What should be the involvement and mandate of the energy regulator in connection with promotion of Renewable Energy and what are the main challenges associated from a regulatory perspective?

[response prepared by Sanford Berg and Ashley Brown (with the assistance of anonymous reviewers, October 2012]

Level of Involvement for a Regulator: Policy-makers will set the targets and (often) procedures for Renewable Energy (RE) initiatives. Their tools can include taxes, subsidies, and targets for utilities. Ultimately, the regulator ends up implementing government policies. Although the boundaries between “policy-making” and “regulating” are inherently fluid and uncertain, the role of the regulator in promoting RE is limited by legislative and executive decisions. RE policies and frameworks are policy decisions that are customarily and perhaps, preferably, taken by policy makers and not regulators. Policymakers, however, may choose to delegate these decisions or a subset of them, to regulators; or they may choose to remain silent on such issues. In the former case, of course, regulators have the power to exercise their discretion, while, in the latter, the scope of regulatory discretion depends on what the legal system provides. For example, Kenya gives the regulator some latitude in the design of auctions for Feed-in Tariffs.

• Basic and macro policy, optimally, is set by the Government: new programs and targets (such as percent of generation that involves renewables–renewable portfolio standards) should have a broad political consensus, since the implications for energy costs (and therefore prices) and resource utilization can be significant.
• Regulators are creatures of the state and not necessarily of the Government: the party in power (the Government) has the authority and the obligation to set basic policy. It not only has the capability, but its action vests legitimacy, credibility, and legal authority to the regulatory regime. In many countries, policy on RE is issued as RE laws (passed by the legislature). In others, the enabling legislation (or executive order) provides broad energy sector objectives, which the regulatory commission then applies to specific RE issues.
• Policy vacuums and communication problems are inherent issues in infrastructure and are to be expected: political authorities should always have a mechanism for transparently offering their views to regulators and vice versa. The problem is the non-transparent bypass of the regulatory processes that seems likely to occur if regulators are not in a position to decide micro policy issues on their own. A potential role of the energy sector regulator involves identifying issues that need to be resolved in the design, development, and implementation of RE. Open channels of communication with various stakeholder groups can be maintained through workshops and white papers.
• Some policy issues require technical expertise to be resolved: If requested, the regulator could provide technical support and inputs to the agency responsible for planning on matters such as expected costs of renewable energy, impact of renewables on security of supply, and quality of service impacts of RE. This is just one of the many roles the regulator could play in promoting cost-effective RE.
• Sector regulators need to coordinate their decisions with other government agencies: Clean and renewable energy is likely to be of concern to a number of organizations. “The regulator should enter into memorandums of understanding (MOUs) with other entities that are promoting electrification, such as ministries and electrification funds. Such MOUs should clarify respective roles and responsibilities and the sequence of needed approvals. The overall goal should be to streamline the regulatory process by minimizing unnecessary duplication and delays.” (Reiche, et. al.) Coordination is required for alignment with other policies, incentives, and administrative processes (including licensing and permitting).

Table 1: Roles and Challenges for the Energy Sector Regulator in Different Phases of RE Policies

Main Challenges Associated with Regulatory Functions Affecting Renewables:

The Table identifies challenges associated with renewables. What is the best choice of regulatory instruments/tools for Renewable Energy promotion based on efficiency and effectiveness of reaching policy targets (FiT versus Green Certificates versus Central Procurement and others)? goes into greater detail on the role of the regulator in seven different mechanisms for incentivizing RE: Feed-in Tariffs, Net Metering, Renewable Portfolio Standards, Energy Auctions (tendering), Power Purchase Agreements, Direct Investment Support (including loan guarantees and tax incentives), and Other Incentives (direct research and development grants and use of targeted funds, assistance in resource mapping, encouragement of the voluntary sector, programs that make green look good, and trade restrictions. However, these policies are generally outside regulatory purview. Note that many of these initiatives involve distributed generation, so access to the grid, power quality, and related issues need to be addressed by regulators in the design of the instruments. The challenges facing the regulator are developed in more detail in What is the best choice of regulatory instruments/tools for Renewable Energy promotion based on efficiency and effectiveness of reaching policy targets (FiT versus Green Certificates versus Central Procurement and others)?, but the different types of challenges are examined here.
While public policy will determine the extent to which renewables are to be incorporated into the generation mix, regulators implement that policy—thus affecting the pace and pattern of RE investments and connections to the grid. Energy regulators often have authority to carry out a number of functions that have implications for the financial feasibility of renewable energy projects.

Decisions regarding energy mix depend on key policy issues such as energy security, environmental policy and rules, how consumers will pay for a cleaner energy mix, and funding sources (if the technology requires subsidization from an external agency or cross-subsidization from customers). Such policies usually depend on the Ministry of Energy (or whatever agency is responsible for expansion plans) and the Ministry of Finance regarding sources and extent of subsidization). If the RE policy does not prioritize the objectives, the regulator will have to balance the objectives identified in the enabling legislation (or executive order). This process can be particularly contentious since the objectives are seldom prioritized: the balancing and timing of initiatives is often left to the agency overseeing RE initiatives (Grace, Donovan, and Melnick).

Key challenges include:

1. Legal Mandate: Does the regulatory commission have legal authority to undertake the function? Each of the potential RE program listed above requires a clear regulatory framework if rules are to be established in a timely and transparent manner. This challenge may be further complicated by a potential lack of clear legal authority when other agencies have responsibilities related to RE, including siting or resource-use.
2. Clarity in Authority: Is there overlapping or unclear allocation of roles and responsibilities of different agencies? The NARUC Handbook (Bjork, et. al., 2011, p. 9) recommends that regulators “Review legal and administrative processes in other sectors that may impact RE advancements, including environmental siting and permitting restrictions, environmental standards, and investment and procurement rules.”
3. Coherence: The internal consistency of RE programs is essential if they are to be cost-effective. Unfortunately, stated policy objectives may not be prioritized, so regulators need to check the links between programs and objectives to ensure that impacts are well-understood and that the beneficiaries are clearly identified. If the affordability objective is applied very broadly, cash flows to the investor in renewables might be reduced. Regulators are in a position to evaluate the internal consistency of RE programs, so that the incentives (established by a number of agencies) reinforce one another. Policy and regulatory consistency is important: the regulatory function should focus on identifying inconsistencies and promoting processes for coordinating the implementation of RE policies.
4. Resources: Does the agency have the staff expertise and/or consulting budget that enables the functions to be performed in a professional manner? For example, it is important that the regulator follows closely the trend in capital costs of renewable technologies to avoid windfall profits under approved Feed-in Tariffs, especially when these technologies are benefitting from regulated tariffs.
5. Transparent Processes: Do special interests representing particular technologies, regions of the country, or politically powerful stakeholders have inappropriate input into the implementation of rules affecting RE? In particular, can stakeholders bypass regulatory processes, limiting transparency and reducing the cost-effectiveness of RE initiatives? Corruption, as reflected in bribery and fraud, raises the cost of doing business and reduces the credibility of government officials promoting energy efficiency and renewable energy. If citizens do not trust regulatory and corporate leaders, then the legitimacy of the system is called into question. This observation implies that bidding procedures, the development of Feed-in Tariffs, and other activities must be perceived as totally transparent and based on best-practice.
6. Funding: Is there stable and sufficient funding for the required investments? The political will can change as new policy priorities emerge, making government funding unpredictable. The availability of donor and private investment funds will depend on perceptions regarding the stability of the policy environment and on forecasted net cash flows from RE projects.

Regulatory Functions Affecting Renewables: Functions that are often assigned regulatory commissions include the following:

Issuing licenses related to regulatory functions: In many jurisdictions, the electricity regulator has the responsibility for issuing a “certificate of use” after completion of capital investment in a facility. Such licensing generally specifies operating standards that have impacts on cost and tariffs. For example, intermittent supply introduces back-up issues for the utility, so regulators must monitor contractual arrangements with solar and wind generators who do not provide firm capacity. Licensing of new generation, transmission, and distribution facilities or approval of sites can be contentious given citizen concerns over Not In My Back Yard (NIMBY) facilities. For example, wind power has been a source of complaints for those affected by new sites.

Setting performance standards: Performance standards on quality/reliability have cost/tariff implications since these involve resources. To protect consumers from excessive prices while implementing public policy, the regulator will need to prescribe procedures and standards for companies’ investment programs. As renewable penetration within the system increases, the commission will need to adapt existing codes of conduct and eventually develop new ones for generation, transmission and distribution companies, ensuring that market participants have access to information in a timely manner. In addition, regulators often oversee network expansion targets (including renewable portfolio standards and the issuance of green certificates).

Monitoring the performance of regulated firms: Collecting and analyzing data on costs, revenues, and performance is essential for tariff determination. Ensuring that Purchase Power Agreements (PPAs) for RE are consistent with model PPAs would be another regulatory task. Thus, monitoring renewable activities falls under the purview of the regulator.

Establishing the price level and the structure of tariffs: It is reasonable for consumers to pay the costs associated with utility generation diversification. Customers would be vulnerable to input price changes due to the excessive dependence upon one fuel source. In addition, if public policy mandates a shift away from fossil fuels, customers become responsible for covering the associated costs. However, the higher cost of some renewables affects electricity affordability, so regulators must address trade-offs among policy objectives. In the context of RE, this means that regulators analyze, evaluate, and approve rate designs, including time of use rates and Feed-in tariffs.

Establishing a Uniform Accounting System: Operators should be required to file reports in formats determined by the regulator. Evaluating the cost-effectiveness of renewables policies and energy efficiency programs requires that operators provide data and reports and that regulators have the capacity to review those studies. Access to information is necessary if RE programs are to be evaluated in timely manner and refined based upon careful studies.

Arbitrating disputes among stakeholders: Regulators ensure that facts are well documented and that different interests are well represented. Siting of new facilities (including distributed generation such as photovoltaics), cost allocation among different customer classes, and interconnection rules have differential effects on stakeholders. The regulatory commission is in a position to organize workshops and promote dispute resolution.

Performing (usually via independent consultancy) management audits on regulated firms: Typically, the regulator reviews the organizational elements of generation, transmission and distribution companies on a regular basis to ensure cost effectiveness and a continuous and efficient supply of services. The commission needs to review the performance of RE initiatives to determine whether goals being met in a cost-effective manner.

Developing human resources for the regulatory commission: Recruitment and staff training warrant particular attention as part of regular managerial responsibilities, since the implementation of RE policies depends on the quality of the professionals who are conducting regulatory analyses. Agency budgets and staff recruitment procedures must be appropriate for the tasks associated with implementing RE policies.

Reporting sector and commission activities to appropriate government authorities: A regulatory agency should submit reports regarding sector activities to a higher authority. Given the expertise assembled at a commission, the agency is in a position to provide information and advice to appropriate government departments that are concerned with RE.

Thus, regulators will face decisions that affect the financial outcomes associated with RE investments. Specific regulatory instruments for promoting RE are discussed in What is the best choice of regulatory instruments/tools for Renewable Energy promotion based on efficiency and effectiveness of reaching policy targets (FiT versus Green Certificates versus Central Procurement and others)? in this series. A parallel set of challenges for Energy Efficiency is introduced in What should be the involvement and mandate of the energy regulator in connection with promotion of Energy Efficiency and what are the main challenges associated from a regulatory perspective?

References

Principles of Regulating Clean Energy in the Ecowas Region
United States Agency International Development, National Association of Regulatory Utility Commissioners, 2014 (working draft)
Leonardi, Matteo

RECP Mini-grid Policy Toolkit
European Union Initiative Partnership Dialogue Facility (EUEI PDF), 2014
http://euei-pdf.org/thematic-studies/mini-grid-policy-toolkit

Report on Renewable Energy and Distributed Generation: International Case Studies on Technical and Economic Considerations

International Confederation of Energy Regulators, February 21 2012, pp. 1-154.

Encouraging Renewable Energy Development: A Handbook For International Energy Regulators
Prepared by Pierce Atwood LLP for NARUC, with USAID funding. January 2011, pp. vii-138.
Bjork, Isabel and Catherine Connors, Thomas Welch, Deborah Shaw, William Hewitt

Regulators, Policy Makers, and the Making of Policy: Who Does What and When Do They Do It?
Brown, Ashley

When Renewable Energy Policy Objectives Conflict: A Guide for Policymakers
National Regulatory Research Institute 11-17, October 2011.
Grace, Robert C., Deborah A. Donovan, and Leah L. Melnick

Electrification and Regulation: Principles and a Model Law
Energy and Mining Sector Board Discussion Paper No. 18, World Bank, July 2006, 1-44.
Reiche, Kilian and Bernard Tenenbaum, and Clemencia Torres de Mästle

Regulatory Functions Affecting Renewable Energy in Developing Countries
The Electricity Journal, July 2013, pp 1-10.
Berg, Sanford

10 Questions to Ask about Scaling On-Grid Renewable Energy
World Resources Institute, Prayas Energy Group
Wood, Davida and Sarah Martin, Bharath Jairaj, Shantanu Dixit, Letha Tawney