Technical Report

NREL/TP-6A20-61570

April 2014

Contract No. DE-AC36-08GO28308

The Evolving Role

ofthe Power

Sector Regulator

A CLEAN ENERGY REGULATORS INITIATIVE REPORT

Owen Zinaman and Mackay Miller

National Renewable Energy Laboratory

Morgan Bazilian

Joint Institute for Strategic Energy Analysis
Technical Report

NREL/TP-6A20-61570

April 2014

Contract No. DE-AC36-08GO28308

The Evolving Role ofthe

Power Sector Regulator

Owen Zinaman and Mackay Miller

National Renewable Energy Laboratory

Morgan Bazilian

Joint Institute for Strategic Energy Analysis

Produced under the guidance of the Department of Energy and the Clean Energy Ministerial by the National 

Renewable Energy Laboratory under Interagency Agreement S-OES-12-IA-0010 and Task Number 

WW3N.1000.

NREL is a national laboratory of the U.S. Department of Energy, Office of Energy Efficiency & Renewable Energy, 

operated by the Alliance for Sustainable Energy, LLC.
NOTICE 

This manuscript has been authored by employees of the Alliance for Sustainable Energy, LLC (“Alliance”) under Contract No. DEAC36-08GO28308 with the U.S. Department of Energy (“DOE”). 

This report was prepared as an account of work sponsored by an agency of the United States government. Neither the United 

States government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any 

legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process 

disclosed, or represents that its use would not infringe privately owned rights. Reference herein to any specific commercial

product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply its 

endorsement, recommendation, or favoring by the United States government or any agency thereof. The views and opinions of 

authors expressed herein do not necessarily state or reflect those of the United States government or any agency thereof. 

Printed on paper containing at least 50% wastepaper, including 10% post consumer waste. 
iii

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Abstract

This paper seeks to briefly characterize the evolving role of the power sector regulator. Given 

current global dynamics, regulation of the power sector is undergoing dramatic changes. This 

transformation is being driven by various factors including technological advances and cost 

reductions in renewable energy, energy efficiency, and demand management; increasing air 

pollution and climate change concerns; and persistent pressure for ensuring sustainable economic 

development and increased access to energy services by the poor. These issues add to the already 

complex task of power sector regulation, of which the fundamental remit remains to objectively 

and transparently ensure least-cost service delivery at high quality. While no single regulatory 

task is trivial to undertake, it is the prioritization and harmonization of a multitude of objectives 

that exemplifies the essential challenge of power sector regulation. Evolving regulatory roles can 

be understood through the concept of existing objectives and an additional layer of emerging 

objectives. Following this categorization, we describe seven existing objectives of power sector 

regulators and nine emerging objectives, highlighting key challenges and outlining 

interdependencies. This essay serves as a preliminary installment in the Clean Energy Regulatory 

Initiative (CERI) series, and aims to lay the groundwork for subsequent reports and case studies 

that will explore these topics in more depth. 

Acknowledgments

This report was produced in part through generous financial support from the International 

Copper Association. The authors also acknowledge Jaquelin Cochran and Jeffrey Logan for their 

support of this work. 
1 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

1 Introduction

Across the globe, the power sector–and regulation of it–is undergoing profound change. 

Regulators are, as always, tasked with balancing a multitude of objectives in order to optimize 

for least-cost service delivery, ensuring high quality and reliability (Bazilian et al. 2013). Yet, as 

policy directives and technology continue to evolve, they increasingly face pressure to address 

environmental and social goals, namely via increased incorporation of clean energy 

technologies.

1,2 Furthermore, small producers, responsive consumers, and variable renewable 

resources continue to permeate many electric systems, creating a fundamental shift in how power 

systems operate, and therefore how the sector must be regulated. While these new technologies 

present new challenges for regulators, as will be detailed in this paper, they also present new 

opportunities to address social and environmental goals. 

The key challenge of modern-day power sector regulation is reconciling the new regulatory 

objectives of this evolving landscape with the already difficult task of balancing existing 

objectives. This paper aims to catalogue the various objectives of power sector regulators, 

highlighting challenges, opportunities, and interdependencies. It is intended to serve as a 

preliminary installment in the Clean Energy Regulatory Initiative (CERI) series, and aims to lay 

the groundwork for future publications that will explore these topics in more depth. 

 

1 In this paper, we define clean energy technologies generally as those which encourage efficient and low-carbon 

power system operation. 

2 See, e.g., Abdullah et al. (2014); Acevedo and Molinas (2012); Arteconi, Hewitt, and Polonara (2013); Bellekom 

et al. (2012); Bernardon et al. (2014); Breukers et al. (2011); Camblong et al. (2009); Fadaeenejad et al. (2014); Koh 

et al. (2013); Mai et al. (2012); Warren (2014); Zeng et al. (2014); and Sioshansi (2012). 
2 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

2 The Complex Objectives of Power Sector 

Regulators

Electricity regulation seeks to navigate many constraints in order to achieve policy and social 

objectives. The interdependencies among these constraints comprise the central challenge of 

regulation. Emergent policy goals, such as addressing climate change, add complexity to the 

already difficult task of power sector regulation. In many markets, utility business models will be 

challenged (Kind 2013; Lehr 2013) and associated principles and models of regulation will need 

to evolve as well. Evolving regulatory roles can be understood through the concept of existing 

objectives and an additional layer of emerging objectives (Figure 1). Following this taxonomy, 

we provide a brief, high-level overview of the existing and emerging objectives of power sector 

regulation.

3

 

Figure 1. Schematic of existing and emerging regulatory priorities

 

3 For more thorough and fundamental overviews of power sector regulation, see, e.g., Pérez-Arriaga (2013); 

Rothwell et al. (2003); and Stoft (2002). 

Existing 

Objectives

Design and Manage Electricity Tariffs

Maintain System Reliability , Meet Demand 

Growth, and Expand Electricity Access

Ensure Financial Health of Utilities

Facilitate Private Investment

Protect the Interests of the Poor

Support Technical Safety and Reliability of 

Power System

Enhance Energy Security and Manage Risk

Emerging 

Objectives 

Reduce Health and Environmental Impacts of 

Power System Operation

Meet Rapidly Growing Demand While 

Minimizing Environmental Impacts and Risk

Support Procurement of Renewable Energy

Integrate Renewable and Distributed Generation 

Resources to the Grid

Incentivize Energy Efficiency, Demand Side 

Management and Smart Grid Technologies

Utilize Microgrid Technology

Facilitate Consumer Participation in Power 

Markets

Enhance Cybersecurity and Protect Privacy

Manage Increased Interactions with Other 

Sectors
3 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

2.1 Existing Objectives

• Design and Manage Electricity Tariffs

A core regulatory task is to design fair and equitable electricity tariffs for numerous customer 

classes and periodically review and redesign those tariffs considering a variety of objectives. 

Inherent to this process is the balancing of costs, benefits, and risk among ratepayers, 

utilities, and private investors, as well as aligning tariffs with public policy objectives. Tariffs 

must be designed at rates high enough to maintain the financial and operational health of the 

utility, attract private investment, meet growing demand, minimize outages, and address a 

variety of other capital-intensive objectives. Yet, consumer costs must be low enough to 

promote continued economic growth and productivity, protect the interests of low-income 

populations, and prevent ratepayers from providing windfall profits to utilities and private 

investors. Tariffs for one rate class may be subsidized by other rate classes or government 

budgets. Raising rates to reflect the true cost of delivered electricity may be necessary in

many settings to ensure the financial health of the utility, but this option may be politically or 

economically unattractive.4

• Maintain System Reliability, Meet Demand Growth, and Expand Electricity Access

Electricity disruptions and supply shortages can have significant economic costs to a 

jurisdiction as a whole (Balducci et al. 2002; Sanghvi 1982). During power shortages, 

utilities often rely on load shedding, industrial load response, or expensive emergency power. 

Coordinated planning efforts, large capital expenditures, and associated rate increases are 

often required to meet demand growth and maintain system reliability, particularly in the 

context of rapid economic growth. Many settings already experience deteriorating 

infrastructure, unmet demand, power quality issues, power scarcity, and large technical and 

non-technical losses; raising financing under these conditions may pose difficulties. 

Expanding access to unserved customers has historically required significant capital 

investment; however, those without electricity are often poor and living in sparsely populated 

regions. Without a sizable, financially equipped customer base to expand service to, such 

projects on a stand-alone basis may not be financially viable. The regulator is tasked with 

assigning costs across rate classes to pay for such projects, as well as coordinating with 

government and international development efforts to optimally execute electrification efforts. 

• Ensure Financial Health of Utilities 

Financially healthy utilities are able to invest in system improvement and to borrow capital 

from private institutions at lower interest rates, reducing debt service costs to ratepayers. 

Financial health also reduces uncertainty that a utility will be able to honor power purchase 

contracts from independent power producers. Regulators must establish a regulatory 

framework that ensures the financial health of utilities while incentivizing operational 

efficiency. Tariffs must be designed such that utilities are able to recover costs with a 

reasonable rate of return, maintain the technical health of the electricity system, retain and 

expand necessary staff, expand infrastructure to meet growing and unmet demand, and 

accomplish other objectives. 

 

4 For a recent overview of electricity tariff fundamentals, see Reneses, Rodríguez, and Pérez-Arriaga (2013). 
4 

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• Facilitate Private Investment

Private investments help to take strain off of utility balance sheets or government budgets as 

capital expenditures and associated financing costs are avoided. To the extent that a power 

sector is open to private investment, and perhaps aims to increase such investment, the 

regulator must create a stable investment ecosystem. The regulator will help to facilitate 

power purchase or transmission use agreements, and provide private investors with certainty 

that those contracts will be honored. Avoiding erratic and non-transparent decision making 

helps to reduce investors’ perceived regulatory risk and contributes to keeping the utilities’ 

cost of capital low.

• Protect the Interests of the Poor

Regulators often have statutory mandates or experience political pressure to protect the 

interest of low-income customers. Tariff design is their key apparatus to do so as rates can be 

constructed to provide free or low-cost electricity to poor customers – though potentially at 

the cost of increased rates to other customer classes. Central or state governments may 

provide subsidies for these activities as well. 

• Support Technical Safety and Reliability of Power System

Regulators must work with system operators, utilities, and standards bodies to develop and 

enforce standards for the safe interconnection to and operation of the power system. This task 

includes, but is not limited to: establishing technical requirements for transmission and 

distribution (T&D) expansion and power system components, rules for interconnection of 

utility-scale and distributed generation (DG) systems, and standards for maintenance 

practices and data collection systems.

5

• Enhance Energy Security and Manage Risk

Regulators, often in coordination with other government actors, play a key role in facilitating 

an energy-secure power sector (Jamasb and Pollitt 2008). Regulators create frameworks to 

promote long-term security of supply for fuels used at generation facilities, minimize the 

frequency of fuel scarcity events, and insulate captive consumers from fuel price volatility 

and scarcity-related spikes. They must consider natural resource endowments and geospatial 

disparity in natural resource availability, geopolitical considerations and associated imported 

fuel delivery risks, and potential fuel price volatilities and hedging strategies. Facilitating 

utilization of a diverse portfolio of domestically produced energy sources is a key strategy to 

mitigating the risk of abrupt supply disruptions or fuel price spikes (Bahgat 2011; Lee et al. 

2012). Utilities that are able to pass unexpected fuel price increases to consumers may lack 

incentive to consider fuel price risk; in this case, the regulator is required to assure riskadjusted capacity expansion decisions are made (Binz et al. 2012; Awerbuch 2006).

6

 

5 For a more extensive review of this topic, see, e.g., Glover, Sarma, and Overbye (2011) and Dhillon (1983). 6 For an overview of risk-aware regulation practices, see Binz et al. (2012). For an overview of energy security 

regulation strategies, see Barton (2004). 
5 

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2.2 Emerging Objectives

Against this backdrop of existing objectives, regulators also face emerging objectives, driven by 

technological change, evolving social priorities, and global events. Some of these objectives are 

new while others represent evolutions of existing objectives. These objectives include: 

• Reduce Health and Environmental Impacts of Power System Operation

Depending on its composition, electricity generation infrastructure has significant impacts on 

local and regional air quality, public health [31,32], water resources [33,34], and global 

carbon emission levels [35]. Mandates to reduce environmental impacts may clash with 

objectives to contain costs, meet growing demand, and maintain system reliability. In order 

to meet environmental requirements, utilities may be required to invest in high-costmitigating technologies such as emissions controls systems or cooling technologies that 

lower water impacts; in some cases, utilities may opt to shut down power plants in lieu of 

retrofits, increasing stress on power reserve margins [36]. Regulators are tasked with 

overseeing and approving these decisions and balancing environmental objectives with others 

in planning and capacity procurement decisions. 

• Meet Rapidly Growing Demand While Minimizing Environmental Impacts and 

Risk

Globally, the size of the middle class is expected to increase by 1.4 billion between 2009 and 

2020 (Pezzini 2012). Reconciling the resulting demand for electricity with environmental 

objectives and the goal of low prices is a signature challenge for many regulators. Energy 

efficiency (EE) plays a key role in striking this balance. In contrast, pursuing purely supplyside strategies of fast, low-cost generation investments may lock utilities into using fuels and 

facilities that are subject to significant market price volatility (Bazilian et al. 2013; Kalkuhl, 

Edenhofer, and Lessman 2012). Such investments also introduce the risk that assets will be 

stranded as the sector moves towards decarbonization. Regulators are tasked with making 

prudent, risk-adjusted decisions for capacity expansion in concert with EE to meet growing 

demand. 

• Support Procurement of Renewable Energy

There has been an intensified interest in accelerating renewable energy (RE) deployment in 

many settings. Regulators are tasked with designing RE incentives and regulating their 

integration into T&D systems. Incentives such as feed-in-tariffs (Couture et al. 2010), adders 

(Tongsopit and Greacen 2013), or auctioned long-term contracts (Maurer and Barroso 2011)

aim to achieve desired levels of renewable development while appropriately limiting the 

costs to consumers. While conventional technology costs change relatively slowly, a key 

challenge of RE regulation is setting tariffs in the context of declining RE technology costs. 

• Integrate Renewable and Distributed Generation Resources to the Grid

Regulators are tasked with setting rules that ensure reliable and safe operation and that 

appropriately allocate renewable integration costs across various stakeholders. Low-cost 

distributed generation resources, especially solar photovoltaic systems, are becoming widely 

available in many jurisdictions (REN21 2013). As these systems permeate low-voltage 

distribution systems, new forms of regulation are needed to accommodate them (Scheepers 
6 

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and Jansen 2007; Ropenus and Skytte 2005). Regulators must create interconnection 

protocols which address distribution and transmission infrastructure limitations, voltage 

regulation, and other power quality issues. They are also involved in facilitating financial 

arrangements between generators and utilities, including setting network tariffs, 

infrastructure connection charges, and system utilization charges. DG systems may clash 

with traditional utility business models and financial arrangements must attempt to balance 

the costs and benefits of DG across various stakeholders (Cossent, Gómez, and Frías 2009). 

As DG penetration levels increase, more active planning, management, and oversight of 

distribution networks will be required of regulators (Lopes et al. 2007).

7

 

• Incentivize Energy Efficiency, Demand Side Management, and Smart Grid 

Technologies 

EE, demand side management (DSM), and smart grid programs present low-cost 

opportunities to meet growing and unmet demand, reduce strain on reserve margins, and 

benefit individual customers. Smart grid systems can ease integration of distributed 

generation (Eurelectric 2013), and advanced metering systems are key to enabling time-ofuse tariffs or dynamic pricing to help manage demand and impact consumer behavior 

(Marques, Bento, and Costa 2014; Agrell, Bogetoft, and Mikkers 2013). However, these 

systems may clash with legacy utility business and regulatory models, which rely on 

increased sales volumes to increase revenues. Regulators are tasked with assigning costs, 

benefits, and risks of EE and DSM programs appropriately across various stakeholders, and 

may oversee jurisdictions where there is limited availability or awareness of EE products. 

They also must establish clear and robust protocols for measuring and verifying savings from 

EE and DSM programs. 

• Utilize Microgrid Technology

In developed settings, microgrids present opportunities to increase resiliency against outages 

and cyber-attacks, provide ancillary services, and accelerate the deployment of distributed 

energy resources (Mercurio 2013; Yuen and Oudalov 2007; Chowdhury, Crossley, and 

Chowdhury 2009). In developing settings, many utilities face chronic challenges expanding 

electricity access; bottom-up network expansion using microgrids with “backwards 

compatibility” to central grid infrastructure presents a novel opportunity for expanding 

electricity access (Zeng et al. 2014; Raman et al. 2012; Xu and Chowdhury 2013; Deshmukh, 

Carvallo, and Gambhir 2013; Greacen, Engel, and Quetchenbach 2013; Tenenbaum, 

Greacen, and Siyambalapitiya 2014). With these new opportunities come new regulatory 

challenges, including establishing new interconnection and operation standards, creating 

streamlined permitting processes, facilitating sustainable business models, and spreading 

costs and risks appropriately.

8

 

 

7 For an overview of distributed generation impacts, interactions, challenges and benefits, see Pepermans et al. 

(2005) and Ackermann and Knyazkin (2002). 8 For an overview of regulatory principals for off-grid electrification, see Reiche, Tenenbaum, and Mästle (2006). 

For an overview of emerging business models for electricity access, see Peterschmidt et al. (2013) and Bardouille 

(2012). 
7 

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• Facilitate Consumer Participation in Power Markets

In many jurisdictions, due to new technologies and business models, consumers are now able 

to directly participate in power markets. This is one of the most rapidly changing aspects of 

the power sector in many jurisdictions, and the benefits of participation are significant for 

individual consumers as well as the power system as a whole (Gelazanskas and Gamage 

2014; Zehir and Bagriyanik 2012). A more active and participatory demand side brings new 

challenges for regulators in managing risk, revenues, reliability, and quality of supply. In 

order to facilitate increased demand-side participation, new tariff structures, dynamic market 

pricing schemes, demand aggregation guidelines, and market-bidding rules are likely 

required (Arteconi, Hewitt, and Polonara 2013; Warren 2014; Finn and Fitzpatrick 2014; 

Brennan 2010). 

• Enhance Cybersecurity and Protect Privacy

As more complex information and communication technology (ICT) systems are being 

deployed in modern grids, new cybersecurity challenges and privacy concerns are arising as 

well (Cárdenas and Safavi-Naini 2012). Regulators, in conjunction with other government 

actors, are increasingly being asked to incorporate cybersecurity considerations into their 

reliability planning (Pearson 2011; Kumar, Pandey, and Punia 2014). Furthermore, as ICT 

systems generate more consumer data, regulators may be asked to issue regulations which 

preserve the privacy of consumers (Malashenko et al. 2013). 

• Manage Increased Interactions with Other Sectors

Interactions with other sectors of the economy are widening the traditional scope of power 

regulation. These include growing interaction with water and food systems, transport 

infrastructure (for example electric vehicles), and relationships between RE and natural gas 

markets (Lee et al. 2012; Bazilian et al. 2011; Richardson 2013; Cochran et al. 2014). These 

energy system integration or “nexus” issues are gaining traction in international and countrylevel policy dialogues and will likely be increasingly incorporated into power sector decision

making. 
8 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

3 Conclusion

Here, we have considered some of the complexities of the evolving role of power sector 

regulation. As emerging objectives become more prominent, the task of power sector regulation 

grows even more complex. In this context, a thoughtful examination of the current landscape and 

more importantly, a path forward, will be critical to the rapid global development of low-carbon 

electricity systems. The state of clean energy regulation is nascent in most jurisdictions, and will 

require experimentation and collaboration. There is no one-size-fits-all solution to navigating this 

constellation of objectives, yet common principles may nevertheless apply across many 

jurisdictions. Ex-post evaluation of specific interventions will remain critical. Many aspects of 

regulation will evolve by trial and error; it is vital that this evolution occurs in a transparent, 

open, and non-erratic manner—under clear regulatory principles—in order to reduce perceptions 

of risk, maximize learning opportunities and facilitate a healthy environment for clean energy 

investment. 

The exploration of these regulatory principles is the chief goal of the Clean Energy Regulatory 

Initiative (CERI), an actively growing platform for regulatory knowledge exchange established 

in 2013. CERI will explore these principles through a range of products, including in-depth looks 

at particular regulatory issues and targeted case studies. Achieving global energy access while 

deploying low-carbon electricity systems worldwide will require decisive and robust action from 

well-informed, well-supported power sector regulators; to that end, CERI attempts to provide a 

path forward on clean energy regulatory issues. 
9 

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