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Government's Role in a Rapidly Changing Energy Sector

Thanks to technology and other factors, the power industry is being remade. State and local governments can have a major impact on this transition.

Rapid changes are sweeping the electricity sector, driven by new technologies, consumer demand and new environmental regulations. Bob Graves, associate director of the Governing Institute, recently highlighted this trend, emphasizing the growth of distributed generation and microgrids.

These technologies, empowered by microchips and wireless communications, are allowing more and more customers to produce their own power -- power that is more reliable, cleaner and more affordable than electricity from the grid. State and local governments will have a major role in this transition, both in guiding their communities through these changes and in regulating a power industry facing profound disruption.

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There's no doubt about the challenges the industry faces. The always quotable David Crane, CEO of the independent power producer NRG, said that thanks to distributed generation "consumers are realizing they don't need the power industry at all." These changes, he said in an interview with Bloomberg TV, are "going to be about empowering the end-use consumer to make energy choices for themselves rather than having the government and the public-service commissioners tell them how they're going to get the power, who they are going to get it from, and how it's going to be produced and delivered to their home."

Many point to cheap solar as the biggest disrupter. Solar companies have cracked the code for manufacturing, and panel prices have fallen through the floor to well below $1 per watt. Pacific Gas & Electric, serving much of northern California, is rapidly approaching 100,000 customers with solar rooftops.

But cheap solar is not the only story. Smart appliances are enabling customers to control their energy use automatically, shifting consumption to cheaper off-peak periods. Power companies are bundling these customers together to create "virtual power plants." The PJM power region, stretching from the mid-Atlantic to Chicago, can get almost 10 percent of its peak needs from such "demand response" customers, saving as much as $650 million a month.

Wind power, thanks to technology advances, lower prices and strong state and federal policy support, also is exploding. In 2012, wind made up 42 percent of new capacity in the United States, more than any other source, representing an investment worth $25 billion. Wind supplies more than 20 percent of the power in Iowa and South Dakota, with peaks of up to 60 percent in Colorado.

Highly efficient appliances and lighting are flattening out power demand, possibly permanently. The federal Energy Information Administration now predicts power demand growth of only 0.7 percent per year, down from about 3 percent per year in the 1990s. This is happening despite growth in population and economic activity.

Perhaps the biggest change for the power industry is cheap natural gas, due to hydraulic fracturing of shale rock, known as "fracking." Gas prices have fallen to $3 per million BTU, down from $10 eight years ago. With increased pressure from tighter environmental regulations, utilities are rapidly swapping out coal for cleaner, more flexible gas. In the past year, coal's share of power generation fell from 44 percent to 37 percent.

All these trends point in the same direction -- toward a cleaner, more efficient, less centralized, and more intelligent power system. This transition is the subject of America's Power Plan, which I direct. The plan is a policy roadmap sponsored by the Energy Foundation in partnership with Energy Innovation. With input from 150 U.S. power experts, it lays out 60 policy recommendations on finance, market design, utility business models and other key issues.

What is the role of state and local government in this transition?

States are the traditional leads on utility regulation, and state utility commissions are the central players, in both regulated and competitive markets. Of the many issues on their plates, a hot one now is utility business models: What is the role of a centralized utility when customers are increasingly producing and controlling their own power? America's Power Plan gives some guidance on new regulatory models for helping utilities adapt to change.

State legislatures, governors and energy offices are key as well, setting goals, providing incentives and giving direction to the regulatory process.

And there are increasing roles for local governments. More than 2,000 communities already have municipal utilities with boards and city councils that serve as utility regulators. These utilities are dealing with the same rapid change, and they can either encourage a graceful transition or be impediments to innovation.

Many cities, especially in California, Illinois and Ohio, are looking at "community choice aggregation," in which cities buy power from competitive suppliers on behalf of their citizens, without acquiring the assets of their local power company and becoming a municipal utility. In Illinois alone, more than 650 cities and towns have chosen this option in the last two years.

Local governments also are responsible for issuing permits for distributed generation. As solar panel costs have fallen rapidly, "soft costs," such as permitting, finance and customer acquisition, have become the dominant expense. Cities are beginning to streamline their permitting processes and lower their fees, making it easier for developers to finish projects.

As wind power grows, siting new power plants and transmission lines is an increasingly critical issue for state and local governments. Given the contentious nature of siting, many stakeholders are looking at new ways of seeking community approval. Rather than the traditional model of utilities exercising eminent domain, developers are exploring new payment and ownership structures, as described by the Center for Rural Affairs.

State and local governments can help encourage technology and business innovation by proactively reforming policy to remove barriers. There is plenty of reason for them to get involved. Changes in America's energy system offer profound benefits for our economy, environment and local communities.

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