By Pete Grills
When electricity prices go up, the cost of doing business goes up. Just ask your industrial and manufacturing clients, the hospital and university you represent, or the municipal utilities and data centers for which you do work. The cost of energy can have a significant impact on the bottom line. No one expects the business lawyer to understand the complexities of energy markets, but the lawyer can know how energy impacts his or her client’s business and how to pull together the expertise to address the issues.
Indiana is one of the most industrial- and manufacturing-intensive states in the U.S. One reason is electricity has been cheap. Not any more. As older coal plants are retired and replaced with new electric generating capacity, electricity prices are increasing. Electric prices are expected to continue to increase as electric transmission and distribution systems are modernized. This all takes money — lots of it.
Economics, new technologies, customer preference, environmental concerns and the need for enhanced reliability and resiliency are changing the way electricity is made and delivered. Historically, electricity has been made at central plants with coal, natural gas or oil as the fuel. It then is delivered to customers over electric transmission and distribution lines. By the time the electricity reaches the customer, two-thirds of the energy is lost due to exhaust heat going up the electric plant’s stack or in line losses. When electric rates were low, these inefficiencies did not seem to be a problem.
As electric prices increase, however, customers are finding new, more efficient, cost-effective and cleaner ways to use electricity. Investments are being made in energy efficiency to reduce the amount of electricity consumed and in demand-side management, which reduces the electricity used during peak hours. The use of demand response is increasing as customers upon notice reduce their electric usage. All of these measures can significantly reduce operating expenses. As the cost of electricity goes up, and the costs of new energy management technologies go down, the payback periods get shorter.
Electric customers also are finding new, more efficient, cost-effective and cleaner ways to generate their own electricity. This can be residential customers installing solar panels on their roofs; large “big box” retail stores doing the same on their businesses; institutional customers, like airports or universities with utility-scale solar; and large industrial customers and municipal utilities generating their own electricity through “combined heat and power systems,” and recovering the heat for production processes and heating buildings and facilities. These are called “distributed energy resources,” which are customer-based and distributed throughout the electric grid. Like efficiency measures, the costs of these technologies are falling quickly, making paybacks much more favorable.
Distributed energy resources provide significant benefits to both the customer and the electric utility. DER can be more efficient, cost-effective and cleaner than central plants. Investments in strategically located DER can defer the need for future investment in electric generating plants and transmission and distribution lines, as well as relieve congestion on existing distribution systems. DER can avoid electric system outages and enhance the reliability of the electric grid. Important to many customers, whether residential or industrial, are the considerable environmental benefits, including the reduction in emissions of regulated pollutants and greenhouse gases.
Metrics are being developed to measure the value of these benefits and to determine fair compensation for what are now being viewed as DER “products and services.” Some states provide financial incentives to support a more rapid deployment of small and large DER installations.
Many of the electric utilities have a different perspective on DER. There are issues relating to the interconnection of multiple DERs at different locations, each with their own operating requirements or capabilities, raising engineering, technical or safety issues. DER reduces electricity sales and makes it more difficult for electric utilities to recover investments in existing facilities. These are costs that must be recovered over fewer kWh sales, driving up rates for other customers and subsidizing DER.
These were some of the issues debated in connection with Senate Enrolled Act 309 this past legislative session. Previously, Indiana had “net metering” that allowed customers who were generating smaller amounts of electricity, primarily residential solar, to receive credit for electricity above what the customer used at the same rate the customer paid for electricity. SEA 309 phases out net metering, significantly reducing the amount of the customer’s credit. Other states also are in the midst of the net metering battle.
As DER becomes a part of the electric grid, the traditional electric utility business model will have to accommodate these industry changes. In all likelihood, it will be done through rate design. Future rates will have to reflect the value of DER and at the same time, rates will have to ensure the electric utility recovers its costs. Some electric utilities already are responding through creative new rate design, finding new ways to generate revenue through support services and developing “behind-the-meter” customer-utility partnerships.
A concern is the potential for lost opportunities. Billions are being invested on both sides of the electric meter — the customers in efficiency measures and DERs, and the electric utilities in grid modernization. It is critical there be coordination. New digital, communication and control technologies now allow for bi-directional flows of electricity and data communication between customer and the utility, creating opportunities to optimize the generation and use of electricity throughout the grid. Timing and coordination of these long-term capital initiatives, however, is essential if lost opportunities are to be avoided.
Why would a business lawyer want to get into the complexities of the energy industry? First, the business lawyer does not have to get into the technical details. The business lawyer need only know how energy impacts the client’s bottom line and how to access the expertise necessary to address the issues. Counsel becomes even more important as electric prices rise, investments are made in infrastructure and the energy sector moves to a different business model.•
• Pete Grills, of counsel at Bingham Greenebaum Doll LLP, provides legal counsel and consulting services to government, institutional and industrial clients across the U.S. regarding energy, environmental and public utility law matters. The opinions expressed are those of the author.