Where the Rubber Meets the Road: Utility Regulation and EVs

This week’s announcement that the Biden Administration’s EPA will pursue new car rules that would lead to a major expansion of electric vehicles is a reminder of the important role state and federal regulators will play in any rapid electrification of the transportation sector.  The new strict pollution limits would result in EVs comprising more than half of cars sold in 2030.  Considering that the AP reports that less than 10 percent of vehicles sold today are electric, it is a dramatic increase in a short amount of time.

If U.S. auto sales reach even a fraction of that growth it is going to mean a lot of work for the nation’s utilities and the regulators who oversee them.  In addition to the sizable increase in generation capacity that would be required to energize a large fleet of EVs, the wires portion of the utility business would need to invest billions to accommodate changing power demands and dynamics.  Even before the EPA announcement, some experts were projecting that every EV on the road would necessitate between $1,700 and $5,800 in grid upgrades.  Take that figure times tens of millions of vehicles, and you begin to get an idea of the size of the investment that will be required.

And who will be making decisions about a sizeable portion of those dollars?  Utility regulators at the federal, and (especially) state level of government, that’s who.  Many of the needed grid upgrades will be in the wires portion of the electricity business, which is to say the regulated part, even in places that have unbundled and deregulated other portions, such as generation.  There is no getting around it, utility company capital expenditures and their ability to recover those investments will make or break electrification of the vehicle fleet.  That means regulators and utilities will need to sharpen their pencils and do the work of protecting the public interest.  Sending proper investment signals, limiting cross-subsidization, ensuring timely rate recovery, and considering alternative ratemaking methodologies should all be on the table.

The issue bears some similarity to implementation of last year’s “Inflation Reduction Act.”  In that legislation, billions of dollars were directed to renewable generation investments, but little changed in terms of the infrastructure needed to accommodate it – especially electric transmission.  Though still early, the implications of that approach are coming into focus: vast sums of money for renewables are effectively sidelined because left unresolved is the nuts-and-bolts of utility regulation, like permitting, interconnection, and cost recovery of electric transmission.  Infrastructure becomes the chokepoint in deploying renewables.

EV’s could face a similar fate, with a lack of infrastructure stymieing their deployment, unless policymakers and regulators can get ahead of the curve.  That starts with establishing smart regulatory policies that provide both customers and utilities with the clarity needed to facilitate transportation electrification.