This column first appeared on the website of the Lexington Institute, where Constance Douris is a vice president.
Electric utilities in California make money from investments for traditional infrastructure, such as power lines, poles, and wires. However, this is based on an outdated regulatory model focused on increasing electricity access. Utilities are motivated to build more of such infrastructure to make a profit, but such traditional investments can conflict with the public interest of building an affordable grid. The California Public Utilities Commission (CUPC) aims to change this with a new pilot program, approved in December, which will provide a financial incentive to utilities for adopting third party energy resources.
The nature of electricity generation, distribution and consumption are changing rapidly to prevent power disruptions that occur from storms, flooding, cyber-attacks, and other threats. Customers also want to become more involved in controlling their energy usage to better manage their electric bills. As a result, utilities are facing a new market landscape where distributed energy resources will play an increasing role.
Distributed energy resources provide alternatives to the electric grid and are defined in the pilot program as renewable generation resources, energy efficiency, energy storage, electric vehicles, and demand response technologies. Distributed resources have been around since Thomas Edison built the first power plant in 1882.
The California pilot will award the utilities, Pacific Gas and Electric, San Diego Gas and Electric, and Southern California Edison, with a four percent financial incentive that will be applied to the annual payment of the resource. The utilities must each identify at least one and up to three optional pilot projects. The minimum one project requirement allows the framework to be tested and the additional projects provide a better understanding as to whether utilities could be incentivized to adopt more distributed resources.
Today, the cost of electricity is lumped with funds needed to maintain operation of the grid and to meet policy goals. While the CPUC is aiming to motivate utilities to adopt more distributed energy resources, it does not want electricity customers to pay more as a result. This is why the pilot program requires that distributed resources plus the financial incentive must be cheaper than the traditional investments they replace.
Distributed resources could provide cheaper alternatives than traditional grid investments because they are small and do not involve major costs such as those that occur when constructing high-voltage transmission lines. Distributed resources could also be built quickly with less risk than larger and costlier investments such as power plants.
Some distributed resources are able to provide more than one service. Hence, an effective counting method must be identified to ensure customers are not paying more than their fair share for a resource. The CPUC was not able to decide on a method to avoid double counting for the pilot program. The utilities are to each pursue a different counting approach in the pilot program and work with an advisory group to finalize the method. Utilizing different approaches will allow the utilities to evaluate the best counting approach that provides the greatest outcome for ratepayers. The CPUC will decide which method to adopt after the pilot is evaluated.
Three examples of how distributed resources could provide more than one service include Sunverge’s Solar Integration System, Totem Power’s next generation utility pole, and electricity storage. Sunverge’s Solar Integration System maximizes on-site solar generation with utility services such as demand response and voltage regulation. Totem Power’s next generation utility pole combines solar photovoltaic, electricity storage, Wi-Fi and 4G communications hubs and an electric vehicle charging port. Battery storage devices alone can provide up to 13 different services to utilities, electricity customers, and independent system operators and regional transmission organizations. Electricity storage could allow parties to store electricity to be used at some point in the future or a distribution system operator could sell electricity to make up for deficiencies in different parts of the grid.
California’s ambitious policy goals could be facilitated by distributed energy resources. The state plans to reduce greenhouse gas emissions by 40 percent from 1990 levels, increase the amount of electricity derived from renewable sources to 50 percent, double targets for energy efficiency and encourage widespread transportation electrification. Furthermore, a bill approved by the state in 2013 requires utilities to reform distribution planning to minimize costs and maximize benefits for ratepayers while promoting incentives to support distributed resources.
Traditionally, electricity is delivered in one direction from the generator, located far from the load, through transmission lines and then to the consumer. In contrast, distributed resources allow for the two-way flow of electricity which could result in some uncertainty. Because grid stability depends on the balance of electricity supply and the minute-to-minute changes in demand, distributed generation at high levels of penetration could exceed energy consumption or load.
The grid is not designed to handle reverse flows of electricity. As a result, high-voltage swings could occur when distributed resources exceed energy consumption that would harm or put stress on customer equipment such as circuit breakers, and make it more difficult to operate the distribution system. Hence, the new pilot program requires the utilities to identify the best locations for the resources and has directed them to identify contingency plans in case a distributed resource is unable to operate or experiences disruption.
Customers seek more involvement to control electricity usage, lower bills and protect themselves from various power disruptions that occur from various threats. As a result, utilities are facing a new market landscape in which distributed energy resources will play an increasing role. Compared to just a decade ago, distributed energy resources are more affordable and efficient. The California Public Utilities Commission aims to adopt more third party energy resources with a financial incentive to make the grid more resilient. These resources could also be utilized to achieve California’s ambitious policy goals. As the program is refined, perhaps other states will allow for utilities to be financially rewarded for the deployment of such resources instead of outdated traditional investments.
Constance Douris is Vice President of the Lexington Institute. Douris has been featured in the Associated Press, New York Times, Washington Post, CCTV, and The National Interest.
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