DRAFT
NARUCMANUALONDISTRIBUTEDENERGYRESOURCES
COMPENSATION
PREPAREDBYTHE
STAFFSUBCOMMITTEEONRATEDESIGN
2016
1
2
TABLEOFCONTENTS
TableofContents
3
Introduction
4
WhatistheRateDesignProcess
6
WhatisDER? 15
Ratedesignandcompensationconsiderations,questions,andchallenges
28
CompensationMethodologies Technology,Services,andtheEvolvingMarketplace
3
41
60
I.
Introduction
OnNovember11,2015,atitsAnnualConvention,theNationalAssociationofRegulatoryUtility
Commissioners(NARUC)adoptedaresolutiontocreateaStaffSubcommitteeonRateDesign.1The
purposeofcreatingthisStaffSubcommitteewastoprovideaforumforstatecommissionstaffto
discussratedesignchallengesintheirstateswithstafffromotherstatecommissions.TheStaff
Subcommittee’spurviewincludeselectric,water,andnaturalgasratedesigntopics.TheStaff
SubcommitteealsoworkswithotherNARUCStaffSubcommitteeswhereareasofinterestoverlap.For
example,theStaffSubcommitteeonRateDesignworkswiththeStaffSubcommitteeonWaterwhen
appropriate,andalsoworkswiththeEnergyResourcesandEnvironmentStaffCommitteeonother
selectratedesignissues.
InitsResolutioncreatingtheStaffSubcommitteeonRateDesign,NARUCrecognizedtheincreasing
importancethatratedesignissueshasonpolicydevelopmentacrossthestates,mostnotablyasit
appliestodistributedenergyresources(DER).UponhiselevationasPresidentofNARUC,Montana
PublicServiceCommissionCommissionerTravisKavullaannouncedthattheStaffSubcommitteeonRate
DesignwouldprepareaDERcompensationmanualtoassistjurisdictionsinnavigatingthechallenges,
considerations,andpolicydevelopmentrelatedtocompensatingDER.AsstatedbyNARUCPresident
Kavulla,“thissubcommitteewillworktocreateapracticalsetoftools—amanual,ifyouwill—for
regulatorswhoarehavingtograpplewiththecomplicatedissuesofratedesignfordistributed
generationandforotherpurposes.”2ThedevelopmentofthisManualisinresponsetoNARUC’s
resolutionandtherequestoftheassociation’sleadership.
ThegrowthofDERacrossthejurisdictionsposesuniquechallengestoregulators.Thetraditionalways
ofelectricitydeliveryfromlargepowerplantsovertransmissionanddistributionwirestothecustomer
areincreasinglybeingchallengedduetothegrowthofDER.DERareresourceslocatedonthe
distributiongrid,oftenlocatedonthecustomer’spremise,andarecapableofprovidingmanyservices
tothecustomerandthegrid.ADER,likerooftopsolargeneration,canoffsetthepremise’s
consumptionanddeliverexcessgenerationontothedistributiongrid.DER,likedemandresponse,can
allowdemandtorespondtosystempricesandconditions.DERisnotsimplysupplyordemand,as
traditionallythought,butcanbemultipletypesofresources,suchasstorageoradvancedtechnology
pairedwitharesource,capableofprovidingavarietyofbenefitsandservicestothecustomerandthe
grid.
Furthermore,traditionalutilityandregulatorymodelsbuiltontheassumptionoftheutilityproviding
enoughelectricitytomeettheentireneedsofitsserviceterritoryareunderpressurebyDER.New
investmentswillbeneededtobetterhandlethistwo-wayflowofelectricity,newwaysofallowingthe
utilitytorecoveritscostsmaybeneeded,andnewassumptionsaroundcustomerdemandwillbe
necessarytomeetthischallenge.AjurisdictionwillneedtoidentifyitscurrentstatusregardingDER,
1
“ResolutiontoCreateaNARUCStaffSubcommitteeonRateDesign,”NARUC(November11,2015)
(http://pubs.naruc.org/pub/D2DDD7AC-E73C-B386-630C-B88491DD0608).
2
InstallationRemarksofNARUCPresidentTravisKavulla(November10,2015)(https://www.naruc.org/aboutnaruc/press-releases/pr-111015/).
4
whatroleitexpectsDERtohaveinthefuture,understandthenatureofDERadoptionrates,and
identifynecessarypolicydevelopmentstoaccommodatethatfuture.
ThisManualisintendedtoassistjurisdictionsindevelopingpoliciesrelatedtoDERcompensation.Itis
alsointendedtobesimilartootherNARUCmanualsontopicssuchascostallocationandnaturalgas
ratedesign.ItspurposeistoassistjurisdictionsinidentifyingissuesrelatedtoDERandassistregulators
inansweringquestionsinawaymostappropriateforitsjurisdiction.ThisManualprovidesregulators
withpossibleoptionsthatajurisdictionmaywanttoconsiderandadopt.ThisManualshouldbe
applicableregardlessofmarketstructure(restructuredversusvertically-integrated),organized
wholesalemarketornot,oradoptionoftechnology,beitadvancedutilityinfrastructureoravailability
ofcustomer-sitedtechnology.
ThisManualisorganizedinfivemainsections.Section2describesthebasicratedesignprocessand
howDERimpactsthatprocess.Section3discusseswhatisDERandwhyitisimportantforstatesto
consider.Section4isaboutthesystemicchallengesandquestionsraisedbythedetailsofratedesign
andcompensation.Section5outlinesavarietyofpossibleDERcompensationmethodologiesthata
jurisdictionmayconsider.Lastly,Section6providesadescriptionofadvancedtechnologiesthatcan
potentiallyassistaregulatorandutilityinplanningandmonitoringDERdevelopment,and
considerationsforwhenitmaybeappropriatetoreconsiderexistingDERcompensationmethodsbased
onDERadoptionlevelsinajurisdictionorutilityserviceterritory.
ThisManualprovidesasnapshotatoptionsavailabletoday,andtheroleofadvancedtechnologyinthe
futuretoassistaregulatorinmonitoringthedevelopmentofDER.ThisManualcannotpredictthe
future,suchasfutureusesofDER,futureDERtechnologies,futurebusinessmodeloptions,orany
unanticipatedadvancementsinmarketdevelopmentorpolicydevelopmentthatmayimpactthistopic.
Giventhatlimitation,thisManualwillhopefullyprovideregulatorswiththeabilitytomeetcurrent
needsandplanforfuturedemands.Howitisultimatelyusedwillbedecidedbyregulators,utilities,
customers,andotherparticipants.Asthepaceofchangedevelopsovertime,itshouldbeexpectedthat
thisManualwillberevised,ascircumstanceswarrant.
TheStaffSubcommitteeonRateDesignthanksallwhohaveassistedinthedevelopmentofthisManual,
andappreciatesthetimeandeffortofthoseontheStaffSubcommitteewhoassistedinthe
developmentandreviewofthisManual,andthosewhohaveprovidedinputand/orcommentsonthis
Manual.
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II.
What is the Rate Design Process
A.
Definition,Principles,Goals,andPurpose
BeforegoingintothedetailsofratedesignimpactsfromDER,afoundationmustbesetrelatingtothe
basicpurposesforratedesignandassociatedfoundationalprinciples.Additionally,akeycomponentof
understandinghowratesaredeterminedincludestheimportanceofunderstandingcostsandwhat
costsautilityisallowedtorecoverbytheregulator.Thissectionprovidesanoverviewofthesetwo
stepsinmostbasicratedesignprocessesacrossthecountry.Aspartofthisdiscussion,itisrecognized
thatmostexistingratedesignsarenotexplicitlydesignedtoreflectaccuratecoststoserveeach
customer.Electricitycostsvarythroughouttheyear,month,week,day,andhour;ratedesignbalances
thisrealitytoallowfortheutilitytorecoveritstotalcostsofservice(i.e.,revenuerequirement),over
thecourseoftime,beitmonthly,yearly,oracrossratecaseproceedings.Thisaveragingofcostsintoa
ratesuppliesaconvenientrateovertime,butdoesnotreflectthechangingnatureofelectricitydelivery
(particularlywithincreasingamountsofDERmaterializing).DERmayimposenewcostsontotheutility,
costswhichneedtoberecoveredtoensuretheutility’sfinancialhealthandtoallowtheutilityto
recovernecessaryinvestmentsinthedistributiongridtomaintainreliabilityandqualityofservice.
Identifyingtheappropriateprinciples,goals,andobjectivesforratedesigncanassistaregulatorin
determininganefficientrate(orcompensationmethodology)thatcollectstheauthorizedutilitycostsor
authorizedrevenuerequirement.
1.
Rates
Ratedesign,theprocessoftranslatingtherevenuerequirementsofautilityintothepricespaidby
customers,isoftensaidtobemoreartthanscience.Whilethereisoftenagreementamongstthe
partiestotheratesettingprocessonthevariousgoalsandprinciplesofratedesign,theweightsgiven
bythedifferentpartiestoeach,andtheopinionsonthespecificsoftheirapplication,varygreatly.Rate
designmaybeinfluencedbylegislativeinitiativesandpoliticalandenvironmentalpolicies.However,a
singleratedesigncannotmeetallratedesignprinciplesandallpolicygoals.Indeed,manyofthegoals
andprinciplesconflictwithoneanother,anditisthejoboftheregulatortostrikeabalancebetween
theseprinciplesandgoalsthatbestreflectsthepublicinterestastheyseeit.
Thebasicpurposeofratedesignistoimplementasetofratesforeachrateclass–residential,
commercial,andindustrial–thatproducesrevenuestorecoverthecostofservingthatrateclass.In
practice,ratesarenotbasedonanindividualcustomer’scosttoserve,rathersimilarcustomersare
accumulatedintorateclasses,andthetotalcosttoserveallofthecustomersinthatrateclassis
allocatedequallyacrossallofthecustomersinthatrateclass.
Overtheyears,severalauthorshavelaidoutgoalsandprinciplesofratedesignthatcontinuetobe
referredto,bothbymorerecentauthors,aswellasthevariouspartiestotheratesettingprocess.One
oftheseenduringauthorsisJamesBonbright,whosePrinciplesofPublicUtilityRatesliststhefollowing
criteriaofadesirableratestructure:
1. Therelated,practicalattributesofsimplicity,understandability,publicacceptability,and
feasibilityofapplication.
2. Freedomfromcontroversiesaboutproperinterpretation.
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3. Effectivenessinyieldingtotalrevenuerequirementsunderthefair-returnstandard.
4. Revenuestabilityfromyeartoyear.
5. Stabilityoftheratesthemselves,withaminimumofunexpectedchangesseriouslyadverse
toexistingcustomers
6. Fairnessofthespecificratesintheapportionmentoftotalcostsofserviceamongthe
differentconsumers.
7. Avoidanceof“unduediscrimination”inraterelationships.
8. Efficiencyoftherateclassesandrateblocksindiscouragingwastefuluseofservicewhile
promotingalljustifiedtypesandamountsofuse
a. inthecontrolofthetotalamountsofservicesuppliedbytheCompany
b. inthecontroloftherelativeusesofalternativetypesofservice(on-peakversusoffpeakelectricity,Pullmantravelversuscoachtravel,single-partytelephoneservice
versusservicefromamulti-partyline,etc.).3
Bonbrightdistillsthesedowntothreeprimaryobjectivesofratedesignfromwhichhisothersflow:
(a) therevenue-requirementorfinancial-needobjective,whichtakestheformofafair-return
standardwithrespecttoprivateutilitycompanies;
(b) thefair-cost-apportionmentobjective,whichinvokestheprinciplethattheburdenof
meetingtotalrevenuerequirementsmustbedistributedfairlyamongthebeneficiariesof
theservice;and
(c) theoptimum-useorconsumer-rationingobjective,underwhichtheratesaredesignedto
discouragethewastefuluseofpublicutilityserviceswhilepromotingallusethatis
economicallyjustifiedinviewoftherelationshipsbetweencostsincurredandbenefits
received.4
2. Costs
Whilethemostcommonlyusedformsofratedesignmaynotbeanattempttocommunicatecostswith
perfectaccuracytothecustomer,thecostofservingthatcustomerisanindispensablyimportant
ingredientinanyratesystem.Tocreateanappropriaterate,itisimportanttodistinguishbetweenfixed
andvariablecosts.Suchadistinctioninforms,thoughdoesnotentirelydecide,thebasisonwhichthose
costsshouldbecollected.Separately,aregulatormayalsochoosetohavetheratesendapricesignal
tothecustomerwhichmayreflectamoreaccuratepricerelatedtothecosttoserveacustomerata
certainpointintimeoroveraspecifiedtimeperiod.Intheshort-term,manyofthecostsofautilityare
fixed.Inthelong-term,manyofthecostsofautilityarevariable.Thequestion,then,ishowmuchofa
utility’scostsshouldbeconsideredfixedforthepurposesofsettingrates.Here,also,thereismuch
disagreement.Intheshort-tomid-term,costsarenotterriblysensitivetochangesinuse.Asaresult,a
customerwholowerstheirusecreatesanadditionalburdenonothers,asthecostsmustbecoveredby
someone.Othersarguethattheappropriatetimehorizontopricethesecostsover,becauseof
economictheoryorthelongplanninghorizonoftheutility,isthelong-term.
3
JamesC.Bonbright,PrinciplesofPublicUtilityRatesat291(1961).
4
Id.at292.
7
Themajorityofratedesignconsiderationshavecorrespondingconsiderationsforcostallocation,and
vice-versa.Totheextentthatregulatorsdesireratestobebasedoncost-causativeelements,the
allocationofthosecostsis(orshouldbe)onthebasisofthosecost-causativeelements.Theregulator
maydecidethattheallocationofcostsshouldreflectdecisionsmadeaboutthewaythosecostsare
collected,orvice-versa.5Thisalsomitigatespotentialintra-andinter-classsubsidies.
B.
IntroductiontoRateDesign 1.
BasicServiceRates
Thereareseveralwaystostructuretheratespaidbycustomers.Eachtendstoaccomplishcertain
principles,goals,andobjectivesofratedesign,asdeterminedbytheregulator,whileneglectingothers.
Ratescanalsobecombinedinvaryingdegreesinanattempttobalancetheobjectivesofthe
jurisdiction.
a.
Flatrates
Aflatratedesignchargescustomersaperunitchargeregardlessofconsumption.Thetotalcosts(or
somesubset)allocatedtoaclassaredividedbytheusageofthatclasstoproducearate.Thisrateis
thenuniformlyappliedtoanyusagebyacustomerwithinthatclass.Thisratestructure(incombination
withamonthlycustomercharge)iscommonlyusedindesigningratesforresidentialelectriccustomers.
Indeed,thisisthemostcommonformofresidentialratedesignacrossthecountrytoday.Dependingon
theobjectivesidentifiedbythestate,aflatratecanmeetsomeofthem,suchasaffordability.Onthe
otherhand,recognizingthatthecostofelectricityvariesthroughoutthedayandbylocation,aflatrate
maynotreflectthecoststoserveacustomeratagiventimeperiod.Forexample,ittendstocostmore
toservecustomersduringpeakperiodsduetotheincreasingmarginalcostofgeneration(i.e.,peaking
generationplantshavehigheroperationalcosts,whichisreflectedinwholesaleelectricitycosts),and
shortageofavailablecapacityonthetransmissionand/ordistributiongrid.Aflatratedoesnotreflect
theseconditions.Aflatperunitratetendstobenefitlow-usecustomersandposessomedisadvantages
tosomecustomerclasses,suchasC&Icustomerswithhighloadfactorsandhighvolumetric
consumption.Forexample,iftheprovisionofservice(i.e.,generationasreflectedin$/kWh)ismore
expensiveatcertaintimesofday,thisratefailstoreflectthat,andthosecustomersusingproportionally
moreoftheirelectricityatthehighercosttimesarebeingsubsidizedbythosewhouseproportionally
moreatlowercosttimes.Additionally,supplycostscanvarydailyandhourly,andtherefore,aflatper
unitratesendsapoorpricesignalforsupplyresourcesiftheydonotreceiveatime-differentiated
wholesalepricethatreflectsthevalueoftheirproduction.
b.
BlockRates
Anincreasingorincliningblockrate(“IBR”)structureisdesignedtochargecustomersahigherperunit
rateasthecustomer’susageincreasesovercertainblocksofusagewithinabillingcycle.Forexample,a
threetierIBRwouldidentifythree“blocks”ofusage.Blockonewouldbe0-150kWh,Block2wouldbe
150kwh-250kWh,andBlock3wouldbeallusageover250kWh.Foreachblock,therewouldbeaprice
forallelectricitychargedinthatblock,withthepriceincreasingasacustomermovesthroughthe
5
Foranintroductiontocostallocationmethodologies,see,“ElectricUtilityCostAllocationManual,”NARUC
(January1992).
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blocks.OneofthemainpurposesofanIBRistosendaconservationsignaltocustomersandto
incentivizeenergyefficiencyandreduceconsumptiononthesystem.Inotherwords,astheprice
increaseswitheachblock,customersmaybeencouragedtoconservetoavoidthehigherblockprice
overabillingcycle.IndesigninganIBR,someconsiderationsmustbemade,suchastheprice
differentialsbetweenthevariousconsumptionblocksandtheavailabilityoftimelyconsumption
informationtocustomers.Ifcustomersdonotpossesstheabilitytoaccesstheirconsumptiondata
throughoutthebillingcycle,theywillnotknowwhenadditionalconsumptionreachesthehigherblock
rate.AnotherconsiderationisthatIBRsimposehigherperunitcostsonhigh-usecustomerseven
thoughdeliveringadditionalvolumesmaynotincreasethecostsofprovidingdeliveryservice.Although
theincentivetoconserveovertimeisgreaterwithanIBRdesignthroughavoidinghigherpricesoverthe
month,thisratedoesnotreflectthehourlyordailychangestothecostofelectricity.Acustomermay
paymoreforelectricityoveragivenmonth,eventhoughamajorityofitsusagemaybeentirelyoffpeak;sinceanIBRdoesnotreflecttheday-to-dayconsiderationsofpeakandoff-peak,acustomermay
overpayforelectricityascomparedtoitsotherwisebasiccostofservice.
Adecreasingordecliningblockrate(“DBR”)structureisdesignedtochargecustomersalowerperunit
rateasthecustomer’susageincreaseswithinabillingcycle.DBRsarestillsometimesusedtoreflect
decreasingfixedcostsasoutputincreases;ahigherinitialratewouldrecoverinitialfixedcosts,andrates
woulddecreaseovertheblocksastheratereflectsmorevariablecosts.However,byloweringthe
savingspotential,DBRsdiscourageconservation,energyefficiency,andcustomeradoptionof
technologiesthatmayreduceconsumptionorotherwisereflectcosts.
c.
TimeVariantRates
Timevariantratesaredesignedtorecognizedifferencesinautility’scostofserviceandmarginalcosts
atvaryingtimesduringtheday.Generally,atimevariantratedesignchargescustomersahigherprice
duringpeakhoursthanoff-peakhours.Unlikeflatrates,customersneedtobeawareofusage
throughoutthedayandthemonthtorespondtothepricesignalsinatimevariantratedesign.A
customermayincreasesavingsunderatimevariantratecomparedtoaflatrate,ifthatcustomeruses
energyappropriatelyduringspecificpeakandoff-peakhours.Avarietyoftimevariantpriceoptionscan
beconsideredbyaregulator;eachoptionprovidestheregulatorwiththeabilitytoreflectavarietyof
goals.Additionally,withtheadventofadvancedmeteringinfrastructure,themeteringtechnologyis
capableofimplementingtheseratedesignoptionsonawiderscale.
Atimeofuse(TOU)ratechargescustomersdifferentpricesaccordingtoapre-determinedscheduleof
peakandoff-peakhoursandrates.Formanyutilities,TOUrateshavebeenavoluntaryoptionfor
residentialcustomersfordecades,but,generally,fewcustomersparticipate.Lackofcost-effective
meteringtechnologyhinderedthewiderdevelopmentofTOU,butadvancedmeteringtechnologyis
beingrolledoutacrossmanyjurisdictions,whichcanfacilitateroll-outofTOU.Manycommercialand
industrial(C&I)electriccustomersalreadytakeserviceunderTOUratedesigns.6
6
OnealternativetoaTOUrateisapeaktimerebate(PTR),whichoperatesconcurrentwithtraditionalratedesign.
Apre-establishedcustomerbaselineofenergyconsumptionisestablishedpriortoimplementation,andthePTRis
awardedifacustomerreducestheirconsumptionbelowthebaselineduringthosepeaktimehours.Customers
willstillpaythetraditionalrateduringthepeaktime,butarealsorewardedforanyreductioninconsumption
duringthosepeakhours.SinceaPTRdoesnotchangethetraditionalratedesign,itmaybeeasierforresidential
customerstounderstand.
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Underareal-timepricingplanforelectricityrates,thecustomerischargedforgenerationattheprice
setinthewholesalemarket(forderegulatedutilities)ortheshort-runmarginalgenerationcosts(for
verticallyintegratedutilities)bythehour.7Largeelectriccustomersmayalreadybeindexedtothe
hourlygenerationpricethroughacompetitivesupplierorutilityratedesign,butadvancedmetering
infrastructureisneededtoimplementreal-timepricingforresidentialandsmallerC&Icustomers.8
Real-timepricingisavailabletoresidentialcustomersintheIllinoisserviceterritoriesforCommonwealth
EdisonandAmeren.Thereal-timeratesfortheseprogramsarebasedontheday-headhourly
wholesalepriceforthegivenutilityzones.9
Adynamicpricingratedesigncontainspre-establishedblocksofhoursreflectingthecharacteristicsof
coststhatoccurduringthoseblocks.ComparedtoaTOUratedesignthatpre-determinesascheduleof
peakandoff-peakhoursandrates,thedynamicpricingscheduleandratesmayberevisedbasedon
marketconditions.10
Autilitymayimplementacriticalpeakpricing(CPP)rateduringtimesofexpectedshortagesor
anticipatedhighusagedaystomimicpeaktimepriceincreases.Theutilitywillannouncethehoursthat
theCPPratewillbeineffectpriortotheCPPevent.TheCPPratereflectsthehighergenerationpriceof
electricityduringthoseCPPhoursortheexistenceofscarcityduringtheeventhours.Generally,theCPP
rateissetsignificantlyhigherthanthenon-CPPrateasameansofincentingcustomerstoreduce
consumption.ACPPcanbeincludedwithaTOUrate;inbothcases,therateisdeterminedbythe
regulator,butaCPPeventisusuallylimitedtocertainpeakhoursoverayear.
d.
Threepartrate/DemandCharges
Sincetheutilitysystemisbuilttopeak,thecostsofprovidingelectricityatpeakhoursishigherthan
duringnon-peakhours-greaterinfrastructureisnecessarytoservepeakload.Toaddressthissituation,
anotherratestructureoptionisthethreepartrate,whichaddsademandchargetotheexistingfixed
chargeandvolumetricrate.Thisraterecognizesthreeofthemajorcontributorstoautilities’costs.To
theextentthateachpieceoftherateproperlyreflectsthecostsassociatedwitheachpiece,theprice
signalshouldbeimprovedoverflatorblockrates.Suchrateshavebeencommonplaceforcommercial
andindustrialcustomers,atleastasanoption,foralongtime.Thischargeusuallyreflectsthecoststo
provideelectricityatagiventime,usuallythepeakhourofthemonth.Inanefforttoidentifycosts
associatedwithpeak,a“demandcharge”isonewayforautilitytosendapeakpricingsignalovera
certaintimeperiod,suchasmonthly.Peakcoincidentdemandchargescanbeusefulinsendingaprice
signaltothecustomerregardingwhenthesystempeaks,andconsumptionduringthatperiodischarged
accordingly;however,non-coincidentpeakdemandchargesmerelychargeacustomerforitspeak
consumption,regardlessofthetimeitoccurred.
7
“SmartRateDesignforaSmartFuture,”Lazar,J.andGonzalez,W.,RegulatoryAssistanceProject(2015).
Availableat:http://www.raponline.org/document/download/id/7680.
8
Id.
9
CommonwealthEdisonisinPJM,andAmerenisinMISO.
10
“DesigningTariffsforDistributedGenerationCustomers,”Migden-Ostrander,J.andShenot,J.,Regulatory
AssistanceProject(2016).Availableat:http://www.raponline.org/document/download/id/7983
10
Themeteringnecessarytoapplytheseratestoresidentialcustomers,however,haveonlyrecentlybeen
installedbymanyutilities,asthecoststoinstallnewmetershadpreviouslyoutweighedthebenefits.
Thereissomedisagreementoverhowappropriateitistoapplyademandchargetosmallercustomers.
Somearguethatthediversityofcustomersinalargeclassissuchthatanygivencustomer’son-peak
demandisnotagoodindicatorofthecostsassociatedwiththatcustomer.Giventhattheseratesare
calculatedbasedonaveragesandgenerallyappliedtoanumberthatisresistanttodownwardpressure,
suchaconcernissomewhatmitigated.Thereisalsodisagreementontheamountofcoststhatare
actuallyrelatedtodemand,oraparticularmeasurementofdemand.11Lastly,systempeakisoftenonly
knownafterthemonth,soacustomerhastobestguesswhenthesystempeakoccurs.
C.
OtherConsiderations
1.
Verticallyintegratedversusrestructured
Adistributionutilityinarestructuredstateisresponsibleforoperatingthedistributionsystemand
recoveringassociatedcoststhroughdistributionrates.Theseutilitiesdonotowngenerationassets.In
suchstates,energysupplyisprocuredinacompetitivemarketandcustomersmaybeabletochoosea
companyfortheirownsupplyservices.Non-utilityprovidersofsupplyoperateunderlimitedregulatory
jurisdictionandmayofferavarietyofratesforsupplyservice.AlargeportionofTexas,mostofthe
Northeast,andsomeMidwesternstateshaverestructuredelectricmarkets.12Inrestructuredmarkets,
retailutilityratesareunbundledsothatacustomerwillseeaseparatechargeforgeneration,
transmission,anddistribution.Additionally,anindependentsystemoperator(“ISO”)oraregional
transmissionorganization(“RTO”)facilitatestheoperationofthebulkpowermarketandmanagesthe
transmissionsystemacrossitsfootprint.WiththeexceptionofERCOT,bulkpowermarketsand
transmissionaresubjecttoFERCjurisdiction.ISOs/RTOsinclude:ISO-NE,NYISO,PJM,ERCOT,SPP,
MISO,andCAISO.
Injurisdictionswithvertically-integratedutilities,theratessometimesmaynotbeunbundledinto
separatepowersupplyanddistributionrates.Asmanyofthecost-causativeelementsdifferbetween
theseutilityfunctions,evenforasinglecustomer,anappropriateratestructuremaybemoredifficultto
agreeon.Totheextentthatregulatorswishtoseparatepricesfordifferentcost-causativeelements,
unbundlingratesmaybeanimportantfirststep.Theimpactofloweredusagemayalsohavemoreof
animpactonintegratedutilities’revenuecollectionability,asithasmoretotalrevenuerequirement
associatedwithassetsthatneedstoberecoveredthroughrates.
2.
RevenueDecoupling
Decouplingseversthelinkbetweensalesvolumeandrevenuefortheutility.Underdecoupling,autility
hastheopportunitytorecovertheauthorizedrevenuerequirement,determinedinabaseratecase
proceeding,withoutregardtotheamountofsales.Theauthorizedrevenuerequirementdoesnot
changebetweenratecases.Underfullrevenuedecoupling,autilityismadewholeforthedifferencein
11
Forexample,non-coincidentpeakorcoincidentpeak.SeeSectionV.C,infra.
12
Californiaisalsoarestructuredmarketwithunbundlingandanindependentsystemoperator,buthasavery
limitedretailchoicemarket.California’sregulatedutilitiesaresubjecttoregulatedratemaking,similartoa
vertically-integratedstate,butgenerallydonotowngeneration.
11
itsannualactualrevenuesandannualtargetrevenues.Autilitywillchargeorrefundthedifferenceto
allcustomersonanannualbasisthroughatrue-upratemechanism.Decouplingeliminatesrevenue
fluctuationresultingfromtheinstallationofenergyefficiencyanddemandresourcetechnology,
distributedenergyresources,andexternalfactorssuchweather,economicconditions,andpower
outages.Partialrevenuedecouplingisolateschangesinconsumptioncausedbyenergyefficiencyand
demandresourcesfromunrelatedexternalfactors,mentionedabove.Thedecouplingtrue-up
mechanismunderpartialrevenuedecouplingwouldexcludechangesduetotheexternalfactors.This
approachtodecouplingismorecomplexthanfullrevenuedecoupling.
3.
Ratedesignassocialpolicy
Regulatorsdifferintheirwillingnessorabilitytoutilizetheadministrativerate-settingprocessto
advancesocialpolicy.Often,regulatorswillconsidertherequestsofpartiestotherate-settingprocess
toadvancecertaingoalsthatmaycreatecross-subsidies.Theregulatormustcarefullyconsiderthe
publicinterestandthedirectionitreceivesfromthelegislativebodywithultimateauthorityoveritin
creatingspecificcross-subsidiestosupportsocialpolicygoalsofthestate.Sometimesthismayresultin
approvalofnon-cost-effectiveprogramsorratesthatsubsidizeothercustomers,butaregulatormay
decidethatsuchdecisionsserveamandateorstatute,orareotherwiseinthepublicinterest.Research
anddevelopmentprojectsmayalsofitunderthisconsideration.
4.
Low-incomeneeds/Affordability
Manystatesimplementpoliciestoreducetheburdenthatlow-incomecustomersfaceinpayingtheir
utilitybills.Recognizingthatelectricityserviceisinthepublicinterest,manystateshavecreated
programstoassistlowincomeorat-riskcustomersinmaintainingelectricityservice.Therearemany
differentprogramsforlow-incomecustomersacrossstates.Theseprogramsmayinclude:aflatrate
payment/discount,percentageofincomepaymentplan,apercentageofbilldiscount,waivedfees,a
blockrateapproach,and/orusagebaseddiscounts.13Additionally,theLowIncomeHomeEnergy
AssistanceProgram(LIHEAP)assistseligiblelow-incomehouseholdswiththeirenergycosts,bill
paymentassistance,energycrisisassistance,weatherizationandenergy-relatedhomerepairs.A
customermustmeetcertaineligibilityrequirementstoenrollinLIHEAPandutilityprograms.
5.
WholesaleMarkets
TheEnergyPolicyActof1992establishedtheframeworkforcompetitivewholesaleelectricity
generationmarkets,andallowedforanewtypeofelectricityproducer,calledtheexemptwholesale
generator,toenterthewholesaleelectricitymarket.14Additionally,theEnergyPolicyActof1992
directedtheFederalEnergyRegulatoryCommission(“FERC”)toallowwholesalesuppliersaccesstothe
nationalelectricitytransmissionsystem.Withtheseprovisions,independentpowerproducerscould
competetobuildnewnon-rate-basedpowerplants.15FERCOrder888(1996)16andFERCOrder200017
13
“Low-IncomeAssistanceStrategyReview,”Brockway,N.,Kallay,J.,andMalone,E.,SynapseEnergyEconomics,
Inc.(2014).Availableat:http://www.synapse-energy.com/sites/default/files/Low-Income-Assistance-StrategyReview-14-111.pdf.
14
EnergyPolicyActof1992,P.L.102-486(signedOctober24,1992).
15
EnergyInformationAdministration,EnergyPolicyActof1992(n.d.).Availableat:
http://www.eia.gov/oil_gas/natural_gas/analysis_publications/ngmajorleg/enrgypolicy.html
12
(1999)reducedimpedimentstocompetitioninthewholesalebulkpowermarketplace,withagoalto
bringmoreefficient,lowercostpowertoelectricityconsumers.InFERCOrder2000,FERCestablished
guidelinesforthevoluntaryformationofRTOstooverseethewholesalemarkets.18AnRTO’sfour
characteristicsare:independence,scope/regionalconfiguration,operationalauthority,andshort-term
reliability.AnRTO’seightfunctionsare:tariffadministrationanddesign,congestionmanagement,
parallelpathflow,ancillaryservices,OASIS/TTC/ATC,marketmonitoring,planningandexpansion,and
interregionalcoordination.19
Two-thirdsoftheelectricityconsumedintheUnitedStatesisdeliveredinregionsthatoperate
wholesaleelectricmarkets.20WholesaleelectricmarketsarefacilitatedbyISOs/RTOsincluding:ISONewEngland,CaliforniaISO,NewYorkISO,theElectricityReliabilityCouncilofTexas,SouthwestPower
Pool,21PJMInterconnection,22andtheMidcontinentISO.23,24
Additionally,theEnergyImbalanceMarket(“EIM”)allowsbalancingauthorities(“BA”)inthewestern
UnitedStatestovoluntarilyparticipateinareal-timeimbalanceenergymarketoperatedbythe
CaliforniaISO.TheEIMdispatcheseconomicbidstobalancesupply,transfersbetweentheCalifornia
16
PromotingWholesaleCompetitionThroughOpenAccessNon-DiscriminatoryTransmissionServicesbyPublic
UtilitiesandRecoveryofStrandedCostsbyPublicUtilitiesandTransmittingUtilities,OrderNo.888,FERCStats.&
Regs.¶31,036at31,705(1996),orderonreh'g,OrderNo.888-A,FERCStats.&Regs.¶31,048(1997),orderon
reh'g,OrderNo.888-B,81FERC¶61,248(1997),orderonreh'g,OrderNo.888-C,82FERC¶61,046(1998),aff'din
partandrev'dinpartsubnom.,TransmissionAccessPolicyStudyGroupv.FERC,225F.3d667(D.C.Cir.2000),aff'd
subnom.,NewYorkv.FERC,535U.S.1(2002).
17
TransmissionPlanningandCostAllocationbyTransmissionOwningandOperatingPublicUtilities,OrderNo.
1000,FERCStats.&Regs.¶31,323(2011),orderonreh’g,OrderNo.1000-A,139FERC¶61,132,orderonreh’g
andclarification,OrderNo.1000-B,141FERC¶61,044(2012),aff’dsubnom.,S.C.Pub.Serv.Auth.v.FERC,762
F.3d41(D.C.Cir.2014).
18
RegionalTransmissionOrganizations,OrderNo.2000,65FR809(Jan.6,2000),FERCStats.&Regs.¶31,089
(1999),orderonreh’g,OrderNo.2000-A,65FR12088(Mar.8,2000),FERCStats.&Regs.¶31,092(2000),aff’d
subnom.PublicUtilityDistrictNo.1ofSnohomishCounty,Washingtonv.FERC,272F.3d607(D.C.Cir.2001).
19
Order2000at5.
20
TheValueofIndependentRegionalGridOperators,ISO/RTOCouncil(2005)(availableat:
http://www.nyiso.com/public/webdocs/media_room/press_releases/2005/isortowhitepaper_final11112005.pdf).
21
Inallorpartofthefollowingstates:Arkansas,Iowa,Kansas,Louisiana,Minnesota,Missouri,Montana,
Nebraska,NewMexico,NorthDakota,Oklahoma,SouthDakota,TexasandWyoming.
22
Inallorpartofthefollowingstates:Delaware,Illinois,Indiana,Kentucky,Maryland,Michigan,NewJersey,North
Carolina,Ohio,Pennsylvania,Tennessee,VirginiaandWestVirginia,andtheDistrictofColumbia.
23
Inportionsof15statesintheMidwestandtheSouth,extendingfromMichiganandIndianatoMontanaand
fromtheCanadianbordertothesouthernextremesofLouisianaandMississippi.
24
FERC,“ElectricPowerMarkets:NationalOverview”(availableat:http://www.ferc.gov/market-oversight/mktelectric/overview.asp).
13
ISOandotherEIMentities,andloadwithinitsfootprint.TheEIMprovidescostsavingbenefitsaswell
asimprovedrenewableintegrationandincreasedreliability.25
Electricityinthebulkpowermarketisvaluedatthelocationalmarginalprice(“LMP”)atnumerous
locationsonthebulkpowersystem.TheremaybetwoLMPvalues:day-aheadandreal-time,andthe
LMPmayincludethewholesalepriceofenergy,congestioncharges,andlinelosses.Occasionally,
wholesalepriceswilldroptozeroorbecomenegative.Thisoccurswhengeneratorsareunableto
reduceoutputanddemandislow.Hydroelectric,nuclear,andwindgeneratorsaretypicallythe
generatorsthatwillproducenegativepricesbecausetheyeithercannotorprefernottoreduceoutput.
Sellerspaybuyerstotaketheoutput.
Insomerestructuredstates,customersareallowedretailaccesstothewholesalemarketandcan
chooseacompetitivesupplier.InNewEngland,largeindustrialcustomerscanchooseasupplyrate
indexedtothewholesalemarketandbechargedareal-timerateforelectricity.Further,ComEdand
AmereninIllinoishaveoperatedreal-timepricingprogramsforresidentialelectricitysupplysince2007,
whentheyimplementedthefirstpilotprograms.Currently,bothutilitiesprovidehourlypricing
programstoresidentialcustomerswhoprefertopaythehourly,marketpriceforelectricity.26
25
CaliforniaISO,EnergyImbalanceMarketDraftFinalProposal(2013)(availableat:
https://www.caiso.com/Documents/EnergyImbalanceMarket-DraftFinalProposal092313.pdf);seealso,California
ISO,147FERC¶61,231(2014),orderonreh’g,clarification,andcompliance,149FERC¶61,058(2014),Order
AcceptingComplianceFiling(June18,2015).
26
CommonwealthEdisonCompany,“HourlyPricingProgramGuide:2015-2016”(availableat:
https://hourlypricing.comed.com/wp-content/uploads/2016/04/2015-2016-HourlyPricing-Guide-v1.pdf).
14
III.
WhatisDER?
ThereissingledefinitionforaDistributedEnergyResource(DER).Sometechnologiesandserviceseasily
fitintoanydefinition,suchasresidentialroof-topwindorsolar,butothershaveyettobedefinitively
placedinsideoroutsideofthecategory.DERsarebeingadoptedateverincreasingratesdueto
favorablepolicies,improvementsintechnologyandcosts,aswellasbecomingmorewidelyaccepted
withidentifiablecustomerbenefits,bothattheindividuallevelandpossiblyforthegrid.However,once
DERadoptionpassescertainlevels,DERscanbegintocausesignificantissuesfortraditionalratemaking,
utilitymodels,anddeliveryofelectricity.IndefiningDER,itisimportantforregulatorstoidentify
potentialeconomicandgridissuesfromDER.Then,afterempiricallyestablishingatwhatadoptionlevel
theywillaffectthegrid,regulatorsshouldexploreandimplementratesandcompensation
methodologiesthatwillleadtogreaterbenefitsforthepublic,customers,andutilitiesalike.
Addressingtheseissueswillrequirelookingatutilityregulationfromanewperspectiveandindeed,a
fewstateshaveinitiated“utilityofthefuture,”orsimilarreevaluationsoftheirregulationspartiallyin
responsetothechangesDERrepresents.Theseprocessesareatthevanguardofananticipatedshift
fromcentralizedcontrolandevaluationatasystem-wideleveltoamoretechnology-dependent,and
data-drivenfocusonmorelocalizedeffectsandsituationsrepresentsasteeplearningcurvefor
everyoneinvolved.
A. DefiningDER
Absentdirectionfromthelegislature,aregulatormayneedtodefineDER,oratleastprovideguidance
toutilities,customers,andotherstakeholdersregardingthejurisdiction’sviewpointonwhatconstitutes
DER.
Inthepast,theelectricutilitysystemhasbeencomposedoflarge,centralizedgeneration,not
necessarilysitednearcustomers,andconnectedtoloadthroughthebulk,highervoltage,transmission
gridwhichlaterflowsdowntothelowervoltagedistributiongrid.Thiswasduetoeconomiesofscale;
sometimesitwascheaperforlargeamountsofgeneratedelectricitytotravellongdistancesbefore
reachingtheutilitiesdistributionsystem,and,ultimately,thecustomer.Traditionally,regulatorsand
utilitieslookingtoadda“resource”througharegulatoryplanningprocessinordertoserveanticipated
loadwouldsitealargegenerationplant,orattheveryleastatransmissionproject,torelievecongestion
onthebulktransmissionsystemandfacilitatedeliveryofelectricitytoload.
Comparedtothetraditional,central-generationmodel,itcouldbesaidthatadistributedmodelis
turningthetraditionalmodelupsidedownbytrendingawayfromlarge,centralizedgeneration
connectedtotheinterstatebulktransmissionsystemtobuildingandintegratingnewresourcesatthe
distributionlevel.
ThefollowingaresomeexamplesofdefinitionsofDERfromacrosstheindustrytogiveoneanideaof
thevarietyofdescriptionsusedandthesimilaritiesanddifferences.
TheDepartmentofEnergydefinesDERasfollows:
15
•
Distributedenergyconsistsofarangeofsmaller-scaleandmodulardevicesdesignedtoprovide
electricity,andsometimesalsothermalenergy,inlocationsclosetoconsumers.27
LawrenceBerkeleyNationalLaboratoryhaspublishedaseriesofpapersontheFutureofElectricUtility
RegulationwhichfocusesonDER.Thisdefinitionwastakenfromthe“KeyDefinitions”sectionoftheir
paper,“DistributionSystemsinaHighDistributedEnergyResourcesFuture”:
•
DistributedEnergyResources(DERs)includecleanandrenewabledistributedgeneration
systems(suchashigh-efficiencycombinedheatandpowerandsolarphotovoltaicsystems),
distributedstorage,demandresponseandenergyefficiency.Plug-inelectricvehiclesare
consideredaspartofdistributedstorage.WhilenotincludedintheformaldefinitionofDER,this
reportalsoconsiderstheimplicationsofcustomerback-upgenerationongridoperationsgiven
thatover15percentofU.S.householdshaveeitherastationaryorportableback-upgenerator
toenhancetheirreliability.28
CaliforniaPublicUtilitiesCode,theNewYorkPublicServiceCommission,andMassachusetts
DepartmentofPublicUtilitieshaveeachprovidedadefinitionofDERapplicabletotheproceedings
currentlyongoingintheirrespectivestates:
•
•
•
California:“‘distributedresources’meansdistributedrenewablegenerationresources,energy
efficiency,energystorage,electricvehicles,anddemandresponsetechnologies.”29
NewYork:“DistributedEnergyResources(DER)isusedinthiscontexttoincludeEnergy
Efficiency(EE),DemandResponse(DR),andDistributedGeneration(DG).”30
Massachusetts:“ADERisadeviceormeasurethatproduceselectricityorreduceselectricity
consumption,andisconnectedtotheelectricalsystem,either"behindthemeter"inthe
customer'spremise,orontheutility'sprimarydistributionsystem.ADERcaninclude,butisnot
limitedto,energyefficiency,distributedgeneration,demandresponse,microgrids,energy
storage,energymanagementsystems,andelectricvehicles.”31
TheElectricPowerResearchInstitutedefinesDERas:
•
Distributedenergyresources(DER)aresmallerpowersourcesthatcanbeaggregatedtoprovide
powernecessarytomeetregulardemand.Astheelectricitygridcontinuestomodernize,DER
27
http://energy.gov/oe/technology-development/smart-grid/distributed-energy.
28
“DistributedSystemsinaHighDistributedEnergyResourcesFuture,”PaulDeMartiniandLorenzoKristov,
LawrenceBerkeleyNationalLaboratory,FutureElectricUtilityRegulation,ReportNo.2(October2015)(available
athttps://emp.lbl.gov/sites/all/files/FEUR_2%20distribution%20systems%2020151023.pdf).
29
CaliforniaPublicUtilitiesCode§769(a).
30
ProceedingonMotionoftheCommissioninRegardtoReformingtheEnergyVision,“ReformingtheEnergy
Vision,”NYSDepartmentofPublicServiceStaffReportandProposal,Case14-M-0101at12,fn.7(April24,2014).
31
InvestigationbytheDepartmentofPublicUtilitiesonitsownMotionintoModernizationoftheElectricGrid,
D.P.U.12-76-C,BusinessCaseSummaryTemplate:Glossary(2014).
16
suchasstorageandadvancedrenewabletechnologiescanhelpfacilitatethetransitiontoa
smartergrid.32
ThefollowingcomponentsmakeupthebasiccharacteristicsindefiningDER:1)theresourceis
connectedtothedistributiongridandnotthebulktransmissionsystem;2)arelativelysmallresource,
certainlyunder10MWbutgenerallymuchsmaller;and,3)generallynotindividuallyscheduledbyan
RTOand/orISO.NorisitnecessarytoreportaDERindividuallytoanRTO/ISO,since,ifaDERis
procuredordispatchedatall,itwouldbeonanaggregatedmannerbya3rd-partyortheutilityitself.
TheremaybemanyotherqualitiesassociatedwithDERs,suchasresponsiveness,specificvaluesor
services,anddispatchability,butthesearelargelyrelatedtothetechnologyitself.
ForthisManual,thefollowingdefinitionofDERwillbeused:
ADERisaresourcesitedclosetocustomersthatcanprovideallorsomeoftheir
immediate power needs and can also be used by the system to either reduce
demand (such as energy efficiency) or increase supply to satisfy the energy or
ancillary service needs of the distribution grid. The resources, if providing
electricity or thermal energy, are small in scale, connected to the distribution
system, and close to load. Examples of different types of DER include
photovoltaicsolar,wind,andcombinedheatandpower(CHP),energystorage,
demandresponse,electricvehicles,microgrids,andenergyefficiency.33
ThisdefinitionreflectsthevarietyofDER,bothtechnologically,butalsoincapabilitiesandbenefits(and
costs)tothegrid.
B. TypesofDERTechnologiesandServices
Asdiscussedabove,energyresourcesthatareconsideredtobeDERincludesolarPV,combinedheat
andpower(CHP),wind,storage,microgrids,andelectricvehicles.EEandDRmayalsobeconsideredas
DERresources.
1. Solarphotovoltaic(PV)systems
Solarphotovoltaic(PV)systemsusesolarcells,formedintosolarpanels,toconvertsunlightinto
electricity.SolarPVsystemscanbelocatedonrooftopsofhomesorcommercialandindustrialbuildings
orcanbeground-mounted.ThePVsystemscanbeusedtomeettheenergyrequirementsforthehome
orbuildingortheenergyfromthesystemcanbeexportedtothegridthroughthedistributionsystemto
beusedbyanearbyload.Duetotechnologicaladvancesandfallingpanelprices,PVsystemshave
becomethefastestgrowingDER.Thiscategoryalsoincludescommunitysolargardens,whicharelarger,
bothbyavailablegenerationcapabilityandacreage,solarinstallationsthatallowcustomersunableto
32
http://www.epri.com/Our-Work/Pages/Distributed-Electricity-Resources.aspx.
33
Diesel-firedbackupgeneratorsmayalsofitinthisdefinition.Whetherajurisdictionallowsbackupgenerationto
countshouldbedeterminedbythejurisdiction.ForpurposesofthisManual,itgenerallydoesnotincludebackup
generation.
17
haverooftopsolarPVparticipateinasolarprogram.Regulatorswillneedtocreaterulesortariffs
regardingappropriatesizesofcommunitysolargardensthatareallowedtointerconnectatan
interconnectionpoint.
2. CombinedHeatandPower(CHP)
CombinedHeatandPowersystems,oftenreferredtoascogenerationorCHP,providebothelectric
powerandheatfromasinglefuelsource.WhilemostpowerplantsintheUnitedStatescreatesteamas
abyproductthatisreleasedaswasteheat,aCHPsystemcapturestheheatandusesittogenerate
electricitywhichisusedformanypurposessuchasheating,cooling,domestichotwater,andfor
industrialprocesses.CHPsystemscanuseadiversesetoffuelstooperateincludingnaturalgas,
biomass,coalandprocesswastes.CHPcanachieveefficienciesofover80percent,comparedto50
percentforconventionaltechnologies.34
3. Wind
Distributedwindenergysystemsusewindenergytocreatepowerandarecommonlyinstalledon
residential,agricultural,commercial,industrial,andsometimescommunitysites,andthesystemsvaryin
size.Sizesthatarecommonforahomecanbeaslargeasa10kWturbineandcanbeseveralMWata
manufacturingfacility.Distributedwindsystemscanbeconnectedonthecustomer’ssideofthemeter
tomeettheirenergyneedsordirectlytodistributiontosupportgridoperationsoroffsetloadsnearby.
Distributedwindsystemsareoftendefinedbytechnologyapplication,basedonlocationrelativetoenduseandpowerdistributioninfrastructure,andnotsize,however,distributedwindsystemsaretypically
smallerthan20MW.35
4. Storage
Energystoragecanbeusedasaresourcetoaddstability,control,andreliabilitytotheelectricgrid.
Historically,storagetechnologieshavenotbeenwidelyusedbecauseithasnotbeencostcompetitive
withcheapersourcesofpower,suchasfossilfuels.However,giventherecentdeclineincostaswellas
improvedstoragetechnologies,storagehasbecomeanoptionthatisabletocompete.36Withthe
growinguseofintermittenttechnologiessuchaswindandsolarenergy,energystoragetechnologies
canprovidetheneededpowerduringperiodsoflowgenerationfromintermittentresourcesthatwill
assistinkeepingtheelectricgridstableandpossiblypreventcurtailmentofresourcesinspringandfall
34
http://www.energy.gov/articles/top-10-things-you-didn-t-know-about-combined-heat-and-power;
https://www.epa.gov/chp/what-chp
35
http://energy.gov/eere/wind/how-distributed-wind-works
36
“BatteriesChargeUpfortheElectricGrid,”Moody’sInvestorsServiceat5(September24,2015).Otherrecent
reportsshowthatenergystoragecanbecostcompetitivewithexistinggenerationresourceswhenallvaluesare
added.See,“TheEconomicsofBatteryEnergyStorage,”RockyMountainInstitute(October2015);“LevelizedCost
ofServiceofStorageAnalysis–Version1.0,”Lazard(November2015).
18
monthswhenelectricityconsumptionisnotimpactedbysummerairconditioningorwinterheating
loads.37
5. Microgrids
Microgridsarelocalizedgridsthatcandisconnectfromthetraditionalgridtooperateindependentlyand
helpmitigategriddisturbances.Microgridscanstrengthengridresilienceandhelpmitigategrid
disturbancesbecauseoftheirabilitytocontinueoperatingwhilethemainelectricgridisdownthereby
functioningasagridresourceforfastersystemresponseandrecovery.
Microgridshelpwiththeintegrationofgrowingdeploymentsofrenewablesourcesofenergysuchas
solarandwindanddistributedenergyresourcessuchascombinedheatandpower,energystorage,and
demandresponse.Byusinglocalsourcesofenergytoservelocalloads,thereisareductionofenergy
lossesintransmissionanddistribution,whichfurtherincreasestheefficiencyofthegrid.38
6. Demandresponse
Demandresponsecanbeusedasaresourcebyutilitiesandgridoperatorsinordertobalancesupply
anddemand.Theuseofdemandresponseasaresourcecanlowerthecostofelectricityinwholesale
markets,byavoidingthedispatchofmorecostlygenerationresources,whichthencouldleadtolower
retailrates.Thereareseveraloptionsforcustomerstoparticipateindemandresponseproductswhich
includeparticipatinginatime-basedrate,suchastime-of-usepricing,criticalpeakpricing,variablepeak
pricing,realtimepricing,andcriticalpeakrebates.Anothermethodistheuseofdirectloadcontrol
programswhichallowforthecyclingofcustomerairconditionersandwaterheatersonandoffduring
periodsofpeakdemandinexchangeforafinancialincentive.Withthecontinuationandincreasedfocus
ofgridmodernizationefforts,demandresponseisbecominganincreasinglyvaluableDERresource.39
7. ElectricVehicles
EV’scanberesponsivetopriceordemandresponsesignalsandchangewhenitcharges.Thisflexibility
toparticipateasademandresponseresource,locatedthroughoutaserviceterritoryprovidesautility
withtargetingEVdemandresponseprogramswheremostbeneficialtothegrid.Additionally,EVshave
theabilitytoputpowerbackontothegridwhichprovidesthegridwithadditionalflexibilitywhen
connectedtothegrid.Thiscapabilityallowselectricvehiclestoactlikeanenergysourcebysupplying
gridservicesasagrid-connectedbatterywhichisabletoprovidemobilebackuppowerduringanoutage
oremergencysituation.Inordertobenefitfromthiscapability,itwillrequirethedevelopmentof
vehiclepowerelectronicsystemswithbidirectionalflow,integratedcommunications,andimproved
batterymanagementsystems.SinceEVsareoftenstationaryformanyhoursoftheday,thebattery
fromtheelectricvehiclecanbeusedasastoragedevicethatcanprovideadditionalgridservices.40
37
http://www.epri.com/Our-Work/Pages/Distributed-Electricity-Resources.aspx
38
http://energy.gov/oe/services/technology-development/smart-grid/role-microgrids-helping-advance-nation-senergy-system
39
http://energy.gov/oe/technology-development/smart-grid/demand-response
40
http://energy.gov/sites/prod/files/2015/09/f26/QTR2015-3D-Flexible-and-Distributed-Energy_0.pdf
19
C. ExpandingtheDefinitionof“Resource”
Theterm“resource”hastraditionallyreferredtoaresourceforelectricitygeneration.Howaregulator
definesDERwilllikelyincluderesourcesotherthanthegenerationneededtomeettheneedsofthe
utilityandcustomersinservingtheirelectricalload.MostpartiesgenerallyagreethatDistributed
Generation,suchasrooftopPV,aswellasstoragetechnologies,whichoftenincludeElectricVehicles,
meetthedefinitionofDER.Thereislessagreementonwhetherotherservicesonthedemand-side,
whichreduceload,shouldbeconsideredaDERasenvisionedbyregulators.Oftheabovedefinitions,
mostincorporateDemandResponse(DR)whichisusedbysomeRTOsandotherjurisdictionsasa
dispatchableresourcetoalievestressonthegridduringpeakperiods.Thus,DRisnotatraditional
resourceasitisnotageneratorsupplyingelectricityintothegrid;rather,itisademand-sideresource
thatchangesthedemandcurveinresponsetoapriceorcanbedispatchedtomeetsystemneedsby
usingdemandinresponsetosystemconditions.Again,themaindifferencelaysbetweenaresource
thatactsassupplyresourceasopposedtoaresourcethataffectsdemand.Otherservicesand
applicationsasenvisionedbyvendorsandsuppliers,suchasmicrogrids,Volt/VAR,frequencyridethrough,andlocationalramping,alsodonotclearlyfitinsidecurrentdefinitionsofresources.These
typesofservices,whileclearlyvaluableandpotentiallyworthyofcompensation,arenotasuniversally
acceptedasDERprimarilyduetolackofuseacrosstheindustry,lackofsufficienttechnologyinstalled
whichcanassistinmeasuring,andschedulingsuchresourceswithgreatercertaintyandconfidence.41
Energyefficiencyprogramsarealsosometimesincludedinthedefinition,asreflectedinthedefinition
adoptedabove.SinceEEisnotdispatchable,butreducesloadonaconstantbasis,itisnotalways
includedinthedefinitionofa“resource.”MeasurementandforecastingplayalargepartinEE,and
whethertheassumptionsthatarerequiredforpredictingwhatthedemand/supplywouldlooklike
absentEE,addssignificantcomplexitytotheissueofdeterminingwhatisthe“resource”valueoftheEE.
AregulatorwillneedtodeterminewhetherornotitisappropriatetoincludeEEinitsconsiderationof
DER.
AnotherissueiswhetheraDERmustberenewableor“green.”Aregulatorwillneedtobalancethe
importanceofitsrelatedenvironmentalpoliciesregardinghowitdefinesaDER.Forpurposesofthe
adopteddefinitionabove,greenisnotanexplicitrequirementtobeagenerationDER.Itmaybethat
renewabledistributedgenerationresourceswouldprovidegreatersocietalbenefitsthanother
generationresources,especiallywhensitednexttoresidentsandload,butthefactisthatanybenefits
orcostsofdistributedgenerationapplyequallytorenewableornon-renewablegenerationifthevalue
oftherenewableenergycreditsaretrackedseparately.Forpurposesoftheadopteddefinition,
environmentaloremissioncriteriaisnotincludedasitshouldbeuptotheregulatortodecidewhether
ornotthedefinition,andcompensationforDER,shouldbelimitedonlytorenewableresources.
41
Anadditionalconstraintisthedelayindevelopmentofstandardstosupportthesafeandreliableoperationand
integrationofmanyofthesetechnologiesintothegrid.AtthetimeofthisManual,keystandardstosupport
integrationoftheseresources,suchasUL1741andIEEE1547,havedelayedtheintroductionoftheseresources
intothegrid.Withoutstandardsinplace,testingandtrialingofnewtechnologiesislimited,whichimpactsthe
abilityoftheutilityandthedeveloperfromgaininginformationandknowledgeaboutthetechnologyandits
interactionwiththeutilitysystem.
20
D. IncreasingImportanceofDERandtheIssuesitPresents
RapidproliferationofDERinafewjurisdictionshasledtoanationaldiscussionandhighlightedthe
issuesthatincreasedadoptionofthetechnologiesrepresentsforregulators,utilities,andcustomers,
alike.TheproliferationofDERhasbeendrivenbyfavorablelegislativeandregulatorypolicies,historical
ratedesign,changesintechnology,suchaspriceandfunctionalityimprovementsinrenewable
generationandstorage,andtheproliferationofcommunicationfunctionalitythroughoututility
distributionsystems.Thetechnologicaldevelopment,asdescribedabove,isareflectionofhowmuch
theadoptionofDERhasgrownintherecentpastaswellastheanticipatedincreasesinthelevelof
adoptioninthenearfuture.TherapidadoptionofDERalsosignalsashiftawayfromthecentralized
utilitymodelbrieflyoutlinedatthebeginningofthisSection.
TheincreasingimportanceofDERledtothedevelopmentofthisManualandanumberofotherarticles
andreportsaddressingDERanditsimpactsontheutility,regulators,andratedesign.42Forexample,
LawrenceBerkeleyNationalLabhasinitiatedaseriesofpapersentitledthe“FutureofElectricUtility
Regulation”toassistinthisdialogue.43Thesepapersemployapoint-counterpointformattoexplorethe
futureofelectricutilityregulationinafuturedominatedbyDER.Otherstakeholdershavealso
identifiedoptionsinresponsetothestressDERplacesonutilitiesandtraditionalregulatorymodels.44
WhileDERhaveyettoreachsignificantlevelsofadoptionratesinmanystates,somejurisdictionshave
seenhigherlevelsofadoptionofDERanditseemsthatfavorablepoliciesandcompensationhavebeen
drivingtheseadoptionrates.ThefourthreportfromFEURbegins,“Byalmostanyreasonablestandard,
however,highpenetrationofdistributedgenerationisnowevidentinHawaiiandmovingquicklyinthis
directioninlocationsinCalifornia,Arizona,TexasandNewJersey.TheHawaiiPublicUtilities
Commission(PUC)reportsthatsolarphotovoltaic(PV)capacityinMauiwillsoonequalmorethanhalfof
thesystempeakdemand.”45,46TheissuespresentedbyDERinthecurrentregulatorylandscape
primarilyinvolvethecoststhatDERimposeonthegrid,andrecoveringthecostofthegridfromDER
customers;properlyincorporatingandcompensatingthebenefitsDERprovide;dealingwithother
physicalchallengesthatthetechnologiesimposesonthephysicalgrid;andownershipissues.
42
Seefn.36,supra.,andfn.44,infra
43
Moreinformationontheprojectandaccesstoallreportscanbefoundat:https://emp.lbl.gov/future-electricutility-regulation-series.
44
Anumberofreportsandwhitepapershavebeenissuedonthistopic.Thefollowingarejustasmallsampling:
“APathwaytotheDistributedGrid,”SolarCityGridEngineering(February2016);“DisruptiveChallenges,”Edison
st
ElectricInstitute(January2013);“Pathwaytoa21 CenturyElectricUtility,”Ceres(November2015);“RateDesign
fortheDistributionEdge,”RockyMountainInstitute(August2014).
45
“DistributionSystemPricingwithDistributedEnergyResources,”RyanHledikandJimLazar,LawrenceBerkeley
NationalLab,FutureElectricUtilityRegulation,ReportNo.4at3(May2016)
(https://emp.lbl.gov/sites/all/files/feur-4-20160518.pdf).
46
InstitutingaProceedingtoInvestigateDistributedEnergyResourcePolicies,DecisionandOrderNo.33258,
HawaiiPUC,DocketNo.2014-192(October12,2015).
21
Aswithanyregulatoryissue,ofcourse,eachstateandeachutilityterritoryisuniquewithitsownsetof
circumstanceswhichmayrendertheidealregulatorytreatmentfromoneterritoryunworkableornot
advisableinanother.
Takeforexample,onekeyvariableinconsideringDERratemaking:thelevelofadoptionofthe
resources.47Thethresholdlevelofadoptionforsignificantimpactsmaynotjustonlyvaryfromstateto
stateandutilitytoutility,butoftenvariesfromfeedertofeederorcircuittocircuitinsideoneservice
territory.MorediscussiononthiscanbefoundinSectionVI.
Thus,inanyevaluation,theutility’sspecificcharacteristicsandtheirmostlikelyreactiontoanyrate
designchangesmustbeclearlyandthoroughlydeterminedbeforequestionsandchallengesfromDER
areaddressedthroughratemakingchanges.Theleveloftransparencyanddetailontheoperationsand
physicalcharacteristicsofautility’sdistributionsystemmaybesignificantlymorethanmayhavebeen
employedinthepast.
E. Costs
TheeconomicpressuresDERputsontheutilityandnon-DERcustomerswithinarateclassisoneofthe
mostdivisiveissuesfacingregulatorstoday.Theseeconomicissuesincluderevenueerosionandcost
recoveryissuesaswellasinter-classcostshiftingapparentintraditionalutilityratedesignandNet
EnergyMetering(NEM)discussions.TheseissueshavebeendrivingmostofinvestigationsintoNEM
policiesandsearchesforalternatewaystotreatDERinratemaking.
1. Revenueerosion
Amajorityofutilitycostsarenotvariableintheshortterm.Traditionally,mostutilitiestakeinmostof
theirrevenuethroughaflat,volumetricchargecoupledwithafixedorcustomercharge.Thishasbeen
thesimplestwaytocollectrevenue,bothforhistoricalmeteringtechnologyandcustomer
understanding.Manybusinessesuseaflatchargefortheirproductsorservicestorecovertheircosts,
includingfixedcosts.Forthistypeofratedesign,revenuerecoveryisatrisktoanyreductioninusage
(i.e.,variationinweatherorDER)unlessthereisamechanismthat“decouples”revenuefrom
customers’usage.Decouplingmeanstheutility’srevenuedoesnotincreaseanddecrease
proportionallywithusagelevels.Approximately60%ofjurisdictionsdonothaveadecoupling
mechanism,souseofdecouplingasasolutionmaybeanoptionformanyjurisdictionstoconsider.48
DERcompensationthatnetsoffaone-to-onecreditforenergyanddistributioncostsreducesthe
utility’scollectedrevenueattheretailratewhilealreadyreducingthecustomer’sbillbythesame
amount.Thisnettingdoesnotnecessarilyreduceanyoftheutility’scosts,butnegativelyimpactsits
revenuecollection,thoughtheeffectisdifferentinverticallyintegratedjurisdictionsversusrestructured
jurisdictions.Thisrevenueerosionissueiswhathasbroughtmanyoftheutilitiestothetabletodiscuss
DERissuesandleadstothecostrecoveryandcostshiftingissuesbelow.
2. CostRecovery
47
Sometimescalledthelevelof“penetration.”
48
https://www.nrdc.org/resources/gas-and-electric-decoupling
22
Reducingtheutility’sopportunitytorecovertheamountofrevenueneededtoreachitsauthorizedrate
ofreturnthreatensitsabilitytorecoveritscostsforoperationsofthesystem.Thisinturnmayleadto
argumentsforregulatedutilitiesthattheseutilitiesare“riskier”thanothersandthusaredeservingofa
higherreturnonequity,whichwouldincreaseratestoallcustomersoftheutility.Manyviewthe
primaryresponsibilityofutilityratesas:recoveringtheembeddedcostoftheutility’sassets;earninga
fairreturn,orprofit,onthesame;aswellasrecoveringtheoperationsandmaintenanceexpenses
necessaryforprovidingtheirservice.Thiscostrecoverycoversthedollarsthattheutilityhasalready
investedintotheassetsrequiredtodeliver,and,ifapplicable,togeneratetheelectricityforasafe,
adequate,andreliablelevelofservice.Theactualcoststobuild,operate,andmaintainanadequate
distributionsystemareoftenviewedasbeingprimarilydrivenbythenumberofcustomersservedby
thesystemorbytheaggregatedemand—whichistheone-timehighestpeakdemandthesystemmust
accommodate.49Regardlessofthedriversofcost,mostutilitiesandmanyregulatorsviewtheutility’s
short-termcosts,especiallyfortheirdistributionsystem,asfixed;indeed,theratebaseandauthorized
revenuerequirementis“fixed”bythestateregulatorduringratecases.This“fixed”amountisthen
allocatedtothedifferentclassesbeforebeingcalculatedintothebillingdeterminantsthatdecidean
individual’sbill.
Subsequently,DERcanaffectthecostrecoveryofdistribution,transmission,andgenerationassets.To
usedistributionasanexample,undertraditionalratemaking,areductioninusage,andthusrevenue,in
asingleyeardrivenbyDERmayleadtolittle,ifany,reductionofthecostsofthesystem-–theterritory
stillhasthesamenumberofpoles,wires,andotherequipment,allwiththesameusefullife.
Thisisasimplification,sinceutilitiesarenotsimplyhandedthemoneytheyspendontheirsystems,but
shouldillustratetheissuewithrecoveringutilitycostsandtheincreasedrisksfacedbyutilities.
3. CostShifting
CostshiftingisanotherissuewhichaffectscustomersinthesamerateclasswithsignificantDER
adoption.Costshifting,orsubsidies,areunavoidableinpracticalratedesignbutregulatorsendeavorto
mitigatetheseeffectsinthelargercontextofthemany,oftenconflicting,ratedesignprinciples.The
responsetoadecreaseincostrecoverycertaintyortoanactualreductioninrevenueisfortheutilityto
comebacktotheregulatortochangeitsrevenuerequirementandratedesign.InthecaseofDER,often
thebillingdeterminantsarechangedtomitigatethepressureonrevenuecausedbyreducedusage
volume.Thus,thedeclineinusagewouldbeshiftedtoothercustomerswhenthebillingdeterminants
areresettoaccountforthedecreasedrevenuefromtheDERcustomers.Atalowlevelofpenetration,
thismaybeanotherimperfectioninratedesign,butatlargelevelsofpenetrationitcanbeproblematic
andrepresentlargeamountsofrevenuebeingshiftedtoother,non-DERcustomersinthesamerate
class.Theremayalsobeequityconsiderationstotakeintoaccount.Forexample,ifcustomerslivingin
multi-familyhousingareinthesameclassasDERcustomersandtherearenoDERoptionsavailableto
multi-familycustomers(sincetheydonotgenerallyowntheirproperty),aregulatormustconsider
49
Formoreinformation,seetheNARUC“ElectricCostAllocationManual.”Thisinitselfisanoversimplification
since,forexample,locationplaysaroleincostallocationasruralcustomerscouldbemorecostlytoservethan
certainurbancustomersofthesamerateclass.
23
whethershiftingadditionalcostrecoverytocustomerswhomaynothaveachancetoparticipateinDER
isappropriate.
Insum,underthetraditionalratemakingmodelandcommonlyusedratedesign,iftheutilitypassesits
relevantthresholdofDERpenetration,itmayfacesignificantintra-classcostshiftinganderosionof
revenueintheshort-run.Ifleftunaddressed,itcouldfacepressuresinthelongtermthatwould
prohibititfromrecoveringitssunkcostsnecessarytoprovideadequateservice.
4. TechnologyandPhysicalIssues
Inadditiontotheeconomicissuesrelatedtorevenueerosionandcostshifting,DER,primarilyDG,can
putpressureonthephysicalgrid.Manyoftheseproblemsaredifferentdependingonthetechnology,
buttheyarealloftencompoundedbyautility’slackofcontrolover,andvisibilityof,DER’seffects.
CustomersitedDER,especiallyrenewablegeneration,isgenerally“non-dispatchable”anditseffectsare
oftenlocalizedatthefeederlevel.
Utilitiesprocureorgenerateelectricitythemselvesthatisplannedlongbeforehandandincludes
marginsforincreasinganddecreasingelectricaloutputaswellasancillaryservicestoensurepower
qualityismaintainedsystem-wide.DERsthatarerenewablegeneration,suchaswindorPV,are
intermittentinnature(absentstorage),whichmeansthatthegenerationisonlyavailablewhenthesun
isshiningorthewindisblowing,andonlyuptothequalityoftheresource(e.g.,strengthofthewindor
angleofsolarpanels,whethertheyarefixedortracking,andthedailyintensityofthesun).
Additionally,thepresenceofcloudsorsuddenchangesinwindvelocitycanmeanthatoutputcanvary
greatlyfrommomenttomoment,includinggoingfrom100%outputto0%almostinstantaneously.In
thisregard,DERcanactasifsizableloadsarecomingonandoffofthesystem,andmakesutilityand
RTOdemandforecastingproblematic.
TheseeffectsareamplifiedwhenDERisclusteredinaspecificarea.Forinstance,ifDERsareclustered
ononefeederandreactingtothesamesuddenchangesinelectricaloutput(say,duetoacloudmoving
overhead)thatfeedercouldsufferoutsizedeffectswhiletherestofthesystemisrelativelyunaffected.
Iftheutilitydoesnothavevisibilityintothesituationonthatfeederatsufficientgranularitynecessaryto
havevisibilityintothefeeder,thiscouldmakethevoltageonthatlineoutsideofacceptableparameters
withoutthewidersystembeingabletotimelyabsorbtheimpacts.Thismayimpactlocalreliability
conditionsifunaddressed,byeithertheutilityorthecustomer.Manyinterconnectiontariffsprovide
detailsonperformancerequirementsforDER,includingflickerandothervoltagerequirementsand
standards.50
Therelevantthresholds,asmentioned,aredifferentdependingonthelocalcharacteristics,butsome
utilitieshavealreadyseenoutputthatexceedsanindividualfeeder’speakusage.Dependingonthe
coincidenceoftherelevantpeakswiththeproductivityoftheDERs,thiscouldrepresentafeederthatis
exportingtothewidergridforsignificantperiods,onlytoabruptlychangecourseduetoacloud.
50
Flickergenerallyreferstothevariabilityoflightoutputfromlightbulbs.Insomecases,flickercanbecausedby
voltagedropscausedbylargeindustrialloads,orfromvoltageswingsfromsolarinstallations.IEEE141andIEEE
1453arethestandardsrelieduponforaddressingflickerconcernsfromresourcesconnectedtothegrid.
Interconnectiontariffsorutilityengineeringhandbooksmayincludeguidelinesandrequirementsrelatedtoflicker
andothervoltagefluctuationtolerancesfromloadsorDER.
24
Thesephysicalissuesoftenhaveamoredisruptiveeffecton“non-modernized”systemswhichpossess
lessgranularityinthevisibilityofthesystem.Iftheutilityhasinstalledadvancedmeteringonits
customers’loadorhasSCADAacrossitsdistributiongrid,itmaybeabletogatherbetterdatainorderto
understandtheimpactsofDERoncertainlocations.Advancedmeteringtechnologyalsoallowsfor
greateroptionsinratedesigns,whichwillbediscussedfurtherinthispaper.Othertechnologiesmay
alsobenefittheutilityinplanningandrespondingtoDERgrowthacrosstheutilitysystem.SeeSection
VIforgreaterdiscussion.
F. Benefits
Thechallengeofacknowledging,identifying,quantifying,planningfor,andoptimizingthebenefitsDER
providetoutilitiesandcustomers,boththosewithandwithoutDER,isanissueonparwithidentifying
appropriateutilitycosts,asdiscussedabove.Iftheprimarygoalisonlymitigatingthecost
considerationsintroducedabove,theregulatormaychoosefromasuiteofotheroptionstoaccomplish
thisgoal.Ontheotherhand,iftheregulatorseekstobetterintegrateandidentifyhowtoaddressDER
impacts,theregulatorshouldfirstdecidewhetherheorsheisinterestedinusingratedesignoptionsto
promoteDERandcalculatingtheseattendantbenefits.Understandingthetradeoffsofthischoice,as,
forexample,oneresponsecouldbeseenasleavingvalue“onthetable,”jurisdictionsinterestedin
movingbeyondthemoretraditionalratedesigndiscussionwillneedtobeopentoavarietyofoptions
tobestunderstandwhatisinthebestinterestoftheparticularjurisdiction.
AgrowingnumberofpartiesinvolvedintheDERdebateacknowledgesomebenefitsofDER,andsome
jurisdictions,utilities,researchers,andadvocateshaveconcludedorpositedthatresponsible
encouragementofDERadoptionleadstopositivecostbenefitresults.Inthisrespect,whenusingthe
traditionalmodelforratedesign,whichdoesnotcompensate(orcharge)customersforproducing
benefits(orcosts)forthegrid(exceptthroughDRprograms),itispossiblethataportionofthecost
benefitanalysisforDERswouldbemissing.Attheveryleast,thiscouldrepresentalostopportunityto
meetcustomerneedsonamorecosteffectivebasis.Asitappliestoemissionorrenewablecredits,itis
importanttonotethatmanystatestrack“RenewableEnergyCredits”separately,anditiswiseto
considerifDERisalreadybeingtrackedorvaluedinthatmanneralready.RenewableEnergyCreditsare
usedtovaluethe“green”componentoftheDERresource,butmaynotaccountfordistribution-related
benefitsoftheenergy.
ThereissomedebateoverwhatarethebenefitsofDER.Partoftheconfusionhereisinquantifying
benefitsfromDERandintegratingDERintothegridandutilitysystems.Regulatorsareincreasingly
interestedincalculatingbenefitswhichhavenottraditionallybeenincorporatedinratedesignorare
hardtoquantify.Environmentalbenefitsofdistributedcarbon-freegenerationisoneexample,butthe
ancillarymarketsofmanyRTOsareanotherexampleofrecentincreasedquantificationofbenefits.
TheservicesandbenefitsfromDERatquestionareoftenprovidedbytheutilityonasystem-widebasis,
oratthefeederlevel.However,someservices,suchaslocalreliabilityorresilience,maybemorecost
effectivelyprovidedbyresourcesdistributedacrossthesystem,ratherthandevelopedandprocuredat
wholesalelevels.TheseconsiderationscovermanydifferenttypesofDERandrepresentvalueor
compensationthatcanvarywidelydependingonthetimeandlocationtheyareprovided.
25
ThesetypesofratedesignsandproceedingswillbeexploredinmoredepthinSectionV,butlisting
someofthecategoriesofbenefitsexploredinthe“ValueofSolar(VOS)”proceedingswillgivesome
indicationofwhatbenefitsarebeingdebated.
MinnesotaenactedthefirstVOStariffandidentifiedalistofbenefitstobemeasured,or,insomecases,
coststobeavoided:environmentalcosts,distributioncapacitycosts,transmissioncapacitycosts,
reservecapacitycosts,generationcapacitycosts,variableutilityplantoperationsandmaintenance
costs,fixedutilityplantoperationsandmaintenancecosts,andfuelcosts.51Someadvocateshave
pushedforincludingevenmorebenefitcategories,suchaseconomicdevelopmentorjobs.Categories
suchasthepromotionofjobsarenormallynotunderregulators’purview,butcanbeusedbythe
utilitiestoadvocateforchangesbeneficialtothemwhenbeforecommissionsorlegislatures.
Manyexpertsandadvocateshavealreadybegunexploringdifferentlong-termoptionsforplanning,
evaluating,andcompensatingDERs.Somejurisdictionsarealreadymovinginthedirectionof
significantlychangingthewayutilitiesrecoveritscosts.52Othersarelookingatimplementinga
distributionsystemoperatormodeland/ormarketmodelsforrequestingandcompensatingDERsbased
onneed,time,andlocation.53Otherstateshavemovedtogreatlyexpandthetransparencyfor,and
participationof,regulatorsintotheplanningofautility’sdistributionsystem.54Inmanycases,these
effortsarebasedoffoftheelectricalsector’snon-profitmodelofthird-partyISOsandRTOs,whichfor
manyutilitiesareresponsibleforplanningandoperatingthebulktransmissionsystems.
Regardlessofwhatdirectionregulatorsofanyparticularjurisdictionwouldliketoheadinthefuture,the
acknowledgementandstudyofthesebenefitswillmostlikelybenecessary.Assuch,theyarejust
another“issue”broughttotheforefrontbyDERs.
G. OwnershipandControl
51
“MinnesotaValueofSolar:Methodology,”MinnesotaDepartmentofCommerceat2(January30,2014)
(availableathttp://mn.gov/commerce-stat/pdfs/vos-methodology.pdf).
52
See,e.g.,ProceedingonMotionoftheCommissioninRegardtoReformingtheEnergyVision,NewYorkPSC,Case
14-M-0101.
53
See,e.g.,OrderInstitutingRulemakingRegardingPolicies,ProceduresandRulesforDevelopmentofDistribution
ResourcesPlansPursuanttoPublicUtilitiesCodeSection769,CaliforniaPUC,R.14-08-013.
54
See,e.g.,InstitutingaProceedingtoReviewthePowerSupplyImprovementPlansforHawaiianElectric
Company,Inc.,HawaiiElectricLightCompany,Inc.,andMauiElectricCompany,Limited,HawaiiPUC,DocketNo.
2014-183;InvestigationbytheDepartmentofPublicUtilitiesonitsownMotionintoModernizationoftheElectric
Grid,MassachusettsDPU,D.P.U.12-76.Seealso,IntheMatteroftheCommissionInvestigationintoGrid
Modernization,“StaffReportonGridModernization,”MinnesotaPUC,DocketNo.15-556(March2016)
(describingnextstepsfortheMinnesotaPUCtoconsiderongridmodernizationactivities,includingdevelopment
ofadistributionsystemplan).
26
Onelastoverarchingcategoryof“issues”fromDERsroughlyfallsunderthecategoryofownershipand
control,thoughtheseareoverlapping.TheincreasedadoptionofDERisoftenpromotedbythird
partiesandnottheutility,andcanbedrivenbythirdpartybusinessmodelswhicharerespondingto
pricesignalsthatcompensatestrictlyonthebasisoftotalenergyproductionandnotgridbenefits(or
costs).Additionally,thelackofvisibilityintothecurrentstateofanyDERandthelackoftheabilityto
controltheDERwhenitisexportingtothegrid,whiletwoverydistinctissues,giverisetomanyofthe
physicalproblemswithincorporatingDERsintothegrid.
Tocompensate,utilitiesinvariousjurisdictionshaveattemptedtobuildintoregulationstheabilityto
interruptthe“dispatch”ofenergyfromacustomer’sDG,ortodiscourage3rdpartyproducts,suchasthe
practiceof3rdpartyleasingofrooftopsolar.Also,regulatorsarebeginningtoseetheneedfor
distinctionbetweentypesofDERwithrespecttotherelativevalues/costseachmayhaveonthesystem.
Forexample,solarPVpanelsthatarewestward-orientedmaybemorevaluabletoautilitysystemthat
peaksinthelateafternoonthanpanelswithasouthorientation.
Anadditionalissuehasbeentheconcernsaboutpredatorylendingandtheneedforconsumer
protectionregulationswhichmayaccompanypushestogetlargeamountsofDGinstalledatcustomer
residencesandthroughcommunitysolarprojects,especiallywheninvolvingprogramsaimedat
increasinglowincomeparticipation.Despitetherebeingprogramstargetedforlow-incomecustomers,
DERsarenotalwaysavailabletoallcommunities.Low-incomecustomersfaceaffordabilityissues,and
duetotheircredithistory,maynotbeabletofinanceDERinvestmentsorparticipateincommunity
renewableprojects.Additionally,low-incomecustomersmayrenttheirhomesorliveinmulti-family
buildingswhereDERisnotaccessibleorabletobeinstalled.DERresourcesmayonlybeavailabletothis
demographicthroughcommunityprogramsandvirtualnetmetering.
Thoughmanyoftheseissuesarenotdirectlyrelatedtoratedesigntheyareincludedheresoregulators
canensuretheyareaddressedwhentheybecomerelevantfortheirjurisdiction.
IV.
Ratedesignandcompensationconsiderations,questions,andchallenges
27
Often,discussionsonDERaremademoredifficultduetotheregulatoryframeworkandutility
incentivesthathavebeeninplacefordecades,orinsomerespectsacentury,arebeingchallengedby
thesenewtechnologies.Traditionalmeansofregulation,ratedesign,andplanninglargelyassumethe
utilitywillmeetalldemandwithgeneration;withtheincreaseinDER,andtherecentlackofload
growth,thecurrentregulatoryandutilitymodelsareaconstrainttoeffectivelyaddressingthegrowthof
DERanditsimpactsonutilityandregulatoryframeworks.Thisismademoredifficultbypartiesin
regulatoryproceedingsoftenonlyaddressingoneaspectoftheinteraction;eithercostrecoveryfor
utilitiesorcustomercompensationonthepartoftheadvocates.Thisseparatestheconversationand
makesithardertoreachanagreementthatisbeneficialforthepublicinterest.Thoughthesespecific
challengeswilllessenwithtimeasknowledgeandexperienceareaccumulated,currentlyoneofthe
biggestissues,ifnotcurrentlythebiggest,isthedearthofempiricaldataavailableontheimpactsand
specificprosandconsofthedifferentwaysregulatorscanaddressDERandratedesign.Identifyingand
understandingthesechallengeswillassisttheregulatorindetermininganappropriateratedesignforits
utilities.
A.Whatdoyouwanttoaccomplishwiththerate?
Inordertodevelopanappropriaterateorcompensationmethod,aregulatorshouldidentifywhatthe
rateshouldaccomplish,andhowtodeterminethebestwaytoimplementtherate.
1. WhatcostsshouldbepaidbyDERandwhatshouldberecoveredfrombaserates?
a. Differentratesvs.changingallrates
Ratemakingisoftentheresultofaregulatorybalancingofavarietyofinterestsandgoalsoftheparties,
andinresponsetotechnologicalandpoliticalconsiderations.Theprevailingratesforanygivenutility
representahistoryofcompromises;ongoals,onthebalancingofdifferentratedesignphilosophies,on
thepracticalityofagivenratecomponentbasedonavailabledata,etc.Giventhishistoryof
compromises,therehavealwaysbeen“winners”and“losers”inratedesign;DERjustpotentiallyshifts
whoarethosewinnersandlosers.Thequestionthenbecomeswhethertheentiretyoftherate
structurethatwouldapplytoallcustomersofagivenclass,includingDERcustomers,shouldbe
modifiedtobettermatchcost-causativefactors,orwhetheraspecialrateshouldbecreatedthatonly
appliestoDERcustomers.Thereisastrongargumenttobemadeforchangingtheratestructurethat
appliestoallcustomers,assendingallcustomersthemostappropriatepricesignalshouldresultinthe
mosteconomicallyefficientoutcomesrelatedtoelectricityconsumption,aswellasdecisionsonthe
installationofDER.55Foranumberofreasons,regulatorsmaydecidethisisnotthebestapproachto
recommend,ortheymaydecidethisisnotthebestapproachtoapprove(e.g.,promotionordemotion
ofDER,availabilityofdata,customeracceptanceorfearsrelatedthereto).56
b. Differentcustomerclassestorecognizedifferenceinservice
55
“APrimeronRateDesignforResidentialDistributedGeneration,”EdisonElectricInstituteat10(February16,
2016).
56
See,e.g.,“DistributionSystemPricingwithDistributedEnergyResources,”RyanHledikandJimLazar,Lawrence
BerkeleyNationalLab,FutureElectricUtilityRegulation,ReportNo.4at46-47(May2016).
28
Anotheroption,onewhichmightbeparticularlyattractivetoajurisdictionunwillingtocommittoa
wholesalerestructuringofratesoruncertainaboutthecostdifferencesbetweenDERcustomersand
others,isseparatingDERcustomersintotheirowncostofserviceclass.Suchanapproachwould
identifythedifferentwaysinwhichDERandnon-DERcustomerscontributetocosts,atleastaccording
tothetraditionalembeddedcostofserviceapproachutilizedinmanyjurisdictions,andtherebyreduce
thecross-subsidiesbetweenDERandnon-DERcustomers.AseparateDERclassmayalsoaidin
identifyingandquantifyingbenefitsandcostsassociatedwithDER.57
Traditionally,customersareseparatedintoclassesbasedonsomeimportantdistinctionintheservice
providedtodifferentgroupsofcustomerswhichaffectsthecosttoservethosecustomers.58The
questionforDERcustomers,then,iswhetherornotthedifferenceintheserviceprovidedtoDER
customersdiffersinawaythatjustifiestheirseparationintoaseparateclass.59,60Ifso,shouldthese
customersalsobefurthersubdividedintotechnology-specificclassesorsubclasses?Itisinstructiveto
considerwhathappenswhenacustomer’susagechangesforreasonsotherthanDER.Ifacustomer
replacesanappliance,orlightbulbs,orthenumberofpeoplelivinginahomeisreduced,otherthings
beingequal,thereislessusagetospreadcostsover.Therefore,therateincreases,providedthatthe
lowerusagehasnotoffsetallthecostsbuiltintotheratethedeclining-usagecustomerhasbeenpaying.
Costsareshiftedtothosecustomerswhodidnotreducetheirconsumption.Generally,thesecustomers
wouldnotbeseparatedintoanotherclass,astheservicesuppliedtoeachsetofcustomersisessentially
thesame.Air-conditioningorelectricheat,however,aresometimesconsideredtobeadifferenttype
ofservice,astheimpactoncostsissignificantlydifferentfromthosecustomersthatdonothavethese
items.SeparatingDERcustomersoutallaysconcernsaboutothercustomerscoveringcoststothe
extentthatthosecostsareassociatedwithdeterminantsusedinallocation.Ifthisisthecase,rate
structuresdonotnecessarilyhavetochange,astheassociatedcostsareallocatedontheappropriate
basis.Theremainingconcernswouldthenbepotentialintra-classsubsidizationbetweentechnologies
withdifferentcharacteristics61andalackofconnectionbetweenthecausationofcostsandtheir
collection.Intheend,regulatorsmustexaminetheparticularloadprofilesassociatedwithvarious
customers,includingDERcustomersandsubsetsthereof,andhowthoseprofilescorrespondtocosts,
anddecidewhetherornotthosedifferencesconstituteasubstantialenoughdifferenceintheservice
providedtojustifytheirseparation.
57
“DesigningTariffsforDistributedGenerationCustomers,”JanineMigden-OstranderandJohnShenot,Regulatory
AssistanceProjectat45(February2016).
58
See,e.g.,“ElectricUtilityCostAllocationManual,”NARUCat22(January1992).
59
ItcanbearguedthataseparateclassisnotnecessaryuntilDERconstitutessomethresholdportionofan
importantcostdeterminant,andthatdoingsobeforethisthresholdismetconstitutesratediscrimination.See,
e.g.,“RethinkingStandbyandFixedCostCharges:RegulatoryandRateDesignPathwaystoDeeperSolarCost
Reductions,”JimKennerly,NCCleanEnergyTechnologyCenter(August2014).
60
Itcanbearguedthatthedifferencedoesjustthat.See,EEIPrimerat11.
61
See“DistributionSystemPricingwithDistributedEnergyResources”at47.
29
2. PriceSignals
Aspreviouslymentioned,themorearatestructurereflectsthecostsassociatedwithanactivity,the
moreappropriatelydecisionscanbemadeabouthowmuchofaservicetouse,whentouseit,and
whetherotheroptionsfortheprovisionofsaidservicemakeeconomicsense.Ideally,ratesareprice
signalsfortheconsumptionofelectricity.Thosesamepricesignalsareusedtocomparetheutility’s
provisionofsaidserviceagainstthealternatives.Regulatorsmaywishtoconsiderhowappropriatethe
pricesignalprovidedbyaparticularratestructureis,inordertoinduceeconomicallyefficient
consumption.
3. Long-termvs.short-termcosts/benefits/outlooks
Anotherconsiderationintheexaminationoftheappropriateratesandratestructureisweighinglong-
andshort-termcostsandbenefits.Therelativeimportanceplacedonthelong-termversusshort-term,
aswellasthatbetweenbenefitsandcosts,canhavealargeimpactonthewayregulatorschoosetoset
ratesandratestructures.Thediscussionisoftencouchedinlanguagereferringtotheappropriate
marginalcosttobeconsidered:longrunorshortrun.Theoretically,inacompetitivemarket,thesetwo
areequal.Giventhattheorysooftenfailstoholdandelectricityisnotapurelycompetitivemarket,this
observationismainlyacademic.
Itcanbearguedthatthemajorityofautility’scostsarefixed.Itcanalsobearguedthatthemajorityor
entiretyofautility’scostsareaffectedbythewaycustomersutilizetheserviceprovided,makingthe
costsvariable.Thetwoopinionsvarymainlyinthetimehorizonconsidered.Thosewhofeelthe
appropriatetimehorizonistheshort-termtendtoidentifymorecostsasfixed.Thosewhofeelthe
appropriatetimehorizonisthelong-termtendtoidentifymorecostsasvariable.Thereareadditional
considerationsrelatedtohistoricalresponsibilityforlong-terminvestmentsmadetoservethe
customersandusagethatwereprojectedatthetimetheyweremade.
B.Impactsonothercustomers
WhendecidingonaratestructuretobeusedforDER,itisimportanttoconsiderthevariousimpacts
DERhasonnon-DERcustomers,bothpositiveandnegative.Athoroughunderstandingoftheseimpacts
canhelpguideregulatorsinchoosingaratestructurethatproperlyreflectsthem.
1. DoesDERavoidutilityinfrastructurecosts?
OnepotentialbenefitofDERisavoidanceofinvestmentanditsattendantcosts;conversely,increased
investmentcostsisapotentialdetriment.Avoidedinvestmentcanleadtolowerratesforallcustomers,
30
dependingonwhethersaidcostavoidancematerializesandhowratesaresettospreadthelowercosts
amongcustomers.Thisisgenerallyalonger-termconsideration,astheplanninghorizonforautilityis
quitelong.Asaresult,thereducedcostsassociatedwithDERmaybeslowtoberealized,astheywill
notoccuruntiltheutilitymakesasmallernewinvestmentthanitwouldhaveabsentthepresenceof
DER.Itmayalsoprovedifficulttoquantifythesecostsavingsandidentifyingtheportionassociated
withDERasopposedtootherfactors.DERcanalsocauseincreasedcosts,includingdistributionsystem
upgradesandadditionalgenerationtobackupintermittentresources,particularlyathighpenetration
levels.
Itishelpfultodividethepotentialforincreasesanddecreasesininfrastructureinvestmentbetweenthe
functionsoftheutilityinordertoexamineeachmoreclosely.
Onthegenerationside,DERcanreduceinvestmentintwoways.DER,insofarasitsupplants(oreven
supplies)usageduringpeaktimes,avoidsthevariablecostofrunningmoreexpensiveunitsatthe
margin,loweringtheoverallaveragecosttoallcustomers.62DERcanalsoreduceoravoidinvestmentin
capacity.IftheDERreducesacustomer’speakloadonthesystem,itmaydelayoravoidtheneedfor
peakingplantsormarketpurchasesforcapacity.IftheDERoffsetsusagemoreevenly,itcanavoid
investmentinmoreexpensivebaseloadplants.
Conversely,dependingonthenatureoftheDER,DERcouldrequireincreasedinvestmentingeneration
unitstomakeupthedifferenceforintermittentresources63ortomeetthegenerationflexibility
requirementsofalargerampupindemand.64
Onthedistributionside,theargumentisbasicallythesame,thoughtheequipmentatissuediffers.
InsofarasDERreducesusageduringpeaktimesatanygivenlevelofthedistributionsystem,future
investmentincapacitymaybereduced.ThereisevenpotentialfortargetingincentivesforDER
installationtoportionsofthesystemwhichmayotherwiserequireexpensiveupgrades.65Athigher
penetrationsofDER,however,additionalcostsmaybeincurredtoupgradethedistributionsystemto
actasstepupfacilities.
2. Costshiftingduetorecoveryoffixedcoststhroughavolumetricrate
OnepotentialdetrimenttoothercustomersofDERiscostshifting.Astheplanninghorizonislongand
benefitsmaybeslowtomaterialize,intheshort-termcostschangeverylittle,particularlywithregardto
non-energyrelatedinfrastructure.IfthesecostsarecollectedthroughaperkWh(orvolumetric)rate,
therewillbefewerkWhtospreadthosecostsover,therebyincreasingthecostscollectedfromthose
whoseusagehasnotbeenloweredbyDER.Thesecostscouldbeconsideredstrandedcosts,and
62
See“SmartRateDesignforaSmartFuture,”JimLazarandWilsonGonzalez,RegulatoryAssistanceProjectat43
(July2015).
63
Id.at63-5.
64
“RateDesignfortheDistributionEdge:ElectricityPricingforaDistributedResourceFuture,”RockyMountain
Institute,eLabat16(2016).
65
See,e.g.,ConEd’sDistributionLoadReliefProgram(“DemandResponseProgramsDetails,”ConEdison,available
athttp://www.coned.com/energyefficiency/demand_response_program_details.asp).
31
collectedfromallcustomersinsomefashion;theargumentsforandagainstwhicharediscussedina
latersection.Ifthecostsaredemandorcustomerrelated,theycouldbecollectedthroughachargefor
thosedeterminants,potentiallyavoidingsomecost-shifting.Itcanalsobearguedthatthesecostshifts
arenodifferentthancostshiftsrelatedtoanyotherchangeinusage,orthattheimpacttoother
customersisminimal,andshouldthereforenotbedealtwithinanywayotherthanthetraditionalway
TotheextentthatDERreducesacustomer’susage,thatcustomerislessreliantontheutilityfortheir
energyneeds.Thisreductioninusagemayhaveacorrespondingreductionincosts;mostassuredlya
reductioninvariablecostsattheleast.Achangeinusagemayaffectothercustomers.Ifusagelowers
enoughinaggregateasaresultofDER,wholesalepowerpricesmaybeaffected,asotherunitsareable
tooperateless.Thereisalsoapotentialeffectoncapacitypricesformuchthesamereason;reduced
demandforcapacitymaydrivethepricedown.IftheDERcustomerexportstothegrid,eitherin
aggregateoratmoreexpensivetimes,othercustomerswillbeusingtheenergysuppliedbytheDER
customer(thoughtheutilitywillstillprovidetheinfrastructureallowingitsdelivery66).
3. Customerisstilltiedintothegrid/utilityisstillresponsiblefordelivery
Therearemanycostsassociatedwithacustomerbeingconnectedtothegrid,aswellasbenefitstothe
customer.Particularlytotheextentthatratesarevolumetric,aDERcustomermaynotbepayingforall
suchcosts.ThesecostswouldthenbepaidforbyothercustomerstothebenefitofDERcustomers.
Thisisessentiallythejustificationforstandbyrates;assuch,theconsiderationsrelatedtothisissuewill
bemorefullyexploredinthesectiononstandbyrates.
4. DERcustomermaystillbegridreliantduringpeaktimes
Dependingonmanyfactors(e.g.,DERtechnology,siting,productiontimes),theDERcustomermaybe
moreorlessreliantonthegridduringpeaktimes,whencostsaregenerallyhigher.Identifyinghowto
ensurethecustomerispayingforitscostsoftakingservicefromthegrid,isimportanttoensurealevel
offairnessbetweenDERcustomersandnon-DERcustomers.Theuseofcertainratedesigns,suchas
TOUordemandchargesmaybeanoptionforregulators,or,asexplainedinSection5,otheroptions
mayalsobeavailable.
5. Costallocationinsideclasses
Asdiscussedearlier,ifDERcustomersarenolongerpayingfortheentiretyoftheiruseofthegrid,
whetherduetoratesnotbeingchargedonthecost-causativedeterminantorbecausetheinvestmentof
theutilityhasnotyetbeenloweredtotakeintoaccountthelowerneedforitsservices,othercustomers
necessarilypaythedifference.Suchasituationpresentsseveralpotentialproblems.
Itcanbearguedthattheresultingcost-shiftisregressive.Thosewiththefinancialmeanstoundertake
investmentsinDERarelikelyabovetheaverageincomeforaservicearea.Ifthisisthecase,the
customerswhopickupanypotentialslackintheutility’sbottomlinearethoselessablethanDER
66
However,itcanbearguedthatitisstillmostappropriateforthecustomerusingenergytopayforthedelivery
system,notthegenerator,asisdonewithallothergenerators.
32
customerstoshoulderthatburden.Aregulatorshouldascertainwhetherornotthisishappening,and
maywishtoconsider“fairness”aspartofitsratemakingdecisions.67
OthersworrythatthecostofremainingtiedtothegridatallwillbeoutweighedbyDER,leadingto
customerscompletelydisconnectingfromthedistributionsystemandpotentiallyinstallingbatteriesto
completelyself-supply.Thisleavestheentiretyofcosts,ratherthanjustsomeportion,previouslyborne
bythatcustomerforotherstopayandeliminatesanybenefitstothegridthatDERmayprovide.Inthis
situation,noamountofratedesignchangescanextractmorefromacustomer(otherthanexitfees).
Dependingontechnologicalchanges,thispotentialoutcomecouldresultfrompushingcostsontoDER
customerswhichcouldleadtouneconomicbypass.
Itcanbearguedthattheresultofsuchcost-shiftingwillmakeDERmoreattractive.Morepeoplethen
investinDER,requiringadditionalcostshiftsadinfinitum.Ifsuchapatternweretohold,itwouldalso
worsentheregressivityproblempreviouslydiscussed,astheincreasingrateswouldincentivize
customerstoinvestinDERwhomaynothaveintheabsenceofthepreviouscostshifts.
6. LifespanofutilityassetsdonotmatchlifespanofDER
AsthelifespanofmostDERsystemsisgenerally20–30years(andmaybelessforindividualpartssuch
astheinverter)andmaybesignificantlyshorterthanthedistributionandtransmissioninvestments
madebytheutilitytoserveacustomer,aninterestingproblemarises.Iftheutilityistheprovideroflast
resort,howdotheyplanforacustomerwhomayormaynotcomebackoncetheirsystemisnolonger
functional?Ifothercustomersarepayingforassetsthatwouldbenecessarytoservethecustomer
shouldtheyreturn,theresultingtransferofcostresponsibilitymaynotbeacceptable.Additionally,to
theextentthataDERsystembecomeslessreliableovertime,theutilitywillbeprovidingadditional
servicestomaintainthecustomer’sorthesystem’sreliability.
7. Strandedcostsanddealingwithstrandedcosts
Asmentionedpreviously,whencustomersreducetheirusageorotherbilling/raterecovery
determinants,coststhatwerepreviouslycollectedfromthosecustomers(orinvestmentspreviously
madetoservethem)maybestranded,atleastintheshort-tomid-termuntilratesarere-set.Asthese
costswereprudentwhenincurred,andarecurrentlybeingrecoveredinrates,theyareusually
permittedtoberecoveredinratesuntilfullydepreciated.Whenratesarere-set,thesecostsareoften
eithercollectedfromothercustomersasaresultofnormalratesettingorcollectedfromthe
responsiblecustomersbychangingtheratestructuretoreflectdeterminantsclosertothosethatcause
thecosts.Analternativetreatmentforthesecosts,however,istosetupaspecialchargetocollectthe
costsfromthecustomerswhowerepreviouslyresponsibleforthem.Thiswastheroutetakenbysome
stateswiththeadventofderegulationofpowersupply.Thistreatmentonlyencompassesthose
customerswhoseusagewasreducedbyDER,notthosecustomerswholeavethesystementirely.Such
chargesalsohavethepotentialofincreasingthelikelihoodthatcustomerswillfinditeconomictoleave
thesystem,thoughthedecisionalsodependsonthefeasibilityandcostsofdoingso.
67
InDocketNos.15-07041&15-07042,Exhibit64AattheNevadaPublicUtilitiesCommission,testimonywasfiled
regardingtherelativeincomesofNEMcustomers.
33
C.
Impactsonutility
InadditiontoconsideringtheimpactDERhaveonothercustomers,itisalsoimportanttoconsiderthe
impacttotheutility.DERintroducespotentialsystemplanningcomplicationstotheutility,particularly
iftheresourceexportstothegrid.Theutilitymayneedtoupgradedistributionequipmentifcircuits
becomeexporterstotherestofthegridandbeginactingasstepupfacilities.Theutilityisstillrequired
tomaintainandupgradethesystemasnecessarytoensurereliability,whichcanbecomplicatedbyDER.
Theutility,orotherentityresponsibleforoperations,needstotaketheimpactofDERintoaccount,
thoughtheremaynotbesignificantinformationflowfromtheDERtotheutility.TotheextentthatDER
doesreduceinvestmentinanyportionofthesystem,thislowerstheutility’sratebase,andtherefore
theamountofreturn.Additionalcomplicationshavebeendiscussedpreviouslyinthecontextofthe
impactsonothercustomers.
Utilitieshaveseizedonthepotentialimpactsonothercustomersasajustificationforincreasingfixed
charges(discussedinmoredetailinothersectionsofthisManual).Utilities,however,havebeenusing
variousjustificationstoattempttogetincreasesinfixedchargesforacentury.Theirclaimsrelatedto
fixedchargeincreasesandDERshouldbetakeninthatcontextandalsowithaneyetowardauthorized
returniflargerportionsofrevenuerecoveryshifttomorefixedcomponents,makingtheutility
potentiallylessrisky,allelseremainingequal.
D.
CrossSubsidies,includingcross-class
Theissueofcross-subsidieshaslongbeencontentiousinDERratemakingasnotedenergyexpertAhmad
FaruquistatedinhisresponsetotheNARUCDERRatemakingSurvey:“Thebiggestchallengeposedby
existingtariffsisthecreationofcross-subsidiesbetweencustomerswhohaveDERsandthosewhodon't.
ThisneedstobeovercomesinceDERsarepenetratingrapidly.”
Crosssubsidies,subsidiesfromonegroupofratepayerstoanother,areendemicinallutilityratemaking
astherearevariationsinconsumptionpatternswithinrateclasseswhichcauseonepartofarateclass
tosubsidizeanotherpartanddifferencesamongclassesduenotonlytodifferentialusebutalso
differentialimpactsofutilityrates.Theclassiccrosssubsidyistohaveindustrialandcommercialrate
classessubsidizeresidential,i.e.,therearedifferentialimpactsofelectricitycosts.InthecaseofDERowningcustomers,therearenowagroupofcustomerswhodiffersignificantlyinbothusagepatterns
andtheeffectsofratelevelsondecisionmaking.Eliminating,oratleastminimizing,thecrosssubsidies
enjoyedbyDER-owningcustomershasbothefficiencyimplicationsandequityimplications.Ifthecross
subsidiesareleadingtouneconomicbypass,i.e.,bypassthatwhiledecreasingcostsforDERowners
increasestheoverallcosttothegeneralbodyofratepayers,eliminationofcrosssubsidieswillincrease
economicefficiency.OftenDERowningcustomersarehigherincomecustomerswhocanmake
investmentsthatlowerincomecustomerscannotmake.Reducingintra-classsubsidieswouldminimize
lowerincomeratepayersfromsubsidizinghigherincomeratepayers.68
68
IncreasingsubsidiestolowerincomeratepayerssotheycaninvestinDERmayreducetheinequalitybut
exacerbateanyefficiencyreducingsubsidyeffects.
34
Crosssubsidiesaffectrestructuredjurisdictionsdifferentlythantheyaffectverticallyintegrated
jurisdictions.Conceptuallyitiseasiertodealwithcrosssubsidiesinrestructuredjurisdictionssothis
discussionwilltacklethemfirstandthenexpandthediscussiontoincludeverticallyintegratedutilities.
1. RestructuredJurisdictions
Inrestructuredjurisdictionswithretailchoice,thecostsofenergyaresetbythemarketeitherbythird
partysellersorbycompetitivelybiddefaultarrangements.Thislargelyremovesthecostofenergyfrom
creatingcrosssubsidiesforDER.Themarketunderlyingrestructuredjurisdictionsalsocanprovide
marketbasedpricesformanyelementsofvalueofDERpricing.
ThebiggestcrosssubsidyinenergypricinginrestructuredjurisdictioniswhenaNEMcustomerhasanet
exportfromtheirsystemandiscompensatedattheirretailrate.ThisisclearlyasubsidytotheNEM
customerpaidforbythegeneralbodyofratepayers.Whileitcanbearguedthatcompensatingthe
energyportionofnetpositiveNEMproductionatretailratesisappropriate,mostobserverswouldsay
thatthetruevalueofsuchenergyis“asavailableenergy”andshouldbecompensatedassuch,whichin
mostrestructuredjurisdictionsisthelocationalmarginalprice(LMP).MostNEMcustomershave
investedintheirDERtooffsettheirownconsumptionandsystemsareoftenrequiredtobesizedtobe
nobiggerthanwouldsupplyannualrequirements.Asystemsosizedwouldhaveanexpectedvalueof
zeronetpositivegenerationoveragivenyear’soperation.Anotherwaytolimitcrosssubsidizationof
energyandotherchargesistohaveaDERownerforfeitanynetpositivecreditsattheendanannual
period.ThiswouldnegateanybenefitstooversizingaDERsystem.
Forgenerationinarestructuredmarket,regulatorsmaywanttoconsideravarietyofoptions,including,
butnotlimitedtothefollowing:
•
•
CompensatenetenergyproductionatLMP(onamonthly/dailybasis)
Limittheeffectsofoverproductionby:
o LimitingthesizeofaDERtoasystemthesizenecessarytosupplytheDERowner’suse
overanannualcycle;
o HaveaDERownerforfeitanynetpositivecreditsattheendofanannualcycle.
Reducingcrosssubsidiesofnon-energyportionsofabillbasedonthroughputismoredifficult.Oneway
tostartistohaveallkWhchargesdenominatedincurrencyterms,i.e.,dollarsandcents,notinkWh
terms.Ifanenergychargeisbasedontimevaryingprices,i.e.,kWhsofenergyvaryinpricebywhen
theyweregenerated,currencyvaluesratherthankWhhavetobeusedaskWharenolongerfungible
betweentimeperiods.WhenNEMcreditsaredenominatedincurrencyitiseasiertoidentifywhen
subsidiesexistthanwhentheyshowupaskWhcredits.Fordistributioncosts,theimportantthingfor
botheconomicefficiencyandsubsidyreductionistohavedistributionratesbasedoncostcausation.
Energythroughputisnotagoodproxyforcostcausationonadistributionnetwork.Forexample,a
demandchargebasedonKWisamuchbetterproxyandadistributionratebasedonkWratherthan
kWhmaybeamoreeconomicallyefficientmannertoeliminatecrosssubsidiesindistributionrates.
However,asdiscussedelsewhere,demandchargescomewiththeirownsetofcomplications,suchthe
needtoeducatecustomersondemand,andavailabilityofadvancedmeteringtechnology.
2. VerticallyIntegrated
35
Fromacrosssubsidyviewpoint,themaindifferencebetweenarestructuredjurisdictionandavertically
integratedjurisdictionisthataverticallyintegratedutilityhasmadeinvestmentsingenerationcapacity
toserveitscustomersandthosecustomershaveanobligationtoprovidetheutilitywiththe
opportunitytorecoverthoseinvestmentsincludingareturnontheinvestment.DERdirectlychallenges
thatopportunity.AutilityhasanobligationtoserveandthatincludesthefullneedsofDERcustomers.
However,DERcustomerssupplymost,ifnotall,oftheirownneedsannually,butnotnecessarilydaily,
andsochronicallyareundercompensatingtheutilityundertraditionalNEMratedesignforthe
generation,transmission,anddistributioninvestmentsmadeonbehalfoftheDERcustomer.Undersuch
asituationitisdifficulttodesignasingleratethatisappropriateforallcustomersinanexistingrate
classasnon-DERcustomersendupsubsidizingDERcustomers.Itisoftensuggestedthatinstitutingtime
varyingpricescanhelpeliminatecrosssubsidies,butthebasicproblemisthatutilitiesdonotrecover
sufficientfundsfromDERcustomerstocompensatethemfortheinvestmentstheyhavemadeontheir
behalf.ThesolutionistodesignratesthatrecoverfromDERcustomersanappropriateamountto
compensatetheutilityfortheinvestmentsithasmade.Thekeyhereishowtodeterminethe
“appropriate”amount.UtilitiesoftenclaimthattheyneedtobeabletosupplytheirentireDER
customer’sneedsatamoment’snoticeandshouldbecompensatedonthatbasis.However,thatdoes
nottakeintoaccountDERdiversityofoutagesorloads.Anychargesoverandabovetheclassbased
kWhenergychargeshouldbecompensatorynotpunitive.Suchachargecanbedevelopedeitherby
creatingaDERrateclassorbycreatingaDERsurchargewithinarateclass.Suchachargecanbefixed,
equivalenttoademandcharge,orvariablebutshouldbedesignedtojustcompensatetheutilityand
keepitwhole.
Distributionchargescanfollowtheideasforarestructuredutility,includingunbundlingthebillinto
separateenergyanddeliveryportions.
3. OtherCrossSubsidyIssues
OneotherpotentialcrosssubsidyissuehastodowithsituationswhereauniformchargeinvolvingDER
isappliedtothegeneralbodyofratepayers,butthemajorityofbenefitsfromthechargeorpolicyflow
toalimitednumberofcustomers.Ahypotheticalcanbestillustratesuchasituation.Ifautilityhas80
percentofitsloadincommercialand/orindustrialloadandonly20percentinresidentialload,butallof
theNEMcustomersareresidentialandthecostsofNEMsubsidies,i.e.,thecostofnetpositiveNEM,are
spreadacrossallratepayers,theresidentialclassisreceivingallofthebenefits,butpayingonly20
percentofthecost.InthiscasetheC&IcustomersaresubsidizingtheNEMcustomersmuchmorethan
areresidentialcustomers.Thewayaroundthisistomatchmorecloselytherecoveryofthecostof
subsidieswiththeclassthathascausedthesubsidies.Anotherexamplemayberatesthatinclude
socialpolicies,suchasaddersforlowincomeassistanceorsocialprograms.Ifusagedeclines
significantly,onemayfindthattherevenuesreceivedforthosesocialprogramswhicharecollected
throughutilityratescorrespondinglydecline.Thismayalsoputadditionalpressureonremaining
ratepayerstofundthosesocialorgovernmentalprograms.
E.
“Grandfathering”or“Transitioning”
AregulatormayneedtodeterminewhetheritisinthebestinteresttoallratepayerstotransitionDER
customersfromoneratescheduletoanother.Thisissometimesknownas“Grandfathering”customers
intooroutofaratescheme.
36
Thechoiceofhoworwhethertotransitioncustomersfromoneratescheduletoaseparaterate
scheduledependsonafewfactors:
DoDERcustomershaveauniqueservice,usage,orcostcharacteristicsthatwouldbe
trackedbyaseparaterateclass;
• Aretherenoworarethereexpectedtobeasufficientnumberofcustomerstojustifyanew
rateclass;and,
• Doestheutilityproviderhavesufficientcapability/technology(suchasmetering/billing)to
separatethecustomersandbilldifferently.
Assumingtheregulatorhastheauthoritytodeterminethis,thereareargumentsforbothtreatingDER
customerssimilarlyanddifferently.Ineithercase,theregulatormustassesswhichratebestpromotes
innovationandresponsivenesstochangesindemandinitsjurisdiction.
•
TheprimaryargumentssupportingshieldingcurrentDERcustomersfromachangeinrates/policy
(possiblyduetomeetingaregulatoryorstatutorythreshold)isthatcustomersdesireandexpectsome
levelofcertaintywhenmakingdecisionsabouttheirindividualinvestmentsinDER.Whileindividual
investmentdecisionsarepersonal,aregulatorshouldconsiderwhetherthepoliciesofthejurisdiction
require/desiretouseratemakingasapolicyandtechnologysupporttool.Also,ifajurisdictionallows
3rdpartyleasingofDERsystems,theviabilityofthosecontracts/leasesmaybepremisedonthe
applicabilityofacertainrateschemeforthelifeofthesystem,usuallyanywherebetween15and30
years.DERcustomersmayhavetheexpectationfromthe3rdpartythatthereisaprohibitionagainst
changingtheirrateschemesandmayarguethatanychangeinrateregimeisanimpairmenttotheir
contractswitha3rdparty.Theregulatormustdecideifthoseexpectationsarereasonableandwere
causedinwholeorinpart,byeithertheutilityortheregulator.Forexample,oneshouldexaminethe
contractssignedbycustomer-generatorsatthetimeofinterconnectiontodetermineifanyexpectation
ofrateregimewasincludedinthosecontracts.
Aregulatorshouldexaminewhetherthecurrentortransitionalrateschemeiseffectiveinyielding
revenuerequirementsorifthereisalikelyshortfall–anindicatorthatinter-orintra-classsubsidiesare
occurring.Aregulatorshouldalsodeterminewhetherthecost,loadprofilesand/orusageforDER
customersisuniqueenoughtowarrantaseparaterateregime.Whencomparingtheoptionsof
shieldingDERratepayersortransitioningtoanewrateregime,aregulatorshouldexaminetheother
ratedesigngoalsandattributes.GrandfatheringgivestheDERcustomerratestability,butpotentiallyat
theexpenseofutilityrevenuestability.IftheregulatorbelievesthatDERcustomersaresimilartononDERcustomers(incostcausation,loadprofile,andusage),thenthefairnessattributescanbemet.
Finally,keepingDERcustomersonarateregimecomportswiththeratedesignattributesofbeing
simpleandconvenientthebest.
Thecounterargumentstograndfatheringcustomersontoarateregimeare:1)Iftheraterecoveryfrom
thosecustomersisnoteffectiveatyieldingrevenuerequirements,aseparaterateregimemaybetter
yieldthatresult;2)Whilegrandfatheringcustomersmayresultingreaterratestabilityforthose
customers,itmaycomeattheexpenseofrevenuestabilityfortheutilityandalsomaycausegreater
volatilitytonon-DERcustomers;3)Ratesareconventionallysubjecttochange,unlikecontracts;and,4)
37
Dependingontheusage/load/costcharacteristics,keepingDERcustomersonapreviousrateschedule
maybelessfairbothhorizontallyandverticallyandmaycreatesubsidyissues.Forexample,ifDER
customershaveadifferentload/usage/costprofileandtheyaretreatedsimilarlytonon-DERcustomers,
thentheverticaldimensionoffairnessmaybeviolated.IfdifferentgenerationsofDERcustomersare
putondifferentrateregimesthentheprincipleofhorizontalfairnesscouldbeviolated.Discrimination
oftheprovisionofservicesamongstcustomersinthesameclass–isaviolationofhorizontalequity
principleofBonbright(similarlysituatedcustomersshouldbetreatedsimilarly).Inpracticalterms,this
meansthataCommissiondesignsratescommensuratewithcostandusagedifferentiation,butonce
thoserateclassesareset,itmustofferservicetoallwithinthatclassnon-discriminatorily.
Regulatorsmustconsidertheeffectsoftransitioninginthefutureaswell.IfDERcustomersareshielded
fromstructuralratechangesforalengthyperiodoftime,willthepotentialrateshockthatoccursatthe
endofthetimeperiodbeunderstoodandpubliclyacceptedatthattime?Regulatorsandconsumer
advocatesshouldconsidersomeformofpublicinformation/outreachprogramstoclearlyexplaintoall
ratepayerstheseeffects,nowandpriortothetimeanyratedesignchangeisimplemented.69
Ifaregulatordeterminesthatagrandfatheringperiodisreasonable,itmustalsodeterminehowit
shouldbeimplemented.Theconsiderationsregardinganappropriateperiodfortransitioningtoa
differentratemayinclude:
1.
Paybackperiods
PriortothetimewhenaninvestmentinDERismade,customershavecertainexpectationsregarding
theratetreatmentforenergyexportedtothegridfromDERs.Theseexpectationsaffectthepayback
timeoftheinvestmentintheDER.Statepolicyandcustomerexpectationsofconsistentapplicationof
DERpoliciesultimatelydrivethedecisionofthecustomerregardingwhethertomaketheinvestmentin
aDER.Theuseofeffective,appropriate,andconsistentratedesignstructuresbystatesisthe
foundationforefficientDERdeploymentandcanfacilitateinvestmentinDERs,consistentwiththegoals
ofthejurisdiction.Whatexpectationdidcustomershaveregardingthelengthoftimetherateregime
wouldbeused?Whatexpectationdidtheutilityor3rdpartyproviderhave?Thechoiceforacustomer
toinvestinDERismadeonce,newratescanonlyaffectcustomerinvestmentandbehaviorgoing
forward,butnotthechoicetoinvest/notinvestinDER.However,thevalueofDERmayfactorintothe
decisionwhetherornottomaintaintheDERsystem.Thisisthedifferencebetweentheinvestmentin
DERandthecontinuingoperationofit.Additionally,thepaybackperiodisanindividualdecisionand
variesdependingoniftheDERsystemwasaPurchase/Install,PPA,orLeaseandmaynotaccountforthe
longterm“value”tothecustomer,forexampleifacustomerhasinstalledbecauseofenvironmental
ratherthaneconomicreasons.
69
Additionally,whenmakingdecisionsrelatedtoDER,customersmaylacksufficienteducationaboutthe
differencebetweena“rate”andalong-termcontractwithaDERprovider.Regulatorsandotherconsumer
protectionadvocatesmaywanttomonitormarketingmaterialsfromDERproviderstoensurethatcustomersare
beingadequatelyandcorrectlyinformedoftheiroptionsandthepotentialresultsoftheiractions.
38
OtherfactorsthatareimportantforconsiderationpriortoinvestinginaDERresourceare:availabletax
credits,RECs,rebatesandincentives,initialcostofinstallationormonthlycosts(loanorleasepayments)
fortheleaseterm,maintenancecostsforthesystem,replacementcostsofsystem,thecustomer’s
averageandannualelectricityuseandcostperkilowatt-hour,bothcurrentandprojected,theexpected
outputfromthesystem,howtheDERmayaffectthehome’sappraisedmarketvalueandlengthoftime
thecustomerplanstoresideinthehome,andtheexpectedlifeofthesolarpowersystemorthelength
oftheleasecontract.70
2.
Typeanddegreeofratechange
Arethechangesbetweenrateregimesmildorsevere?Aretherewaystomitigatetheseveritysuchas
staggeringtheimplementationdates?
3.
DifferentialDERcustomers
IfcertainDERcustomersaretobemovedtoanotherrateregimewhileothersremainonadifferent
regime,isitappropriatetousethebillingdata/usageof‘grandfathered’customerstosettheratesgoing
prospectivelyforother,non-grandfatheredcustomers?Istheuseofaproxygroupinthatcircumstance
appropriate?Doestheutilityhavetheappropriatebillingstructureinordertodistinguishbetween
differenttypesorgenerationsofDERcustomers?Andifnot,doesthisaddadditionalcoststotheclass?
4.
Billingconsiderations
Shouldtheratestructurebeing‘grandfathered’staywiththecustomer,thepremise,theutilityaccount,
orsomecombinationthereoffortheduration?Doesthisallowfortransactionsbetweencustomers,
suchasthesaleofthehouseorpanels?
5.
Dynamicchangestoasystem
Cana‘grandfathered’customeraddpanelsandhavethenewpanelsalsobeunderthegrandfathered
rate?Istherealimitthattheregulatorshouldsetonadditions/replacementsandhowisthattobe
enforced?
6.
Otherquestions
Howshouldtheregulatorvaluethetradeoffsbetweenstabilityofcustomerinvestmentandthedilution
ofappropriateforwardpricesignalsorpotentialcross-subsidization?Istherearegulatoryprecedent
thatcouldbeusedtoguidethisdecision?
70
“SolarPowerforYourHome:AConsumer’sGuide,”ClaudetteHanksReichel,LSUAgCenter(2015)(availableat
http://www.lsuagcenter.com/~/media/system/e/4/8/8/e48836bdb7da5028f3116b6531b344d7/pub3366solarpow
erforyourhome2.pdf).
39
40
V.
CompensationMethodologies
ThegrowthofDERacrossthecountryanditsimpactsontheutilityisincreasingeveryday.Regulators
areoftentaskedwithtwo,potentiallycompetinggoals:ensuringthefinancialhealthandviabilityofthe
regulatedelectricutilityanddevelopingpolicies,rates,andcompensationmethodologiesforDER.This
sectionoutlinesseveraloptionsthataregulatormayconsiderindetermininghowtocompensateDER.
Itispossiblethataregulatormaychoosetoimplementoneormoreofthematatime.Additionally,itis
importanttonotethataregulatormaintainflexibilityindeterminingthecompensationpolicy,as
changesinthemarket,policy,law,andtechnologycontinuetoevolveovertime;understandingthisis
anevolutionwillassisttheregulatorinrecognizingthattheappropriatecompensationmethodology
maychangeovertime.
A. NetEnergyMetering
NetEnergyMetering(NEM)isthesimplestandleastcostlymethodtoimplementacompensation
methodologyforDER.NEMadaptsthetraditionalmonthlybillingpracticestotheintroductionof
generationfacilitieslocatedonthecustomerside.Intraditional,non-time-differentiatedbilling,the
meterisreadonceamonth.Thedifferencebetweentwoconsecutivereadingsdefinesthequantityof
electricserviceprovidedbytheelectricutilityandreceivedbythecustomer.If,forexample,ameter
displayed10,000kWh(cumulative)onMarch30,andsubsequentlydisplayed10,200kWhonApril30,
thedifferencebetweenthetworeadings,200kWh,signifiesthemovementof200kWhacrossthe
meterfromtheelectricserviceprovidertothecustomer.That200kWhisthencalculatedagainstthe
ratetodeterminethecost,plusadditionalbillingdeterminants,suchasafixedcustomercharge,taxes,
orotherchargesasapprovedbytheregulatortoformthetotalbill.Thekeypointisthatthemeasureof
serviceisdeterminedbythedifferencesbetweentheperiodicreadingsofthemeter.Thisisthemethod
ofcalculatingelectricenergyconsumptionusedbymostU.S.utilitysystemsforresidentialservice.
NEMworksinthesameway:thekWhchargeisbasedonthedifferencebetweentwoperiodicreadings
ofthemeter.ThenewingredientinNEMisthatthereisnotonlyenergyconsumptionbehindthe
meter,butalsoenergygeneration.Neithertheamountofgenerationnortheamountofenergy
consumptioncanbedeterminedfromthemeterreadingalone.Usingthesameexample,the200kWh
differencebetweenthetwosubsequentmeterreadingssignifiesthenetmovementofthemeterand
thenetquantityofserviceprovidedbytheutilityforthebenefitofthecustomer.Itispossiblethatthe
customerproducedsomeamountofkWhgreaterthanzerowhileconsumingsomeamountofkWh
greaterthan200betweenthetworeadings.Neithertheamountofproductionnortheamountof
consumptioncanbedeterminedfromthetworeadingsofthemeter,onlythenetmovementofthe
metercanbemeasuredbythismethod.Onceagain,thekeypointisthatthemeasureofserviceis
determinedforbillingpurposesbythedifferencebetweenthetwoperiodicreadings.
NEMdevelopedasastraightforwardmethodforinterconnectionofverysmalldistributedenergy
systemsatatimewhenresidentialelectricmeterswereanalogsystemsdesignedtobereadmanually.
Whilethehighcapitalcostandoperatingexpensesassociatedwithmultiplespecializedinterval41
recordingmeterscouldbejustified–andwererequired–forlargeindustrialandcommercialelectric
servicecustomers,suchcostswouldhavebeenprohibitiveforresidentialpropertiesandwouldhave
overwhelmedanysavingsfromself-generation.Aslongasonlyaverysmallfractionofhouseholdswere
connectingPVorotherself-generationsystems,andaslongasthequantitiesofenergymovingfrom
customerstothegridwereverysmall,itseemedreasonabletoallowcustomerstohookuptheir
behind-the-metersolarpanelsystemswithoutmandatingadditionalcostsformoreprecisemetering
systems.So,intheageofanalogmetersandmanualreadingofthosemeters,NEMwastheonly
practicalwaytointroducePVandotherhome-basedgenerationsystems.Atthetimewhenresidential
PVsystemswerenewandcostly,adoptionofNEMprovidedastrongincentivetoinstallhomesystems.
Muchhaschangedsincethen;solarPVcostscontinuetodeclineandthecostofadvancedmetersare
muchlessexpensive,aremoreprecisethantheintervalmetersofthelastcentury,andcanberead
electronicallyatveryshortintervals(fiveminutesorevenshorter).
NEMhasgreatadvantagesforahomeownerorsmallsystemoperatorbyallowingthecustomerto
generateelectricenergywhenthepowerisavailableandthenconsumingitatatimeofconvenience.
ForsolarPVsystems,solarpanelsaresituatedatananglebestidentifiedtocapturethegreatestsolar
radiance,whichtypicallycoversnoonto4:00PMintheafternoon.71Thecustomercanthen“use”the
electricenergyatatimemoreconvenient,suchasinthelateafternoonandevening.Essentially,the
customerisabletousetheutilityasabankforenergy.
ProponentsofNEMarguethattherevenuereductionofutilitiesfromNEMisjustifiedandappropriate.
First,utilitiesarenotrequiredtopurchaseorgeneratetheelectricenergythatthecustomersare
generatingandusingthemselves.Customergeneration,itisargued,reducesutilitygenerationevenif
thegenerationoccursattimesotherthanwhenthecustomersconsumeelectricenergy.Besidessaving
thesystemthecostofgeneratingtheelectricenergythatthecustomergenerationoffsets,customer
generationalsounloadsthedistributionsystem(andtosomedegreethetransmissionsystem),thereby
reducingsystemlossesandforestallingrequiredexpansionand/orupgrades.Proponentsarguesuch
savingstothesystem(andthereforetoallsystemusers),thoughdifficulttocalculate,justifygranting
customersthefullbenefitofreducedbills,includingnotonlyreducedenergycostsbutalsoanymargin
builtintothekWhcharge.
TherearecomplicationsthatarisefromNEM.First,itispossible–evenlikely–thatduringsomehours
betweenthetwomonthlyreadings,theamountofgenerationexceededtheamountofconsumption.
Thatistosay,attimesthemetermayrun“backwards”inthesensethattheflowofkWhwasfromthe
customertotheelectricserviceprovider.Then,duringotherhours,themeterwillrun“forward”
71
Typically,solarpanelsfacesouthwest,whichallowsforthegreatestamountofsunlighttopowerthepanels.
However,asidentifiedbythePecanStreetProject,thismayexacerbateafternoonrampingperiodsasthesolar
outputdeclinesrapidlyastheangleofthesungoesdown.ResearchfromPecanStreetProjecthighlightstheneed
forsomepanelstofacewest,eventhoughsolarradianceislessduringlateafternoonhours,asitmayassistin
alleviatingafternoonrampingconditionsduetothesettingsun.(Seehttp://www.pecanstreet.org/2013/11/reportresidential-solar-systems-reduce-summer-peak-demand-by-over-50-in-texas-research-trial/).Thishighlightsone
ofthetechnicalandeconomicchallengeswithNEMwithpoliciessupportingtotalproductionwithoutlocationor
timingattributes.
42
recordingconsumptioninexcessoftheamountofcustomergenerationatthattime.Thatonenet
measureisthebillingdeterminantunderNEM.
Returningonceagaintotheexamplediscussedpreviously,iftheApril30readingis9,990kWh,thenet
differenceis-10kWh,thatis,consumptionofanegativeamountofelectricserviceforthemonth.The
resultofNEMinthisexampleisthatthecustomerproducedmorekWhthanwasconsumed,andit
appearsthatthecustomerproducednetelectricservicefortheelectricserviceprovider.UnderNEMin
thisexample,thebillingdeterminantofenergyconsumptionisanegativenumber.Applyingthat
negativenumbertotherateinthetariffmayresultinanegativeinvoice,which,dependingontherules
inplaceinthejurisdiction,maybecarriedoverintothenextmonthasacredit.
ItisnotthepurposeofNEMforcustomerstoachievenegativenetenergyconsumptionoverall,butit
mayoccurduringtimesoftheyearwhenbothheatingandcoolingdemandsarelow.Atothertimesof
theyear,suchasduringthesummer,whenelectricenergyisusedforairconditioning,andduringthe
winter,whenelectricenergyisusedinheatingsystems,thenetenergyconsumptionwouldbepositive.
Thatis,formostmonths,theamountofenergyconsumptionoverthemonthislikelytobegreaterthan
theamountofenergyproducedbythecustomer’sgeneratingequipmentduringthatmonth,
outweighingoratleastmatchingthenegativemeasurementforthisAprilexample.Overalonger
period,suchasayear,itispossibleforacustomerwouldachieveanegativenetbalanceforthewhole
period,therebyavoidingallchargesassociatedwithelectricityservice.
AsecondcomplicationofNEMisthatitdoesnotaccountforanydifferenceinvaluebetweenthecostof
serviceassociatedwiththetariffrateforkWhandthevalueofthekWhitself.Thatenergymaypassin
eitherdirectionacrossthemeterimpliesequivalencebetweenthedeliveryofenergyandtheprovision
ofelectricservice.Traditionalelectricratescarryamargininexcessofthedirectcostsofthemeasured
kWhsothatthetotalcostsoftheelectricutility,includingfixedcostsandothervariableoperatingcosts,
canberecoveredthroughthatcharge.Bymeasuringonlynetenergy,andcreditingexcessagainstthe
totalbill,NEMreducesnotonlytheenergyrevenueoftheutilitybutalsothemarginavailableforthe
coverageofothercosts.
AthirdcomplicationisthatNEMdoesnotaccountfortimeorlocationaldifferencesincostsorvalueof
energy.Ofcourse,thetimingandlocationquestionisnotattributablespecificallytoNEM,butisa
featureoftraditionalmonthlybillingsystemswithorwithoutcustomergeneration.Still,thematter
becomesmorecomplexwhenbothconsumptionandproductionareinvolved.Thesimplicityassociated
withasinglemonthlymeterreadingprovidesnoinformationaboutacustomer’spatternofgeneration
orconsumption,orthelocationofthecustomer.Theadventofadvancedmetershasfacilitatedthe
abilitytoadoptoftime-of-use(TOU)ratesfortraditionalelectricserviceandforNEM.Differentrates
fordifferentTOUperiodsmayreduce,butdoesnoteliminatetheconceptualissuethatneitherthe
amountofgenerationnortheamountofconsumptionismeasuredunderNEM,onlythenet.
Additionally,manyNEMdiscussionsfallbackonrecoveryofsystemcosts.First,theoperationalissue:
NEMcustomersdonotcompensatethesystemfortheoperationalcoststheyimposeonit.Theyforce
thesystemoperatortoabsorbtheirexcessduringpeakgeneratingperiods,andtheyforcethesystem
operatortorampgeneratorsandadjustthesystemto“repay”thecustomergenerationatother
43
hours/days/seasons.ThismeansthecostsofthesystemarehighereventhoughtheNEMcustomersare
notchargedforthoseadditionalcosts.Second,byovercompensatingtheNEMparticipantsthrough
theiravoidanceofkWhcharges,NEMnecessarilyisimposingthoseavoidedcostsonthe
nonparticipants.InthisviewthenonparticipantsaresubsidizingtheNEMparticipants.
ThoughNEMisthesimplestformofinterconnectionforgeneratingsystemsbehindthemeter,itfailsto
accountforthecomplexityofgridoperations.Forgridstabilitytobemaintained,theremaybeaneed
fortheabilityofthegridoperator,suchasthedistributionutility,tocurtailtheoperationofthe
generatingsystem,essentiallyoverridingthedesireofthecustomertogenerateasmuchaspossible.
Theeffectsofanyonecustomer’sactionsarenegligibleandmakelittledifferencetogridoperations.
However,NEMdetractorsarguethatasgreateramountsofcustomergenerationareconnectedtothe
system,anysavingstothesystemmaybeoverwhelmedbygreatercosts.Customer-sidePVgeneration
peaksintheafternoon,andthegridoperatoraccommodatesthecustomersurplusflowingontothegrid
byloweringtheloadserviceofdispatchablepowerplantsdowntominimumload,thelowestlevelof
operationconsistentwithanabilitytostayonlineandbeavailabletoprovideservice.Thisactionhasa
costand,inthefuture,maystraintheabilitiesofconventionalplants.Then,laterintheday,as
customergenerationfallsoff,customerloadsbegintorise,andnetcustomerloads,accountingforthe
reductionincustomer-sidegeneration,riseveryrapidly.Thedispatchableplantsmustrisequicklyfrom
theirminimumloadsuptotheirmaximumtomeettheincreaseinsystemloadandkeepthegridstable.
Thissuddenrampalsohasacost.NEMdetractorsarguethatNEMcustomers,farfromsavingcoststo
thesystem,mayactuallyincreasesystemcosts.Andbecausethesystemmaximumloadsdonotoccur
atatimewhenthecustomergenerationishigh,theremaybenosavingsfrompostponingsystem
expansionorsystemupgrades.FromthepointofviewofNEMdetractors,NEMovercompensates
customerswithcustomer-sidegenerationandaddssystemcoststhatmustbepaidbyallcustomers.
Finally,whileNEMmayreducethetotalamountofutilitygeneration,itdoeslittletoencourage
customerstouselesselectricserviceoverall.Infact,underasituationofinclining-blockrates,the
chargesthattheNEMcustomersavoidaretheinthehighestblocks.NEMcustomersmaymovefroma
highblocktoalowerblock,therebydecreasingthemarginalcostofusingmoreelectricenergy.IfNEM
customersusemorethantheyotherwisewouldhave,thenanysystemsavings–especiallysavingfrom
reducedsystemgeneration–isreduced.
B. ValuationMethodology
Therearetwomainmethodsofdeterminingthevaluationmodelforthismethodology:Valueof
ResourceandValueofService.Anothertermthatmayalsobeusedtoreflectthisconceptis“Buy
All/SellAll.”Inotherwords,acustomerischargedforitsconsumptionandisthenseparatelypaidforits
generation.Conceptually,avaluationmethodologyallowsforthedisconnectionofconsumptionfrom
generation.Putanotherway,acustomerwouldbechargedforitsconsumption,includingdistribution,
generation,transmission,taxes,andotherfeesorriders,whichareoftencalculatedbasedontotal
consumption.Foritsproduction,acustomerwouldthenbecompensated(orcharged,iftheresource
imposesacost)ataseparateratebasedonanumberoffactors,asdeterminedbytheregulator.
DecidingwhichpathtotakemaydependonthelevelofpenetrationofDER.Ifthejurisdictionhas
44
limitedpenetrationofDER,ValueofResourcemaymakemoresense.Ontheotherhand,ifDERis
showingsignificantpenetration,thentheValueofServicemaymakemoresense.
1. ValueofResource(VOR)
ThismethodseparatesthecostsofutilityservicesandbenefitsthatmayoccurfromDERsystemsand
attemptstovaluethemseparately.Itisimportanttovaluebothpositiveandnegativefactorsforeach
ofthecategoriesofcosts/benefitstoensureneutrality.Thismethodattemptstorecognizepotential
benefitstothegrid,othercustomers,and/orsociety.Afewstatesarecurrentlyinvestigatingor
determiningtheVORvariablesandvaluesandmanyuseverysimilarvariables.However,itisimportant
tonotethatthevalueofDERchangesovertimebasedonavarietyoffactors:relativelocationand
concentration,naturalgasprices,andthepriceofutility-scalerenewablesamongstotherthings.
Consequently,settingafixedvalueforalongperiodoftimemaybeunwise.However,aregulatorcan
establishaprocesstosetthevaluesperiodicallytoensurethattechnologicalandpractical
considerationscanbechangedasthedistributionandtransmissionandgrowthofDERoccurs.Most
methodologiesconsiderboththepositiveandnegativeeffectsof:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
AvoidedEnergy/Fuel
EnergyLosses/LineLosses
AvoidedCapacity
AncillaryServices
TransmissionandDistributionCapacity
AvoidedCriteriaPollutants
AvoidedCO2EmissionCost
FuelHedging
UtilityIntegration&InterconnectionCosts
UtilityAdministrationCosts
EnvironmentalCosts
ThepositivesoftheVORmethodarethat,onceavalue/rateisdetermined,itisknownandcanberelied
onasavalueofrenewableordistributedgenerationsenttothegrid.Customer-generatorscangain
certaintyregardingthevalueoftheirinvestments(atleastforatime).Asthisprovidesgreater
certainty,thismethodcanencouragetheuseofDER.Asstatedpreviously,thevaluesunderlyingthis
methodcanbeupdatedascircumstanceswarrantoronaknowntimetabletoreflectcurrentmarket
conditions,ortobeincludedordeterminedaspartofintegratedresourceplanning.SinceaVOR
methodvalueselementsthatareoftenoverlookedandcanquantifybenefitsinatransparentmanner,it
maybemoreacceptedbyparties.ThemorecomprehensivetheVORmethod,themorecomprehensive
itwillbeinevaluatingthefullrangeofcostsandbenefitsofDERsystems.Finally,thismethodtreats
VORsimilarlytootherresourcesthatautilitymayobtainandprovidesacomparisonwithwhichtomake
resourceplanningdecisions,andmaybeusedtosetthevalueforalltypesofrenewablesincluding
PURPAresources.
45
Fortheshortterm,aVORmethodologyallowsaregulatortoidentifyselectresourcesthatitdetermines
asworthyofvaluing.Forexample,aregulatormaydecidethatelectricvehiclesorsolarPVareof
sufficientinteresttothestatetowarrantspecificvaluation.AregulatorcouldthendevelopaVORtariff
foraspecificDER,andpotentiallypairitwithanappropriaterate,suchasTOU.Thiswouldallowthe
resourcesunderthattarifftoremaintogetherforconsiderationandreviewbytheregulator.AVOR
tariffwouldalsoassistinkeepcostscontainedunderonetariff,sothattotalcostsandbenefitscanbe
betteridentified.Again,theregulatorwillneedtodeterminethevaluesofeachcomponent,suchas
thoselistedabove,butitcanprovidebettersignalstotheresource,includinglocation,timing,benefits,
andcosts.
Onemustusecaution,however,thattoensurethatanyvaluecomponentdeterminedbytheVORisnot
alreadybeingtrackedortradedseparately.Forexample,inNevada,renewabledistributedgenerationis
eligibleforrenewableenergycreditsandcustomer-generatorsaregrantedcreditsbasedonsystem
output.However,agreaternumberofrenewableenergycreditsaregivenifthesystemisadistributed
energysystem,sothevalueoftheavoideddistributionwouldbecountedtwiceifvaluedbothasaREC
andasacomponentofaVORpayment.Also,ifenvironmentalcredits/benefits(suchasenvironmental
costs,avoidedCO2andavoidedpollutants)areseparatelytrackedthroughissuanceofrenewable
energycredits(RECs)througharecognizedtrackingmechanism,72oneshouldremovethemfromthe
VORlist,elsethosesamebenefitsoravoidedcostswouldbedouble-counted.Determinationsofvalue
shouldattempttoreflecttheactual,marketvalueofatraitasidentifiedand“valued”bythat
jurisdiction.Inthisinstance,avalueforcarbonavoidanceshouldbebasedonmarketvalue,andshould
avoidalternative,non-marketbasedvalues.
Asalways,therearedownsidestotheVORmethodologyaswell.Onedetrimenttothismethodisthatit
oftenrequiressubjectivejudgmentsandmayallowforvaluesthatarenotquantifiedinarigorous
manner.Anotheristhataprocesstodetermineboththelistofitemstobevaluedaswellasthevalues
themselvesmaybehighlycontestedandprolonged.Asstatedpreviously,someofthebenefitsand
costs,particularlydistributionrelated,aresiteandlocation-specificandmayswitchbetweenabenefit
andacost,dependingonthelocationinthesystem.SincetheVORmethodisparticularlysite/location-
specificitmayneedtobereviewedandrevisedregularlytoensurethatpricingandvaluesignalsremain
correct,whichmayresultincontestedproceedingsmorefrequently.Finally,ifaVORisused,thevalue
paidbytheutilityfortherenewableoutputshouldbetrackedthroughafuelchargeorother
componentthatdoesnotdirectlyflowintoautility’sratebasesuchthatthereisnotfurthererosionof
therevenuerequirementandpotentialcross-subsidization.
2. ValueofService
72
TwoexamplesaretheWesternRenewableEnergyGenerationInformationSystem(WREGIS)andtheMidwest
RenewableEnergyTrackingSystem(M-RETS).BothsystemstrackandfacilitateRECtransactionsintheirrespective
geographicalregions.
46
AnalternativevaluationmethodologyrelatestoidentifyingservicesthataDERcanprovidedirectlytoa
distributionutility.Inthismethodology,thedistributiongridistreatedasanetwork,whereeachpiece
connectedtoitprovidesvalueinbeingconnectedandbyprovidingadditionalservicestosupportthe
developmentofthenetwork.Toaccomplishthis,afunctionalunbundlingofdistributionserviceswould
berequiredbytheregulator,similartotransmissionunbundlinginthe1990s-2000s.Byintroducing
services,thedistributionutilitywouldbeabletoidentifyspecificservicesnecessarytomaintaingrid
reliability,thenthedistributionutilitywouldbeabletoprocureDERthatsatisfiedthetechnicaland
economicrequirements.DERwouldthenbecomebuiltintodistributionnetworks,abletobecounted
byresourceandsystemplanners,anddispatchedbydistributiongridoperators.Identificationof
additionalservicesfromDERprovidesadditionalvaluestreamsfromDERinvestments,otherthansimply
payingforthegeneration(e.g.,solarPV)oradjustmenttodemand(e.g.,demandresponse).DER,much
liketraditionalpowerplants,arecapableofprovidingadditionalbenefitsdirectlytothedistributiongrid,
suchasvoltagesupport,ramping,orevenlocalblackstart,suchasfromamicrogrid.Additionally,these
resourcescanassistthedistributionutilityinmaintainingreliabilitybyencouragingadiverseresource
mix;itmaybepossibleforaregulatortoconsidercompensatingDERforreliability.BybuildinginDER
intoadistributionutility’sportfolio,theregulatormaybeabletoprovideadditionalopportunitiesfor
drivingextrabenefitsforDERthatsupportsboththecustomerandtheutility.
SimilartoVOR,aregulatorwouldneedtodeterminetheservicesthatwouldbesoughtfromDER.
Additionally,thevalueswouldneedtobeinclusiveofmanyofthesamefactorsasoutlinedintheVOR
section.Understandingtheservicesneededforthedistributiongrid,similarlylikethetransmissiongrid,
thecoststoservewillcontinuetofluctuateacrossthedistributiongridasDERcontinuetoproliferate.
Thismayresultinsomeareasofthedistributiongridcostingmoretoservethanothers,whichmay
upsetalong-standingratedesigngoalofensuringequityinsideaclass.Asdescribedelsewhere,
divisionsofcustomerclassesmaybeanoptiontoaddressthisissue.
Finally,VOSwillrequiresubstantialtechnologicalinvestmentbytheutility.Severalofthese
technologiesarediscussedinSectionVII.Nevertheless,inmanyinstances,customersareinvestingtheir
ownmoneyforDER,someofwhichmayalreadycomewithtechnologytoenableaVOStariff;the
laggingfactormayremaintheutilityandregulatoryapprovalofinvestmentsinnewtechnology.
Additionally,movingtoaVOSmodelwilllikelyrequireare-framingoftheutility(andregulatory)model
forrecoveringcosts.Aregulatormayconsideramovementawayfromautilityrecoveringallcosts
directlyfromusage,andallowingtheutilitytorecovercoststhroughVOS,extraearningson
performance,orallowingagreaterrateofreturnonoperationalandmaintenance.
3. TransactiveEnergy
AmorefutureorientedversionofavaluationmethodologyisTransactiveEnergy.TransactiveEnergy
(TE)isaconceptdevelopedbytheGridWiseArchitectureCouncilandPacificNorthwestNationalLabs
(PNNL).TEisbothatechnicalarchitectureandaneconomicdispatchsystemhighlyreliantuponprice
signals,robustdevelopmentoftechnologyonboththegridsideandthecustomerside,andrules
allowingformarketstodevelopthatenableawidevarietyofparticipantstoprovideservicesdirectlyto
eachother.This“peer-to-peer”componentdifferentiatesTEfrommanyoftheotheroptionsdiscussed
herein.
47
AsexplainedbyGridWise,TEisameansbywhichcustomer-sitedresources,includingdemandresponse,
storage,andotheron-sitegenerationsources,canbeinterconnectedwiththegridandbeinteractive
withthegrid.TEfacilitatesthecoordinationoftheseresourcesthroughmarketsandothermeansby
whichresourcescanbedispatchedinresponsetopriceorothersignals.AsdefinedbyGridWise,TEis
“Asystemofeconomicandcontrolmechanismsthatallowsthedynamicbalanceofsupplyanddemand
acrosstheentireelectricalinfrastructureusingvalueasakeyoperationalparameter.”73Underlyingthis
isthedevelopmentandidentificationofservicesandvaluestreamsavailabletodistributionresources.
Theseservicesandvaluescouldbesoughtbytheutility,athirdparty,oranothercustomer.
GridWisenotesthattechnologyisbecomingmorewidelydeployedbyutilities,businesses,and
customers,devicesacrossthespectrumarebecomingmoreintelligent,andlargeramountsofclean
resourcesarebeinginstalled.Theseinvestmentsareincreasinglybeingdonecloserandclosertothe
edgeofthedistributionandontocustomerpremises.Withthechangingnatureofthedistributiongrid
andthecustomer,planningandoperatingthedistributiongridbecomesincreasinglycomplex.TEisa
meansbywhichanoperatorcanrationalizethesecomplexactionsthatmaybeoccurringoutsideits
control.
TEcanenableamuchlargersetofvaluestreamsforcustomer-sitedresources.Ascustomerscontinue
toinvestintechnology,tryingtoextractadditionalvalueoutofthoseresourceswillbekeytocontinued
deploymentofthosetechnologies.Allowingtheseresourcestooffertheservices,inawaythatdoes
notimpactthereliabilityofthegrid,mayassistcustomerstopickandchoosefromavarietyof
preferences.Additionally,theflexibilityprovidedbytheseresourcestotheutilitycouldassistin
avoidingcostlyinfrastructureupgrades.
However,developmentandimplementationofaTEsystemrequiresasignificantamountoftechnology
andcommunicationsequipment.AMIisarequirementunderTE.Furthermore,anticipatingcustomer
acceptanceofthisconceptremainsunprovenatbest.Long-standingpublicpolicyonresourceplanning
andprocurementreliesonlong-termrecoverofinvestments,butTEfocusesonaseriesofshort-term
transactions;ensuringadequatecompensationandcertaintyforinvestmentswillneedtobeproven.
Lastly,manystateshavepolicieslimitingtheabilityofcustomerstosellexcesselectricitytoother
customers,orprohibitaggregatorswhomaybeinabetterpositiontooptimizeagroupofresourcesand
integratethemwiththeutility.74
C. DemandCharges
73
“GridWiseTransactiveEnergyFramework,Version1.0,”GridWiseArchitectureCouncilat11(January2015).
74
Formoreconsiderations,see“TransactiveEnergy:ASurrealVisionoraNecessaryandFeasibleSolutionstoGrid
Problems?”NilgunAtamturk,CaliforniaPUC(October2014).
48
Demandchargeshavelongbeenusedincommercialandindustrialcustomerclassrates,buthavenot
historicallybeenappliedtoothercustomerclasses.Someadvocatesarelookingtousedemandcharges
onamorewidespreadbasissinceallcustomerclassesconceptuallyincurdemandcharges.
Demandchargesareanotherlineitemcostincludedonautilitybill-inadditiontofixedandenergy
costs,whichmakeupautility’srevenuerequirement.DemandisoftencalculatedandchargedinKW
andused,atleastinpart,to“splitupthepie”oftherevenuerequirementwithineachclass.Demand
chargesendeavortomeasurethe“sizeofthepipe,”orcapacityneedsofacustomer.Therearetwo
historicalwaystocalculateademandcharge,eitherbytakingthecustomershighestinstantaneous
demandacustomerdrawsfromthesystem,measuredinKW,overacertaintimeperiod;or,
alternatively,byusingthecustomer’shighestKW(peak)dividedbytherelevanttimespan,duringthe
periodinquestion.
Whenproposedorusedinaresidentialcontext,demandchargesareoftenincludedasapercentageof
thedeliveryportionofabillandaremeasuredonamorefrequentbasis,oftenmonthlypresumablyto
increasebillstabilityandallowcustomerstoreacttopricesignals.Iftheratesareunderstoodby
customersandloadscanbeshifted,thenthesedemandchargescanincentcustomersto“shave”their
peaksorshiftusagetoanothertime,andwithcoincidentrates,reducetheoverallsystempeak.How,
when,andhowoftenthisdemandiscalculatedcanvaryinpractice.
Lately,interesthasbeenpaidtouseofdemandchargesonresidentialandsmallcommercialcustomer
classesinareaswiththetechnologytodoso,suchasadvancedmeteringtechnology.
Partiesadvocatingfortheuseofdemandchargesonamorewidespreadbasisstatethattheshort-run
costsofthedistributionsystemareallfixedinnatureandshouldbeproportionedamongcustomersin
thesamerateclassbasedontheirmaximumdemandregardlessifitcontributestoasystempeak.
Otherpartiesinsistthattousedemandchargestheymustbecoincidentandthusmeasureacustomer’s
contributiontocertainsystempeaks.
Advocatesarguethatdemandchargescanensuregreaterrevenuecertaintyandcostrecoveryforthe
utility–andcostsarebettercoveredbythecostcausers(unlikeNEM,orotherrateswhichoffset
distributioncosts).Sincethecostsarerecoveredbasedonindividualpeaksratherthanoverallvolume
ofusage,whichcanvarygreatlyfromyeartoyear,thereisalsomorecertaintythattheutilitywillbe
abletofullyrecoveritsauthorizedreturn.Inthiswayitreducesriskfortheutility.Additionally,
advocatesarguethatdemandchargesareachargetheindustryisfamiliarwith,andthereforeshould
comewithasmallerlearningcurve.
However,asopponentsargue,therearemanyunknownsanduncertaintysurroundingtheuseof
demandchargesonclassesotherthanC&I–mainlyregardingcustomerimpacts.Empiricaldataonthe
impactsandcustomeracceptanceandresponsestoresidentialandsmallcommercialdemandcharges
49
areinsufficient.Inareviewofresidentialdemandchargeratedesigns,RMIidentifiedonly25demand
chargeratesofferedtoresidentialcustomers.75
Whiledemandchargestructuresmayencouragereductioninpeak(dependingonhowpeakisdefined),
itmaynotsendanadequateconservationsignaltoreduceusage,ifimplementedwithanassociated
reductioninkwh/volumetriccosts,andsubsequentlythecostsofgeneration(ascomparedtovolumebasedrates).Additionally,demandchargesdonotassistincustomerunderstandingoftheratedesignas
thereisasmallmarginforcustomererror;higherbillscanbeearnedthroughashortertimeframeofa
lapseofattention(i.e.,toomanyappliancesonatonce)andcanresultinthepossibilityofhigherbill
volatilityfrommonthtomonth.Lowerincomecustomers(orthosewithlowloadfactors)areespecially
hardhitastheycanhavelesscontroloverpeakdemandusage.Lastly,demandcharges,ifalarge
portionofacustomer’sdistributionbill,wouldovercollectcustomercostsasdemandcosts.
Importantly,manypartiesonallsidesoftheissueseemtorecognizethepotentialforusingdemand
chargessparingly(i.e.,torepresentadollarortwoonanaveragebill)andwhenmeasuringdemand
coincidentwithsystempeaks,76butthenumberofopponentsquicklygrowastheutilitiesbeginto
dependmoreandmoreontheseratesforrecoveringtheirdistributionsystemcosts.
SomeutilitieshaveproposedusingdemandchargesinconjunctionwithNEMrates.SincetheNEMrates
usuallyprovideacreditagainstconsumptiononavolumetricbasis,chargingaresidentialcustomertheir
distributioncoststhroughKW-basedrateseliminatesthepossibilitythatNEMcompensationisshifting
costs.Thispractice,however,wouldnotcompensateorchargeDERcustomersforanybenefits,or
additionalcosts,theyrepresenttothegrid.
Asdiscussedbelow,thedemandchargesuccesswillbelargelydrivenbythefinedetailsofthestructure
imposed–ultimatelywhopayswhatportionofthechargeandtheparityofthatallocation.
1. ConsiderationsinDemandCharges
Aswithmanyofthecompensationmethodologiesavailabletoregulators,theimplicationsoftheuseof
demandchargesdependgreatlyonthedetailsofthedesignandimplementationofthecharge.Ifdone
appropriately,reducingthesystempeakshouldleadtosavingsforallcustomersonthesysteminthe
long-runasgenerationbecomeslessexpensiveandiftheregulatorcanproperlyincorporateany
distributionsavingsinnewrateproceedings.
Ifaregulatorisinterestedinconsideringtheuseofdemandchargesforresidentialorsmallcommercial
classes,issuesarisethatarenotasprevalentofproblemsforC&Iclasses.Eachofthesechoicescan
representverydifferentimpacts,customerexperience,andpolicyimplications:
75
“AReviewofAlternativeRateDesigns,”RockyMountainInstituteat57(2016).
76
“SmartRateDesignforaSmartFuture.”
50
•
Classifyingusersintoclassesonatype-basis,locational-basis,oronanindividualbasis
Theseconsiderationsshapehowcostswillbeallocatedbetweentheseclasses.Theywouldalsodictate
whoacustomerwouldbecomparedtowhendeterminingtherelevantportionofdemandcostsfor
whichtheyareresponsible.
• Defining‘system’andsystempeak
Duetothesmallerlocationalnatureofthedistributionsystem,utilitiesandregulationsneedto
determinewhatareasshouldbeconsideredasasysteminwhichtoassessacustomer’scontributionto
peakusageordemand/capacityneeds.Shouldtheutilityuseasystem-widepeakoramorelocalarea
(i.e.,substation/feederlevel)?Additionally,certaindistributionscostsaredriven,notbydemand,but
bythenumberofcustomers,geographiccircumstances,customerdensity,orotherfactors.
•
Useofcoincidentalornon-coincidentalpeak
Isthedemandmeasuredcoincidentornon-coincidentwiththesystempeak?Aredifferentcustomers’
demandmeasuredconcurrentlyatasetpointintime(systempeak)oraredifferentpeaktimespans
used(i.e.,instantaneous,15-minute,or30-minutetimespanstomeasuretheindividualcustomer’s
usage)?
2. CoincidentPeakConsiderations
Usingacoincidentpeakmethodbetteralignsthedemandchargewitheconomicprinciples(toalign
coststocostcausers,amongothers),however,coincidentpeakdemandchargescanbeharderto
understandandcanleadtoreducedratestabilityonthepartofthecustomer.Notably,customersand
theutilitymaynotknowwhenthesystempeakoccurreduntiltheendofthemonth.Whileitmaybe
possiblefortheutilitytodeclareinadvancethatonehouronthenextdaywillbecalculatedassystem
peak,theutilityrunstheriskofchoosingthewrongdayand/ortime,whichwouldthenmitigatethe
economicsignalthedemandchargeintendstoreflect.
Itcanbedifficulttoimplementtruecoincidentpeakpricingbasedonannualcycles,suchaswithC&I,
sincethevariouslevelsofthedistributionsystemcanpeakatwildlydifferenttimesanditcanleadto
varyingandpotentiallyveryhighcustomerbillsasutilitiescollectsubstantialrevenuesinasinglebilling
cycle.Understandably,regulatorshaveactedcautiouslywhenconsideringwhetherornottocollectall
distributioncostsduringashortintervalrepresentingthehighestsystemusage,whilechargingnothing
oraminimalamounttherestoftheyear.
3. Non-CoincidentalPeakConsiderations
51
Useofthenon-coincidentalpeakmethodindetermininganindividualcustomer’sappropriateshareof
demandchargesisfunctionallyproblematic.Non-coincidentalpeakusagedoesnotcorrelatewithhow
thesystemisdesigned,andcostsareincurred,asthesystemneedstobedesignedforpeakusage.In
otherwords,ifacustomer’speakdemandoccursinnon-peakhours,thereislikelyplentyofavailable
capacity,whichhaslittleeconomicimpactontheutility’scoststoservethatdemand.Ofthe25
demandchargeratesidentifiedbyRMI,66%ofthembasethechargesonaresidential77customers’noncoincidentpeak.AsRMInotes,“Non-coincident-peakdemandchargesaremorestraightforwardfor
customerstounderstandandforutilitiestoadministerbut,ifappliedtoanythingbeyondcustomerspecificcosts,theymaynotreflectcostcausation.”78
However,ifnon-coincidentisused,therearemethodsthatcanbetteraligncosts.Factorstoconsider
whendeterminingacustomer’snon-coincidentalpeak:1)withinwhattimeperiodisthepeakmeasured
(i.e.,acalendardayorbusinesshours),2)Whatdaysaremeasured(weekdays,weekends)?Thelonger
theperiodmeasuredinanon-coincidentratetheharderitisforacustomertoshifttheirpeakoutside
ofthattimeperiodandthemoretheratebehaveslikeafixedcharge.Forexample,acustomerwho
weldsinthemiddleofthenightduringa24-hourmeasurementperiodmaypaythesameasiftheywere
weldingduringasystempeak.
4. Re-calculationofPeakUsagePeriod
Howlongistheperiod(orcycle)inwhichthepeakisestablished?Inotherwords,howoftenisthe
demandmeasuredandacustomer’sratere-calculated(i.e.,monthlyoronceayear)?Isitappropriateto
usetheC&Imodelinwhichasystem’stotalpeakismeasuredonceayearandanindividualcustomers
usageatthattimedeterminestheindividual’smonthlyrateforthenextyear?
Whenappliedtothedistributionsystem,theneedforamuchshorterpeakusageperiodbecomes
necessary.Inthecaseofdemandbeingmeasuredover24hours,acustomercanonlyreducetheirbill
byreducingtheirpeakinrelationtoothercustomers(i.e.,thatpeakshiftnolongerresultsinthe
opportunityforsavings).IftheKWpeakisaveragedoveraperiodoftime,thenthelongertherelevant
timespan,themoreshortlivedspikes(e.g.,ahairdrierorwelder)canbesmoothedoutandgenerally
thelowertheKWamount(i.e.,aspikeduringa15-minutetimespanwouldrepresentalargerdemand
thaniftherelevanttimespanwas30-or60-minutes).
Someexamplesofdemandchargesinclude:inonestatelegislature,autilityproposedamandatory,
non-coincidentresidentialdemandratewhichwouldbemeasuredmonthlyasthehighest30-minute
usageoverweekdaysbetween6amto9pmandrecover100%ofdistributioncostswhencoupledwitha
reducedfixedcustomercharge.79Anotherexampleusesacustomer’scoincidentdemandtocalculatea
77
“AReviewofAlternativeRateDesigns,”RockyMountainInstituteat57(2016).
78
Id.
79
https://www.comed.com/News/Pages/EnergyPlan.aspx;
http://ilga.gov/legislation/billstatus.asp?DocNum=1585&GAID=13&GA=99&DocTypeID=SB&LegID=88279&Session
ID=88
52
volumetriccharge.Inonejurisdiction,thecapacitychargesforaresidentialreal-timepricingprogram
arecalculatedbyaveragingthecustomer’shighestelectricaldemandcoincidentwiththefivehighest
hoursofoverallsystemdemandinPJMwiththefivehighesthoursonthelocalutility’ssystem.The
averageisthenadjustedandusedtocalculatethevolumetricchargeforthenextyear.80
5. EffectonDERcustomers
Recentinterestindemandchargesisarguedtostemfromutilitiestryingtoreducetheimpactofthe
currentincentivesforDERs(suchasNEM)andindoingsoimprovetheirraterecoveryandreducecross
subsidyissues.Theseresultsdoaffectcustomerswithdifferentresourcesindifferentways.Generally,
andespeciallyforPVandotherDERcustomers,thisratedesignreducestheirabilitytolower
distributioncostsorwhattheyarepayingforthegrid.Fromapolicyperspective,withoutother
compensation,demandchargesrateswouldgenerallydecreasetheROIforDERsandreducethe
attractivenessofthesetechnologies.
SomeDERs,however,mayallowcustomerstoreactfavorablytodemandchargesandpotentiallysave
money.Itcouldbesaidthatdemandchargesencouragestoragetechnologies,oranyothertechnology
orservicewhichflexiblyimplements“peakshifting”orthepracticeof“fillingthetroughs”and“shaving
thepeaks”ofacustomer’sinstantaneoususage.Anyresourcethatencompassestechnologyora
servicewhichwouldenableacustomertoreducetheirrelevant,measuredpeakascomparedtoothers
intheirrateclassshouldbeabletoreducetheirdistributionratesundermostdemandcharges.
Whethertheirrateswouldbelower,orwhethertheywouldhavemorecontrolovertheirrates,undera
demandchargeversusanotherratetypewoulddependontheindividualcustomer’ssophisticationand
understandingoftherate,theirloadfactorandprofile,aswellasthedetailsofthedemandcharge.EE
andDRprogramsbothmayhelpreduceacustomer’speakload,buttheresultswouldbelimitedto
specificcircumstancesandpotentiallyforonlybriefperiodsoftheyear,dependingontheprogramor
technologyinvolved.
6. PathforwardforRegulators
AtthetimeofwritingthisManualempiricaldatafordemand-basedratedesignsthatarebeing
implementedonamandatorybasisforlargeinvestor-ownedutilitiesislimited.81Thus,regulators
shouldbewaryofcountingonunsupported,promisedbenefitsandcautiouswhenplausibleharmmay
representitself.Itmaybethatpilotswhichholdtheircustomer’sharmlesscouldbethebestway
forward.Regardless,moredatashouldbeavailableinthefutureasseveralutilitieshavesubmitted
proposalstoregulatorsandlegislators.Whatevertheimplicationsofthesenewerratesmaybea
regulatormustbecomfortablewithhowtheywillinteractwiththeirjurisdiction’suniquecircumstances
beforeimplementingthem.
80
https://hourlypricing.comed.com/faqs/
81
“AReviewofAlternativeRateDesigns,”RockyMountainInstituteat76(2016).
53
D.FixedChargesandMinimumBills
Fixedcharges(alsocalledcustomercharges,facilitiescharges,etc.)areratesthatdonotvarybyany
measureofuseofthesystem.FixedchargeshavealonghistoryofuseacrosstheUnitedStates,andare
afixtureofmanybills.Fixedchargeshavebeenusedbyutilitiestorecoverabaseamountofrevenue
fromcustomersforconnectiontothegrid.Somearguethat,asthemajorityofautility’scostsarefixed
(atleastintheshortrun),fixedchargesshouldreflectthisrealityandcollectmore(ifnotall)ofsuch
fixedcosts.Othersarguethathigherfixedchargesdilutetheconservationincentive,failtoreflectthe
appropriatecostsasfixed(long-termratherthanshortterm),orshouldonlybesettorecoverthedirect
costsofattachingtotheutility’ssystem.
Higherfixedchargesaccomplishthegoalofrevenuestabilityfortheutility,and,dependingonthe
degreetowhichoneagreesthatutilitycostsarefixed,matchcoststocausation.However,theinterplay
betweencollectingmorecoststhroughafixedchargeandthevolumetricratemayresultinuneconomic
orinefficientpricesignals.Indeed,anincreaseinfixedchargesshouldcomewithanassociated
reductioninthevolumetricrate.Loweringthevolumetricchargechangesthepricesignalsenttoa
customer,andmayresultinmoreusagethanisefficient.Thisincreasedusagecanleadtoadditional
investmentsbytheutility,compoundingtheissue.
Thispotentialityalsohighlightsthedisconnectbetweencostsandtheircausationthatahigherfixed
chargemayhave.Ifhigherusageleadstoincreasedinvestment,thenitmaybeappropriateforthe
volumetricratetoreflectthecoststhatwillbenecessarytoserveit,whichwouldpointtowardsthe
appropriatenessofalowerfixedcharge.Inotherwords,itmaybemorereasonabletolowerthefixed
costsandincreasethevolumetricrate,whichwouldsendamoreefficientpricesignal.
Arelatedmovementistheadoptionofaminimumbillcomponent.California,whichdoesnothavea
fixedchargecomponentforresidentialcustomerbills,adoptedaminimumbillcomponenttooffset
concernsraisedbyitsregulatedutilitiesregardingunder-collectionofrevenueduetocustomers
avoidingthecostsoftheirentireelectricbill.82Inotherwords,someNEMcustomersinCaliforniawere
abletozeroouttheentiretyoftheirbill,andavoidpayingthedistributionutilityanycosts.Inadecision
revampingitsratedesign,theCaliforniaPUCadoptedaminimumbillcomponent,whichensuresthatall
customerspaysomeamounttotheutilityforservice.TheCaliforniaPUCsetaminimumbillamountat
$10,whichiscollectedfromcustomerswhohavebillsunder$10.MassachusettspassedtheSolar
EnergyAct(“MASolarAct”),Chapter75oftheActsof2016inApril2016.TheMASolarActallows
distributioncompaniestosubmittotheDPUproposalsforamonthlyminimumreliabilitycontribution
tobeincludedonelectricbillsfordistributionutilityaccountsthatreceivenetmeteringcredits.
Proposalsshallbefiledinabaseratecaseorarevenueneutralratedesignfilingandsupportedbycost
82
OrderInstitutingRulemakingontheCommission’sOwnMotiontoConductaComprehensiveExaminationof
InvestorOwnedElectricUtilities’ResidentialRateStructures,theTransitiontoTimeVaryingandDynamicRates,
andOtherStatutoryObligations,“DecisiononResidentialRateReformforPacificGasandElectricCompany,
SouthernCaliforniaEdisonCompany,andSanDiegoGas&ElectricCompanyandTransitiontoTime-of-UseRates,”
D.15-07-001(July13,2015)
54
ofservicedata.Ontheotherhand,minimumbillseliminateaconservationsignalbyencouraging
consumptionuptotheminimumbillamount.83
Ineitherevent,distributionutilitiesoftendisputewhichcomponentsarefixedandshouldberecovered
fromcustomers.Asdiscussedpreviously,thereisagreatdealofdisagreementastowhatconstitutesa
fixedcost.Areoverheadcostsfixed?Whatportionofthedistributionsystemisfixed?84
Understandingandidentifyingwhatare“fixedcosts”isakeycomponenttodeterminingcompensation
toDER,revenuerecoveryfortheutility,andhowtobestbalanceutilityfinancialhealthandthegrowth
ofDER.
E. StandbyandBackupCharges
Standbyserviceisserviceavailabletoafull-orpartial-self-generatingutilitycustomerstoprotectthe
customerfromlossofserviceintheeventofanunanticipatedoutageofitsownself-generating
equipment.Standbyserviceisprovidedthroughapermanentconnectioninlieuof,orasasupplement
to,theusualinternalsourceofsupply.Itispowergenerallynottaken,butavailableonanalmost
instantaneousbasistoensurethatloadisnotaffected.Ofcourse,anyandallgenerationsourcesare
subjecttofailurefromtimetotime.Thereforecontrolareasandutilitysystemsmaintainreserves,
includingreservesthatareoperatingandreadytopickupload.Whenutilitiesoperatedalmostallof
thepowerplantsonthesystem,standbypowerwassuppliedbyallgeneratorstoallgenerators,andit
wasanimplicitpartofthesystemofoperatingreservessupportedthroughchargesforretailservice.
Onlylargenon-utilitygenerators,suchascombinedheatandpowersystems,facedfeesforstandby
service.Now,withtheadventofeverlargerportionsofnon-utilitygeneration,thesubjectofthecostof
providingstandbyservicecomesupanew.
StandbychargesarechargesassessedbyutilitiestocustomerswithDERsystemsthatdonotgenerate
enoughelectricitytomeetitsneedsormayexperienceaplannedorunplannedoutageandtherefore
mustreceivepowerfromthegrid.Thesecustomersarecommonlyreferredtoas“partialrequirements”
customers.Thestandbychargeisassessedbytheutilitytoassistinthepaymentofgridservicesand
standbygenerationandisusuallycomprisedofademandcharge$/kWandanenergychargebasedona
$/kWhbasis.Thesechargesrecoverboththecostoftheenergyusedtoservethecustomeraswellas
thecostsoftheutilityforprovidingthecapacitythathastheabilitytomeetthepeakdemandofthe
customerreceivingthestandbyservice.
83
“SmartRateDesignforaSmartFuture.”Seealso,“RecoveryofUtilityFixedCosts:Utility,Consumer,
EnvironmentalandEconomistPerspectives,”LisaWood,RossHemphill,JohnHowat,RalphCavanagh,andSeverin
Borenstein,LawrenceBerkeleyNationalLaboratory,FutureElectricUtilityRegulation,ReportNo.5at58-59(June
2016).
84
See,e.g.,thediscussionoftheminimumsystemandzero-interceptmethodsofcostallocationintheNARUC
ElectricUtilityCostAllocationManualat136-142.
.
55
Thesechargesaregenerallyapprovedbystateregulatorsprimarilyduetosystemreliabilityconcernsof
utilities.WiththeincreaseofDERsystemsonthegrid,somepartiesfearthatutilitiesareassessing
thesechargestodiscouragecustomersfrominvestinginDERsystemsbecauseprojectsbecome
uneconomicwithstandbyfeeseventhoughtheDERprojectisprovidingbenefitstothegrid.
Electricsystemoperatorsmustbeabletomaintainsatisfactorysystemconditionsinthepresenceof
changesinconditions,bothontheproductionsideandontheconsumptionside.Theymustbe
preparedforthelargestcontingenciesthatcanbefalltheirsystems.Sometimesthiskindofpreparation
isreferredtoas“n-1”or“n-minus-one”preparation.Thisrelatestotheplanningforlargesystem
events,suchasthelossofatransmissionlineoracommercialgeneratingunit.Inthetraditionalcaseof
nearlyallgenerationbeingsuppliedbyutility-operatedplants,standbyisprovidedbyallforall.
However,withtheadventofsignificantamountsofgenerationbeingsuppliedbynon-utilitygenerators,
includingDER,notexplicitlyaccountingforthecostofstandbypowermayprovideacostadvantageto
thenon-utilitygeneratorsandmaybeacostburdenupontraditionalnon-generatingcustomers.It
wouldneverbethecasethatanysingleDERwouldrisetomeritattentioninalistofimportant
contingenciesforanelectricsystem.
Backupserviceissimilartostandbyserviceexceptthatitisaplannedserviceandisusuallynotavailable
onaninstantaneousbasis.Whencommercialgeneratorsplanmaintenance,theyprovidelongnoticeto
thesystemoperatorsandgenerallymakecontractarrangementsforreliablebackupservicetomaintain
localareaload,aswellassystemload.Theremayberegulatedtariffsforbackupserviceforcommercial
generators,buttheyarenotcommonforDER,suchasbehind-the-metersystemsofsmallcommercial
andresidentialcustomers.Stilltheterm“Backupservice”may,insomecasesbeusedinthesameway
as“standbyservice.”85
Bothbackupchargesandstandbychargeshavebeenassociatedwithlargecommercialandindustrial
systems,bothloadandgeneration.86Historically,theyaremostassociatedwithnon-utilitygenerating
systems,suchaslargeself-generationsystemsatindustrialplantsandwithcombinedheatandpower
cogenerationsystems.Theyexistsothatutilitiesandsystemoperatorsarenotsaddledwithcostsof
maintaininglargereservesbeyondmereprudence.Theyhavenotgenerallybeenassociatedwith
intermittentgeneratingsourcesexceptforlargecommercial-sizedprojectswhoseoutput(orlackof
output)couldaltersystemoperationsandrequirements.
85
Theterm“backupservice”isbeingappliedmoregenerallytoserviceoptionsthatappeartofitthegeneral
definitionofstandbyservice.AnexampleistheAlabamaPower“RateRiderRGBSupplementary,Back-upor
MaintenancePower”schedule,whichstates,“Back-UpPowerisnotavailablewhenthecustomerrequires
MaintenancePower,butisavailableonlyduringunscheduledoutages,whichcanoccurwhenacustomer’sown
generationequipmentisnotproducingenergyorcapacity,orisexperiencingperiodsofintermittentgeneration.”
86
Thereisanotherwayinwhichtheterm“backupservice”isused,butitisnotdirectlyrelatedtoDER.Buildings
withelevatorsgenerallyarerequiredtohaveabackupsourceofpowerabletopowertheelevatorsand
emergencylighting.Oftenthebackupserviceisadieselgeneratorlocatedonsite.Thistypeofserviceismore
akintostandbyservicethantocommercialbackupserviceinthatitisnearlyinstantaneous,anditisdirectly
connectedtotheload.However,dieselgeneratorsonstandbyatcommercialbuildingsarenotconsideredDER.
56
TherelevanceofstandbyservicetoDERisthatifadistributedsourceofpowerfails,theutilityorother
load-servingentitymustbepreparedtomeettheload.Generallythereisnodirectpurchaseofstandby
serviceforDER,particularlyattheresidentialorsmallcommerciallevel.Powerplants,includinglarge
commercialrenewableenergyresources,maymakestandbyarrangementsandmaypayspecific
standbycharges.
EventhoughmostDERaresmallandoperateindependently,alargenumberofsmallDERinaggregate,
iftheyalldothesamethingsatthesametime,whetherplannedornot,couldrisetothelevelofan
importantcontingency.Forexample,alargenumberofhouseholdPVsystems,justafewkilowatts
each,spreadthroughoutaserviceterritory,andallresponsivetothesamesunandthesameclouds,
could,andshould,beconsideredanimportantplanningcontingency.SincePVgenerationis
concentratedintheearlyafternoon,andtheirproductiondropsoffinaverypredictablemannerasthe
afternoonwearson,itmaybedifficultforthesystemoperatortomanagethesystem.Theresultingnet
load,theloadthattheelectricsystemmustdispatch,canbecountedontovaryupanddowneachday
inresponsetothepatternofthePVsystems.Suddensystemchanges,suchasachangeincloud
conditions,couldmakeforacombinedreductioninoutputthatwouldbeworthyofsystemoperators’
attention.However,theredoesnotseemtobeacallforspecificstandbychargesforsmalldistributed
energyresources,particularlyforbehind-the-meterresources,atthistime.87
IfthereisareasonforstandbyandbackupserviceforDERsystems,therewillbeacostofprovidingit,of
course.AndifitwerenotchargedtotheDERsystemowners,thatcostwouldstillexist.Onlyitwould
havetobeabsorbedbythesystemoverallandbythenon-participatingcustomersintheformofhigher
costsorintheformoflowerreliability.Ifitisdeterminedthatsystemreliabilitywillsufferwithout
greaterreservesthancouldbejustifiedforasystemwithoutDERresources,thenbyallmeans,theDER
customersshouldpayfortheservice.InstitutinganexplicitstandbychargeforDERwouldallowforthe
costcausertopayforthecostsassociatedwiththestandbyserviceforwhichtheutilityprovides.A
studyoftherequirementsoftheutilitybydeterminingwhatcustomerdemandmayhavetobemet
whentheDERsystemgoesdown,eitherplannedorunexpectedly,mayproduceevidenceof
considerablecosts.
Inconsideringwhethertoimplementastandbychargeorbackupservicecharge,regulatorsshould
considerthepolicyimpactsofrequiringallDERtopayasmalltarifftosupportstandbypower
availability.WhentheconcentrationofPVandotherDERgeneratingsystemsbecomesgreaterthanitis
now,thatquestionshouldbeconsideredagain.Withoutastudyoftheactualcostsofadditional
reservesrequiredforsystemreliability,itispossiblethatanaïvecalculationofthestandbychargemay
87
ThoughaWikipediaarticleonnetenergymeteringreferredtoastandbychargethatwasabandonedbefore
2005,andanotheronSolarPowerinVirginiaindicatedarequirementforsolararraysofcapacityabove10kW,
theredoesnotseemtobeeitherstandbychargesorbackupchargesasageneralmatterinthedistributedenergy
resourcesarea.However,itmaybepossiblethatsomeutilitiesarecurrentlyconsideringwhethertopursuethis
option.
57
overstatetheactualcoststothesystemandtheneedsofthecustomers.Anychargewouldneedtobe
justifieddirectlyandnotbeallowedtodiscouragetheinvestmentbycustomers.88
F. InterconnectionFees/MeteringCharges
TheinterconnectionprocessallowsforDERstoconnecttotheelectricgrid.Inmanystates,theDER
ownerwillobtainapprovalfromthelocalutilityandreceiveauthorizationtoconnect,pursuanttothat
utility’sinterconnectiontariff.Interconnectionfeesrecoverone-timecoststhatautilityincurstosetup
theDERontheutility’ssystem.Thesecostsincludereviewingtheapplicationtointerconnect,account
andbillingset-up,variousstudiesandsystemimpactreviews.89Thestudiesconductedduringthe
applicationprocessdeterminewhethertheutilitywillneedtoinvestinsystemmodificationsforsafety
orpowerquality.Inmostcases,theDERownercausingtheneedforthesystemmodificationis
responsibleforthecostofthesystemupgrade.Additionally,manystateshavestraightforward
proceduresforsimpleinterconnections(i.e.,foraDERlessthanapredeterminedsize,usuallyaround
10kW-20kW).TheCaliforniaPublicUtilitiesCommissionallowedutilitiestochargeaone-time
interconnectionfeethatrecoverscostsassociatedwithinterconnectingtheDERtotheelectricsystem
fromthecustomerbenefittingfromtheinterconnection.Theinterconnectionfeewillrangefrom$75to
$150.90InterconnectioncostsinMassachusettsmayincludeanapplicationfee($300-$7,500,depending
onthesizeoftheDERproposedtobeinterconnected),variousstudies,systemmodifications,awitness
test,andthecostofinstallinginterconnectionfacilities).91Forsimpleinterconnectionsin
Massachusetts,theDERownerwillnotgenerallypayanapplicationfee,butmayberesponsiblefor
othercoststointerconnect.Interconnectionfeesinotherstatesvarybutaregenerallysetataflatfee
plusachargeperkW.92
AmeteringchargerecoverscostsformetersthatmeasuretheenergyfromtheDERsenttotheelectric
grid.Someelectricutilitiesincludemeteringcostsinthecustomercharge.Otherutilitiesbillcustomers
foraseparatemeteringcharge,whichrecoversthecostofthemeter,themaintenanceofthemeter,
meterreading,andservicesassociatedwiththedataoutputfromthemeter.Forexample,
88
Forinstance,arecentWisconsinDaneCountyCourtruling(case#:2015CV000153)overturnedtheWIPSC’s
previousdecisionthatwouldhaveallowedutilityWeEnergiestoimposeastandbychargeonsolarcustomers,
citingalackofevidenceforthecharge.
89
EEIPrimerat9;“InterconnectionofDistributedGenerationtoUtilitySystems:RecommendationsforTechnical
Requirements,ProceduresandAgreements,andEmergingIssues,”Sheaffer,P.,RegulatoryAssistanceProject
(2011).Availableat:http://www.raponline.org/document/download/id/4572
90
OrderInstitutingRulemakingtoDevelopaSuccessortoExistingNetEnergyMeteringTariffsPursuanttoPublic
UtilitiesCodeSection2827.1,andtoAddressOtherIssuesRelatedtoNetMetering,“DecisionAdoptingSuccessor
toNetEnergyMeteringTariff,”Decision16-01-044,CaliforniaPUC(February5,2016).
91
DGInterconnectionSeminar.(2016).Availableat:
https://www9.nationalgridus.com/non_html/MA_DG_Seminar.pdf
92
“InterconnectionofDistributedGenerationtoUtilitySystems:RecommendationsforTechnicalRequirements,
ProceduresandAgreements,andEmergingIssues,”Sheaffer,P.,RegulatoryAssistanceProject(2011).
58
CommonwealthEdisonandOrange&Rockland(non-residential)imposeaseparatemeteringchargeto
theircustomers.93
Theadvantagesaninterconnectionfeeand/orameteringchargeisthatthesecompensationoptionsare
basedonprinciplesofcostcausation.ThecostoftheDERconnectingtothedistributionsystemandthe
costofmeteringservicesforthatDERischargedtothecustomerimposingthosecosts.Ifthereisa
differenceincosttoservetheDERownerforinterconnectionandmetering,thenitistheDERowner
payingforthosecosts.Theutility’sothercustomerswillnotsubsidizetheDERowner.
Therearealsodisadvantagesofimposinganinterconnectionfee.Forexample,iftheinterconnectionfee
isafixedcharge,butthereisnoincrementalcosttointerconnecttheDER,thentheDERownerwillbe
providingasubsidytoothercustomers.Additionally,iftheutilitydeterminesinthestudiesconducted
throughtheinterconnectionprocessthattheDERwillrequiredistributionsystemupgrades,theDER
ownerisresponsibleforthesecostsregardlessofthepriorDERfacilitiesinstalledonthedistribution
system.Thus,thefinalDERtointerconnectisresponsibleforthetotalcostofthedistributionsystem
upgrade.Moreover,aninterconnectionfeemaypreventDERadoptionbecausetheadditionalfee
increasesthepaybackperiodoftheDERinvestmenttotheowner.Additionally,ifthemeteringcharge
isgreaterthanthecompensationthattheDERownerreceivesfortheenergyisprovidestothegrid,the
overallDERinvestmentvaluetotheownerisreduced.Finally,theDERmaycausetheutilitytoincur
otherdistribution-relatedcosts,buttheutilitydoesnotrecoverthesecostsfromtheDERowner
throughtheone-timeinterconnectionfeeorthemeteringcharge.
VI.
Technology,Services,andtheEvolvingMarketplace
93
ForComEd,seehttps://support.comed.com/articles/ce10000-Understanding-your-bill#1;forOrange&
Rockland,see
http://www.oru.com/customerservice/askusaquestion/aboutbilling/understandingyourbill.html
59
Advancedtechnologiescannotonlysupportoperationsofagrid,theycansupportregulatorsinmaking
decisionsaboutratedesign.Communicationabilitiesarebeingcoupledwithadvancedtechnologies,
providingdatatotheutility,andpotentiallytotheregulatoraswell,whichcanbeusedtomake
informeddecisionsaboutcompensation.Theresultingdatacanhelptheutilitymeasuretheimpactsof
DER,moreaccuratelymeasureconsumptionandgeneration,andanalyzetheneedforDERataspecified
level(meter,bus,feeder,circuit).Withthisinformationtheregulatorcanalsomakemoreaccuratecost
andbenefitanalysisofDER,canevaluatethecurrentratedesignmethodology,andcontinuously
reevaluatethepropermethodologyaslevelsofpenetrationchange,newtechnologiesandservicesare
developed,andotherobjectivesorpublicpolicygoalsneedtobemet.Additionally,usingthis
information,aregulatorcanbetteridentifyadoptionlevelsacrossajurisdiction.Beingawareofthe
continualpaceofchangeandadoptionratesoftechnologiesbycustomers,aregulatorcanidentify
appropriatestrategiesforaddressingthesechangesinamoreproactivemanner.
A. OngoingMonitoringandAdoptionRates
ThelevelandpaceofpenetrationofDERresourcesinasystemisimportantinthedeterminationof
what,ifany,policyreformsareneeded.TheactualpenetrationlevelsofDERresourcesvarygreatly
acrossthecountryandevenvarysignificantlywithinthesamejurisdiction.Beforestatesembarkonthe
journeytoimplementsubstantiveratereformsduetothegrowthofDERpenetrationinitsjurisdiction,
eachstateshouldlookcloselyatdata,analysisandstudiesfromitsparticularserviceareabeforeany
suchactionsaretakensinceallelectricsystemsareimpactedbyDERpenetrationsdifferently.The
impactsthatareoccurringinonejurisdictionduetohigherDERpenetrationsmaynotnecessarilybethe
sameforanotherthatisexperiencingsimilarDERpenetrations.
InapaperforLawrenceBerkeleyLab’s“FutureElectricUtilityRegulation”series,PaulDeMartiniand
LorenzoKristovoutlineapathforregulatorsandutilitiestoplanforfutureutilityandregulatoryroles.94
Inthispaper,theyincludeanadoptioncurvethatpointsouttheimportanceofmonitoringadoption
ratesofDERacrossajurisdiction.Conceptually,thecurveidentifiesthreestagesofactivity:Grid
Modernization,DERIntegration,andDistributedMarkets.Eachstageisidentifiedwithtwo
characteristics:adoptionofDERandinstallationoftechnologytosupportDERdevelopment.The
majorityofstatesarestilllocatedinStage1,wherethereisalowamountofDERadoptionandutility
investmentsingridmodernizationarestillunderway.AccordingtoDeMartiniandKristov,themove
intoStage2occurswhenDERadoption“reachesbeyondabout5percentofdistributiongridpeak
loadingsystem-wide.”95Stage3occurswhenahighamountofDERpenetrationoccursandregulators
constructasystemtoallowformulti-sidedtransactionstooccurbetweenDERandthedistribution
94
“DistributionSystemsinaHighDistributedEnergyResourcesFuture:Planning,MarketDesign,Operationand
Oversight,”PaulDeMartini,LorenzoKristov,LawrenceBerkeleyLab,FutureElectricUtilityRegulation,ReportNo.2
(October2015)(https://emp.lbl.gov/sites/all/files/FEUR_2%20distribution%20systems%2020151023_1.pdf).
95
DeMartini/Kristovat9.
60
utility,butalsotoandfromcustomers.Thismeansthedevelopmentofpoliciestoenabledistribution
levelmarkets,anddeterminingtheroleofthedistributionutilityintoamarketfacilitatorrole.96
ThisdiscussionisincludedtoprovideregulatorswithavisualofafutureforDERadoptionandan
awarenessthatdecisionsonDERcompensationmethodologiesarenotstaticdeterminationsthatcanbe
madeonceandthenleftalone.Compensationdecisionsmadeinoneyearwilllikelyneedtobe
reviewed,modified,orchangedovertimeastechnologycontinuestodevelop,customersadoptDERat
greater(orslower)rates,andasneededtosupporteconomics.Forexample,adecisiontoadoptNEM
asthecompensationmethodologymaybeappropriateifaregulatordecidestoincentivizeadoption
ratesofsolarPV;however,asadoptionratesincrease,itmaynotbenecessarytocontinuetoprovide
suchanincentive.Assuch,regulatorsshouldremainflexibleinitsdecisionmaking.Tocontinuethe
example,NEMmayresultinclusteringofsolarPV,whichmaycausetheutilitytoincuradditionalcosts
toshoreupreliability;aregulatormaywanttoconsideranalternativecompensationmethodologyto
reflectthecostsofsolarPVatthatlocation.Alternatively,shouldothertechnologies,suchasstorageor
electricvehicles,increasetheiradoptionrates,aregulatormaytrytoturnNEMintoatechnology
agnosticprogram,ormaychoosetoimplementanentirelynewsuiteofcompensationoptions.
Itisimperativethataregulatorunderstandthetradeoffsindetermininganappropriatecompensation
methodology,bothintermsoftechnologyadoption(doesthemethodologyemphasizeonetechnology
overanother;whatdoesthatmeantothemarketandtheutility?)andovertime(doesthemethodology
encourageadoptionofspecifictechnologiesintheshorttermasopposedtoallowingavarietyof
technologiestodevelopovertimetomeetgridneeds).Theavailabilityofnewtechnologycanassist
96
Id.at10.
61
regulatorsinmakingthesedecisions.Hawaiiisanexampleofthis.Hawaiihasasignificantadoptionof
solarPV,andtheHawaiiPublicUtilitiesCommissiondecidedtoeliminateitsNEMtariffaltogether,
decidingthatothercompensationmethodologiesaremoreappropriateforitsstate.97Understanding
andmonitoringhowDERisimpactingthegridandutilityratesisessentialtofairlycompensatingDER,
andthenbeingflexibleenoughtorecognizewhenthosemethodologiesarenolongermeetingthe
policygoalsofthejurisdictionandistimetomoveontoothermeansofdeterminingappropriate
compensation.
ForjurisdictionswithcurrentlylowDERpenetrationandwithcurrentpoliciesnotdesignedtospurDER
growth,reformsmaynotbeastimesensitiveincontrasttotheneedsofjurisdictionswithhigherDER
penetrations.ForthejurisdictionswithlowDERpenetrationandgrowth,thereistimetoplanandtake
theappropriatestepsandavoidunnecessarypolicyreformssimplytofollowsuitwithactionsother
jurisdictionshavetaken.Reformsthatarerushedandnotwellthoughtoutcouldsetpoliciesand
implementratedesignmechanismsthathaveunintendedconsequencessuchaspotentially
discouragingcustomersfrominvestinginDERresources,ormakinginefficientinvestmentsinDER.
B. Roleoftechnology
Asdiscussed,certainadvancedtechnologyinvestmentsarerequiredinordertoimplementseveral
methodologiesdescribedabove.Forexample,withoutanadvancedmeter,implementinganoptionlike
TransactiveEnergywillnotbefeasible.Thesetechnologiesallowformoregranularinformationabout
usageandproductiontobecollected;thisinformationcanthenbeusedasafoundationfor
considerationofappropriatemethodologies.However,decisionsoninvestmentsintechnologyshould
notbelimitedonlytoimplementingparticularmethodologies,rather,decisionsonutilityinvestments
shouldcontinuetorelyupontotalbenefits.Inotherwords,specificinvestmentsshouldprovidegreater
benefitsthansimplyenablementofaspecificmethodology.Manytechnologiesmayprovidemultiple
benefitstreams,andenablegreateropportunities.Understandinghowthesetechnologiesfitinthe
largercontextisimportantbeforeapprovinganyinvestment.
Nevertheless,itwillbeimportantforregulatorstomaintainanawarenessofthepaceoftechnological
changeovertimeasnewtechnologieswillprovidenewopportunitiesforidentificationofbenefitsand
costs.Thisdatacanthenbeusedtoidentifypotentialchangestoexistingratedesignchoices.
Additionally,thisdatacanbecollectedinrealtime.Forexample,traditionalanalogmetersareread
onceamonth,butdigitalmetersconnectedtoacommunicationsnetworkcollectedinformationonan
hourlyor15minutebasis.Furthermore,metersconnectedtoacustomer’sHomeAreaNetworkcanbe
readinreal-timeinincrementsaslowas8seconds.Havingratedesignoptionsthatcanmakeuseof
thistypeofdatamayenableawidevarietyofbenefitsavailabletothecustomer.Thisisbutone
example;technologyisincreasinglyembeddedinconsumerproductsandcanbeleveragedfora
potentialwidevarietyofratedesignsandcompensationprograms.
Technologyimplantedonthedistributiongridcanalsoprovideimportantdataforthedevelopmentand
implementationofDERcompensationmethodologies.Smarttransformers,linemonitoring,SCADA,
hostingcapacity,andothersuitesofserviceslikeADMSandDERMS,allowforbetterintegrationofDER.
Bycollectinginformationaboutthecapabilityofthedistributiongrid,inreal-time,utilitiescanhavea
97
InstitutingaProceedingtoInvestigateDistributedEnergyResourcePolicies,DecisionandOrderNo.33258,
HawaiiPUC,DocketNo.2014-192(October12,2015).
62
clearerviewofthestateofthedistributiongrid.Knowingpowerflows,voltagefluctuations,and
availablecapacityforfeedersacrossthedistributionsystemcangreatlyassistinhelpinglocateDERin
locationsmostbeneficialtothegrid.Havingthisinformationcanalsoassistindevelopingappropriate
DERcompensationmethodologies,aswithoutthislevelofknowledgeaboutthegrid,DERswillbe
locatedwithlittleinputfromtheutilities.Similarly,recognizinghowtousethisinformationto
understandadoptionlevelsoftechnologywillassisttheregulatorindeterminingwhenachangeis
needed.
C. TechnologyOptions
1. AdvancedMeteringInfrastructure
AccordingtoEnergyInformationAdministration,nearly52millionadvancedmetershavebeeninstalled
acrosstheresidentialcustomerclassthroughouttheUnitedStatesasof2014.98Theseadvancedmeters
arecapableofmeasuringconsumptionin15minuteto1hourincrements.Themetersareconnectedto
acommunicationsnetworkandarethenabletotransmittheconsumptioninformationbacktothe
utility’sbackofficeforbilling.Thisstandsinstarkcontrasttothehistoricalmodeofmetering,which
usuallyoccurredonceamonth.Somemodesofautomatedmeterreadingwerecapableofreading
daily,insupportofspecifictariffs,butwerenotimplementedwidely.Inotherwords,utilitieshavegone
fromhaving12datapointsayearaboutacustomerto8,760datapoints,ifmeasuredhourly.Itisalso
possiblethatcustomerscannowaccessthatsameamountofinformation;insteadofwaitingforthe
monthlybill,customerscanlog-ontotheirutility’swebpageandaccessthehourlyusageinformation,
typicallyona24hourlag.Theusesforthisinformationisstillinitsinfancyandislikelytoevolveover
time.
Withtheinstallationofadvancedmeters,implementingratedesignslikeTOU,CPP,andreal-timepricing
becomespossibleatlowercoststhaninthepast.Anintegralpartofanadvancedmeteringsystemisa
communicationsnetwork.Thatnetworkallowsthemetertocommunicatewiththeutilityandcansend
information,likeconsumption,butalsoreceivemessages,likepricesordemandresponsesignals.This
two-wayflowofinformationmeansthattheutilitycanprovidecustomerswithusage,price,andcost
informationoverthecourseofthemonthratherthanonlyonce,attheendofthemonth.
AdvancedmetersalsooftenincludesasecondradiotosupportaHomeAreaNetwork(HAN).TheHAN
iscapableoftransmittinginformation,includingusage,voltage,andgenerationdatatoarouterorother
in-homedisplayinasoftenaseightsecondincrements.ThiscommunicationissupportedbyZigbee
(IEEE2030.5),whichisalow-powercommunicationstandard.In-homedisplaysorrouterscanconnect
tothecustomer’sWi-FinetworksandanyotherdevicesinsidethecustomershomethatsupportWi-Fi,
includingthermostats.
Withthisnewdataandnewcommunicationnetworks,regulatorscanhaveabetterunderstandingof
potentialcustomerresponsestoratedesignsbyhavingaccesstomoregranulardatasetsandexpanded
phasedroll-outsofnewratedesigns.Furthermore,withthisinformation,customerscanbetter
understandthepotentialimpactsofinstallingDERattheirlocationorsigningupforcommunityDER
programs.Bybeingableto“dothemath,”customerscanidentifythefinancialimpactstothemselves
98
http://www.eia.gov/tools/faqs/faq.cfm?id=108&t=3.Thisnumberislikelyhigherasofthewritingofthis
Manual.
63
andunderstandwhetheritmakessensetoinvestinDERornot.Withpoliciessupportingthe
developmentofHANanddataaccess,itmaybepossibletoidentifyadditionalservicesfromthehome
itselfthatmaybebeneficialtothegrid,eitherindividuallyatthepremiseoraggregatedacrossaspecific
geography.
Lastly,advancedmetersarenotonlycapableofcollectingconsumptioninformationaboutapremise,
butcanalsocollectgenerationdatarelatedtoanon-siteDER,suchassolar,andvoltage,tonametwo.
Bybeingabletocollectthisinformation,advancedmeterscanbeusedtofacilitatecompensatingDER
foritsgeneration,aswellasanumberofotherservicesthataregulatorchoosestoallow.Suchpolicy
developmentpresumesalargeenoughamountofDERispresentacrossthedistributionsystemasto
impactdeliveryofelectricity.Useofdatageneratedbyadvancedmeterscanassistregulatorsto
identifypotentialDERcompensationmethodologies,andhavethedataavailabletosupporttheviability
ofthemethodologyaswellasusitforsettlementandcompensation.
2. ADMS/DERMS
InordertosupporttheadoptionlevelsofDER,utilitiesmayseekadditionalinfrastructureand
technologicalsupporttoassistinmaintainingreliabilityandenhanceresilience.Twooptionsincludean
AdvancedDistributionManagementSystem(ADMS)oraDistributionEnergyManagementSystem
(DERMS).
ADMSaddslevelsofcommunication,intelligence,andvisibilityintothedistributiongridforthe
distributionutilitytobetterunderstandreal-timeconditionsacrossitsdistributionserviceterritory.
ADMSprovidestheutilitieswithseveralspecificfunctions,suchasautomatedfaultlocation,isolation,
andservicerestoration(FLISR),conservationvoltagereduction,andvolt/VARoptimization.99Installing
ADMSisnotmerelyaboutbetterintegratingDER;rather,ADMSwillchangehowautilityoperatesand
whereautilityenvisionsitselfandcustomersinthefuture.Ascustomerscontinuetoadopttechnology
andDERcontinuestogrow,havingtheinformationaboutthegridthatispossiblefromADMS
investmentswillhelptheutilitymeetcustomerdemandswhilemaintainingreliability,resilience,and
flexibility.
WithhigherlevelsofDERadoption,DERMSbuildsuponanADMSnetwork.DERMScanallowtheutility
todispatchresources,bothontheutilitysideandthecustomerside,forecastsupplyanddemand
conditionsupto24to48hoursinadvance,betterintegrateAMIdatawithotherutilitysystems,suchas
ADMS,outagemanagement,andweathersystems,andcommunicatewiththirdparty/aggregator
systems.100DERMScanalsobeusedtosupportislandingandmicrogridfeatures,whichmayprovide
additionalvaluetoboththecustomersandtheutilityincertaintimesofneed.
BothDERMSandADMSaresuitesoftechnologysolutionsthatcanenablethedistributionutilityto
betterunderstand,plan,operate,andoptimizetheincreasingamountofDERshowingupacrossa
serviceterritory.Understandingthecostsandbenefitsofthesetechnologies,andhowtheycanbeused
99
“VoicesofExperience:InsightsintoAdvancedDistributionManagementSystems,”DepartmentofEnergy
(February2015)(https://www.smartgrid.gov/files/ADMS-Guide_2-11.2015.pdf).
100
“InsideSDG&E’sPlantoOptimizetheDistributedGridoftheFuture,”GreentechMedia(May16,2014)
(http://www.greentechmedia.com/articles/read/sdge-and-spirae-break-new-ground-on-the-grid-edge).
64
tobetterplan,price,andvaluetheDERacrossaserviceterritorycanbeveryhelpfulindesigningand
implementingmoreadvancedcompensationmethodologies.Indeed,bybeingabletomakeDERa
dispatchableresource,technologycanhelpmitigateandminimizeriskstothereliabilityofthe
distributiongrid.UtilizingtechnologytoturnDERintoaresourcethatcanbecountedonand
dispatchedmayopenupnewvaluestreamstotheutilityandtheconsumer.
3. Smartinverters
Aswiththeavailabilityoftechnologyontheutilityside,therearetechnologyoptionsalsoavailableto
customers.OnespecifictechnologyisaSmartInverter.ForsolarPVinstallations,aninverteris
necessarytoswitchelectricityfromDirectCurrent(DC)toAlternatingCurrent(AC).Thegrid,including
thelocaldistributiongrid,usesACpower,sobeforeelectricitygeneratedbyasolarPVinstallationcan
beexportedontothegrid,itmustbechangedintoAC.Morerecently,thisinvertercannowbeoutfitted
withadditionalsoftwarethatcanaccomplishadditionalservices.Forexample,aSmartInverteris
capableofactivelyregulatingthevoltageofthesolarPV’soutput.101AscloudspassoverasolarPVunit,
thevoltagecandropontheelectricitythatisexportedontothegridcausingdropsinvoltageatthat
location;inordertoraisethevoltagelevelsup,thetransformercapacitorwillstepinandprovide
voltagesupport.HavingaSmartInverteraddressvoltagedropsbeforeexportingtothedistributiongrid
isavalueandservicethatcanbeprovidedbythecustomer,anddeferringoravoidingadditional
distributionupgrades.
Inmanycases,theSmartInverterisnowincludedinnewsolarPVinstallations.Indeed,the
recommendationoftheCaliforniaPUCSmartInverterWorkingGroup,subsequentlyadoptedbythe
CaliforniaPUC,istorequireSmartInvertersforallnewsolarPVinstallationsseekingtointerconnect
withthedistributiongriduponcompletionofthesafetystandardcurrentlypendingbeforeUnderwriters
Laboratory.102UtilizingthecapabilitiesoftheSmartInvertertoallowforthegenerationorstorage
resourcetoautonomouslymanageandbalancetheflowofelectricity,andotherancillaryservices,like
voltageride-through,canbeenabledandvaluedthroughappropriatecompensationmethodologies,
especiallyinareasofhighsolarPVadoption.Regulatorsshouldcontinuetomonitorprogresson
101
“RecommendationsforUpdatingtheTechnicalRequirementsforInvertersinDistributedEnergyResources:
SmartInverterWorkingGroupRecommendations,”SmartInverterWorkingGroup,CaliforniaPublicUtilities
Commission(January14,2014)
(http://www.energy.ca.gov/electricity_analysis/rule21/documents/recommendations_and_test_plan_documents/
Recommendations_for_updating_Technical_Requirements_for_Inverters_in_DER_2014-02-07-CPUC.pdf).
102
TherearetwospecificstandardsnecessarytosupportthefullimplementationofSmartInverters:IEEE1547and
UL1741.IEEE1547identifiestheavailablefunctionsforaSmartInverter.ThecurrentversionofIEEE1547does
notallowformanyoftheidentifiedfunctionsofaSmartInverter,andiscurrentlyundergoingrevisions.An
interimversionofthestandard(IEEE1547(a))thatmeetsCaliforniarequirementsisavailable.UL1741ensures
thattheSmartInverterisoperatingsafely,bothindependentlyandinconjunctionwithutilitydistributionsystems.
Thisstandardisalsoundergoingrevision,withafinalversionexpectedsometimein2016.Lastly,theCalifornia
SmartInverterWorkingGroupalsoidentifiedIEEE2030.5(alsoknownasZigbee)asthecommunicationstandard
betweenutilitysystemsandtheSmartInverter.“RecommendationsforUtilityCommunicationswithDistributed
EnergyResourcesSystemswithSmartInverters:SmartInverterWorkingGroupPhase2Recommendations,”Smart
InverterWorkingGroup,CaliforniaPublicUtilitiesCommission(February28,2015)
(http://www.energy.ca.gov/electricity_analysis/rule21/documents/SIWG_Phase_2_Communications_Recommend
ations_for_CPUC.pdf).
65
adoptionratesofSmartInvertersandthestandardsdevelopmentprocessforthistechnologyand
capability.
4. HostingCapacity
InordertobetteridentifylocationsfordevelopmentofDER,autilityneedstounderstandthe
characteristicsofitsgrid.TechnologieslikeADMSandDERMScanfacilitatethat.Theendresultofthis
modelingisahostingcapacityanalysisofthedistributiongridsfeeders.Hostingcapacityhelpsthe
distributionutilityassesstheimpactsofDERonitsfeeders,andidentifyavailablecapacityonthose
feeders.103Thisanalysiscandeterminewherethereisavailablecapacityandareaswherethereislittle
availablecapacity;makingthisinformationavailabletodeveloperscanassistDERdevelopersinbetter
locatingpotentialDER.Currently,totheextentautilityisdoingafeeder-by-feederhostingcapacity
analysis,theinformationislargelykeptinsidetheutility.Withoutsuchinformation,DERdevelopers
havenovisibilityintolocationsthatcanbenefitutilityplanners,whichcanthendelayultimate
constructionofaresourcebygoingthroughlengthyutilityinterconnectionprocesses.Withwidespread
adoptionofDERandintegrationwithutilitydistributionsystemplanningefforts,theavailabilityof
hostingcapacityanalysescanalsobepairedwithdevelopmentofdistributionlocationalmarginalprices
todriveeconomicsitingofDER,muchthesamewaythattransmissionplanningandlocationalmarginal
pricesidentifiesareasinneedofadditionalresourcestorelievecongestion,forexample.
103
EPRI,“HostingCapacityMethod”(http://dpv.epri.com/hosting_capacity_method.html).
66