

• There are currently no mechanisms for recognizing the growing uncertainty in the future use of system assets

• LDCs are losing revenue from commercial and industrial customers who are offsetting their electricity use driven by Government policy

• DER solutions have different characteristics than traditional solutions making it hard to compare the economics

• Limited mechanisms for LDCs to define or earn revenues from new services (e.g. transactional or use of system services)

• There are additional costs of reviewing and facilitating innovative alternatives

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Distributors

Cultural:

• There is tension between taking risk on new technology or approaches on critical infrastructure and the obligation to maintain reliable universal service

• Traditional solutions are tried and true within the utility and the business and regulatory processes for them are well understood; innovative solutions require more work and their treatment by the regulator is uncertain

• The potentially rapid pace of change is being driven by customer choices

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Innovators

Market Analysis:

• Data on the future system capabilities and constraints is generally not available

• Data is not monitored at the level of granularity necessary for some innovative solutions

• There is a lack of transparency around utility connection requirements

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Innovators

Financial:

• Cannot monetize all benefits of solutions (e.g flexibility)

• Economic competitiveness difficult to attain without scale

• Hard to get financing without a pipeline of work (one off pilots aren't enough)

• Incentives specifically directed to development of new technologies or business models are limited

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Innovators

Cultural:

• Innovators may not always be viewed as customers by LDCs

• May not understand utility business and regulatory process (e.g. used to moving faster than the regulated utility world)

• Limited opportunities/venues for innovators to profile new solutions

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Customers

Reliability:

• Standard power availability and quality from the grid is not sufficient for some customers; whereas others might prefer to pay less for the minimum standard of reliability and quality

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Customers

Financial:

• Need to lower energy costs

• Cannot reap rewards of all services DERs can provide

• Costs avoided by some customers get shifted to others

• Lack of clarity on control and monetization of customer data

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Customers

Cultural:

• Customers may value choice but be wary of new products/services and entities providing those services

• Privacy and security of customer data

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Regulator & Policy Makers

• Developing capability to carry out effective prospective benchmarking

• Ensuring appropriate sharing of risk

• Improving ways of accounting for uncertainty

• The traditional regulatory view of reliability (common standard; obligation to serve) may need to be redefined

• Transaction based vs asset based revenue model

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Potential Actions to Encourage Innovation

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1. Maximize Consumer Value

Using more rules-based approaches to provide more certainty, ensure a level playing field to support innovation, and facilitate solutions with the greatest value for consumers. To do this, the OEB should:

• Establish clear rules for:

• integrating DERs into distribution systems, increasing the transparency and consistency of both the connection process and cost responsibility

• using DERs to optimize and protect the operation of the distribution system

• Establish conditions of service regarding resource or service commitments between parties

• Ensure utility conduct does not impair competition

• Utilities should be able to provide competitive services using excess system capacity, where appropriate

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1. Maximize Consumer Value cont’d

• Adopt a more systematic method for determining value and price at the distribution level

• Enhance value recognition in investment decisions using a common evaluation criteria – considering elements such as the value of flexibility, location, time, resiliency, and externalities as appropriate – in a manner that supports evaluation and selection of competing alternatives based on a fair assessment of their value

• Remunerate utilities so they are indifferent to selecting conventional and alternative solutions, regardless of ownership, such as by changing the way revenue requirements are calculated or providing targeted incentives for certain solutions

• Ensure that the benefits and costs of all investments, including distributed energy resources, are allocated rationally and fairly, such as by recognizing new revenue streams, allowing pooled cost recovery, stacking of revenue streams, and allowing utilities pricing flexibility

• Consider mechanisms to provide timely funding for utility innovation such as through a competitive process or “use-it-or-lose-it” allowance

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2. Deploy Market Based Solutions & Facilitate Consumer Choice

Enhance transparency of distribution system needs and capabilities and ensure better access to information. To do this, the OEB should:

• Require distributors to publish system characteristics and capabilities to support market development and ensure distributors consider all reasonable options

• Determine the appropriate granularity of information to be available in order to reveal the value of investments at different locations and times

• Enable pacing of investment in infrastructure needed to manage penetration of distributed energy resources and support new services, such as monitoring and control

• Establish a repository for information at the OEB to support the evolution of the sector

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3. Ensure Universal Access as Consumer Choice Increases

Preserve a basic level of service by regulating to the extent needed and forbearing where sufficient competition exists, having regard to the economic circumstances of different consumers. To do this, the OEB should:

• Examine how trends in the sector may affect current view of “basic distribution service.” Considerations may include:

• Where does the regulated utility begin and end?

• What services or functions are monopoly?

• Do historic principles of natural monopoly continue to be appropriate?

• Impacts of sector transformation on vulnerable consumers

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