TODAY’S STUDY: The Landmark Illinois New Energy Law
DER Are Coming And Illinois Is Ready For Them
Vazken Kassakhian, Cristin Lyons, Bill Hosken, June 2017 (ScottMadden and Smart Electric Power Alliance)
When distributed energy resources (DERs) arrive, Illinois will be ready.
Through thoughtful investment and proactive regulation, Illinois has laid the foundation for the proliferation of DERs and the attendant changes to the regulatory construct and the utility business model.
In recent years, legislation has funded significant upgrades to utility infrastructure, increasing the reliability and automation of the electric grid. As part of this investment program, the state implemented performance-based, formulaic ratemaking that has tied utilities’ earnings to their success in upgrading infrastructure and improving grid reliability.
Recent legislation has furthered these goals by extending performance-based ratemaking and setting specific targets for solar power, energy efficiency and distributed generation. State law has also taken into account a future in which higher DER penetration will require a more sophisticated approach to customer compensation for behind-the-meter (BTM) resources, an approach that takes a closer look at the locational value of DERs, and allows utilities to treat distributed generation rebates as a regulatory asset and earn a return. Energy efficiency, too, can be treated as a regulatory asset and earn a return. This approach addresses both the physical infrastructure and the regulatory model while laying the foundation for both increased reliability and the mechanisms to fund it. This approach provides both short-term flexibility and the ability over the longer term to accommodate the coming changes in the power sector.
Penetration of DERs in Illinois is relatively low today, but expected to grow rapidly with the changes afoot. The state has taken important steps to enable the technical integration of DERs and to pave the way for regulatory changes that support their integration. The NextGrid initiative is poised to further these important changes.
The callout above provides a summary of key activities contributing to electricity market transformation in the state.
While New York and California are often cited for leading the charge on innovative energy policy, Illinois has quietly solidified its position as a market to watch. During the past two decades, the legislature has passed several sweeping laws that have changed the way electricity is generated, sold, and consumed in the state. That legislative leadership continued in 2016 with the passage of the Future Energy Jobs Act.
So, what is the state of the electricity market in the state today? How have these legislative initiatives led to transformation in the electricity market? And, most importantly, have they resulted in a modernized grid and utilities that are flexible and ready for growth in distributed energy resources1 (DERs)?
This paper discusses the ways Illinois has and is transforming its grid to accommodate a variety of resources and will:
n Discuss the current state of the electricity market in Illinois,
n Evaluate the degree to which the market has transformed from a traditional centralized grid with limited customer choices to a more distributed system enabling more customer choice,
n Assess whether utilities in Illinois are prepared for rapid growth of DERs thanks to the grid modernization efforts undertaken to-date.
This paper begins by identifying the efforts taking place in particular areas through the lens of the market transformation “swimlanes” of The 51st State—Phase II Developing Roadmaps to the Future2 developed by the Smart Electric Power Alliance. The swimlanes are organized to describe and highlight key areas affected by market transformation:
n Retail market design
n Wholesale market design
n Utility business models
n Rates and regulation
n Asset deployment
n Information technology
The paper then assesses the degree of transformation taking place in Illinois against four key market reform doctrines from The 51st State— Blueprints for Electricity Market Reform3 (outlined in Table 1).
The doctrines and swimlanes together encompass all aspects of electricity market structures, roles and responsibilities. The four doctrines identify key overarching elements of market transformation, while the six swimlanes structure the intricacies involved in mapping change in the industry. The two are inevitably interconnected. For example, decisions regarding how best to promote energy efficiency will drive conversations on retail markets, and utility roles and responsibilities, and have effects on ratemaking.
By combining these two frameworks, this paper provides a holistic view of the economic, operational, and regulatory factors that contribute to Illinois’ readiness to manage a resilient and efficient modern grid. It describes why we believe Illinois will be ready when DERs arrive.
Over the past 20 years, several major pieces of legislation have driven transformation of the electricity market in the state. First, the Electric Service Customer Choice and Rate Relief Law of 1997 opened the door to energy competition. This legislation deregulated the state’s two biggest electric utilities, Ameren Illinois (Ameren) and Commonwealth Edison (ComEd). Up until that point, only larger commercial and industrial customers had the ability to purchase the supply portion of their electric service from an Alternative Retail Electric Supplier (ARES), while residential and small businesses remained with their respective incumbent utilities. During the 10-year transition that followed, the Illinois Commerce Commission (ICC), which oversees the state’s utilities, reduced the price of electricity by 20 percent and froze the rates for small business and residential customers.
In May 2002, 4.4 million residential customers became eligible to choose their electric provider for the first time, but the rate caps in place discouraged any competitive providers from serving them. In the commercial space, however, competition gained traction. By October 2005, approximately 22,000 commercial customers were buying their electricity from an alternative provider.6 Following the expiration of the rate caps in 2007, residential customers also began switching to alternative providers in greater numbers. Today 89 alternative providers serve retail customers in Illinois, with 75 percent of customers (by usage) in ComEd’s service territory and around 80 percent in Ameren’s territory served by alternative providers.7
Net energy metering (NEM) was introduced in August 2007, when the state enacted Senate Bill 680 that requires investor-owned utilities and alternative providers’ in Illinois to offer net metering. The law provides that DER generation may be supplied back to the grid at retail rates, subject to a cap. The cap limits the load of a utility’s NEM customers and dual-metering customers8 to 5 percent of the total peak demand supplied by the utility during the previous year.9 Illinois has very low penetrations of net-metered solar as of the date of this publication.
The 2011 Energy Infrastructure Modernization Act (EIMA) was intended to improve reliability and drive the modernization of the grid with new digital infrastructure. As part of the program, the ICC authorized a 10-year, $2.6 billion grid modernization program for ComEd and a $648 million grid modernization program for Ameren.
The programs funded reliability and smart grid investments, including advanced metering infrastructure (AMI). EIMA also required the adoption of performance-based rates to determine the authorized return on equity (ROE), which is reset annually.
The December 2016 passage of the Future Energy Jobs Act (FEJA) brought a major expansion of energy efficiency and reinvigorated the state’s renewable energy industry. The Illinois renewable portfolio standard (RPS) passed in 2007 requires that 25 percent of energy generation comes from renewable sources by 2025, but it has been stymied by a lack of consistent funding mechanisms for developers.
The FEJA attempts to address this issue by allocating $140 million per year to enhance the Illinois RPS by authorizing the Illinois Power Agency to purchase renewable energy credits (RECs) for RPS compliance. To address the additional concern that RECs might be purchased on the secondary market and not encourage new project construction, 4 million solar renewable energy credits and 4 million wind RECs are required to come from new projects in the state, translating into about 3,000 MW of solar projects and 1,300 MW of wind projects.
The NEM program remains in place up to the 5 percent cap of the prior year’s peak demand. However, after that cap is reached, the legislation discusses developing a pathway to a rebate based on locational value to the grid.
The legislation also requires utilities to offer rebates to distributed generation and community solar projects with smart inverters. Utilities are allowed to take control of the inverter for grid reliability services and compensate those services through a tariff. Performance-based formula ratemaking established under the EIMA was also extended through 2022…
Illinois has laid an excellent foundation that positions it well for modernization of the grid and increasing penetrations of DERs and renewables. When DERs arrive at scale, the state will be ready.
Transformative grid modernization initiatives completed under the EIMA provide the technical and operational capability for utilities to manage fluctuations in load brought on by DER, energy efficiency, and demand response programs. These hardware and software upgrades have been accompanied by innovative programs such as realtime pricing programs for retail customers and the piloting of many new technologies and business models through the utilities’ smart grid test beds. The requirements, incentives, and directives of the FEJA are expected to encourage renewables and DER.
Illinois has done the work necessary to develop a grid that can accommodate these resources. As noted in the discussion of the doctrines, the state has created a system that is efficient and offers significant customer choice, based on the alternatives available today.
A rapid acceleration of demand for DERs will be facilitated by the important work to date, however, that does not mean the integration of DERs and evolution of the business model will be easy.
The next challenge will be to evolve the regulatory construct to the benefit of all parties, ensuring that customers receive the benefits of new products, utilities are able to provide reliable, cost effective service and third parties have the opportunity to participate in a way that helps meet these goals. Utilities will remain responsible for the reliable operation of the grid; the key will be to ensure that the business model and regulatory framework continue to drive to this result while enabling new products and services.