Wednesday, February 10, 2016

A Pathway to the Distributed Grid - Evaluating the economics of distributed energy resources and outlining a pathway to capturing their potential value

Executive Summary:
Modernizing an aging grid will require significant investments over and above those seen in any recent period – potentially exceeding $1.5 trillion in the U.S. between 2010-2030.1 Given the large sums of ratepayer funds at stake and the long-term impact of today’s decisions, it is imperative that such investment is deployed wisely, cost-effectively, and in ways that leverage the best technology and take advantage of customers’ desire to manage their own energy.

In this report, we explore the capability of distributed energy resources (DERs) to maximize ratepayer benefits while modernizing the grid. First, we quantify the net societal benefits from proactively leveraging DERs deployed in the next five years, which we calculate to be worth over $1.4 billion a year in California alone by 2020. Then, we apply this methodology to the most recently available  Investor Owned Utility (IOU) General Rate Case (GRC) filing – Pacific Gas and Electric’s 2017 GRC – in order to evaluate whether DERs can cost effectively replace real-world planned distribution capacity projects. Finally, we evaluate the impediments to capturing these benefits in practice. These structural impediments undermine the deployment of optimal solutions and pose economic risk to consumers, who ultimately bear the burden of an expensive grid. Accordingly, we suggest several ways to overcome these impediments by improving the prevailing utility regulatory and planning models.
We find that an electric grid leveraging DERs offers an economically better alternative to the centralized design of today. DERs bring greater total economic benefits at lower cost, enable more affordability and consumer choice, and improve flexibility in grid planning and operations, all while facilitating the de-carbonization of our electricity supply.
A grid that harnesses the full potential of distributed energy resources such as rooftop solar, smart inverters, energy storage, energy efficiency, and controllable loads. We find that an electric grid leveraging DERs offers an  better alternative to the centralized design of today. DERs bring greater total economic benefits at lower cost, enable more affordability and consumer choice, and improve flexibility in grid planning and operations, all while facilitating the de-carbonization of our electricity supply
To evaluate the potential benefits, we build on existing industry methodologies to quantify the net societal benefits of DERs. Specifically, we borrow the Net Societal Costs/Benefits framework from the Electric Power Research Institute (EPRI), incorporating commonly recognized benefit and cost categories, while also proposing methodologies for several hard-toquantify benefit categories that are often excluded from traditional analyses. Next, we incorporate costs related to the deployment and utilization of DERs, including integration costs at the bulk system and distribution levels, DER equipment costs, and utility program management costs.
In addition to evaluating net societal benefits at the system level, we consider the benefits of DER solutions for specific distribution  projects in order to evaluate whether DERs can actually defer or replace planned utility investments in practice.

Specifically, we apply the relevant set of cost and benefit categories to the actual distribution investment plans from California’s most recently available GRC filing, which is PG&E’s 2017 General Rate Case Phase I filing. This real-world case study assesses a  commonly voiced critique of utilizing DERs in place of traditional utility infrastructure investments: that not all avoided cost categories are applicable for every distribution project, or that DERs only provide a subset of their potential benefits in any specific project.  Therefore, we consider only a subset of utility-applicable avoided cost categories when assessing the set of distribution infrastructure projects in PG&E’s 2017 GRC filing; we also utilize PG&E’s own avoided cost values rather than our own assumptions. Even using PG&E’s conservative assumptions on this subset of benefits, we quantify a net benefit for DER solutions used to replace the distribution capacity investments in PG&E’s 2017 GRC...

While our analysis shows net societal benefits from DERs, both at the societal and distribution project levels, under the prevailing  utility regulatory model DER benefits cannot be fully captured. Instead, utilities have a fundamental financial incentive of “build more  to profit more”, which conflicts with the public interest of building and maintaining an affordable grid. Under today’s regulatory  paradigm, utilities see a negative financial impact from utilizing resources for distribution services that they do not own – which  includes the vast majority of distributed energy resources – even if those assets would deliver higher benefits at lower cost to  ratepayers. This financial incentive model is a vestige of how utilities have always been regulated, a model originally constructed to  encourage the expansion of electricity access. However, in this age of customers managing their energy via DERs, this regulatory  model is outdated. This report offers a pathway to removing this structural obstacle, calling for a regulatory model that neutralizes the conflict of incentives facing utilities. While separating the role of grid planning and sourcing from the role of grid asset owner – such as through the creation of an independent distribution system operator (IDSO) – would achieve this objective, some states may choose not to implement an IDSO model at this time. In these instances, this paper proposes the creation of a new utility sourcing model, which we call Infrastructureas-a-Service, that allows utility shareholders to derive income, or a rate of return, from competitively sourced  third-party services. This updated model would help reduce the financial disincentive that currently biases utility decision-making against DERs, encouraging utilities to deploy grid investments that maximize ratepayer benefits regardless of their ownership.
A second structural impediment to realizing DER benefits is the current grid planning approach, which biases grid design toward  traditional infrastructure rather than distributed alternatives, even if distributed solutions better meet grid needs. 

Combined with the “build more to profit more” financial incentive challenge, current grid planning can encourage ‘goldplating’, or overinvestment, in grid infrastructure. Furthermore, outdated planning approaches rely on static assumptions about DER capabilities  and focus primarily on mitigating potential integration challenges rather than proactively harnessing these flexible assets. This report offers a pathway to modernizing grid planning, calling for the utilization of an Integrated Distribution Planning approach that  encourages incorporating DERs into every aspect of planning, rather than merely accommodating DER interconnection. Additionally,  transparency into grid needs and planned investments is fundamental to realizing benefits. As such, this report recommends a data  transparency approach that invites broad stakeholder engagement and increases industry competition in providing grid solutions.

Key Takeaways
1. Distributed energy resources offer net economic benefits to society worth more than $1.4 billion per year in California alone by 2020, including benefits related to voltage and power quality, conservation voltage reduction, grid reliability and resiliency, equipment life extension, and reduced energy prices.
2. To realize these benefits, the utility regulatory incentive model must change to take advantage of customer choices to manage their own energy. Utility incentives should promote best-fit, least-cost investment decisions regardless of service supplier – eliminating the current bias toward utility-owned investments.
3. Utility planning approaches must also be modernized to capture these benefits. Utilization of an integrated distribution planning framework will unlock the economic promise of distributed energy resources, while widely sharing utility grid data in standard data formats will invite broader stakeholder engagement and competition.

Recommendations and Next Steps
Our ultimate goal is to help provide concrete evidence and recommendations needed by regulators, legislatures, utilities, DER providers, and industry stakeholders to transition to a cleaner, more affordable and resilient grid. While the details of implementing these recommendations would vary from state to state, we see the following as promising steps forward for all industry stakeholders in modernizing our grid:
1. Future regulatory proceedings and policy venues related to capturing the benefits of DERs should incorporate the expanded benefit and cost categories identified in this paper.
2. Regulators should look for near-term opportunities to modernize the utility incentive model, either for all utility earnings or at a minimum for demonstration projects, to eliminate the bias toward utility-owned investments.
3. Regulators should require utilities to modernize their planning processes to integrate and leverage distributed energy resources, utilizing the integrated distribution planning process identified in this paper.
4. Regulators should require utilities to categorize all planned distribution investments in terms of the underlying grid need. Utilities should make data available electronically to industry, ideally in a machine-readable format.
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