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Why utility leaders should embrace a “no regrets” approach to decarbonization

Val Jensen's picture
Senior Fellow ICF Climate Center

Val is a specialist in the energy industry field with over 40 years of experience. As Senior Vice President for strategy and policy at Exelon Utilities, he oversaw technology and business...

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  • Jul 22, 2021 8:47 pm GMT
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As more states and cities across the U.S. pursue net-zero carbon emission targets, utilities are key partners in creating successful strategies through investment in customer energy efficiency and clean energy supply, as well as by enabling building and vehicle electrification. At the same time, this heightened focus on carbon emission reductions may seem like just another priority to be juggled by utilities and their regulators along with grid modernization, customer service, cybersecurity, and essential reliability investments. 

 

But this perception of decarbonization as just another program on a utility’s checklist stems from an increasingly antiquated perspective. Instead, decarbonization is better viewed as a, or even the, defining characteristic of the industry’s operating and planning environment. Decarbonization then becomes a key framing element of long-term strategy, providing a marker for how each investment value is measured, instead of a competing priority. 

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In order to successfully adapt to this future, utilities must understand three things: (1) why putting decarbonization at the core of any strategy matters, today; (2) how to embrace a “no regrets” approach to future investments; and (3) how to reframe programs and goals through the decarbonization lens. 

 

Positioning decarbonization at the center of your strategy

 

Decarbonization, and the clean energy future it makes possible, has become a feature of many utilities’ vision, mission, and core values statements. While only words in an annual report, these statements do represent important steps in the broader transformation of utilities from 20th century industrial enterprises into 21st century service enterprises. These commitments are cornerstones of new cultures being rebuilt to attract a new generation of workers and to serve customers who want their service providers to align with their values. Now, all investments are largely evaluated in order to advance a clean energy vision.  

 

Utilities have already begun to re-orient their businesses in this way. In 2019, Minnesota based Xcel Energy proposed the Upper Midwest Energy Plan, setting an objective to cut its carbon emissions by 80 percent compared to 2005 levels. The plan also calls for the utility to acquire 3,000 megawatts of utility-scale solar by 2030 and bring 1,850 megawatts of wind online in Minnesota by 2022. This approach treats a decarbonized world as the future that the utility is actively working to build, rather than a set of assumptions to which the utility passively reacts. 

 

Embracing a “no regrets” approach

 

Whether we view decarbonization as a set of assumptions or as a mission, utilities are still faced with futures characterized by uncertainty. Estimates of the costs or effectiveness of some carbon reduction strategies will almost certainly be wrong. The strategic question then becomes what investments can and should we make today, even if the payoffs are uncertain? 

 

Despite the firmest city, utility, state, and federal commitments to decarbonization, success ultimately depends on the collective actions of individuals, businesses, governments, and countries over which utilities largely have limited input or authority to implement. A sound decarbonization strategy has to acknowledge this and prepare for the possibility that global temperatures and sea levels will continue to rise, as will the intensity of droughts and storms. It’s the utility’s job to ensure that critical systems remain resilient no matter increased climate risks.

 

For example, let’s say a utility’s decarbonization plan involves investment in a solar farm that will substantially reduce its carbon footprint. If sea levels continue to rise, the utility is also aware that a major substation will be threatened by coastal flooding. The question then becomes whether to invest in the solar farm, which is key to reducing its carbon emissions, or prioritize relocating the substation. Even though well-intentioned, if sea levels continue to rise, one could argue that investing in the solar farm is the wrong decision in the long run. 

 

Uncertainty is a fact of life, and one that utilities have always faced in making long lead-time and long-lived investment decisions. The risks created by uncertainty can be managed through a combination of tactics, beginning with identifying the “no-regrets” actions that will pay off under any plausible future. 

 

Energy efficiency programs are a classic “no regrets” strategy. Whether or not we limit climate impacts, EE saves customers money now and, by lowering energy consumption, also reduces carbon emissions. It can also increase thermal comfort in homes, enabling shelter-in-place strategies under outage conditions. Another example of a “no regrets” investment is prioritizing investments in economically disadvantaged communities. Historically marginalized groups, including indigenous peoples and low-income communities, are increasingly vulnerable to the effects of a changing climate and often suffer the most from environmental degradation. These communities are more susceptible to rising heat, flooding, and other major climate events. Investing in clean energy programs (e.g. community solar, energy efficiency, and clean transportation) in these communities can lower local emissions (which contributes to decarbonization), reduce energy costs, and boost community resilience. 

 

Reframing programs in an energy landscape increasingly driven by carbon reduction 

 

In an energy landscape increasingly driven by decarbonization commitments, utilities and policy makers are challenged to reorient customer-facing programs. For forty years, utility energy efficiency programs were designed to reduce electricity consumption – an objective enshrined in regulation and statute across the country. While efficient use of electricity remains a priority, decarbonization will require increased use of electricity in transportation and buildings, forcing stakeholders to rethink the historic frameworks for energy efficiency programs that reward consumption reductions and penalize increases. In fact, recent ICF analyses found that efficiency is essential to keeping total energy usage and costs low in building electrification scenarios. 

 

In addition, as the adoption of clean and intermittent sources of electricity grows, traditional energy efficiency needs to evolve to include demand flexibility, enabling utilities to target the times and places it is most needed. Ultimately, this leads to what some call ‘energy orchestration’ – using increasingly sophisticated sensing and control technology to deliver targeted load reductions and tapping distributed resources such as batteries. 

 

Managing the timing of increased use of electricity also becomes increasingly important. Utilities across the country are launching programs to promote transportation electrification in a variety of ways, including customer education, installation of electric vehicle (EV) charging infrastructure and subsidization of charging stations. For transportation, electrification is energy efficiency – electric vehicles are several times more efficient in terms of miles per unit of energy. However, unconstrained charging at any time can put expensive stress on the grid, and so utilities also are promoting a variety of strategies to encourage “smart charging,” or charging at the times when the grid is less stressed and/or carbon reductions can be maximized. These include both time-of-use pricing plans and direct control of chargers to limit operation during high-load times. To help reduce greenhouse gas, Baltimore Gas and Electric Company (BGE) launched a program called EVsmart® which includes an option for customers to enroll their Level 2 charges in a “Charging Time of Use Rate,” saving them money by charging off-peak. 

 

And electrification projects aren’t limited to EVs. The Sacramento Municipal Utility District (SMUD), provides rebates up to $3,000 for customers upgrading their inefficient HVAC systems to energy-efficient, multi-stage heat pumps. These new heat pump water heaters reduce greenhouse gas emissions by approximately 50% compared to gas heaters, contributing to SMUD’s mission to become carbon free by 2030. 

 

For utility leaders, viewing decarbonization as a cornerstone of their business operations, planning, and long-term strategy is crucial as cities and states across the U.S. prioritize a decarbonized future. And in this increasingly uncertain world, no-regrets actions, including those laying the groundwork for broader electrification efforts, are essential to success.

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Matt Chester's picture
Matt Chester on Jul 22, 2021

Energy efficiency programs are a classic “no regrets” strategy. Whether or not we limit climate impacts, EE saves customers money now and, by lowering energy consumption, also reduces carbon emissions. It can also increase thermal comfort in homes, enabling shelter-in-place strategies under outage conditions. 

Love this-- it really highlights how there's something in it for everyone: reduced customer bills, lower capital expenditures from the utility, enabling a cleaner grid, there really are no down sides. Those are easy wins we should be implementing now while the more contentious ideas get hashed out and caught up in gridlock.

Thanks for sharing, Val!

Josh Gould's picture
Josh Gould on Jul 27, 2021

Great post Val! Would be interested if there's anything you'd alter about this guidance for a wires-only (no gen) utility that doesn't directly control the carbon content of the electrons it transmits and distributes?

Val Jensen's picture
Val Jensen on Jul 30, 2021

Thanks for the note, Josh. The piece actually grew out of my experience in a strategy group within a set of wires-only companies. A large part of what drove us and, I’m pretty sure many other companies, was community/local desire to build decarbonization strategies and their associated desire to have their local utilities be part of those. At the same time, our broader corporate strategy was built on long-term utility investment that included several overlapping phases beginning with shoring up reliability and resilience and followed by investment to enable distributed resources and support decarbonization (including electrification). EE programs were essential pieces of the DER, decarbonization and platform evolution piece of the strategy. Recognizing that the downstream parts of the strategy (decarb., enabling DER, etc.) had diminished value if the core system was significantly negatively impacted by climate change impacts (sea level rise, more severe storms, etc.) we set to work first on the resilience piece. The important part of that for your question was that it was focused exclusively on what the distribution companies could drive via their investments.

 

So, the short answer is that I think there actually is quite a lot a distribution company can do, particularly if framed in the broader context of community climate strategy. In some ways, not having generation – at least fossil generation – creates more degrees of freedom in building a decarbonization strategy.

Josh Gould's picture
Josh Gould on Aug 2, 2021

This is great, Val.  The reliability/resiliency pieces really resonate, thank you.

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