This week, the Virginia State Corporation Commission rejected the Integrated Resource Plan (IRP) document for the state’s major utility, Dominion Energy. IRPs guide investment and procurement decisions to find the least-cost outcome for regulated utilities and are used in over half of US states. The State Corporation Commission in Virginia found that the utility had failed to adequately represent future demand for electricity and thereby erred in identifying its necessary generation resources. In particular, the utility did not account for the impact of a required investment of $870 million on energy efficiency programs.
The failure in this case to adequately account for demand-side management options raises the following question: Is the IRP process in general up to the task of integrating investment options on the demand and supply sides of the market to identify least-cost pathways for consumers?
We released a new report this week that addresses this question by surveying IRPs from a sample of eight utilities. We find that while many utilities account for demand-side measures, they always do so in a parametric way—meaning that they identify a specific level of demand and then use the IRP to identify supply-side investments to meet it.
This approach will not be adequate in the next decade. We’re anticipating the possibility of expanded electricity demand, due to electric vehicles and other technologies as well as the expanded introduction of renewable resources. These factors elevate the dynamic problem of scheduling demand to match the timing of when supply is available.
This is the most pressing and exciting issue facing the electricity industry today.
Over the last half century, three big ideas related to this challenge have rocked the electricity industry. One was the introduction of IRPs in the 1980s. Historically, IRPs were focused on supply-side investments. The IRP process was once at the forefront of progressive reform by institutionalizing transparency and public input into investment decisions of vertically integrated and regulated monopoly companies that provided the nation’s electricity.
Second, a decade later, the idea of competitive electricity markets emerged. This notion severed the nation into roughly two camps—one where generation remains regulated based on the cost of serving customers and one where generation services are provided in a competitive market. The IRP process does not necessarily apply to competitive markets where individual firms take on the risks of investment in hopes of financial reward. Whether one favors one or the other of these models isn’t very relevant today though—for the foreseeable future, the nation is set in two factions of either regulated or competitive generation services.
The third idea that has deeply affected the industry is the recognition of opportunities to improve the efficiency of how energy is used, and thereby potentially reduce the need for new supply-side investments. However, a least-cost approach to providing electricity services to customers seemingly involves optimization on both demand and supply sides for the industry. Today, many IRPs consider demand-side measures as part of the planning process.
Now, a new big idea is on the table that may rock the industry yet again. Despite the important role of demand-side programs to make consumer use of electricity more efficient so that we consume less, the next 15 years may see a dramatic expansion of electricity use in the US economy. This change is due to innovative applications of telecommunications and electronics, the introduction of electric vehicles, technological and market changes that have reduced the cost of electricity generation, and environmental concerns. The substitution of non-emitting electricity generation for combustion of fossil fuels in the transportation and building sectors offers important prospects for reductions of greenhouse gases and other pollutants.
Our new paper asks the following question: Can the IRP process as it is practiced today provide a platform for navigating the expected expansion of the US electricity sector?
That expansion can benefit consumers as well as electricity companies, but it introduces a complex new dimension. For electrification to offer environmental benefits, it must involve a growing role for renewable resources. However, even as the cost of renewable resources—specifically, wind and solar photovoltaic—has fallen to the point of making them the least-cost generation resources in many settings, their variable availability introduces indirect costs to the electricity system as it is currently configured.
We anticipate that the solution to integrating variable renewable resources involves the expanded use of electricity and end-use management. Electricity consumption in transportation and buildings includes inherent electric and thermal storage capabilities that can take advantage of low marginal-cost generation from renewables when they are available. In other words, the demand-side attributes of new uses of electricity to charge batteries as well as heat water and space in buildings are complementary to the further introduction of renewables because these uses can take advantage of renewable energy when it is plentiful. This pathway requires the integration of demand- and supply-side resources, something that IRPs are intended to accomplish.
We examined eight IRPs to identify whether they adequately consider the potential contribution of demand-side resources. These plans employ cost-effectiveness screening to evaluate traditional energy efficiency programs but they do not capture the value of flexible demand-side resources that can adjust the timing of consumption to match available resources.
We find that forecasts of electricity demand are treated parametrically, and supply-side resources are then modeled dynamically to fill in around fixed levels of electricity demand. Flexible demand suggests a different paradigm: the possibility of dispatching demand to meet supply when supply is available.
Integrated resource planning has an important role to play—but to realize that outcome the planning process must evolve to achieve a true integration of supply availability and demand-side activity. As currently practiced, the IRP process is not yet up to that task.
