How location-based prices and utility rewards could help California’s electric grid

By Larissa Koehler, Jamie Fine

Distributed energy resources, from rooftop solar panels to smart well-weatherized homes and timed electric vehicle charging, are vital pieces of the clean energy puzzle. Coordinating how and where to encourage them in a way that benefits the electric grid, the environment, and Californians can be complicated. In its’ Integrated Distributed Energy Resource proceeding, the California Public Utilities Commission (Commission) recently asked stakeholders [PDF] to “consider how existing programs, incentives, and tariffs can be coordinated to maximize the locational benefits and minimize the costs of distributed energy resources.”

This key step forward in the proceeding is potentially a big deal. Why? Rocky Mountain Institute’s report puts it this way [PDF]:

“More granular pricing, capable of reflecting marginal costs and benefits more accurately than today’s rates do, will provide better incentives to direct distributed resource investments, regardless of whether investments in and management of [distributed energy resources] are undertaken by customers, by utilities, or by third-party service providers.”

By reflecting both costs and benefits in retail prices that electricity customers pay, California can modernize the grid while spurring the efficient and fair build out of distributed clean energy resources. This can help the state substitute traditional and inflexible polluting resources [PDF] with a variety of more nimble distributed energy resources where the grid can handle them. What’s more, distributed energy resources can lead to cleaner air in areas traditionally burdened by higher levels of harmful air pollution. They can achieve all this while bolstering the electric grid and protecting the health of the environment and of Californians.

Location, location, location

Distributed energy resources can deliver energy, help the electric grid run more efficiently, displace polluting generation and expensive transmission infrastructure, and boost resiliency, while reducing emissions. By reflecting all of these benefits (as well what it costs for the grid to support these resources) in the price of distributed energy resources through tariffs, California can better guide where and how to deploy them in greater numbers. Environmental Defense Fund (EDF) believes the time is now for consideration of these location-based tariffs for several reasons:

  • The Commission is already using this type of pricing in various proceedings and programs, including net energy metering [PDF], rates that incentivize the deployment of storage [PDF], and California Alternative Rates for Energy (or CARE) programs.
  • Tariffs have proven effective at achieving both general and specific Commission goals.
  • Tariff-supported distributed energy resource adoption can reduce bills for economically vulnerable customers by expanding opportunities to access these resources. A transparent tariff that rewards actions taken by customers “at the distribution edge” paired with educating potential participants through expanded marketing and outreach can spur the growth clean energy resource in a more equitable way.

Creating effective location-based tariffs for distributed energy resources

EDF has suggestions to ensure the deployment of tariffs in the most effective way possible, namely by doing the following:

  • To ensure distributed energy is cost-effective and helps improve air quality in areas hit harder with harmful pollution, the Commission and utilities should develop tariffs that reflect the net benefits (benefits minus costs) achieved through the use of distributed energy resources in a given place. The information necessary to create these tariffs is already being developed in in the Commission’s Locational Net Benefits Analysis working group.
  • The process to build tariffs should include frequent engagement with customer groups and third party distributed energy providers.
  • The Commission should adopt a “bottom-up” approach to tariff development, recognizing the costs and benefits of customer-owned resources, such as rooftop solar panels or smart-charging electric vehicles, and reflect the net benefits or costs in tariffs, thereby creating rates that differ by location. These location price differences then spur (or discourage) customer investments. This approach can more effectively reduce costs, manage risks, and create a resiliency management strategy, and makes use of “big data” utilities now have at their fingertips to understand costs, benefits, and how customer actions affect each of them.
  • The Commission should address environmental inequities caused by disparate air pollution impacts, ensure resiliency and reliability through distributed energy resource diversity, and reduce safety risks by deploying distributed energy resource solutions in lieu of overhead wires.

Finally, in order to be truly successful, location-based tariffs must be combined with an effective utility incentive mechanism. Because utilities profit by building new infrastructure like poles, wires, and power plants, they are not inclined to help build and optimize the use of more distributed energy resources that would displace their traditional ways of paying their shareholders. As EDF has written before, one way to overcome this barrier is transitioning to a system in which utility shareholders receive payments based on achievement of a set of pre-determined metrics, or a “fees for services” business model. This model would reward utilities for connecting customers with third party distributed energy resource providers or optimizing distributed energy resource capabilities.

By combining a new utility business model with location-based tariffs, the utilities and the Commission can build a renewable, flexible, and affordable electric grid to take California into the clean energy future.

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