Utility 2.0: NY’s New Business Model Should Properly Value the Costs and Benefits of Distributed Energy Resources

Source: AtisSun

Source: AtisSun

As we’ve mentioned before, New York is changing how it evaluates and compensates electric utilities. One goal of this change is increased consumer engagement, which makes customers allies in the development of a more reliable, resilient, and ‘smart’ electric grid.

Many customers have begun taking advantage of new energy technologies and their falling prices by turning to community microgrids, installing on-site distributed generation, like rooftop solar, or investing in more efficient appliances, among other actions. Advances in telecommunications and information systems have also created new opportunities for energy services we could not have imagined just a few years ago. For example, innovative tools like demand response allow third parties or utilities to turn off pre-approved appliances – like swimming pool pumps and air conditioners – remotely when the power grid is stressed and needs a quick reduction in energy demand.

To this end, more customers are adopting local, distributed energy resources (distributed energy). These are customer-focused energy resources that either reduce energy demand – through energy efficiency measures or demand response programs – or generate electricity on-site. In order to support its goals of reforming the state’s utility business model, New York will have to take into account the increased role of distributed energy and properly value its costs and benefits.

Distributed Energy can offset investments in infrastructure

Understanding the benefits from making such investments can help avoid large costs ultimately shouldered by all customers. Take, for example, a large building that consumes a massive amount of electricity and places stress on the grid. Installing proven energy efficiency measures such as better lighting and insulation and even purchasing a new air conditioning system would substantially reduce energy use and operating expenses. It could also have a positive impact on the system at large and compare favorably with the cost of adding another substation – which could run into the millions – to meet increased energy load demand in the neighborhood.

Timing matters

While energy efficiency helps utilities avoid extra costs by reducing total demand, many of the benefits coming from energy efficiency and other types of distributed energy vary over the course of the day. Reductions in energy demand through on-site power generation, energy storage, or demand response programs have a much larger benefit during peak times when utility infrastructure is pushed to the limit. Incentivizing households and businesses to either produce electricity during peak times or shift their energy use to times of day when there is less demand on the power grid can help utilities avoid investments such as installing new wires or other equipment or upgrading a substation. Furthermore, because these activities are more valuable to the system during peak times, they should be priced accordingly. Demand response at 4pm is a heck of a lot more valuable than it is at 4am when energy-intensive appliances aren’t generally being used.

Location, location, location

Also, benefits vary depending on how much distributed energy is deployed in the area. For example, the utility’s ability to avoid costly infrastructure upgrades is made possible only by reaching a critical mass of distributed energy resources; thus, the impact of an extra kilowatt (kW) of solar energy is much greater in an area with little distributed energy. Finally, the benefits can also vary depending on the energy demands in a particular location. Some areas may be ripe for rapidly-growing energy needs, which may require infrastructure upgrades. Incentivizing distributed energy in such an area would yield a larger benefit than in areas where there are no foreseen upgrade needs.

All benefits and costs need to be properly valued

As customers begin to use more distributed energy, utilities must fully value all of its benefits in order to make more optimal planning decisions. This includes benefits that may not yet have a known market price, such as carbon pollution. For instance, producing solar – in lieu of fossil fuel – electricity has important health and environmental (or “social”) benefits in the form of reduced carbon emissions. The federal government has priced the social cost of carbon at approximately $40 per ton and has other methods for valuing all the benefits of reduced pollution that utilities could adopt. If pollution emissions are not properly valued by the utility, the full benefits of switching to clean electricity sources or customers reducing their demand will be left unaccounted for in the utility’s decision-making process.

On the other hand, adding distributed energy to a utility’s mix may incur some costs that should also be included in the valuation process. Increased reliance on distributed energy requires investment in new equipment, such as modernized electricity meters that could help incentivize demand response among customers in areas and at times that need it most. Properly valuing costs, along with the array of benefits, can help utilities better understand whether or not these new investments in distributed energy resources pass the cost-benefit test.

This is an exciting and important time to be working in the electricity sector. After a 100-year reign, the “make more, sell more, profit more” utility business model is being reconsidered, and there is real potential for smarter, cleaner solutions. But we need to make sure utilities are considering (and valuing) all of the features that will transform our outmoded energy system into a truly intelligent, efficient, connected network.

Last month, EDF filed comments (Track 1 and Track 2) in New York State’s historic ‘Reforming the Energy Vision’ (REV) proceeding to re-evaluate the longstanding utility business model in light of a rapidly changing energy sector. We recommend: 1) transitioning from traditional rate of return regulation to performance-based regulation; 2) fully valuing all costs and benefits associated with distributed energy resources; 3) removing barriers to non-utility entities participating in energy service markets; and 4) requiring the utility to optimize the load it serves.

Over the coming weeks, we will devote a blog post to examining each of these recommendations in depth. This next blog post in our Utility 2.0 series will discuss removing barriers to non-utility entities participating in energy service markets.

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