NARUC Joins the Debate on DERs

Traditional utility business models and regulatory frameworks were built on the assumption that the utility would act as the “sole source provider” of electricity to meet the demands of customers across its entire service territory. Though their impacts vary based on location, Distributed Energy Resources (DERs) are rapidly changing this as a given. This changing landscape has placed utilities and regulators in unchartered territory.

In response to the increased penetration of DERs and associated issues, the National Association of Regulatory Utility Commissioners (NARUC) created a Staff Subcommittee on Rate Design tasked with “creating a practical set of tools…for regulators who have to grapple with the complicated issues of rate design for distributed generation and other purposes.” In November, NARUC released the subcommittee’s final report titled Distributed Energy Resources Rate Design and Compensation. The purpose of this report is to:

  • Assist jurisdictions in identifying issues related to DERs
  • Assist jurisdictions in developing policies related to DER compensation
  • Assist regulators in answering DER-related questions in a way that is most appropriate for its jurisdiction
  • Provide regulators with possible options that a jurisdiction may want to consider and adopt
  • Provide a snapshot of options available today and discuss the role advanced technology will play in the future to assist regulators in monitoring the development of DERs

ScottMadden has developed the following document, which provides an overview of DERs, a description of why they are causing so much upheaval in the industry, a summary of the NARUC reports, and an outline of the key questions utilities must address in relation to DERs.

Additional Contributing Authors: Eric Hanson, Frank Nelms

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Summary of NARUC Manual on Distributed Energy Resource Compensation

    • October 2016

Contents

    • Introduction
      Overview of DERs
      Issues Created by DERs and Initial Responses
      Methodologies at a Glance
      Industry Response to the NARUC Report
      Key Questions for Utilities
      Contact Us

1


Introduction

    • Traditional utility business models and regulatory frameworks were built on the assumption that the utility would act as the sole source provider of electricity to meet the demands of customers across its entire service territory. Though their impacts vary based on location, Distributed Energy Resources (DERs) are rapidly changing this as a given. This changing landscape has placed utilities and regulators in uncharted territory. How should they operate and regulate given this new reality? NARUC Enters the Debate
      In response to the increased penetration of DERs and associated issues, the National Association of Regulatory Utility Commissioners (NARUC) created a Staff Subcommittee on Rate Design tasked with, creating a practical set of toolsfor regulators who have to grapple with the complicated issues of rate design for distributed generation and other purposes. It is important to note that the subcommittee acknowledged that its final product would not be a solutions manual that would solve all issues regulators are struggling with relating to DERs. In late July, the subcommittee presented a draft manual (the final version is expected sometime in late November), titled Distributed Energy Resources Compensation, that is designed to:
      Assist jurisdictions in identifying issues related to DERs
      Assist jurisdictions in developing policies related to DER compensation
      Assist regulators in answering DER-related questions in a way that is most appropriate for its jurisdiction
      Provide regulators with possible options that a jurisdiction may want to consider and adopt
      Provide a snapshot at options available today and discuss the role advanced technology will play in the future to assist regulators in monitoring the development of DERs

2

  • The purpose of this document is to 1) provide a brief overview of DERs and their impacts on utilities and the regulatory process; 2) summarize the highlights of the NARUC manual; and 3) outline the key questions utilities must address in relation to DERs.

What Are DERs

    • According to NARUC, a DER is defined as a resource sited close to customers that can provide all or some of their immediate power needs and can also be used by the system to either reduce demand 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.
      Though the technologies that qualify as DERs vary by state, they typically include the following:
      Solar Photovoltaic (PV) Systems
      Combined Heat and Power
      Wind
      Battery Storage
      Regardless of the technology, DERs typically have many of the following characteristics:
      Sited close to the customers and connected to the distribution grid but not directly to the bulk transmission system
      Run based on weather conditions/customer preference, not necessarily as directed by a utility or RTO/ISO
      Reduce a customers consumption of traditionally generated electricity
      Located often behind the meter
      Output can be provided back to the grid
      Capable of providing a variety of benefits and services to the customer and grid
      Typically smaller in scale, generally no larger than 10 MWs

3

    • The increased deployment of DERs over the past few years can be attributed to improving technologies, declining costs, favorable public policies and tax benefits, and changing customer tastes and preferences.
    • Microgrids
      Demand Response
      Electric Vehicles
      Energy Efficiency
    • Overview of DERs

Why DERs are Changing the Utility Industry

    • Overview of DERs

4

  • Customers are both providers and consumers of electricity
    Third parties can be engaged in providing benefits and services directly to customers, including resource aggregation, asset financing, etc.
    Many believe improvements in DER technology and the speed of their deployment have outpaced regulatory changes
    • While the grid, utility business models, and regulatory structure were designed for one-way traffic, DERs are dependent upon a system that allows for multi-way traffic a shift that could dramatically change the utility industry.
    • As DERs do not fit into the existing operational/regulatory construct, they are starting to create issues that must be addressed by regulators.
    • Traditional Model
    • Integrated DER Model
    • Utility uses centralized generation assets to serve customer load
      Customers pay for their usage and fixed costs
      Electricity flows to customers; dollars flow to the utility
    • http://engineering.nyu.edu/k12stem/sosc/curriculum/energy01/power-storage-in-a-smart-grid/

DER Facts and Figures

    • 5

    • https://www.navigantresearch.com/research/market-data-demand-response; http://www.utilitydive.com/news/ders-in-2016-what-experts-expect-for-a-booming-sector/411141/
      https://www.lazard.com/media/2390/lazards-levelized-cost-of-energy-analysis-90.pdf; http://scottmadden.com/reports/V16_I1/
    • Bloomberg New Energy Finance forecasts the recent extension of the federal Investment Tax Credit (ITC) and Production Tax Credit (PTC) will have the following impacts by 2021:
      New solar capacity will increase 44%, from 41 GWs to 59 GWs
      Residential solar will benefit most with an estimated 54% increase in new capacity
      New wind capacity will increase 76%, from 25 GWs to 44 GWs
      DR is expected to be the most widely deployed DER technology
      40 GWs of DR is forecasted to be brought online globally in 2016, with 1,100 GWs by 2025
    • More than half of the Distributed Generation (DG) capacity in the United States is located in five states: CA, NJ, NY, FL, and AZ; however, DG only accounted for 1% of U.S. electric generation in 2015
      The top five states for DG as a percentage of total nameplate capacity are Hawaii (18.4%), New Jersey (5.5%), Massachusetts (5.1%), California (4.8%), and Arizona (3.0%)
    • Even without subsidies, some solar PV and wind installations can be less expensive than natural gas
      Levelized Cost of Energy (LCOE) for different DERs varies regionally; for example, solar in the Southwest and wind in Texas do not need subsidies to compete
    • Overview of DERs

DERs Are Causing Significant Issues for Utilities and Regulators

    • 6

    • Issues caused by DERs for utilities and regulators include, but are not limited to:
    • Issues Created by DERs and Initial Responses

A Continuum of Responses

    • 7

    • The response from regulators to the ongoing market changes and aforementioned issues associated with DERs has spanned a wide continuum.
    • Issues Created by DERs and Initial Responses
    • Net Metering
    • Pay for
      DG
      Customers get paid for net excess generation
      Rates differ (full retail, avoided cost)
      Alternatives (value of solar)
    • 45 States
      and D.C.
    • Pilot Programs
    • Try Some Things
      Investigation of alternatives
      Focus areas include:
      Solar
      Battery storage
      Electric vehicles
      DG
    • Maryland,
      New Hampshire, Rhode
      Island, and Virginia
    • Grid Modernization
    • Upgrade for the Future
      Upgrade T&D for current and future needs
      Integrate distributed resources
    • Massachusetts
    • Business Model Redesign
    • Change the Game
      Distributed system operators
      Expand revenue streams
      Enable transactive marketplace
    • New York,
      California, and
      Hawaii
    • Pure Dereg Market

Texas

  • Market Decides
    Market determines products; economics is king

What Can Regulators and Utilities DoOptions Abound

    • Though the speed of DER penetration in a particular utilitys service territory will vary, there is no question that the rate at which DERs are deployed will continue to accelerate
      The increased deployment of DERs is rapidly rising on the list of major issues facing the utility industry
      Though integrating and operating a system with DERs is or will soon be the new normal for many utilities, there is still time for utilities to engage regulators to shape future policies and regulations, particularly around how utilities should be compensated in the future
      To address the financial issues caused by DERs, NARUC identified several potential compensation methodologies available to regulators
      Net Energy Metering
      Demand Charges
      Valuation Methodology
      Fixed Charges
      Minimum Billing
      Each of these methodologies has distinct pros and cons that must be fully understood by regulators, utilities, and rate payers to ensure the selected solution(s) adequately address the specific compensation issue(s) caused by DERs for their particular state/jurisdiction/ service territory

8

    • Transforming the electric grid [and accompanying regulatory construct] has been appropriately likened to trying to rebuild an airplane in midflight. Lena Hanson, Rocky Mountain Institute
    • Methodologies at a Glance
    • Standby Charges
      Backup Charges
      Interconnection Fees
      Metering Charges

Net Energy Metering and Demand Charges

    • Methodologies at a Glance

9


Valuation Methodology (Value of Resource/Service)

    • Methodologies at a Glance

10

  • 1There is also a more futuristic approach called the Transactive Energy model (sometimes likened to a distribution-level RTO) in which customer-sided resources can be interconnected to and actively interact with the grid, DERs would provide services directly to each other, and money would change hands. However, due to significant technology requirements and potential costs, it is uncertain whether this approach will take root in the near term.

Fixed Charges and Minimum Billing

    • Methodologies at a Glance

11


Standby Charges and Backup Charges

    • Methodologies at a Glance

12


Interconnection Fees and Metering Charges

    • Methodologies at a Glance

13


Positive Reactions
Phil Moeller, a senior vice president at the Edison Electric Institute (EEI), praised NARUCs efforts, stating, We want DER, but we want to make sure the rate structure is right to minimize cost shifts. If we wait, we could have reliability issues.
According to Green Tech Media, the manual acknowledges the potential short- and long-term benefits of DER and speaks favorably of conducting comprehensive value of resources (VOR) studies for DER systems to help with ratemaking.
Sean Gallaher from Solar Energy Industries Association (SEIA) supported collaboration, stating, Were in favor of trying to find ways to work through these issues together.

    • Concerned Reactions
      Jim Lazar from the Regulatory Assistance Project raised concerns that the paper uses a short-run cost perspective rather than a life-of-asset perspective because that inevitably leads to the conclusion there is a revenue shortfall and the costs shift.
      Sean Gallaher from SEIA criticized the assumption that revenue erosion from DERs will lead to cost shifting, stating, You have to do the math on all benefits and costs. The manual could have been a little clearer on that.
      Solar City, SunPower, SEIA, and advocacy group Vote Solar have criticized NARUC for not publishing the comments it has received. The groups argue that disclosing comments on the draft manual could help weed out inaccurate or outdated information and allow stakeholders to identify issues that are relevant to appropriate service territories.
      Environmental groups and solar advocates are concerned the NARUC manual is coming together too quickly and could enshrine a set of policy recommendations that undermine the DER market before it is fully understood or analyzed.
      Several pro-solar DER advocacy groups have voiced concern over three fundamentally incorrect assumptions: 1) much of utilities costs are fixed; 2) DERs do not significantly reduce fixed costs or provide other benefits; and 3) energy rates and net metering invariably cause costs to be shifted from low-usage customers and those who self-generate to high-usage ones.
    • As one would expect, the NARUC draft report has elicited both positive and negative responses from around the utility industry. Though NARUC has not yet released the comments it has received (which has become an issue in itself), all parties agree that additional dialogue is needed to determine the appropriate next steps.
    • Industry Response to NARUC Report

14

  • http://www.utilitydive.com/news/naruc-rate-design-manual-reignites-debate-over-cost-shift-value-of-solar/423586/
    https://www.snl.com/web/client?auth=inherit#news/article?id=37580521&KeyProductLinkType=4&cdid=A-37580521-13611
    https://www.greentechmedia.com/articles/read/How-Regulators-are-Thinking-About-Distributed-Energy-Resources
  • With the final report scheduled for release in late November, time will tell if/how NARUC decides to address these comments.

Key Questions for Utilities

    • 15

    • These are only some examples of the myriad questions utilities must answer relating to DERs.

Contact Us

    16

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