Constructing a Robust Legal Framework for the New Energy Economy
Colorado has the potential to lead the nation by evolving its legal paradigm to adapt to and anticipate the continued wave of energy innovation
As the final quarter of 2018 draws near, Colorado industry is moving swiftly into the new energy economy, a comprehensive shift to a new mix of energy sources coupled with an emphasis on innovation and digitization. The corresponding increases in small-scale, local generation and storage of electricity, more efficient and cleaner development of fossil fuels, integration of electric vehicles (“EVs”) and other smart technologies into the grid and use of artificial intelligence and blockchain to manage electricity production and use are just some of the exciting concepts that shape this paradigm shift. These diverse ideas share one major theme: Their ultimate success depends on a strong, supportive and comprehensive legal framework. Changes in law and regulation typically lag behind the pace of innovation. As a result, the energy industry, regulators and stakeholders often work within a legal framework designed for yesterday’s technology.
The jurisprudential approach underlying traditional methods of generating and storing electricity has begun to address some of these changes, but it is suffering growing pains as changes in technology and the organization of the industry outpace regulatory developments. Historically, the business of making and delivering power relied on a centralized generating infrastructure run by utility monopolies with a top-down management system. There were relatively few of these centralized facilities, and they were almost exclusively powered by reliable fossil fuel resources, and distributed power to widely scattered end users. Beginning in the 1980s and 1990s, the regulatory landscape shifted toward a market-based system to accommodate the rising number of independent participants.
Today, this legal framework is evolving to encompass more competitive sources of generation, but it has been sluggish in adjusting to smaller-scale, community-based energy and the diversification of the kinds of resources that can meet consumer needs in the future.
Colorado needs laws and regulations that better account for and incentivize the small-scale, local generation of electricity, efficient and clean production of oil and natural gas, integration of renewable power sources, use of EVs, implementation of wide-scale storage systems across the grid, and protection of the data and intellectual property underlying all of these innovative technologies. And Colorado can lead the rest of the country in all of these areas.
The new energy economy needs pragmatic, principles-based regulation to thrive. Rather than laying out detailed rules for each technology development as it comes along, Colorado lawmakers should focus on setting out broad but well-defined principles that businesses and industry must follow. The law should seek principled flexibility rather than micromanagement or command and control. These principles could focus on a variety of critical areas, such as the creation and sustainability of jobs in clean energy and fossil fuels, incentives for public-private energy partnerships, the accommodation of new market entrants and the encouragement of energy efficiency. At the same time, caution should be applied to avoid creating over-generous incentives for the adoption of new technologies and business models so that improvements that are put in place can be sustained over the long haul.
Environmental and sustainability concerns will also remain key legal priorities. Colorado remains at the forefront of thoughtful, fair and informed shale gas regulations that continue to encourage the clean and efficient development of natural gas in the state. The National Renewable Energy Laboratory in Golden illustrates the engagement between local, state, and federal government and industry that underlies and supports the development of innovative, environmentally friendly energy solutions that can be applied in Colorado and beyond.
Nonetheless, the integration of different utility services, broader range of market participants and new ways of bundling energy services may raise difficulties in defining and grouping these services for regulatory purposes. For instance, should selling EV-charging or other energy-storage services force a company to be regulated as a “utility,” or instead recognized as a new kind of service provider? Colorado lawmakers should consider addressing the bundling of services and ownership responsibility for each piece of the energy generation, storage, and distribution puzzle to avoid unnecessary overlap and regulatory burden. Similarly, Colorado has an abundant supply of natural gas, with companies exploring the use of compressed natural gas to power vehicles and the development of small scale LNG plants. A flexible regulatory environment (at both the state and federal level) could encourage the increased use of natural gas as a transportation fuel.
Colorado has a continuing opportunity to remain a frontier state for energy and a catalyst for positive regulatory innovation across the United States. Recent Colorado legislation encourages the installation of both small- and large-scale energy-storage systems by prohibiting rate discrimination and other grid-connection barriers. This legislation is a great start that will, in the words of the original Senate Bill 9, “enhance the reliability and efficiency of the electric grid, save money, and reduce the need for additional electric generation facilities.”
The new energy economy is here to stay. Colorado must continue to lead by evolving the legal paradigm to adapt to and anticipate the state’s continued wave of energy innovation.
Scot Anderson, Andrew Lillie, Markley Schlegel and Mary Anne Sullivan are members of Hogan Lovells' Energy and Resources team.