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[Episode #24] – Starting Over

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What if we didn’t have to work around the grid we have today, with all of its inertia and incumbents and inflexibility? If we could start over and design the grid from scratch, what would it look like? And once we understood that, how might it change the way we are going about energy transition now, in order to reach that goal more quickly and directly? If what we really want is a grid that is fair, equitable, reliable, efficient, resilient, sustainable, and which serves our climate and social goals, what are the first principles we might work from, and what mechanisms might get us where we want to go? This freewheeling conversation aims to help all of us “think outside the box” a bit more, and imagine what the possibilities might be if we could just start over.

Geek rating: 9

Guest: Jim Kennerly is a Principal Analyst with Sustainable Energy Advantage in Massachusetts, a consulting firm specializing in renewable energy markets and policy, where he focuses on solar and distributed energy markets and policy. Formerly, he was a Senior Policy Analyst at the North Carolina Clean Energy Technology Center at NC State University, where he researched distributed energy economics, utility regulation and rate design with funding from the U.S. Department of Energy SunShot Initiative, and also worked on the Database of State Incentives for Renewables and Efficiency (DSIRE) project. Jim also served as a regulatory analyst to the North Carolina Sustainable Energy Association and a consultant to the U.S. EPA's ENERGY STAR program at ICF International.

On Twitter: @kennerlyJ1

On the Web: Jim Kennerly’s LinkedIn profile

Recording date: July 28, 2016

Air date: August 24, 2016

Chris Nelder: Welcome Jim to the Energy Transition Show.

Jim Kennerly: Thanks a lot, Chris.

Chris Nelder: When it comes to rate design it's easy to get deep in the weeds pretty quickly and I think those of us who have followed the debates over rate design with respect to rooftop solar, particularly the swirling proposals around net metering and what to do about the impact that is having on utilities, tend to get pretty focused on the pros and cons of various tariffs and we can lose sight of the goal. I mean we argue for months over things like fixed charges and demand charges or switching from net metering to buy-all-sell-all tariffs or some other mechanism and we forget that the whole intent here was to foster rooftop solar as a supply resource and start moving away from the big centralized thermal generators of the past. So I think it might be interesting for us to go back to first principles here and talk about what we're really trying to do here. What would a good regulatory and tariff design look like if we started from scratch today rather than having all this other stuff to worry about like paying off the owners of potentially stranded assets like coal and nuclear plants or creating smart incentives that actually encourage the stuff that we want? - working toward generation transmission and distribution architectures that are designed around distributed renewables from the getgo and so on. So here I think we might slightly reprise a recent conversation that you and I had on Twitter where we started with some fundamental principles offered up by Ben Paulos who was actually our guest on episode 3 of this podcast so just for the benefit of listeners who didn't happen to catch that exchange, the four rules of distributed energy that Ben suggested as his DER manifesto were: 1) Customers have the right to generate and save power. 2) Customers that use the grid should help pay for the grid. 3) Customers that provide benefits to the grid should be paid for those benefits. 4) Public policy should prefer distributed clean domestic energy. So let's just start with the first one. Should customers have the right to generate and save power? I think we'd agree without reservation that customers should be able to save power that is to implement efficiency measures without any restriction. Yeah?

Jim Kennerly: Yeah I think that's basically right. Well at least I should start with thinking of what's a right legally versus sort of like what public policy ought to be. And I think legally speaking, the Public Utility Regulatory Policies Act (PURPA) allows customers to self generate in order to offset their usage and the amount that they generate, the amount that they physically use on site is something that is protected and it's more difficult for a utility to claim is unreasonable or unjust as far as the regulatory standard is concerned. And so ultimately there is certainly a right to self generate, but it does get somewhat more complex once you get to the level of does a customer have the right to self generate and sell back to the grid?

Chris Nelder: Right. OK so we would agree that you should be able to save power no matter what. And I think nothing should prevent me from saving or generating power full stop, within reasonable limits. I mean wouldn't you agree that it's really a question of what can you do while being connected to the grid? Isn't that grid interconnection really the kind of sticking point?

Jim Kennerly: I think there are certainly costs associated with interconnection. There are certainly costs associated with you know the utility side of processing an application, of determining whether reliability is affected and all those different issues. You know as far as a right is concerned I think it's not a right without cost. Obviously there's a cost to it. And if there is a cost associated with integrating that system into the grid, that's something that utilities certainly attempt to recover through rates and through additional charges because obviously not all of the cost necessarily is passed on in every case to the generator.

Chris Nelder: Right. But I mean just to make it really clear what I'm talking about here, if I'm totally off grid then I should be able to generate and save as much power as I want to, off grid.

Jim Kennerly: Yeah I think that's certainly something that you can do more effectively because it's not touching the grid. It's not touching something that's not your property and something that affects someone else's property and also is meant for you know the public use.

Chris Nelder: Exactly. Exactly. OK so again I'm just kind of trying to build up from first principles here. So it's interconnection then is the key point at which we start getting into the difficulties. So is interconnection a right or should it be and is it subordinate to a utility's monopoly right to own and run a distribution system?

Jim Kennerly: Well I think it's different in different states. There are certainly states that have a more open perspective as far as the ability of wholesale generators whether that's at the transmission level or the distribution level to connect. I think as time goes on it will be somewhat more difficult to justify restrictions on interconnection that are you know just across the board. You know just simply say you cannot interconnect. But I think that there is a question of how much does it cost to interconnect? You know what is the price of integrating distributed resources look like and what should it look like so that the utility can maintain the service necessary to serve your location or your system or what have you and it's different for larger systems systems at load or virtually net metered systems. It's different for different kinds of systems.

Chris Nelder: Right. But I haven't actually raised the issue of price yet. We haven't quite gotten there yet. So we're just we're just talking now about should we have the right. So I think we would generally agree that a customer should have the right to interconnect to the grid.

Jim Kennerly: I think in general, yes, but it's something that there are situations I could see in which that right can either be curtailed or come at some cost.

Chris Nelder: Yeah. And I think we would agree that it has to be bounded right. There have to be limits to that right. I think on the Twitter exchange you made an analogy to the fact that you can't yell fire in a crowded theater even though you have the right to freedom of speech.

Jim Kennerly: Yeah.

Chris Nelder: It's the same kind of thing. OK.

Jim Kennerly: But yeah it's a right with responsibilities, for lack of a better word.

Chris Nelder: Yeah OK. And then the utility of course has its own responsibility to manage your grid and to keep it reliable and to serve everyone who's connected to it and so on. So at some point the utility's right probably is supervening to the customer's right to interconnect.

Jim Kennerly: Yeah it certainly can be. I mean we've seen situations where in Hawaii for example where they've reached extremely high penetrations on a given distribution circuit where they've either gone much more slowly with interconnection or have halted interconnection entirely. I think a way that some of the utilities in that situation and HECO in particular and I've seen the utilities in New York start doing this as well, looking at the areas in which DG would create more locational benefit and that sort of a way to get around the question of can you interconnect and what's the cost of interconnecting and you know what sort of the you know for lack of a better word distribution investment deferral value of doing so. But certainly yeah it can be something the utility can get to the point of saying we can't deliver reliable service and so as a result this is not possible but it seems like most likely a fairly extreme case.

Chris Nelder: Yeah Hawaii is sort of an extreme case.

Jim Kennerly: At least compared to the rest of the United States.

Chris Nelder: Yeah because they have such an incredibly high peneration of solar on its grid already.

Jim Kennerly: Sure.

Chris Nelder: And you can see the argument where they would say look we can deny you the right to connect to this right now with your solar system because we can't keep the grid balanced and operating and reliable if you do.

Jim Kennerly: Sure.

Jim Kennerly: OK. So let's talk then about the right to generate. Now I think I'd slightly rephrase that as do customers have the right to be full and equally compensated market actors, both generating and participating in demand response markets as some other merchant generator or the utility itself if it's vertically integrated?

Jim Kennerly: So I think certainly you know if you want to take it from the extreme case to kind of see if it's the exception that proves the rule for lack of better word, I think many people would argue it may not necessarily be just to pay some kind of temporary or a day-ahead kind of wholesale value. I think there's a lot of skepticism of the idea that there's no other either utility cost or market cost that's avoided in that scenario. I think that that's something that is certainly something that a lot of market participants are pretty hesitant to sign up with that kind of thinking. But certainly it is not necessarily, I mean if you're talking about the case of net metering, it's very different in different jurisdictions. Some jurisdictions are you know if there is a winter peaking utility and solar doesn't doesn't really contribute much to that peak it's kind of difficult to say for certain that the capacity value will be sufficient to have the benefits outweigh the costs. And that could happen. I mean there are certain times and places where that can and likely does happen. It's somewhat less common however if you're in a place where if you have a lot more load growth occurring, if you have a lot more investment to defer, I think that's certainly when compensation would be much higher and likely reflects something of the utility would forgo and for that reason would be beneficial and likely more economically efficient. So I think that there's also a larger question though and I think this is something that I've seen a lot of smart people start bringing up, I mean particularly in areas that have a lot of renewables, is to say you know what is this going to do to wholesale prices? Like what is this going to do when you have some very low variable cost resources like renewable energy that will ultimately make variable cost so low that it's difficult to sustain further investment in not just fossil fired or nuclear resources but further renewables.

Chris Nelder: Yeah the so-called value deflation argument.

Jim Kennerly: Yeah. And I think that's the question that's embedded within this question of fair compensation is to say what is fair compensation now may not be fair compensation when renewables are 50 per cent of the grid.

Chris Nelder: That's a great point.

Jim Kennerly: It's something that's sort of fungible and works on a sliding scale. And I think that's why this debate... I think sometimes this debate falls a bit short in terms of the cognizance of change over time.

Chris Nelder: Yeah especially if you're talking about you know putting up another rooftop solar system that's going to be there putting power on the grid with a zero marginal cost for 25-30 years.

Jim Kennerly: Sure. And I mean and it's different when you're talking about you know foregoing some kind of utility investment. You know if it's actually offsetting, and this is particularly true with energy efficiency, a lot of utilities in the past would only encourage energy efficiency insofar as it was profitable for them and by that they meant it passed the rate pair impact measure test, which is to say if this raises costs for rate payers at all this isn't something we want to do. That's just a very strict perspective. It's something that you see with renewables.

Chris Nelder: Well I think where we're going with that was that as a customer you should have at least to some level the right to connect and to be a participant in markets both providing energy to the grid and to take energy off the grid through a demand response and to compensated for those things.

Jim Kennerly: Right.

Chris Nelder: But there are even further limits on that because we have caps on interconnections and even in California there's a specified limit to how much of the grid power should be allowed to be provided by rooftop solar and when they hit the limit they don't have to accept any more interconnections. But I guess the point I was getting at there is that the customer doesn't have an equal right to the utility to generate power and to be compensated for it and to connect to the grid. I mean there's there's limits right there where by state law you know the utility only has to accept so many interconnections and the utility only has to pay so much per power generated by rooftops solar.

Jim Kennerly: Sure. I did want to note though that in part that happens also because net metering is kind of "a dumb system" you know where it's not accounting necessarily for the granular attributes of the electricity on a more sophisticated distribution grid and so that's why there are caps in place.

Chris Nelder: That's right. They're only getting paid for energy. They're not getting paid for so-called ancillary services or other services that they might actually be providing to the grid.

Jim Kennerly: Right. And I think a lot of utilities when they agreed to those compromises sort of thought to themselves well solar isn't going to get that cheap that quickly and lo and behold, it did. And I think that's why you're seeing a lot of this happen the way it did in the sort of more less orderly manner for lack of a better word.

Chris Nelder: OK so I think we've kind of laid some of the fundamentals here that shouldn't be too controversial. Now I'd like to kind of expand the problem space a little bit and talk about things maybe in a little more creative way. So suppose we ignore just for the moment the current structure of the grid power market and all the players and the assets on it and the problems of making those players and assets whole as we get through this energy transition and some of them get pushed off the grid and think what would we do if we were to just build the whole thing from scratch like right now? Would we still want utilities to operate the grid, but that let anybody who wants to generate power do it? So if I put a rooftop solar system on my house, should I be absolutely competing on an equal footing 100 percent with some other merchant generator? You know let's all be generators. I mean if we were to start from scratch I'm sure we wouldn't design what we have now. (laughs) So what would we design and why shouldn't we all be generators and why shouldn't we all be participants in demand response markets?

Jim Kennerly: OK. I think you raise a good point because there's a very different mindset you take when you're looking at Greenfield versus you know the world as it is. And I think that that's something that it's a really interesting question and it's something that Karl Robideau and I took a look at it and you may remember there was a competition that CEPA had. It was the smart electric power alliance... I forgot the first day.

Chris Nelder: The 51st State?

Jim Kennerly: Yes The 51st State exactly. And you know Karl and I took a look at this question of... CEPA posed in the question as "What would you do if this was a brand new state and you wanted to in essence start over from a policy and market perspective?"

Chris Nelder: And I thought that was a fascinating series of papers by the way.

Jim Kennerly: Yeah we really enjoyed working together on it. I think what was interesting is we kind of did the perspective of the catastrophic event in a particular jurisdiction and we called it Superstorm Cindy of all things... That was Karl's idea. But we kind of posed this idea that you know the utility wanted to "harden their infrastructure" and so for that reason they wanted to raise rates and they wanted to go on this you know multibillion dollar reconstruction plan. And it was definitely intended to be kind of a REV-esque exercise. And you know I think what was interesting was that we were kind of talking about what should happen and then the thing that was most interesting was to see REV start to talk about and implement some of the things we were suggesting such as looking at you know what's the sort of value to society of a utility investment, of the utility sided investment and say Is this a good investment from the perspective of society as a whole? You know New York as a whole if it's REV or Massachusetts as a whole or if it's Massachusetts or California as a whole. And you know that was one thing we wanted to look at because we were saying this is electricity generation and it's water use and it's fuel use and it's criteria air pollution, it's carbon pollution have a really significant impact and these are unpriced extra maladies. And so we wanted to look at pricing in as many of those externalities as possible. And I think it does tend to be in my personal view the most effective ways to kind of look at these problems because ultimately if you look at energy capacity externality value and that ultimately turned out to be where New York is beginning to head. And I think that's something that we were thinking that would be the most valuable in you know a green field kind of situation sort of you know what could you do with all the control you want. And I think that was one thing and the other was just to look at the utility's business model as rewarding them for making investments that do not necessarily increase sales. And I think it's not just simply making them whole for their investments but also encouraging them with incentives that are tied to their you know their return on equity, their return on their assets to give them an opportunity to do that because I think when you're so deep in an accounting system it's based on sales, it's really hard to think about that differently.

Chris Nelder: Yeah. OK so two points that I'd like to take off from there. One is if we were to just design the whole grid from scratch right now would it even make sense to have vertically integrated utilities?

Jim Kennerly: I think it's a great question and it really comes down to something Karl and I looked at as well was what is and what will remain in a natural monopoly state? And I think that's the whole reason why Sam created the vertically integrated model to begin with. He realized that it made sense for there to be one provider all the way from the plants to the socket. And it made sense to the meter and I think he realized that that was the cheapest way to go instead of having seven trolley companies on the street, it's better to have one. You know it's better to have one electricity provider instead of 10 Edisons you know with the powerhouse at the end of the street. And I think then it made sense but over time I guess it's reasonable to question whether it does or it doesn't. And over time that's been the direction is to say oh well we have these disruptive moments such as the advent of combined cycle natural gas plants. That made a lot of economists rethink the idea that generation should be vertically integrated and that's what lead to restructuring in a bunch of different states and so it's this question of national monopoly that just kind of keeps moving its way down from the generator level through the transmission level through the distribution level and there's been questions of market design that have occurred here as a result. Now it's not clear necessarily whether having a vertically integrated utility from the point of generation down necessarily makes sense in every jurisdiction. In some it may. In some it may not. And over time it is definitely changing and I think it's definitely going to be a question that is posed more and more and more and I think even in the places that are restructured like in New England there's going to be these questions of you know is there sort of a wise pathway towards having a system operator instead of a utility? You know and I think that New York has kind of bridged that question by saying let's make them a distribution service provider. You know it's kind of a way of getting past the question of should there be a utility. It's just a way of getting past that point but in theory you could see there being something resembling an RTO at the distribution level that could sort of serve the same function.

Chris Nelder: Exactly.

Jim Kennerly: I think it's going to be something very complicated and it's probably going to require a very very high penetration of distributed resources.

Chris Nelder: Yeah and it would require something like the Internet to do the communications and the management which didn't exist 100 years ago.

Jim Kennerly: Right. And I think not just the internet but you know the Internet of Things and you know a lot of advancements just beyond the traditional Internet. But you know there's just the certain customer-facing Internet.

Chris Nelder: Right. So the other direction I wanted to take from that previous point was when I was reading those 51st State papers, I spent some time actually trying to compare and contrast the proposal that you and Karl Robideau had come up with with the one that John Wellinghoff and James Tong had come up. And I thought it was a really kind of a fun exercise but also sort of a confusing one to try to compare the two because you know my head started to spin. So since I got you here I just thought I'd ask you like how would you compare and contrast your respective proposals?

Jim Kennerly: I think there was a little less specificity in what Karl and I were looking at than what James and John were looking at. I don't think that what they were doing was wrong. I don't think I really saw a proposal in the mix that just to me I thought was kind of insufficient in the past. You know I didn't really see a lot of... I didn't see a lot in there that I was thinking well that just doesn't make any sense at all and I think that you know with that being said I think probably that difference was was exactly what I was mentioning earlier which is the national monopoly piece of things. You know I think what Karl and I left the door open to the utility potentially owning generation or owning any asset if it's shown that natural monopoly is sort of the smart way to go and is cost effective from that societal cost test perspective. And I think that it really does go back to the idea of silo cost test and taking into account these pretty significant unpriced externalities that is really the secret to the sauce of a lot of this. And I think that's where you kind of head over time, with policy that sort of more broadly applicable if that makes sense.

Chris Nelder: Yeah. I mean one of the things that did jump out at me from my comparison of your respective proposals was that I felt like Tong and Wellinghoff were really focused on going toward just sort of a full blown unrestricted free market.

Jim Kennerly: It was more the transact of energy kind of... Yeah absolutely.

Chris Nelder: And so in that case pricing these externalities becomes kind of an interesting problem doesn't it? Because I mean this is this is something that I've done some work on where you look at competing investments while trying to price in externalities like the social cost of carbon.

Jim Kennerly: Sure.

Chris Nelder: But there's a lot of other when you get into grid power there's a lot of other stuff besides the cost of carbon.

Jim Kennerly: Absolutely.

Chris Nelder: That really ought to be priced in. You know there's the value of all these services and so on. And now we're seeing proposals like the one that just made its way finally through the system there in Minnesota where they've got a proper value of solar tariff. Right. So I mean I can sort of imagine how that stuff gets priced into a full blown market design like Tong and Wellinghoff were proposing. How would that work in the proposal that you and Robideau came up with?

Jim Kennerly: I'm not sure I can answer that like how it started but I would say that I think what's interesting and intriguing about the whole value solar approach and I mean I think it's something that can mean a lot of different things and so I would just be careful how I described it because I think it involves you know sort of the separate estimation of a wide variety of benefits and costs. And I mean also just you know from what perspective and... You know who pays and why and all that kind of stuff. It's very complicated.

Chris Nelder: In the end it's the outcome of a negotiation right? We all agree to price these things this way.

Jim Kennerly: Yeah and I think you're heading in a really interesting direction. I'll come back to that in a second. But what's interesting about the value of solar approach is that it takes into account a wide variety and it unbundles a number of these different costs and avoided costs for lack of a better word. I think benefit sometimes, it can be kind of a normative word and it's sort of like what costs are avoided versus what costs incurred? You know and I think that's the more sort of neutral and sort of policy-wise way of putting it in my perspective. And those things change over time like I was saying previously about markets being more saturated. If the market becomes more saturated with extremely low variable cost resources then it would make sense that that market clears at a lower level reflecting that the marginal resource starts to become much lower priced. And I think that that's something that can be accounted for in a value of solar methodology and then that concern of start to act as a brake on development, you know if that needs to occur. You know I don't think there's much of an outer limit to distributed resource development, but at the same time there does come a point at which it kind of has a market corrective element and I think that's what was interesting about value of solar and sort of policies that incorporate you know a more explicit cost and avoided cost framework.

Chris Nelder: I mean I guess it really kind of comes down to what are the mechanisms of doing that pricing and how does that flow through to contracts you know?

Sure. And I think that's the really interesting question which is... This debate is very complicated. It's one that's very technical and I mean the debate about net metering in particular and the solar value is sort of the vanguard of the distributed resource revolution for lack of a better word. And I think that debate is... I think it's troubled by kind of an interest and a focus on the solution rather than the goal, if that makes sense and I think that what happens is there's sort of this question of well you know it's just the industry and I think it's understandable you know that they understand net metering. They understand how it works. They can project it forward. They can talk to an investor about it. You know and I think that I very much understand why that's a hard thing to walk away from. And I think at the same time a lot of utilities will say oh if it costs our customers anything we need to cut it or we need to reduce it or end it or you know whatever their reaction is. And I think that the interesting places in the word that really you know rang true to me of what you said was negotiation. And I think that that's sort of where this discussion and this debate needs to go and I think that's the direction I've sort of been sensing it's starting to go. And I think I think what's happened in New York has really started to break the logjam of that conversation, of that sort of like intense solutions focus and sort of an intense desire to keep the solution as it was. I think it's a good development. I think looking at it as sort of a compensation mechanism and to say how do we set up compensation in an appropriate manner that reflects a wide variety of costs and avoided costs and how that can be replicable? Because I think what's useful is for there to be a I mean there's going to be diversity but having replicability is really really important and I think it's it's important for investment in general it's important for the investors of the utility. It's important for the investors of distributed resources.

Chris Nelder: Yeah I would agree. You know I've thought that REV was just a super interesting thing for the very reason you mentioned, that it kind of broke the logjam and opened up the possibility that if New York could actually crack that nut and figure out a new way of doing things and how to restructure their markets that it would be replicable. It's something that the rest of the states could follow and all of a sudden we'd be in a whole new ballgame.

Jim Kennerly: Yeah it's not quite that easy.

Chris Nelder: And it has a long way to go and you know I don't want to speak too much to it because some of my colleagues at RMI have been integrally involved with that project and I've had absolutely nothing to do with it so I shouldn't say anything about it probably but... It's a process that I was following for a long time before I came to work at RMI and I just think it's super interesting as a model that other states could follow. And even if REV should turn out to be just a colossal failure it would be a success in the sense that it really just got down in there with those difficult problems and grappled with them and started to explore different ways of solving those problems. And it opened up a dialogue in that debate and it got guys like us looking at it and thinking about it and considering different ways of doing things which in itself would be a massive advance really.

Jim Kennerly: Sure. And I think one thing that people may not... Some people I should say, may not necessarily like about the American system of government is how much federalism and how much sort of devolution of power exists. And I think that's something that is really central to the work that you know the policy work and the policy analysis that I do because states are so different and they treat these issues so differently.

Chris Nelder: And different PUCs have different sorts of authority...

Jim Kennerly: Absolutely. Precisely. And I think that's one of the things that's so interesting to me because I think it's sort of a hindrance in the sense for distributed resource development but it's also kind of a really interesting opportunity. There's a really interesting kind of silver lining associated with it. You can try new things. You can try different things in different places and see how they go. And I think that's something that's really potentially valuable about what's happening in New York because there's going to be different... You know, Minnesota for example will do grid modernization differently. In Massachusetts... is doing grid modernization differently. And it's going to be something that's sort of appropriate to the circumstances. And I think that really goes back to what Karl and I were talking about. We were trying to talk in much broader terms because we realized it was going to be different in different circumstances and it was going to be something that you wanted you want to look at these broader principles of saying does it fit the economics such that there is the possibility that a sustainable market can emerge, not just a superfast and then cut off market like it was in Nevada or in other places. You want to set it up so it's steady and it's a self-sustaining force. I think those are the goal of I think of good policy is to not necessarily say what has to be net metered and what has to be the wholesale and what has to be this and I think that that's sort of what ends up being a lot of the hindrance of creating thought. I mean I think the market kind of demands it and it demands let's find a way that works.

Chris Nelder: Yeah. So just to be 100 percent candid about this whole thing what we're really talking about here is who's going to who's going to lose right?

Jim Kennerly: That's exactly right. And I think everyone is going to win and lose at different times and in different ways. And I think that's just not an answer most people want to hear. You know and I don't think that's something that's easy to hear. And if it's good they always want to get to continue. If it's bad they want to instantly end the bad. And I think that's just human nature. And I think you're absolutely right.

Chris Nelder: That's right. And with respect to these debates that we have about you know what's the right sort of market design and so on I think it's almost comical sometimes how we get so deep into the weeds about the technicalities of one market design or one tariff or whatever over another when in the back of our minds what we're all really thinking about is do I stand to win or do I stand to lose? And that's part of why I wanted to have this dialogue with you about you know just kind of going back to first principles and saying well how would we design this if there was nobody to lose?

Jim Kennerly: And you know I'll tell you I think the analyst in me wants to sort of take it completely out of more sort of political and human element. But it's impossible. You know and I think great policy analysis and great market analysis and great you know laws and regulatory systems are based on understanding the human element and understanding that different people have different perspectives. Different people will win and lose in different ways and places and times. And I think those are the things that last or the things that people can buy into.

Chris Nelder: Yeah. And recognizing all that and that there are all sorts of restrictions on the way that people act and what they can do and there's all sorts of money on the line and there's all sorts of business relationships and so on that we have to work around... I think that's one of the reasons actually why I'm quite interested in Commissioner Florio's proposal from the California Public Utility Commission where where he's basically said, OK. You all understand and you all have done business for a long long time around this concept of rate basing right? Bring me some assets that you want to buy and I will give you a regulated rate of return on those assets. If it seems like it's a reasonable cost and there's an actual need for it in the grid, I will give you a regulated rate of return on those assets. And that's something that everybody's been operating with for decades and we all understand how it works and we've all got all sorts of spreadsheet models and database models and everything all ready to go. Everybody knows how this game is played. Right?

Jim Kennerly: They've got some pretty cool ones in California...

Chris Nelder: And so what I think is really cool about his proposal is he says Bring me portfolios of distributed energy resources and I'll give your regulated rate of return on it, 5 percent or whatever it is. So instead of just saying Bring me a natural gas plant, bring me another transmission substation or another nuclear plant or whatever he's saying bring me a whole mess of demand response assets. Bring me a bunch of behind the meter batteries. Bring me efficiency investments and I'll give you 5 percent. And that I think is a really... I mean it's funny. It's sort of simultaneously creative and sort of dull. You know?

Jim Kennerly: Sure it's a sort of... Old wine bottles in new bottles I guess... I mean I don't know. So I'll just I'll be flat out. I have not read necessarily any kind of detailed proposal. From what I understand of what you're saying. I will say that I think one of the things that I would wonder about a proposal like that is the arbitrage that's happening behind it. And I think if there's a point at which the utility is saying or the grid operator whomever it is you know in whatever situation is saying OK well I will pay you this rate that doesn't necessarily compensate you at the value it creates because I need to be able to profit myself. I don't know if that's sustainable market design. I don't know if that's something that will work. I think it really does come down to as you said before, negotiation. It comes down to finding some place where it does work and where it's a stable value. A stable value that both parties can agree to. So I guess I don't know from that specific components perspective but in terms of the idea of the utility having essentially callable resources that are at the distribution level... I think that's certainly where if a disturbing energy future is going to manifest itself it's going to need to go and it's going to need to be dealt with as sort of some kind of arbitrage relationship with the utility being in a position of profiting sufficiently such that its investors continue bringing the capital forward.

Chris Nelder: Yeah and you want to really think about where... Where are we going? You know that's kind of the reason why I wanted to open up the dialogue space here in this interview was to just think about if you could start from a blank slate and come up with a new design then what would that tell you about where you want to go based on where you are now? You know I mean it helps you because it helps you define a goal rather than just trying to think about well what can I do tomorrow? You know because I think that kind of incrementalism doesn't necessarily get you where you want to go. And that's why I think REV is so interesting it's just kind of a giant leap toward the future that you want you know? So when I think about that I think, what if we just operated the whole grid like a municipal utility? So it's the entire purpose is just to provide a public good. It's not to be a source of income for investors. Maybe the whole thing is just a nonprofit. So there you still have a utility with the responsibility of keeping the grid working and balanced and they get paid for that, but it would be publicly owned and it would be not for profit. What do you think about that idea? Because sometimes I wonder if we're really going toward a fully distributed grid, doesn't that sort of a model make more sense than an investor based model or a profit based model?

Jim Kennerly: I would probably say yes and no. I'll start with the no, which is I think I would just reframe some of what you're saying in terms of calling it a nonprofit or calling it publicly owned because I think one gestalt that I kind of use in the way I think is everyone has investors. You know even cities have investors. Even if they don't have you know... The city may have municipal bonds that it purchases and has underwritten by an investment bank or you know some other kind of financial firm and they still have a coupon that the investor is expecting and they are intending to pay their investor. Now you can go even further and that's just debt for publicly owned utility. If you go towards the equity side of it, well think of Austin Energy. Austin Energy is a rather large source of funds for the city of Austin and they get a very large cut of the profit that goes into a fund that covers all sorts of services like parks and police and fire and all that kind of stuff. So to say that those entities aren't investoring themselves... I mean they may not literally be sitting there in a business suit with shiny shoes but they're still investors in the sense that they're sort of expecting something.

Chris Nelder: They're invested in the outcome.

Jim Kennerly: Exactly. And that's something I kind of hear municipalization pushes and things like that and I think there is a certain element of greater democracy for sure. But I think something also is certainly intermediating itself there which is in order to have power over something that something has to still produce something. So if you brought in distributed resources to the utility that's owned by a locality or if it's a co-op or something on those lines they're still invested in the sense that if their sales go down and they don't make the money that they used to make, that's going to create some amount of tension you know and that's going to create some kind of sense of we need to look into this. And some people say oh we need to stop this. You know. And so I'm pushing back just a little bit on the idea of investors on utility side. I would also say so on the distributed resource side too because... And it's especially true for a lot of these you know new assets and new resources is that investors are still not as comfortable with it as they are with something that's been around for a hundred years. You know an investor in an oil exploration and production company is going to have a very different understanding and comfort level with that asset and some are going to be more aggressive and some are going to be more conservative and so they're going to have a different desire than an investor who's investing in a new technology who wants greater assurance and part of that greater assurance is a higher return. And so a higher return means a higher cost of resource. And that's just something to keep in mind is that in the end investment is needed at somewhat higher returns in order for this future to happen. So if something like what you're proposing could work it would need to operate within the kind of gestalt if that makes sense.

Chris Nelder: Yeah that all makes sense. I guess sort of in the back of my mind as I think about this I'm also thinking about some some ideas that we heard from Lorenzo Kristov who was a guest on the show in episode 10 which is you know just a super heady conversation about you know his ideas for the architecture of the grid of the future. And one of the things that he talks about was you know when we think about how the grid should work in the future or what the architecture of it should be and all the different players who participate in transactions on the grid and all the different stakeholders we should really be thinking more broadly than we do like we should be thinking about all sorts of other municipal assets as components of the grid. We should be thinking about... Can you use a waste water treatment plant as a demand response asset? Can you use a landfill as a flexible load?

Jim Kennerly: That's interesting.

Chris Nelder: And these are all municipal assets really at some level right? I mean they all serve a public good, however they're defined. You know like maybe some other of them are municipal, maybe some of them are privately owned or investor owned or whatever but they all should work together because they're all serving a public good and it really is all one giant human ecosystem of a city or what have you. So I just think about...

Jim Kennerly: It's grid broadly defined.

Chris Nelder: Yeah yeah. And I just think like if that's where... If we're really going toward a new architecture in the future shouldn't we take these kind of ideas on board? Shouldn't all be considered properly as assets serving the public good? They should work together.

Jim Kennerly: Sure. I think that this is such a fascinating question because in the end it really does come down to some really kind of nuts and bolts aspects of sort of who we are as a society...

Chris Nelder: Bingo.

Jim Kennerly: You know what we believe and what we value. And I think that's why this debate is very complicated because different people have different views. Even people who agree largely about a lot of things... You know, who may share a very similar ideology, may have a really different view about the role of the market. You know you can just see the diversity. I mean just look at our political parties. There's now just a huge amount greater obvious diversity in viewpoints that are not exactly reconcilable anymore. It used to be these were differences that were easier to paper over. And they were easier to bridge with something. I think distributed energy is really fascinating because it's... I feel like the word disruption is almost getting over used but it's sort of moving in a sort of very determined march forward into several different interrelated markets. And I think that that's... This question that you know and the guest you're describing brought up and I'm sorry I missed that episode now. I'll have to take a listen to it. It's very interesting. If you're trying to have a really efficient market place but also just an efficient society you want to price those externalities you want to look at what creates avoided costs and what creates greatest benefit broadly and for society and for rate payers and for all involved. And I think that's sort of the great challenge of different places. It's going to make more sense to do one thing in one place and another and another. You might want to do REV in New York but you might want to do modernized southern company in Georgia. It's just going to be different but it can be something that is... And I shouldn't just say can. It has to be something that requires the sort of faith necessary for creative thought to move forward and to kind of give it support and nurturing and life.

Chris Nelder: Yeah! That's awesome. I mean that's I think that's exactly the right way to think about it.

Jim Kennerly: Yeah and if I could just say one thing. My research you know that I worked on at the center was just this question of how can rate design work to help bring the soft cost of solar down? And I think one of the ways to think about it is just simply that when you get out of the space of needing a solution and needing it to be net metering or needing it to be a wholesale rate or needing it to be anything. It's sort of like your brain just stops. Your executive function or your creative sense just sort of stops working. And I think that that's just something you want to avoid if you're trying to make good policy.

Chris Nelder: Yeah I would agree. So let's think into the future a little bit.

Jim Kennerly: Sure.

Chris Nelder: How do you think the grid power transition is really going to unfold ultimately? I mean are we going to keep working away toward a mostly decentralized renewable grid where utilities are mainly left with just maintaining wires or will that transition or that transformation just prove too difficult for utilities? Like would that be just too much of a stretch and then we'll just have to make a wholesale switch to a different way of doing things? What's your buy?

Jim Kennerly: I guess I would just ask the rhetorical question of if it costs less and it's of value to someone then what choice do they have? But that being said there's a huge amount of uncertainty as to whether that will occur or how and where. I think that's a really big question. Solar for example said that the ITC extended through 2022 in essence and in the end of 2021. And that's a fairly long time you know but there's a number of different factors that are allowing it to be cost effective. You know I wouldn't call them subsidies or characterize them in some way but they're sources of payment that allow it to be competitive. And I think in different places when you take those away they move faster or slower in different places. I mean they're going to be different in Texas for example you can have a merchant generator with very little subsidy whatsoever. I mean there were bids going in in Texas that were call corrected for 35 to 40 dollar range without any assumption of an ITC extension and so it could happen in those places but if you look at a place like that it's a little darker and colder unlike Massachusetts where I'm from that may not be easy to justify. And if those things were not there I think it would move differently and I think that those policy levers are going to be moving in different directions in different times and very unpredictable ways. And I think it's going to be unpredictable because of politics unpredictable because of the market unpredictable because of electric bills. And you know the minute customers start to really focus on how high their bills are it's amazing how quickly things can change. For example. And so it's just not an easy answer. But I would say that it's not going to be nothing. And it's probably going to be quite a lot. It's Just over what time scale are you asking?

Chris Nelder: Yeah.

Jim Kennerly: And storage is going to play a big role too. I think storage has a huge role to play especially in places that have better price discovery, where you can better understand the forward price of electricity and how to store and manage it and all that kind of stuff.

Chris Nelder: Right. So I think I hear you basically saying that it's going to be price driven. Wherever the price goes, that will dictate the outcome.

Jim Kennerly: And politics. Yeah, I would say. Price and politics.

Chris Nelder: OK. I mean I like to think that maybe we could be more creative. That maybe we could reach for another model if we think it's right.

Jim Kennerly: I suppose we could be we can be an autocratic society and have someone decide for us but yeah that's not how it works.

Chris Nelder: Or we could we could wind up with everything. All devices and actors becoming one giant algo operated real time market.

Jim Kennerly: Right. OK. Well I think yeah and I think that in a sense that's sort of like the wholesale market is heading toward being. You know I mean it is in many ways like the sort of central generation plants and it's much more knit together and it's much more sort of self-governed by the generators. I mean that's how Mepool in New England works you know in rough form and it's much more complicated than that. And there's the question of whether that can take root. There's a question of whether that can work. But there's questions about scale. It's a question of you know would it be only be at the level of the distribution utility? Would it be at the level of the state? Of the region? Would it be... Those are extremely complex questions but they're going to be questions that have to be answered in probably starting to be like a decade or two at the latest. I mean that's the thing is yeah.

Chris Nelder: That's what I'm getting at I mean.

Absolutely.

You know right now, sure, you've got a bunch of generators out there in the bulk power market acting and responding you know pretty quickly and sort of in an algorithmic way. But you know one of the concepts that I thought was super interesting from our conversation with Eric Gimon in episode 20 was you had this idea of like a little... I can't remember what he called it. It was a little box that would that would negotiate energy transactions for your whole house. Right? So it would talk to all the devices in your house and they would talk to the grid and it might be able to take advantage of like a real time tariff for example and then it would be able to do all sorts of negotiating and grid power price arbitrage with all the devices in your house. Right? So you can kind of imagine how that would work, you know?

Jim Kennerly: There are companies trying to do that right now.

Chris Nelder: Sure. I mean you've already got companies that are doing that as aggregators of electric vehicles for example that are out there providing you know demand response services to the end of the grid. And so you imagine a future where you've got let's say 150 million rooftop solar systems out there and you've got you know 200 million of these little boxes out there doing real time grid power price arbitrage and interactions with the grid. I mean that's just a totally different architecture from the one we've got now where you've got a few thousand power plants out there right?

Jim Kennerly: Sure. And I mean the grid is a very large and complex machine and you know I think I remember it really opened my eyes I remember when I was first learning about electricity in the grid, to have it described to me as a single machine really just kind of like... That was a very very watershed moment in my understanding of electricity and the markets and the whole question of you know how it affects society and you know climate and everything. It just made me realize, like it's a machine. But it doesn't mean it's a machine that can't be reconfigured. And you know it sounds like you know as your previous guest you mentioned that sort of thing you thought of expanding that machine to more things and you know expanding it and not just necessarily being electricity, it sounds like or maybe just those things contributing to the electricity grid. But that's a really fascinating question. But remember too that this all involves people. It all involves people who do jobs and who watch all of these things and pay attention to all of these things. So I'm not sure it can completely be kind of something that just takes care of itself. I think it probably is going to be something that will be an evolution. I mean I think all of these things we're still going to be discussing some form of this question I think in 2050 and I don't mean just the question of you know energy. I mean you know what should a distributing market be? I mean I think this isn't going to end. The climate issue will not let it be.

Chris Nelder: No I think the climate issue will just add increasing pressure to deal with these questions and to move faster with evolution and grid transition and you know power transition in general. One of the I don't know I guess one of the guiding principles that I have with respect to energy transition is that none of these problems that we're grappling with here are fundamentally technical problems. Most of them are policy problems. They're problems of human arrangements.

Jim Kennerly: Sure I mean markets are created by humans.

Chris Nelder: Yeah they're contracts and agreements and rules and regulations and all that stuff. They're all human arrangements. They're not technical problems. Like there's no technical reason why you can't run a 100 percent renewable grid. And so once you realize that and you realize that every agreement can be undone or can be changed, you know I mean you certainly do have to solve a lot of difficult problems along the way to a transition. You have to make whole people that are going to stand to lose money or you have to figure out how to make it possible for new entrants to participate in all that kind of stuff. But if the transition to a decentralized renewable grid is where we're going and if that's deemed to be a social good and a priority for humanity because of climate change and other reasons then we know that ultimately all of the costs involved in doing that transition and all of the new assets that we have to build are going to be socialized anyway. Right? They're going to be socialized through a lot of funky methods sometimes a lot of different ways of doing things but they're all going to be socialized anyway. So why not just toss out PURPA, get rid of the whole concept of a qualifying facility, scrap the entire regulated business, and just go whole hog with the idea of socializing it and making it a public asset, however you want to structure that. I mean you could you could even make one big pool of all the legacy assets right now and just say we're going to amortize this all the way and pay for it with printed money?

Jim Kennerly: I don't know about the printed money. That sounds a little too much like the Weimar Republic to me. But yeah I'm not enough of a macroeconomist to say on that one but I think just something to remember is that... And I think this is not a perspective that's easy to sort of think of. It's a very abstract concept but it's also very real. It's the idea that you know these are assets with lives you know? And those lives come to an end. There's a lot of different plants out there that are very old you know. And I think that's something that a lot of the EPA regulations have had a really significant impact on. There were a lot of older coal fired power plants that just kind of were limping along but limping along well enough but they just couldn't handle it in that new environment. And I think when you think of it as sort of like a series of different plants that has sort of discrete points at which doesn't really make sense operate much longer and assets just kind of move and they come in waves. You know and I think that's a way to sort of think about these changes and how the system will come into force. And I think that it's more just a question of how and when and timing and cost. And I think you're absolutely right. It is about those decisions. Because I mean different places make those decisions and then justify them in different ways. You know we kind of created the system that we have. I always find it funny when I hear someone sort of say well the market sort of decided that when they're talking about monopoly you know. I just sort of laugh myself. But that being said I think it's just a question of... It does come down to people and their decisions and it comes down to lots of decisions... It's amazing the lengths people will go to justify those decisions if they're generally working. You know if there's they're generally working for some dominant group of people so yeah I mean all of policy is politics is power. That's just sort of how it works. And I think ultimately when you demonstrate that something new and different is part of the fabric of life it will happen. And I think that's what will happen with EVs. That's what happened with cell phones. That's just sort of how people are. There's a first adopter, early adopters cycle to sort of late adopter Internet maturity... And I am not as expert on technological S-curves but sort of that whole idea of like adoption happening and you need some of those early adopters to justify the sort of middle and late phases of adoption. And that's the same is true of policy and that's what I think we'll see over time, but there's this giant intervening factor of the climate and insuring you know decarbonized system too.

Chris Nelder: Well it's hard to argue with that. Well thank you Jim. This has been a really fun conversation.

Jim Kennerly: Yeah I really enjoyed it. Thanks so much.