IERI: Summary of Preliminary Stakeholder Engagements (2020 – 2021)

In 2020 and 2021, The Innovation and Electricity Regulation Initiative (IERI) at NRCan delivered a series of stakeholder engagements. The objective of the series was to bring together regulators, utilities, provincial/territorial governments and other stakeholders to have discussions to inform federal programming and accelerate net zero innovations within provincial regulatory frameworks.

• November 26 2020 – Regulatory Approaches for Innovation Project Review
• Audience: regulators, provincial / territorial governments and utilities across Canada
• Purpose: to discuss common regulatory challenges and solutions to advance grid modernization. To hear presentations from Canadian regulators, including Ontario Energy Board (OEB), British Columbia Utilities’ Commission (BCUC) and Nova Scotia Utility and Review Board (NSUARB). 

• December 10 2020– Atlantic Electricity Regulators Forum
• Audience: regulators in the Atlantic region and Quebec
• Purpose: to discuss the challenges faced by regulators in supporting innovation projects and the potential role for federal programming to address those challenges

• February 24 2021 - Atlantic Electricity Regulation Workshop
• Audience: electricity stakeholders in the Atlantic region
• Purpose: to discuss regulatory barriers and challenges faced by grid modernization projects – specifically developing improved ways to value grid modernization and communicating these values to the public

Key Insights from Preliminary Engagements

Innovation & climate objectives: The role of the regulator

• With respect to the electric grid meeting innovation or climate action objectives, the role of the economic regulator is primarily reactionary and treated no differently from any other utility-proposed project; to scrutinize the benefit-cost analysis to ratepayers and to consider whether the project could instead be undertaken for equal or less by the private sector in a competitive market. Regulators can only work within the confines of existing provincial and territorial legislation and policy and therefore will only be involved at the procedural level.
• Regulators evaluate projects based on long-term benefits, costs and risks to ratepayers. However, innovation driven projects do not need to meet the standard of lowest long-term cost – but they should have the potential to achieve it.

Regulatory Barriers

• Innovation projects that are outside the conventional regulatory framework can pose difficulties because they may be unlike traditional utility applications. Often, innovation projects require greater scrutiny, new and different data, and possibly additional information (e.g. technical capacity) compared to traditional projects given that it hasn’t been done by that utility before. This can result in slower processes even if there are dedicated regulatory processes set up to evaluate them, and challenges to evaluating business cases with little and sometimes insufficient industry data.
• Every jurisdiction in Canada has unique energy needs, electricity grids and market structures, political motivations, legislative mandates and policy drivers – these differences make it challenging to harmonize regulation across the country.
• The Federal government should continue to use its convening power to bring together a diverse group of stakeholders (government, utilities, regulators etc.) and host seminars/workshops for knowledge dissemination. However, some barriers can only be overcome with policy development.

Valuation of Grid Modernization Projects

• The rapid rate of adoption of new technologies combined with the challenge of measuring the benefits of grid modernization has led to challenges for regulators and utilities – both parties must decide if and when to invest in grid modernization projects.
• Access to more data can help strengthen the value proposition of innovation projects to customers and help regulators and utilities decide on which innovation projects to pursue.
• It is important to understand the spectrum of business models available and the motivations, consideration, and perspectives of stakeholders when designing targeted incentives to increase participation in grid modernization projects.
• Customers expect the electricity system to be reliable and tend to be price sensitive. To gain support for an innovation project, customers need to be engaged throughout the development process and informed of its benefits and challenges. 
• It becomes difficult to validate benefit claims and convince the regulator that a project should be funded by all ratepayers when only specific communities/sections of the rate base receive direct benefits.

Embedding innovation into Justification Criteria: An example in Nova Scotia

In 2018 the Nova Scotia Utility and Review Board (NSUARB) developed a definition for innovation within their Capital Expenditure Justification Criteria (CEJC). There are two headings under which the innovation criteria were set out.

1. Innovation capital projects are justified on the basis that there is a reasonable expectation that they will provide customer value in some or all of the areas of:
• Reducing upward pressure on revenue requirement,
• Reliability and grid stability,
• Government policy,
• Compliance, and
• Customer experience through the deployment of proven technologies in innovative ways.
2. Innovation capital investments may be justified on the basis that they are reasonably expected to allow for testing before deploying at scale, provide valuable data and learning or aid in the development of business cases, where applicable.

The role of regulatory sandboxes

• Regulatory sandboxes are a tool that can allow an economic regulator a closer look at innovation projects and provide them with a less formal opportunity to discuss regulatory barriers even if they are not supporting the project through rate recovery. However, sandboxes can be less transparent than more formal processes, which must be more inclusive and transparent.
• When designing a sandbox, a regulator may chose to go with an open and streamlined application process so they can evaluate a wide range of projects. However, this process may not properly communicate the scope the regulator is looking for or their vision for a future integrated energy system they are trying to encourage with the sandbox.
• Administering Innovation Sandbox projects can be more resource intensive for regulators, thus a balance must be struck between requests for more detail in project applications and ensuring that applications are answered in a timely manner. Furthermore, having in-house expertise at the regulator, a dedicated team of experts in codes, standards, licensing staff, legal counsel and strategic policy teams, is critical in addressing the needs of sandbox users.

Increasing complexity in achieving electricity sector objectives

• As the electricity sector moves towards creating a modern flexible grid to support Canada’s vision to reach net zero by 2050, it is increasingly challenging to fulfill all objectives at the same time. Some objectives are foundational: affordability, maintaining business growth and earnings, and ensuring the reliability and equity of services. However, with climate change, infrastructure must become more adaptable and resilient alongside meeting the additional objective of GHG emission reduction targets (Navigating Barriers to Utility Investment in Grid Modernization”, Guidehouse report commissioned by the Electricity Working Group for the Energy and Mines Ministers’ Conference, 2020).

These insights are informing the ongoing work of the Innovation and Electricity Regulation Initiative.