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SCOTTMADDEN, INC. | 25 THE 51 ST STATE: DEVELOPING A PRACTICAL ROAD MAP FOR DISTRIBUTED ENERGY RESOURCES Industry provides Smart Electric Power Alliance (SEPA) insight. SEPA’s “Homework Assignment”: Define a Path to a DER Future • SEPA launched the 51 st State Initiative with two primary objectives: Create equitable business models and integrated grid structures to ensure that electricity is provided safely, reliably, efficiently, affordably, and cleanly Meet customer demand in the near and long term for solar and other distributed energy resource (DER) assets • In Phase II of the initiative, SEPA sought road maps from industry stakeholders detailing the steps required to transition to high DER penetrations and ensure success for all stakeholders • To encourage thought leadership, the road maps were to be set in a hypothetical “51 st state” • ScottMadden was one of 14 industry stakeholders to submit a “51 st state road map” Our Key Finding: Leverage the Natural Advantage of Utilities Illustrative Scenario: Wires-Only Investor-Owned Utility Transitions to Hypothetical “51 st State”* Current State • Utility serves urban and rural customers in deregulated market; may not own generation assets • RTO/ISO manages wholesale market • Retail net metering produces small but growing base of distributed solar PV • No other renewable policy support Future State • Net metering replaced with rate rider providing payment/charge to customers with DER assets • Rate rider commensurate with value provided to electric system: Based on time and location of individual installation ›› May change over time ›› Utility may own DER assets • Some stakeholders believe that the electric utility is the primary barrier to widespread deployment of DER assets • However, ScottMadden has found that high DER penetrations can be achieved without necessarily creating a radically different regulatory and business construct for the electric industry • Instead, the natural advantages of the electric utility can be leveraged to accelerate DER deployment and penetration • Notably natural advantages of the utility include: Customer Relationship: The utility is well positioned to introduce and educate customers about DER technologies and options System Management: The utility has long managed the dynamic electric system and is best positioned to continue to serve in this role ›› Reliability and Security: As the composition of the grid changes, the utility will need to continue to meet reliability and security standards ›› Transaction Costs: The utility is in the best position to “balance” transaction costs during operations and avoid costly administrative overlays