Kathy (Huishan) Hu is a research associate, grid edge, at Wood Mackenzie
Electric utilities face a daunting task. Keeping the lights on for customers safely and affordably has always been the primary mandate. But this has become tougher amid frequent extreme weather events and unexpected and dramatic demand growth from data centers, manufacturing plants and other large industrial facilities.
Not only that, a greater variety of energy resources are burgeoning at the edge of the grid: residential solar panels, energy storage, demand flexibility from electric vehicles and smart thermostats and more.
External factors, along with technological advancements and changing customer preferences, are driving utilities to plan their investments more holistically for a future distribution grid.
A modern grid is underway with strong regulatory support
A modern distribution grid is under development. As of 2023, the 50 largest investor-owned utilities in the United States have requested $62.8 billion across a series of grid modernization initiatives. These initiatives range from attaching smart field devices to overhead wires to equipping control rooms with advanced grid operating software.
Regulators shoulder heavy responsibility to evaluate whether these requested investments are just and reasonable. Wood Mackenzie has evaluated 85 regulatory proceedings across 38 states and found that contrary to the conventional opinion that regulation is an obstacle to grid modernization, regulators have, in fact, largely demonstrated strong support for these initiatives over the past six years. Of the $62.8 billion in requested investments that have reached a final decision by the regulator during that period, more than three-quarters of requested dollars have been approved and less than 3% have been rejected. The remaining funds have either been struck from the project budget or withdrawn by the utility itself.
Notably, almost all proposed investments in advanced metering infrastructure have received approval over the last five years. This includes requests that were approved only after several attempts, showing that one must look past individual decisions when assessing regulatory treatment. For example, Dominion Energy succeeded in its AMI bid in January 2022, following two rejections, in which the Virginia State Corporation Commission was unconvinced that a standalone AMI could bring customer savings. Massachusetts IOUs, such as Eversource, also received approval on their second try after bolstering their business case in the same year.
Similar regulatory backing can be found for large physical infrastructure investments. Last November, the California Public Utilities Commission greenlit an unprecedented plan by PG&E to bury and harden 2,000 miles of electrical lines in areas at high risk for wildfires. The approved $4.7 billion investment will hike bills for residents by $32 per month. The strategy aims to reduce the risk of wildfires by 99%. In the wake of the devastating Camp Fire in 2018, it appears that regulators will accept long-term and high risk-reduction solutions, even when faced with steep upfront costs.
Utilities struggle to demonstrate the need and value of new grid technologies
Despite regulators’ overall favorable disposition to grid modernization, some utilities have struggled to quantify the need and value of new technologies.
An exemplary case is the Hawaii Electric Light Company, which encountered regulatory skepticism over its proposed advanced distribution management system and smart field devices. The Hawaii Public Utilities Commission questioned the necessity of the field devices, given overlapping functionalities with a previously installed AMI. The value of the ADMS was then jeopardized as field devices could not be deployed to support it.
The complex interdependencies of grid modernization technologies make it more challenging to justify them on a standalone basis. Regulators often seek additional information for investments that would be dependent on complementary technologies or programs, such as presenting a time-of-use rollout plan for an AMI investment.
Another significant barrier is the need for concrete, evidence-based justification to mitigate the risks of speculative benefits. For instance, Consumers Energy’s proposal for a distributed energy resource management system was rejected due to unclear immediate reliability benefits under scenarios of low distributed energy resource penetration.
Investment in digital grid solutions like DER management software remains one of the least approved and funded categories. Planned investments for DER management applications are nearly 100 times less than physical solutions. Until utilities can successfully demonstrate the value of digital technologies like ADMS and DERMS, they risk being underfunded and delayed.
Small mistakes can lead to rejections too
Our analysis shows that eleven utilities, including HECO and Consumers Energy, have had their funding requests denied or had to prematurely withdraw them. An overlooked reason for these rejections is the lengthy and iterative nature of the proposal process.
On average, it takes regulators about a year to review grid modernization submissions, which includes numerous hearings and stakeholder interventions. Some utilities have wrestled with maintaining consistency across various sources, such as workbooks, testimonies and prior applications. Others incorrectly assume that extensions of prior investments will automatically be approved, neglecting to provide adequate justification for ongoing projects, which leads to further delays.
Last but not least, a denial order does not preclude one from a second try. As utilities learn from their mistakes, their business case could become more convincing in the next application.
To conclude, the overall modernization effort on the distribution side of the power grid is experiencing some strong tailwinds. To sustain the momentum, electric utilities with greenlit grid modernization projects must work hard to uphold the promises of delivering tangible customer benefits.
