The future of integrated resource planning: How integrated should it be?

Positive Energy’s Discussion Paper Series on Energy Planning aims to share insightful analyses on a variety of topics related to planning in the energy sector. The Series aims to spur debate, dialogue and reflection.

This discussion paper considers the economic regulators’ review of integrated resources planning (IRP) for gas and electric utilities in Canada. The IRP process has typically been conducted by each regulated utility considering only the energy demands of its customers without consideration of other available energy types. However, moves towards net zero greenhouse gas emissions by 2050 and electrification are driving new behaviours that include “fuel switching”, thereby placing new demands on the IRP planning process.

This paper begins by looking at the historical context of public utility growth in Canada, the role of the economic regulator in the IRP process and how IRPs have historically been prepared and reviewed. It considers the role of IRP planning in both “vertically integrated” jurisdictions and in provinces that are “unbundled” thus having a wholesale electricity market. Although public utilities have a key role in the preparation of an IRP, the focus of this paper is on the review of the IRP and the role of the economic regulator in that review.

The preparations underway in a number of jurisdictions for net-zero are profoundly affecting the IRP review process. Increased electrification and fuel switching from natural gas to electricity are affecting investment decisions in both the natural gas and the electricity sectors, presenting challenges in both. A significant portion of fuel switching activity is policy driven which comes with attendant uncertainty.

Fuel switching between electricity and natural gas is largely zero-sum overall with respect to the demand utilities face. However, switching results in a loss of load for the natural gas utility and a proportionate gain in load for the electric utility. This results in a coupling of electricity and natural gas demand forecasts and increases the risk of over-forecasting. As a result, this discussion paper concludes that instead of preparing and reviewing gas and electricity plans separately, they should be considered together. Further, potential net-zero and electrification impacts on the IRP planning process include the use of electricity as a transportation fuel.

The paper also considers how in many cases energy transition is significantly increasing the exposure of regulated utilities to competitive markets; this is an emerging regulatory challenge as economic regulators review investment decisions in this competitive marketplace. Economic regulation was never intended to apply to this competitive market situation that public utilities find themselves in and economic regulators may not have the tools to deal with this emerging phenomenon.

The increasing occurrence of fuel switching adds risk to infrastructure investments in all sectors of the energy system. One of these risks is the risk of stranded assets. While many think this risk is confined to natural gas infrastructure investment, the paper also considers the risks to investments in the electricity sector.

In the petroleum fuels sector, these risks are largely taken by the investor or shareholder of the companies that participate in the sector. In the regulated electricity and natural gas sectors, a greater proportion of the investment risk is taken by customers. While the IRP process is a key tool to mitigate these risks, imperfect forecasting methodologies and the inherent imperfections of the economic regulatory system that misalign risk and reward may still not satisfactorily mitigate these risks.

The paper then questions how to leverage the competition that is emerging in the regulated utility sector to better align investment risk and reward. Other questions about the IRP process, include: Is there a plan for how an electrification scenario unfolds? Is a long-term plan needed? What is the role of market forces in the planning process and what is their impact on the role of the economic regulator?

In the absence of answers to some of these questions, we risk placing at the feet of economic regulators the responsibility to approve increasing amounts of capital (at-risk to ratepayers) in both the electricity and natural gas sectors. It also requires regulators to understand the assumptions implicit in trajectories towards electricity — the plan that both electricity and natural gas utilities would arguably be working towards. We could also potentially turn energy planning for net-zero and electrification into a large, comprehensive — and consequently unwieldy — planning exercise.

David Morton, Executive-in-Residence, Positive Energy