Southern California Edison Co. (SCE) is requesting regulatory approval to recover over $50 million from ratepayers to analyze the feasibility and cost of a "commercial-scale" clean hydrogen power generation (CHPG) facility that would gasify coal to fuel a combined-cycle power plant and sequester the associated carbon emissions underground. If the study demonstrates the CHPG technology to be commercially viable, SCE intends to request the authority to build, own, and operate the facility.
This request to have ratepayers fund an essentially research and development (R&D) expenditure warrants revisiting fundamental industry structures and relationships.
During the era when vertically integrated utilities provided all electric services, ratepayer funding for utility-conducted R&D reflected a natural extension of the monopoly franchise. The absence of a competitive wholesale market dictated that, if regulators deemed investments in energy R&D beneficial to ratepayers, the utility would necessarily conduct the R&D, and ratepayers necessarily funded it. In theory, ratepayer funding made sense because ratepayers would benefit from R&D that enabled the utility to offer better products at lower prices.
Given changes in the industry structure, the question now is whether ratepayer funding of utility R&D remains appropriate.
Who should fund R&D?
Is ratepayer funding for utility-conducted R&D consistent with today's wholesale competitive market structure? No. SCE's proposal presupposes that, "[a]s a public utility, [it] is uniquely positioned to be the instrument of public policy needed to advance CHPG technology." Such reasoning ignores 30 years of market transformation that has limited the utility monopoly to distribution service. In light of these changes, regulators should not unquestionably accept ratepayer funding of utility R&D. Rather, they should fully assess whether other funding mechanisms, available through competitive markets and commercial arrangements, promise greater advantages.
In 2006, the New York Power Authority (NYPA) issued a request for proposals (RFP) to procure electric generating capacity from a "clean coal" power plant. NRG Energy won the RFP, obtaining a conditional contract to sell power from a 680-MW integrated gasification combined-cycle plant designed to sequester the related carbon emissions. This approach illustrates how competitive markets can better align incentives related to energy R&D funding. Presumably, NRG's bid price reflected costs associated with the R&D required to commercialize the technology that was required to fulfill its contractual commitments. If NRG's R&D investment yields a commercially viable facility, both it and NYPA ratepayers will benefit; if it fails, the developer will absorb the costs.
In contrast, when ratepayers fund utility R&D, they are responsible for the costs, and for the utility "made whole," whether or not the R&D is successful.
There is an alternative. Given the increasing interest in climate change and greenhouse gas–related issues, and Wall Street's appetite for investing in "green" technologies, additional investors and developers will likely be willing to partner in similar solicitations.
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