Covington CleanEquity Conversations: AI and IoT – Benefits, Risks, and the Role of Regulation

By Simon Amies on Posted in Artificial Intelligence (AI), Internet of Things (IoT)

On March 8-9, 2018, a bespoke group of approximately 200 leading entrepreneurs, investors and advisors focused on deploying and commercializing cutting edge technologies gathered in Monte Carlo from across the globe for the 11th annual CleanEquity® Monaco Conference.  Complementing other plenary sessions and emerging company presentations, the conference initiated a new feature — Covington CleanEquity Conversations — intended to capture and memorialise the unique thought leadership opportunity presented by the gathering in Monaco. On the first day, conference participants separated into three breakout groups for Chatham House Rule discussions curated by partners from the international law firm Covington & Burling LLP of three critical issues confronting cleantech deployment and commercialisation:

  • AI and IoT – Benefits, Risks, and the Role of Regulation
  • Sustainability – What goals should businesses prioritise and what are the right metrics?
  • Will market driven innovation alone save us from climate change?

On the second day, the Covington team reported during the conference’s final plenary session key takeaways from the three breakout group discussions.  Covington and CleanEquity organizer and specialist investment bank, Innovator Capital, are pleased to share brief summaries of the thought leadership developed by the proceedings of conference participants on each of the three topics.

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AI and IoT –  Benefits, Risks, and the Role of Regulation

  • Rapid evolution and proliferation of artificial intelligence and the Internet of Things holds tremendous promise for dramatic, transformational efficiency gains in nearly every industry.
  • At the same time these technologies present risks of massive employment disruption, losses of privacy and yielding of human free will to decisions made by algorithms and machines.

In a session led by Covington’s Corporate Partner Simon Amies, conference participants examined these propositions and then considered two questions:  Where should regulation step in?  Can regulation be effective to manage the risks without diminishing the benefits?

The Benefits

There was universal agreement that evolution and proliferation in AI and the Internet of Things have the potential to bring transformational efficiency gains across virtually all sectors of industry.  AI has already transformed business models in the technology sector through the deployment of sophisticated algorithms to process vast quantities of data, and machine learning and automation are already being utilized on a large scale in other areas of industry, revolutionizing processes and delivering significant efficiency gains.

A number of the presenting companies noted that artificial intelligence already plays a pivotal role in their businesses, with some utilizing the technology at the heart of their business model — one company uses its machine learning system to manage and optimize grid operations — and others use AI as a tool to enhance research and refine product development.  One participant flagged the fundamental change to supply chain dynamics and manufacturing processes with the emergence of the smart factory in the Industry 4.0 model, leading to increased efficiency, reduced costs and maximization of resources.  Mass-customisation of lower-cost goods manufactured to order in close proximity to the market bring reduced shipping costs and lead times.

The Risks

But as often happens with the adoption of disruptive technology, new and often unforeseen risks and challenges emerge.

One participant noted concerns surrounding access to, control and ownership of personal data in the field of healthcare with the focus on development of personalized and precision medicines.  Another flagged how personal data could be used by employers to make hiring decisions or by insurers to price auto or life policies, but without explicit consent from the individuals.

One participant pointed to the safety and security concerns of having automated intelligent systems replace humans at the controls of cars and other machines and equipment.  In the case of the autonomous vehicle, who is responsible in the event of an accident where the system makes a conscious decision which turns out to be the wrong one, causing a fatality?  Another participant identified the risks of malicious attackers disrupting or asserting control of systems run by AI and IoT, whether on an industrial scale or on a micro level seeking to take advantage of one individual.

The threat of AI and IoT to jobs was also highlighted.  Many jobs that have kept the workforce occupied for generations could become redundant almost overnight as businesses look to adopt technologies that bring gains in efficiency and productivity and at the same time reduce labour costs.  The labour market is predicted to encounter massive change of a scale not seen since the Industrial Revolution which will have consequent effects on wealth inequality and potentially global stability. While governments and policy makers are likely to take steps to protect jobs, there will be increasing demand for skilled technicians capable of supporting digital capabilities.

The Role of Regulation

The discussion then focused on the two key questions of (a) where should regulation step in and (b) can regulation be effective to manage the risks without diminishing the benefits?

The first observation was that against the backdrop of recent high profile data breaches and the imminent deadline for implementation of the EU’s General Data Protection Regulation, regulation is appropriate and has an important role in managing the risks presented by AI and IoT.  Data privacy legislation has continually evolved since the emergence of the internet, adapting and reacting to the challenges associated with mass collection, use and storage of personal data to ensure privacy, security and transparency.  Privacy laws already apply to AI systems that process personal data, which means new systems need to be designed adhering to these standards where applicable.

One participant commented that it should not be left to the law-makers to ensure risks are adequately legislated against. There is also a role for participants in the market, particularly large corporations, to ensure responsible and fair practices are followed through the adoption of codes of best practice reflecting key ethical principles.  It was noted that Microsoft had established six ethical principles to guide the development and use of artificial intelligence — AI systems should be fair, reliable and safe, private and secure, inclusive, transparent, and accountable.[1]

In discussing the risks of autonomous vehicles, one participant noted that current product liability laws would apply, meaning that claims may exist where loss is caused by a vehicle that is found to be defective or unsafe.  It is likely that these laws will evolve to clarify where responsibility lies, and manufacturers and insurers will look to law-makers to set down standards on how autonomous systems that control driverless vehicles should operate in specific situations rather than make these decisions for themselves.

It was noted that the adoption of standards and regulations for AI and IoT would need to be consistent and coordinated on a global level.  International policy-makers such as the Organisation for Economic Co-operation and Development will need to develop standards that will be accepted universally.  With an increasingly fierce arms-race developing between developed nations to be the economic leader in AI and IoT, this will be challenging.

The final point tackled by the group was the need for employment laws to evolve to recognize the changes in employment practices that are likely to flow from the move to automated systems.  Current employment laws are based around the model of employers employing workers at specific worksites, whereas people are increasingly engaged through remote, part-time or project-based work.  As jobs are displaced through adoption of AI and IoT, new skilled roles will be created to develop, monitor and manage the new systems.  Governments will have an important role in ensuring that the education curriculum adapts to ensure students acquire the necessary skills required to support digital capabilities.

[1] Microsoft. 2018. The Future Computed – Artificial Intelligence and its role in society.  https://blogs.microsoft.com/uploads/2018/02/The-Future-Computed_2.8.18.pdf

IoT Update: Will California’s New Autonomous Vehicles Regulations Provide a Roadmap for a National Regulatory Framework on Driverless Cars?

By Jake Levine on Posted in Advanced Vehicles, Internet of Things (IoT)

On April 6th, the California Public Utilities Commission (CPUC) issued a Proposed Decision authorizing pilot testing for autonomous vehicles (AVs) in California. This action follows up on the California DMV’s permitting rules for AVs in California, which would have allowed driverless testing and deployment permits to issue as early as April 2 of this year. The DMV’s action was big news when it broke at the end of February; it meant that AVs could be deployed without any human in the vehicle. Now, the CPUC has proposed a pilot to allow the use of driverless test vehicles with passengers inside as soon as this summer.

While shared and electric mobility has already been deployed at scale, the road ahead for autonomy is still evolving. California is working to tackle this third pillar, and prior to the CPUC’s Proposed Decision, companies like Uber and GM Cruise had urged the Commission to move forward to enable the use of AVs for passenger transportation under existing regulatory frameworks. Lyft encouraged the Commission to address AVs in a rulemaking, noting that it “ma[de] little sense” to wait for Congress to act, or to “scramble” to regulate after AVs are already deployed en masse.

But now that the Proposed Decision has been published, stakeholders need to make sense of it.

The Proposed Decision sets up regulatory frameworks for pilots of “drivered” autonomous testing and “driverless” autonomous testing. In each scenario, the Commission sets out a number of significant requirements, such as, among others:

  • Test AVs must have been in DMV-permitted drivered or driverless operation on California public roads for a minimum of 90 days, and companies must include in their 90-day attestation reporting on data such as disengagements, collisions, hours of operation, and operating environment.
  • No fare-splitting for driverless passenger service is permitted (in other words, no ridesharing in driverless cars).
  • A host of data reporting requirements apply, including reporting, within 24 hours, all communications between the passenger and the remote operator, and monthly public reporting of several other metrics (e.g., vehicle miles traveled (VMT), wait time, etc.).

The tech community has expressed concerns about the CPUC’s draft regulations. In a comment letter filed on April 26th, a group of coalitions representing a large number of multinational technology and automotive companies expressed concerns about CPUC’s Proposed Decision. The coalitions argued that companies should be permitted to charge a fare during pilot testing; that data requirements were overly intrusive; that fare-splitting prevents shared mobility; that the applicability of driver requirements were overly broad; and that data requirements would cause unnecessary delay and pose a risk to privacy and confidentiality.

There will no doubt be further opportunity to refine the CPUC’s longer-term approach to AVs and the regulatory frameworks at play. As part of the CPUC’s Proposed Decision, the Commission has indicated that its Transportation Enforcement Branch will hold a workshop to allow AV stakeholders to better understand the Proposed Decision and to interface with CPUC and DMV staff. And the rulemaking itself (which takes on a broad range of “Passenger Carriers, Ridesharing, and New Online-Enabled Transportation Services” issues) promises additional opportunities for engagement beyond this Proposed Decision. For example, in its April 27 Scoping Memo, which outlines the next steps of the same proceeding, the Commission signaled its intent to consider the possibility of designating an entirely new regulatory category — so-called “Autonomous Vehicle Carriers” (AVC) — to deal with outstanding AVs issues. AV companies have commented that it would be appropriate to simply regulate AVs within the existing categories: Transportation Network Companies (TNCs) or Charter-Party Carriers (TCPs).

Twenty-two states have enacted legislation related to autonomous vehicles, but California’s intensive regulatory development of a new testing regime has the potential to set the tone for a national discussion around implementation. Other states have focused on specific issues, such as definition-setting, data generation and cybersecurity rules, and truck platooning standards. In Arizona and Nevada, autonomous vehicle operators remain free to test without a driver. Meanwhile, in Washington, D.C., the possibility of preemptive federal legislation still looms; and the Department of Transportation continues to provide guidance and seek stakeholder comment.

For now, California companies and regulators have the chance to put pen to paper on a first draft. Given the preponderance of AV companies based in California – including Uber, Lyft, Waymo, and Zoox, not to mention the plethora of technology companies working at the seams of autonomous technology development, such as Nuro, Nauto, and Ridecell — that draft will almost certainly have implications beyond California’s borders.

This post is part of a series of Covington Internet of Things Autonomous Vehicles Updates. Our introductory AV post discussed policy trends in the U.S., Europe, and China. Next up we will be exploring similar AV testing developments in both China and Europe.

FERC Calls For More Comments On Distributed Resource Aggregation

By Bud Earley on Posted in Electric Storage, FERC

Taking another step toward a comprehensive policy on the participation of electric storage resources and other distributed electric resources (DERs) in wholesale markets run by independent grid operators, FERC has requested additional comments on its proposal regarding aggregating DERs and their potential effects on the bulk power system.  FERC’s request follows up on a technical conference.

Background

As reported on this blog in February, FERC approved a final rule that knocked down barriers to electricity storage resource participation in markets administered by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs).[1]  Those rules require each RTO to adopt market rules that recognize the physical and operational characteristics of electric storage resources.

FERC had also proposed to require RTOs to allow DER aggregators to participate in the  markets under rules that best accommodate the physical and operational characteristics of the aggregation.  Such rules are important because individual DERs may be too small to participate directly in the organized wholesale electric markets on a stand-alone basis.  However, FERC wanted additional information on aggregator participation before adopting rules and accordingly held a two-day technical conference in April 2018.

The call for comments

The technical conference addressed (1) the participation of DER aggregations in RTO  markets and, (2) the potential effects of DERs on the bulk power system.  FERC’s call for additional comments was issued in two notices.  Each notice generally addresses one of the two topics discussed at the conference and includes specific questions that commenters may address.

 The notice regarding participation of DER aggregations in RTO markets.  This notice requests comments on the following topics and others:

  • Economic dispatch, pricing, and settlement of DER aggregations.
  • How DER aggregations could locate across more than one pricing node.
  • Bidding parameters or other mechanisms needed to represent the physical and operational characteristics of DER aggregations.
  • Operational impact of DER aggregation on facilities regulated by state and local authorities.
  • Coordination among DERs, aggregators, RTOs and distribution utilities at the integration stage and during ongoing operations.
  • Compensation for DERs that can participate in both RTO and retail markets, including an opt-out provision to allow states to require DERs to choose participation in either the RTO market or retail compensation programs, but not both.

The notice regarding potential effects of DERs on the bulk power system.  This notice requests comments on the following topics and others:

  • Collection and availability of data on DER installations.
  • Regional DER penetration levels and potential effects of inaccurate long-term DER forecasting.
  • How DERs can support or enhance bulk power system reliability.
  • Challenges for DER developers and owners to provide DER real-time data.
  • Incorporating DERs in modeling, planning, and operations studies.

The notices were issued April 27, 2018 in separate dockets and comments are due within 60 days of issuance.

 

[1] For brevity, this post will use the term RTO to refer to both RTOs and ISOs.

FERC Reviewing Gas Pipeline Policy

By Bud Earley and Bill Massey on Posted in FERC, Natural Gas

Under the Natural Gas Act (NGA), FERC certificates the construction and operation of pipelines to transport natural gas in interstate commerce if they are “required by the present or future public convenience and necessity.”  For almost two decades, FERC has used a 1999 policy statement’s guidelines to evaluate whether new pipelines meet that statutory standard.  The use of natural gas has been steadily growing, and in 2017 FERC certificated over 2,700 miles of new interstate pipelines, the highest annual level in history.

Now FERC is conducting a top-to-bottom review of the 1999 guidelines and issued a Notice of Inquiry (NOI) requesting public comments on whether and how they should be revised.  The outcome of FERC’s review could have a significant impact on the development and transportation of shale gas, and the availability of new pipeline capacity to serve increasing demand from gas-fired electricity generators and LNG export facilities.

The 1999 policy statement 

The policy statement sets out the analytical steps the Commission takes in evaluating a new pipeline application.  If the applicant has existing pipeline customers, the threshold issue is that the project must be able to proceed without subsidies from those customers.  This usually means that the project would be incrementally priced.

FERC then conducts what it calls an “economic test” by balancing evidence of the new pipeline’s public benefits against its adverse effects.  FERC determines whether there are any adverse effects on (1) the existing customers of the pipeline proposing the project, (2) existing pipelines in the market and their captive customers, or (3) landowners and communities affected by the new pipeline’s route.  If there are, the Commission may identify conditions that it could impose on the certificate that would minimize or eliminate the adverse impacts.

Where there are residual adverse impacts, an applicant must show a project’s public benefits that are proportional to the project’s adverse impacts.  Examples of public benefits are meeting unserved demand, eliminating bottlenecks, access to new supplies, lower costs to consumers, providing new interconnects that improve the interstate grid, providing competitive alternatives, increasing electric reliability, or advancing clean air objectives.

Applying the guidelines to certificate applications over the years, FERC has shown flexibility.  For example, the NOI notes that as evidence of unserved demand, applicants have most often presented precedent agreements with prospective customers for long-term firm service, and the Commission has accepted those customer commitments as the principal factor in demonstrating project need.

A pipeline application for certification also triggers environmental review under the National Environmental Policy Act (NEPA).  FERC’s review addresses impacts on various environmental resources, including geology, soils, groundwater, surface water, wetlands, aquatic resources, vegetation, wildlife, special status species, cultural resources, land use, recreation, aesthetics, socioeconomics, air quality, climate change, noise, and reliability and safety.

Because the NEPA review typically takes longer than the review of the non-environmental aspects of a proposed project, FERC often initiates its study of environmental impacts at the applicant’s request during the pre-filing stage.  Coordinating with other agencies whose approval is required and ensuring that their concerns and those of stakeholders are adequately addressed can extend the time needed to complete the NEPA review process.

The NOI observes that over the past decade there has been a marked increase in the involvement of federally recognized tribes, affected landowners, and environmental organizations in proposed natural gas project proceedings.  Their concerns have primarily focused on the need for new projects, alternatives, cumulative impacts, and the effects related to the production and consumption of natural gas, particularly the contribution of GHG emissions to global climate change.

The NOI

The NOI notes that in the 19 years since the policy statement was issued, there has been  unprecedented change in the dynamics of the natural gas market.  Among the changes are: (1) a revolution in natural gas production technology leading to dramatic increases in production and areas of production; (2) customers routinely committing to long-term precedent agreements for firm service during the formative stage of projects; (3) increased use of natural gas for electric generation; (4) increased concerns of landowners and communities potentially affected by proposed projects; and (5) increased interest in environmental impacts.

FERC wants comments on potential modifications to its approach for determining whether a proposed project is required by the public convenience and necessity, and has identified four general areas of examination:

Reliance on precedent agreements to demonstrate need for a proposed project.  Recent changes in the gas industry whereby producers are contracting for increasing amounts of pipeline capacity, as well as an increasing number of shippers affiliated with pipeline companies, have raised questions as to whether precedent agreements remain an appropriate indicator of need and whether FERC should examine additional information in evaluating the need for proposed pipelines.

Potential exercise of eminent domain and landowner interests.  After FERC authorizes a project, the project sponsor can assert the right of eminent domain for outstanding lands it could not acquire through a negotiated easement.  Should FERC consider adjusting its consideration of the potential exercise of eminent domain in reviewing project applications, and if so, how?

Evaluation of alternatives and environmental effects under NEPA and the NGA.   There has been increased stakeholder interest regarding the alternatives to a project that the Commission evaluates in its public interest determination, how the FERC addresses climate change, and the evolving science behind GHG emissions and climate change.

Efficiency and effectiveness of the Commission’s certificate processes. FERC wants to improve the transparency, timing, and predictability of its certification process.

With respect to each of these areas, the NOI asks specific questions for commenters to address.  Comments on the NOI are due June 25, 2018.

Coming Up: FERC Conference on Storage Resources in PJM

By Bud Earley on Posted in Electricity, FERC

In its recent landmark Order No. 841, FERC directed Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) to remove barriers to participation by electric storage resources in their wholesale electricity markets.  The expectation is that each RTO/ISO will adopt rules that recognize and compensate physical and operational characteristics of storage resources, including battery storage, boosting their role in the nation’s electricity grid.  Against this policy backdrop, FERC recently issued two orders addressing issues affecting electric storage resources’ participation in one RTO’s regulation service market.

PJM, the RTO operating in the mid-Atlantic region, principally Virginia, Maryland, Delaware, Pennsylvania, New Jersey and Ohio, says its rules are procuring too many dynamic resources such as storage and are causing operational problems.  PJM made market software changes and proposed tariff revisions to address the issues.  Storage entities opposed these changes, claiming discriminatory treatment.  FERC rejected the tariff revisions and directed its staff to hold a technical conference to address the issues raised.  The upcoming technical conference will address the nuts-and-bolts challenges to integrating storage resources into regulation markets in a non-discriminatory manner and its outcome could have implications beyond the PJM market.

Below we summarize some of the complex technical issues presented by participation of  storage resources in PJM’s regulation services market.

Regulation service

As a balancing authority, PJM manages the supply and demand of electricity by economically dispatching generation to meet its load and the scheduled interchange with other balancing authorities.  Real-time imbalances between supply and demand result in an Area Control Error, or ACE, which is the difference between scheduled and actual flows across interconnections with other balancing authorities.  Regulation service is purchased to maintain or return the ACE to zero.

When the ACE indicates an imbalance, a dispatch signal is sent to each regulation resource to raise or lower its output to correct the imbalance.  PJM sends two different types of signals.  One, called RegA, is used to dispatch slower, sustained-output resources, such as steam and combustion resources. A faster signal, called RegD, is used to dispatch faster, dynamic resources, such as battery storage.

PJM experienced problems in its dispatch of resources to supply regulation service and proposed tariff changes to FERC.  Also, PJM took some dispatch actions on its own to alter the dispatch of storage resources.

Tariff order

PJM proposed changes to its tariff to address the following stated problems in its regulation market:

  • The algorithm it uses to establish the tradeoff between RegA and RegD resources to place them on a comparable basis for market clearing purposes was stated to be inflating the procurement of RegD service.[1]
  • The performance, or “mileage,” component of the market settlement equation was stated to result in a higher financial signal for new RegD market entry, contributing to an over-procurement of those resources.[2]

PJM proposed changes to its tariff to address these problems, among them were adopting a different algorithm that determines the tradeoff between RegA and RegD resources and removing the mileage component from the settlement equation.

Storage entities opposed the removal of the mileage component from the settlement equation. The storage entities argued that the proposal violates FERC policy and is unduly discriminatory.  In Order No. 755, FERC required, among other things, that regulation service compensation should be based on the actual service provided and include a performance payment that reflects the quantity of regulation service when following the dispatch signal.   Protests asserted that PJM’s proposal ignores the actual performance of regulation resources, and that under the new algorithm RegD resources will always be under-compensated.

FERC agreed and rejected PJM’s tariff proposal because it does not comply with the requirement of Order No. 755 to compensate all regulation resources based on the quantity of regulation service provided.  FERC found that the proposal does not account for actual mileage in settlement and does not accurately reflect the contribution of RegD resources when they operate.  Because PJM stated that it proposed reforms are interdependent and a change in one area will impact other areas, FERC did not address other aspects of the proposal.

Complaint order

PJM originally designed the RegD dispatch signal to be “unconditionally energy neutral,” within a 15-minute period; in other words, 7.5 minutes of input followed by 7.5 minutes of output.  According to PJM, however, this feature of the signal was causing operational problems.  Because it always signals RegD resources to maintain power balance over a 15-minute interval regardless of the direction PJM needs regulation resources to  move, the signal sometimes causes the RegA and RegD signals to work against each other, i.e., signaling the two types of resources to move in opposite directions, thus impeding efficient regulation control.  According to PJM, at times, hundreds of megawatts of RegD resources were performing in a way that respected their energy neutrality but inhibited PJM’s ability to control the ACE.

To address this issue, PJM had made the following unilateral changes in its dispatch practices over the last few years:

  • Revised a business manual such that the algorithm used to establish the tradeoff between RegA and RegD resources caps the amount of RegD resources that could be procured at 40 percent of the total (down from 62 percent under current rules) and at 26.2 percent during certain hours.
  • Revised its regulation signal software so that the RegA and RegD signals move together in the direction that minimizes ACE and that the RegD signal is “conditionally neutral” over a 30-minute period (instead of 15 minutes). Under “conditional” neutrality, managing ACE is the first priority and neutrality for energy-limited resources such as storage is honored only when system conditions permit.

Storage resource entities filed complaints against PJM’s revisions, arguing that both changes are unduly discriminatory against RegD resources and that both must be submitted for Commission review because they significantly affect the terms of service and thus must be included in a tariff accepted by the Commission rather than in business practice manuals.

With respect to the signal software revisions, storage resources argued that the original energy-neutral signal respected RegD resources’ limited-energy characteristics.  Since the revisions, those resources have been directed to operate outside of their design parameters, making responding to the dispatch signal more difficult and resulting in performance issues, reduced compensation, and adverse impacts on equipment.

FERC found that both the algorithm used to establish the tradeoff between RegA and RegD resources and the parameters of the signals to regulation resources significantly affect the rates, terms, and conditions of regulation service and thus should be included in the PJM tariff .  However, the Commission did not direct PJM to submit a compliance filing but instead directed staff to convene a technical conference to address the issues raised in the complaints.

Technical conference

In the complaint order, FERC says the technical conference should address the issues raised in the complaints, and, given the related issues raised in the tariff case, the conference should also examine PJM’s two-signal regulation market design with respect to the requirements of FERC’s compensation policy.  FERC directed staff to request data and information from PJM and the complainants prior to the technical conference to help inform the discussion,

FERC will issue a separate notice establishing dates and technical conference details.  The conference will be convened under Docket EL17-64 and EL17-65.

[1] PJM purchases regulation service in a bid-based auction market.

[2] A performance payment reflects the quantity of regulation service, or work done, when following the dispatch signal. It is sometimes referred to as “mileage” as it is based on the MW changes from both increasing and deceasing generation.

Covington CleanEquity Conversations

By W. Andrew Jack on Posted in Sustainability

On March 8-9, 2018, a bespoke group of approximately 200 leading entrepreneurs, investors and advisors focused on deploying and commercializing cutting edge technologies gathered in Monte Carlo from across the globe for the 11th annual CleanEquity® Monaco Conference. Complementing other plenary sessions and emerging company presentations, the conference initiated a new feature — Covington CleanEquity Conversations — intended to capture and memorialise the unique thought leadership opportunity presented by the gathering in Monaco. On the first day, conference participants separated into three breakout groups for Chatham House Rule discussions curated by partners from the international law firm Covington & Burling LLP of three critical issues confronting cleantech deployment and commercialisation:

  • AI and IoT – Benefits, Risks, and the Role of Regulation
  • Sustainability – What goals should businesses prioritise and what are the right metrics?
  • Will market driven innovation alone save us from climate change?

On the second day, the Covington team reported during the conference’s final plenary session key takeaways from the three breakout group discussions. Covington and CleanEquity organizer and specialist investment bank, Innovator Capital, are pleased to share brief summaries of the thought leadership developed by the proceedings of conference participants on each of the three topics.

Sustainability -What goals should businesses prioritise and what are the right metrics?

Many global corporations have embraced corporate sustainability and carbon reduction goals. Large equity funds also are examining corporate sustainability practices and using a variety of proprietary or third-party environmental, social and governance or “ESG” ratings to assess corporate progress. But this proliferation of goals and array of often indecipherable ratings systems challenges societal measurement of “sustainability progress.” In a session led by Covington’s Clean Energy Industry Group Chair Andrew Jack, conference participants grappled with the following questions:

  • Do investors need better, more comparable, information about corporate sustainability efforts?
  • What sustainability goals should businesses prioritize?
  • How should sustainability be measured, incentivised and rewarded?

Improving Sustainability Disclosure is Essential

There was strong consensus for the view, from the perspective of both investors and companies, that mere compliance with current government disclosure mandates is insufficient to satisfy investor demands for corporate sustainability disclosures. For example, in the United States, corporations are not legally required to publish sustainability reports. Yet, prompted by investor and other stakeholder needs, at least 82% of the Standard & Poor’s 500 companies publish such reports.

There was equally strong consensus that it is a daunting task for corporate managers to sort through and select among the growing thicket of guidelines and voluntary reporting frameworks. Proliferating disclosure standards promulgated by the Global Reporting Initiative (GRI), Carbon Disclosure Project (CDP), Sustainability Accounting Standards Board (SASB), Task Force on Climate-Related Financial Disclosures (TCFD) and other organizations provide wide latitude for sustainability disclosures. One participant noted that these standards are so diverse and loose that sustainability reports can say just about anything. Another participant commented that this diverse guidance landscape means that ESG rankings and metrics are not sufficiently comparable and thus are not terribly meaningful. Efforts to winnow the goals and metrics surrounding sustainability reporting to a more discrete core set of comparable measures would be beneficial.

Core Sustainability Goals and Priorities

To aid in this winnowing, participants in this breakout session responded to a brief survey rank ordering five separate sustainability goals by assigning 1 to the highest priority and 5 to the lowest. The survey also prompted participants to offer suggestions for other sustainability goals that businesses should pursue. The group prioritised the five enumerated goals as follows:

Rank Average Score Sustainability Goal
1. 2 Reduction of greenhouse gas emissions
2. 2.38 Reduction of fresh water consumption
3. 2.77 Energy efficiency
4. 3.15 Reduction of solid waste disposal
5. 3.38 Avoided deforestation / reforestation

These results reflect quick responses of a relatively small group of cleantech investors and entrepreneurs and therefore may not be representative of the rank ordering of sustainability goals that would be revealed in a survey of a broader segment of the business community. Moreover, within this small group the conversation revealed a fair amount of debate among priorities. One participant suggested that all five goals were equally important to society. This sentiment was echoed by others who observed that the overall objective of corporate sustainability efforts should be to promote human health and well-being, which necessarily requires the simultaneous pursuit of multiple goals. Some in the group suggested that corporations should be guided by the seventeen Sustainable Development Goals adopted by the United Nations that collectively focus on ending poverty, protecting the planet and ensuring prosperity for all. Other specific goals provided by participants included:

  • reducing inequality within societies through inclusive and equitable quality education
  • affording and strengthening gender equality
  • training and upskilling of workers
  • ubiquitous deploying of IoT devices; and
  • enhancing transparency and accountability regarding corporate actions

Measuring Progress
The group encountered some challenge developing metrics that could assess progress toward the sustainability goals. There was consensus that corporations need to establish reliable, transparent baselines against which to measure change and that metrics surrounding generalized goals such as the U.N. SDGs need to measure quantifiable impacts. For the goal of reducing greenhouse gas emissions, the group discussed the feasibility of using GHG emissions per unit of revenue as a metric. Participants generally regarded this as a reasonable tool, provided that it is used to compare performance of companies within specific sectors. For example, the airline industry has a different level of carbon intensity than the consumer electronics industry. Hence the group thought it could be useful to compare the GHG-intensity performance of one airline versus another airline, or one consumer electronics company versus another. But many in the group thought it would be unfair to measure the GHG-intensity of an airline against a consumer electronics company. Some participants, however, argued that it might be reasonable to compare GHG emissions per unit of revenue across different sectors. They observed that industries that are profitable by outsourcing to society the costs of their negative externalities tend over time to face societal pressure to retrench and compensate society for the negative externalities. In this sense, cross-sector comparability of GHG emissions per unit of revenue could be meaningful to accelerate the reduction, and minimize societal costs, of GHG emissions.

Incentives and Rewards

One participant staked the position that sustainability goals provide their own incentives and rewards, in that they are like Maslow’s hierarchy of needs. Corporations taking a long-term view are motivated to achieve all of the sustainability goals, but some take precedence over others. In this vein basic needs for sustainable clean air, water, and food must be met before the higher needs of social equality can be achieved. Another participant noted — as should be self-evident from the gathering of investors and entrepreneurs at the conference — that climate change presents a tremendous business opportunity that more enterprises should embrace. In this respect, businesses that demonstrate the greatest improvement on disrupting and addressing the problem of free riders on negative externalities should receive the greatest rewards. The discussion concluded by returning to the theme that many sustainability goals are linked together and should be considered holistically, keeping in mind the overall purpose to promote human health and social welfare.

FERC Requires Generators to Provide Primary Frequency Response

By Bud Earley on Posted in Electricity, FERC

FERC has approved a final rule requiring generating facilities that interconnect to the grid to provide primary frequency response.[1]  Primary frequency response actions are needed to stop extraordinary deviations from the grid’s target frequency that could cause grid instability.  The North American Electric Reliability Corporation, the group responsible for grid reliability standards, said that “(f)requency response is among the essential reliability services critical to the reliability of the bulk power system.”  FERC notes declining frequency response performance and the impact the evolving generation resource mix on frequency response.

Background

The reliable operation of the alternating current North American electric grid depends on maintaining a frequency near 60 Hertz (Hz).  Frequency variations, however, can occur due to sudden changes in the balance between load and generation and can cause instability, and possibly load shedding, if the frequency deviates too far from 60 Hz.  Frequency responsive control equipment in a generating facility can sense changes in system frequency and, through turbine-governors, autonomously adjust a generator’s output to help move the system frequency back toward 60 Hz.

The final rule is aimed at two problems. First, there are indications that some generator owners and operators within the Eastern Interconnection disable or otherwise set their controls such that they provide little or no primary frequency response.

Second, synchronous generating facilities with standard governor controls have historically been the predominant sources of frequency response service.  However, those generators are being replaced, in part, with non-synchronous variable energy resources such as wind and solar.  FERC observes that variable energy resources have not typically had primary frequency response capabilities.

The final rule

Newly interconnecting generating facilities are required to install, maintain, and operate equipment capable of providing primary frequency response as a condition of interconnection to the grid.  Accordingly, FERC is modifying the standard interconnection agreements to reflect this requirement.

The final rule adds the following obligations to the standard interconnection agreements:

  • Requires generating facilities to install and operate equipment that can sense changes in system frequency and autonomously adjust the generating facility’s output.
  • Sets minimum uniform operating requirements for primary frequency response and prohibits generating facilities from limiting the provision of primary frequency response, except under certain conditions.
  • Requires generating facilities to respond to frequency deviations immediately and sustain the response at least until system frequency returns to a value within an acceptable deviation range.

The new rule does not require generators to operate with headroom, i.e., operate below their maximum operating capability so that there is additional energy to provide primary frequency response.  In addition, the rule does not mandate that a generator receive compensation for providing primary frequency response.  FERC observes that the cost of installing, maintaining, and operating a governor or equivalent controls is minimal but the rule does not prevent a public utility from requesting compensation.

The new interconnection agreement conditions apply to:

  • Newly interconnecting generating facilities, including distributed energy resources, that execute interconnection agreements on or after the effective date of the final rule; and
  • Generating facilities that already have an executed or filed interconnection agreement but that take any action request that results in an interconnection agreement filed on or after the effective date of the final rule.

The final rule provides exemptions or accommodations for the following types of generation resources:

  • Combined heat and power. Newly interconnecting CHP facilities that are sized to serve on-site load and have no material export capability are exempt from the operating requirements of the rule but must install control equipment capable of providing primary frequency response.
  • Electric storage resources.  Interconnection agreements must include specific accommodations for storage resources and limitations regarding when they will be required to provide primary frequency response, such as identifying an operating range within which storage resources will be required to provide primary frequency response and identifying  circumstances when storage resources will not be required to provide primary frequency response.
  • Nuclear facilities. Nuclear generating facilities are exempt from the final rule due to their unique operating characteristics and the regulatory requirements of  the Nuclear Regulatory Commission.

The final rule is effective 70 days from publication in Federal Register.

[1] This blog reported on the Commission’s proposal as well as its call for additional comments to address certain issues.

Reforming Permitting Approval Process a Centerpiece of President Trump’s Infrastructure Plan

By John Mizerak and Ingrid Rechtin on Posted in Infrastructure Development, NEPA

Earlier this week, President Trump released the outline of his infrastructure plan, which includes over three dozen proposals intended to reduce delay, inefficiency and redundancy in the project permitting process.  The plan contemplates amendments to major federal environmental statutes, including the National Environmental Policy Act, the Clean Air Act, and the Clean Water Act.

The chief goal of the proposed reforms—highlighted in both the President’s recent State of the Union Address and an earlier Executive Order—is to streamline the permitting process so that federal agencies approve projects in two years or less.  The plan establishes a “firm deadline” for lead agencies to complete environmental reviews and issue a Record of Decision (ROD) under NEPA within 21 months, and requires them (or a state agency acting pursuant to delegated authority) to issue or deny any necessary permits within 3 months thereafter.

The plan lacks detail regarding just how such a deadline would be enforced, stating only that “appropriate enforcement mechanisms” would be established.  What these might be appears to be in flux:  an earlier draft plan, made public about two weeks before the President’s official release, outlined a review process by the Federal Permitting Improvement Steering Council for agencies that missed deadlines.  This process was omitted from the final product.

The guiding principle underlying many of the proposed reforms is eliminating overlapping agency authority and duplicative review in the permitting and review process.  For example, the plan establishes a “One Agency, One Decision” environmental review structure, and requires a single environmental review document and ROD to be signed by all involved agencies.  Agencies would be directed to focus only on their areas of “special expertise,” and would be permitted to rely on the determinations of other agencies that certain projects are categorically exempt from environmental review, instead of having to conduct their own independent assessment.  As another example, the authority to issue dredge and fill permits under section 404 of the Clean Water Act would be consolidated in the U.S. Army Corps of Engineers.  The Corps would gain final authority to construe the jurisdictional terms “navigable waters”/”waters of the U.S.” under section 404 of the Act—authority that currently rests with EPA, though both agencies currently exercise it pursuant to a Memorandum of Agreement—and EPA would lose its current ability to veto a 404 permit.

The plan also contains a number of other provisions intended to speed the infrastructure permitting process, including calling for procedures to expedite review for projects likely to result in positive environmental impacts, and limiting the availability of injunctive relief to stop projects that have already been approved pending a court challenge.  The plan also requests that two pilot programs be established which would exempt projects wholesale from environmental review in lieu of performance-based review or negotiated environmental mitigation.

Several of the proposed changes, including the idea of setting deadlines for agency action, draw from the report Two Years, Not Ten Years: Redesigning Infrastructure Approvals, issued by the nonpartisan reform organization Common Good.  Philip K. Howard, Senior Counsel at Covington & Burling LLP, was the lead author of the report, and E. Donald Elliott and Gary Guzy, each a former general counsel of EPA and members of the firm’s environmental practice group, contributed pro bono legal advice.

It remains to be seen which if any of these proposals will be enacted into law.  The President’s plan is merely an outline, and no proposed statutory language implementing these ideas has yet been made public.

Does California Offer a National Model For Energy Storage Rules?

By Jake Levine on Posted in California, Energy Storage, Renewables

Energy storage has frequently been cited as the critical missing link in an electric infrastructure designed to maximize the benefits of cheap, renewable energy.  Because energy from the sun and the wind is inherently intermittent, it has not been able to satisfy a round-the-clock need for electricity.  And in many places we’ve built more renewable capacity than we can use, when the sun is shining, or when the wind is blowing.  For example, in sun-soaked California and the West, electric grid operators have recently been confronted by the challenge of “over-generation” during peak solar hours of the day, which can result in the curtailment of solar generation to avoid overloading the grid with electrons.  Similarly, in Texas, so much wind blows at night that the electricity off-takers can sometimes get paid through “negative” power prices to use the wind power.

For California, a state that has set its electric grid on a path toward 50% renewable by 2030 (SB 350 (De León)), and one that is considering a 100% RPS by 2045 (SB 100 (De León)), the question of energy storage has taken on a practical significance.  And regulators at the federal and state level have been quite busy taking down barriers that have made the increased adoption of energy storage resources impracticable.

Today Bud Earley of Covington blogged about the recent approval at the Federal Energy Regulatory Commission (FERC) of its 2017 electric storage rulemaking.  That rule set out broad market criteria for the participation of energy storage resources in regional electricity markets, and left the question of distributed energy resources (DERs), for a later date.

Given its innovative policy work on both fronts, California is a natural market to look to for policy models that may be relevant beyond the California ISO (CAISO).  In California, state regulators have already begun seeking comment and setting rules for the participation of both DERs and energy storage in the market.  The CAISO has begun, for example, reviewing applications from some companies, including investor-owned utility companies, to seek approval as distributed energy resource providers (DERPs); and the CAISO has sought and received approval from FERC to seek tariff proposals that allow DERPs to aggregate and sell resources in the grid.  And with respect to energy storage, the state regulator — the California Public Utilities Commission (CPUC) — recently issued a decision for new “multiple-use” applications for energy storage, which allow storage providers to “stack” various services.

This CPUC decision, in combination with FERC’s rule, and adjacent statewide efforts on DERs, will continue to reduce friction in the market for energy storage.  The concept of “stacking” is designed to allow the grid to more completely take advantage of the various services offered by energy storage technologies (as well as allowing storage providers to more completely market and sell the various incremental values storage provides to the wholesale market, the transmission and distribution grids, the customer, and to resource adequacy).  For example, a storage facility that might ordinarily have been under contract for frequency regulation services could, in a stacking scenario, also sell services to provide when it would have otherwise been idling, such as additional capacity, resource adequacy, or peaking.

The CPUC’s decision adopted eleven interim rules outlining how these multiple-use applications should be evaluated, and established a Working Group, to be convened by the CPUC Energy Division, and in coordination with the CAISO, to “develop actionable recommendations.”  For example, the CPUC specifically sought input from the Working Group on possible modifications to Rule 6, which deals with how storage resources may contract for reliability services.  Notwithstanding the work that remains to fine tune the rules in this decision, it holds the promise of providing additional revenue streams to energy storage providers who in turn might develop innovative financing and service agreements to bring projects online.  As California begins to turn toward preferred resources offerings in lieu of traditional “must-run” contracts or to replace traditional energy infrastructure (see, e.g., Aliso Canyon procurement), the prospect of valuing energy storage projects for their various benefits introduces a new degree of financial competitiveness for storage.

In addition to engaging through the forthcoming CPUC and CAISO Working Group, stakeholders have been encouraged to participate in the state’s energy storage process through the CAISO’s Energy Storage and Distributed Energy Resources (ESDER) initiative.  And the state legislature has also been active on this topic in recent years, introducing numerous bills (some of which, such as AB 2868 (2016), have passed) with the intention of deploying additional storage resources into the California grid; this year’s legislation on a 100% RPS (SB 100 (De Leon)) and on a regionalized grid (AB 813) (Holden)) are likely to address energy storage in some capacity.

FERC Lowers Barriers to Electricity Storage

By Bud Earley on Posted in Electricity, FERC

The Federal Energy Regulatory Commission (FERC), with four new Commissioners confirmed during the latter half of 2017, including a new Chairman, is taking a critical next step toward clearing away obstacles to wholesale market participation by storage resources, a key emerging technology.

At its recent public meeting, FERC approved a final rule that largely adopted its 2016 proposed rule aimed at knocking down barriers to electricity storage resource participation in markets administered by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs).[1]  Four of the FERC commissioners issued separate statements supporting the rule.[2]

As reported on this blog, FERC’s 2016 proposal also would have required RTOs and ISOs to allow distributed energy resource aggregators to participate in the markets.  However, the Commission said it needs additional information on aggregator participation and will hold a technical conference.

The Energy Storage Association said FERC’s new rule “signaled both a recognition of the value provided by storage today, and more importantly, a clear vision of the role electric storage can play, given a clear pathway to wholesale market participation.”

In the wake of this final rule, market observers are expecting a flurry of activity and development in storage.  How FERC manages RTO implementation, and how innovative technology providers respond to the RTO market rules, will continue to shape the nascent market for real-time electric storage resource services.  Energy storage has been a prominent issue among California policymakers, and Jake Levine in Covington’s Los Angeles office has today posted a blog about storage policy developments in California.  A link to his blog is here.

Market rules for storage resources

Current market rules designed for traditional generation resources can create barriers to entry for emerging technologies, such as electric storage resources, and limit the services they can provide.  In its order, FERC finds that better integration of electric storage resources into the RTO markets is necessary to enhance competition and ensure that these markets produce just and reasonable rates.

The new final rule requires each RTO to adopt market rules that recognize the physical and operational characteristics of electric storage resources.  Those rules must do the following:

Ensure that electric storage resources are eligible to provide all services that they are technically capable of providing.  Some organized wholesale market rules now limit the services that electric storage resources may provide.  For example, smaller electric storage resources are  generally restricted to participating in the markets as demand response, which can limit their ability to employ their full operational range and prohibit them from injecting power onto the grid.

Ensure that storage resources can be dispatched and can set the wholesale market clearing price as both a wholesale seller and wholesale buyer.  Storage resource participation as both sellers of services and buyers of energy will improve market efficiency and competition by allowing the RTO to dispatch these resources in accordance with their most economically efficient use.  In addition, participation as dispatchable load will allow storage resources to set the market clearing price, thus better reflecting their value and ensuring they are dispatched based on the highest value service they are capable of providing.

Account for the physical and operational characteristics of storage resources through bidding parameters or other means.  The physical and operational characteristics of a resource must be accounted for so that the RTO can model and dispatch the resource consistent with its operational constraints.  Some characteristics are flexible and can be changed through a resource’s offer or bid while others are static and thus would not change in an offer or bid.  Accordingly, FERC recognizes there may be means other than bid parameters to account for physical characteristics that do not change over time, such as reporting that information when registering as a market participant, and allows RTOs some flexibility.

Set a minimum size requirement not to exceed 100 kW for participation in the organized wholesale markets.  Electric storage resources range in size from 1 kW to 1 GW, and most of them tend to be under 1 MW.  FERC observes that all RTOs already have the modeling and dispatch software capabilities to accommodate the participation of resources that are as small as 100 kW.

Specify that the sale of energy from the market to a storage resource that the resource sells back to the market must be at the wholesale market clearing price. FERC has found that the sale of energy from the grid that is used to charge electric storage resources for later resale into the energy or ancillary service markets constitutes a sale for resale in interstate commerce.  As such, the just and reasonable rate is the RTO market’s wholesale Locational Marginal Price.

The rule applies to resources that voluntarily participate in RTO markets and are capable of receiving electric energy from the grid and storing it for later injection back to the grid, regardless of their storage medium (e.g., batteries, flywheels, compressed air, and pumped-hydro).  FERC clarified that the rule applies to storage resources located on the interstate transmission system, on a distribution system, or behind the meter, and rejected a request to allow states to decide whether storage resources located behind a retail meter or on the distribution system may participate in the RTO markets.

Each RTO must file tariff changes needed to implement the requirements of this final rule within 270 days of its publication in the Federal Register.

Market rules for distributed energy resource aggregators

FERC’s 2016 proposal recognized that individual distributed energy resources may be too small to participate directly in the organized wholesale electric markets on a stand-alone basis.  For example, they may not meet the minimum size requirements to participate or have difficulty satisfying all of the operational performance requirements.  The proposal would have required each RTO to allow distributed energy resource aggregations, including electric storage resources, to participate directly in the wholesale electric markets under rules that best accommodate the physical and operational characteristics of the aggregation.

FERC found that it needs additional information before deciding what action to take regarding distributed energy resource aggregation reforms.  Accordingly, the Commission will hold a two-day technical conference in April.

[1] For brevity, this post will use the term RTO to refer to both RTOs and ISOs.

[2] Separate statements were issued by Commissioners LaFleur, Chatterjee, Powelson and Glick.

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