As more countries work toward transitioning to a cleaner and more flexible grid, there is an increasing need for a clear set of utility business model tools and regulatory pathways.
Rocky Mountain Institute’s Electricity Programme is developing a series of reports that go in-depth on some of these most promising opportunities.
The Institute’s Performance Incentive Mechanisms (PIMs) for Progress: Aligning Utility Performance with the Public Interest, reviews a selection of historical PIM examples and provides a simple taxonomy of their results to identify important lessons for future PIM development.
By exploring why some PIM proposals are rejected by regulators and others are accepted, as well as what happens to PIMs after acceptance, we can learn how these regulatory tools can be best leveraged to support public interest goals in a shifting energy landscape.
What are PIMs?
PIMs are a regulatory tool to help transition the utility business model to one where an increasing share of revenues rely on utility efforts to meet the customer, policy and technological demands emerging from the transformation taking place in the power sector.
PIMs can motivate utilities with financial rewards and penalties to deploy and utilise distributed energy resources, improve resilience, better engage customers and deliver greenhouse gas emissions reductions.
As utilities and regulators try to balance these new expectations with existing responsibilities, PIMs provide utilities with the flexibility needed to meet both traditional and emerging demands, while still serving shareholder, customer and broader public interests.
From a historical perspective, PIMs have a mixed track record in delivering effective and sustainable changes to utility performance, noted the report.
While there are plenty of success stories, there are also many examples of PIMs that did not motivate desired utility behavior, created perverse incentives, or either over- or under-compensated utilities relative to the customer benefits created.
Given the great potential of well-designed PIMs, we need to understand their past results to identify what characteristics make PIMs successful.
Powerful tool for the energy transition
“PIMs have the potential to be an enormously powerful tool in the energy transition. But our experience and research have shown that not all PIMs are created equal. We felt we needed a thorough examination of the wide range of past PIM results in order to help others avoid some common pitfalls and use these tools successfully,” said Cara Goldenberg, Manager, Electricity Practice at Rocky Mountain Institute.
Eight recommendations to improve PIM results
Based on research and interviews with stakeholders involved in PIM development, the report offers eight recommendations to regulators, utilities and other stakeholders looking to integrate PIMs into their regulatory frameworks:
- Determine what role PIMs can play in supporting public policy goals;
- Evaluate how PIMs can work within current regulatory frameworks;
- Consider how PIMs can support utility growth into new service areas;
- Strive for outcome-based PIMs where possible;
- Leverage data to better understand utility operations;
- Align incentive structures with expected benefits;
- Prioritise flexibility and learning;
- Design effective approaches for stakeholder participation.
Whether the intent is a broad vision for utility transformation or a narrower exploration of how incentives can improve specific programs, utility regulators and stakeholders looking to develop PIMs can learn from the range of historical PIM experiences across time and geography, states the report.
While it may be premature to make a final assessment of their results, important lessons are already emerging from ongoing PIM processes in states such as Rhode Island, New York, Minnesota and Hawaii.
As more and more states attempt to update the traditional regulatory compact of yesteryear to reflect what is in today’s public interest, PIMs are a tool to remake how utilities are compensated for new services while ensuring customers and wider society benefit as well.