The Long and Uncommon Road: Why Can’t DERs and Utilities Just Get Along

Adapted from: Utility Dive, Come together? DER aggregation sparks more confusion than consensus in power sector.

(Utility Dive) – According to former Secretary of Energy Ernie Moniz, the rise of renewable energy is “inevitable” and clean energy sources will soon be the “norm.” Considered fringe technologies less than a decade ago, wind and solar energy are indeed becoming competitive with traditional generation, making them an increasingly attractive investment for power providers in states like Colorado or Texas, even when compared with natural gas. But as quickly as that revolution in the power system has become commonplace, another is picking up steam.

The next big change, already in the works and raising urgent questions, is the aggregation of distributed energy resources (DERs) into a reliable grid resource. Indeed, some of the most optimistic observers expect the growth of distributed generation to exceed the growth of new central-station plants worldwide after 2018. These DER proponents say it is time to remove the obstacles and allow powerful software to manage rooftop solar and behind-the-meter battery storage as a viable way to meet grid needs, just as traditional utilities already do.  However, skeptics point out four key areas of concern that need to be answered before aggregated DERs can replace central-station utility plants as a more common grid resource:

  1. Valuation. Who will determine the real value of DERs in electricity markets, and how;

  2. Reliability. Will DERs managed by third parties present a threat to electric reliability, and who will oversee or regulate these third-party DER managers;

  3. Anti-competition. Can utilities build a new business model and compete with DERs in the marketplace, and should they;

  4. Aggregation. For any given grid, is a third-party provider or is a central-station utility better positioned to aggregate the DER marketplace, and who will select the aggregator.

Not surprisingly, utilities have a wide variety of opinions about aggregated DERs. At one end is Duke Energy, the nation’s second-largest utility by customer base and an emerging leader in utility-scale solar. According to Duke Energy spokesperson Randy Wheeless, “the issue [DERs] isn’t on our radar.” At the other end of the spectrum is EnerNOC, a leading demand response provider. EnerNOC Senior Manager and DER Team Lead Jeff McAulay says “there is a collective realization that DERs have more value together than they do separately.” Most utilities look upon DERs from the middle, like Southern California Edison (SCE), which serves more than 14 million in the Golden State and has a DER aggregation pilot with SolarCity. The transformation is coming, SoCal Edison Director of Energy Policy Gary Stern says, but the distribution grid is not ready for it. In particular, Stern does not see the technologies in place to provide utilities with the ability to manage DERs and maintain reliability. “We are working to modernize the grid so it can handle the proliferation of these resources,” says Stern. “We are not quite there yet but that is what we are trying to achieve.”

While Duke, EnerNOC and SoCal Edision may not agree on the future of DERs, they all agree that no one has captured the market. But, embedded in the variety of opinions are crucial hints about how utilities think of the above four questions.

The many faces of distributed energy resources. Source: Pulse

Valuation

Distributed resources, especially rooftop solar, were seen just a few years ago as heralding a “utility death spiral.” Today, distributed resources figure highly in many utilities’ resource planning. But if DERs are to be truly marketable as a grid resource comparable to central-plant generation, their value must be defined. That’s difficult, since each type of DER, from solar to batteries and grid-enabled water heaters, offers its own unique benefits and value when compared with traditional central-plants. Indeed, even states like California, Hawaii and Arizona where DER proliferation is greatest have a difficult time defining value. Nevertheless, there seems to be some agreement among regulators that the best way to support a transition toward DER is with pricing mechanisms that assign value to individual resources. For instance, as utilities expand their DERs, they will eventually be able to identify location specific needs where DER has greater value.  “The utility is in a unique position to leverage economies of scope as well as economies of scale that should incent investment and be competitive with third party aggregators” noted Nick Rinaldi, Senior Manager and spokesperson for Greentech Media.

But there should also be an opportunity for DER providers to establish the value of their own contributions to the grid, too. The value proposition for third-part providers will be to deliver the same value the utilities provide but at a lower price, or provide more value than utilities can deliver. But DERs will not be able to fully seize upon a market opportunity until they have identified an acceptable method of valuing their contribution to the grid. According to Rinaldi, the question of valuation is simple: “The ability of a private-sector service provider to bid into grid services market will be determined by a generally accepted profitable DER business model.”

Reliability

Accommodating greater penetration of DERs throughout the grid is not a simple or straightforward issue. The challenges are enormous and varied, ranging from capacity shortfalls on the generation side to ratepayer exposure on the consumer side.  Even the mundane is a concern, like finding the right business partner. Basically, all of these unique demands boil down to the promise and peril of electricity reliability – and with respect to this particular issue, there is no middle-ground because consumers are not willing to compromise. But for all the infinite ways that the reliable delivery of electricity might be disrupted, most utilities think there is an easy solution.  Electricity reliability can be virtually guaranteed if the right safeguards and economic incentives (and dis-incentives) are contractually in place around DER performance.  For instance, according to EnerNOC Western Regulatory Affairs Director Mona Tierney-Lloyd, “Reliability can be managed through contractual means between the utility and third-party aggregators – the third-party aggregator should be able to put different resource characteristics into a contractual agreement, just as utilities are expected to do.”  Avista’s Technology Strategist Curt Kirkeby agrees without qualification: “Aggregation [DER] services must be subject to contractual terms that protect and dictate reliability and performance.”

Interestingly, expert thought-leaders in the American Energy Society do not believe that responsibility for reliability should be shared equally. Indeed, AES interviewed a number of its Members, and many agreed that reliability is primarily the responsibility of the utility, and will be in the foreseeable future. For instance, Pacific Gas and Electric (PG&E), California’s largest electricity provider, has pilot demand response programs and 1,700 MW of interconnected distributed solar, giving it a chance to experiment with a variety of DER contracts. “As we learn more about the benefits to the distributed network, we learn a lot more about the best ways to set up contractual agreements,” says PG&E Director of Customer Specialized Programs Bruce Barney. Even so, Mark Esguerra, head of electric asset management also at PG&E, has some concerns: “Any contract that gives DER aggregation responsibilities to the private sector or to third-parties will inherently threaten the system and local reliability.”  And yet, the assumption that central-station utilities should be entirely responsible for reliability is unrealistic.  Indeed, individual DERs simply know too much about their system to be ignored.  For safe, reliable, and cost-effective dispatch of aggregated DERs, a contract between all parties should clearly state details about shared responsibility for operational coordination and appropriate levels of visibility, monitoring, and controls for the transmission system operator, the utility operating the distribution, as well as the DER aggregator.

Anti-competition

To date, the private marketplace has been the main driver of DER growth, with developers targeting individual consumers for sales of rooftop solar, batteries, electric vehicle chargers, and so on.  With utilities beginning to see opportunity, a new debate has emerged regarding whether utilities should be able to compete with third-party DER providers to sell the same products and services, either through their regulated businesses or unregulated subsidiaries. Given the utility’s existing customer relationship and access to usage data, many third-party providers believe utility involvement in the DER space to be uncompetitive. “Utility ownership of DERs threatens the business model of developers like SolarCity,” EnerNoc’s Tierney-Lloyd said. “Grid operators should define the need and then allow aggregated DERs to bid in against other resources to meet that need.”

However, central-station utilities like SoCal Edison are deeply concerned if utilities are excluded from competing with third-party DERs; according to Henry Stern, Managing Director of Regulatory Affairs at SoCal Edison: “We are asking for the appropriate-information sharing between the DERs and the utilities; we don’t need IP insight, but we do want to know about the physical activity of the third-party’s resources so we can ensure the coordination between the distribution grid and the transmission grid.” According to Bruce Barney at PG&E, “there isn’t any threat to the free market as long as DERs respect the obligations of the utilities to their customers.”

Aggregation

Perhaps it should be expected that each stakeholder generally believes their side is best suited to manage and oversee DER. But their self-confidence does not suggest common-ground.  No one can identify with certainty the primary entity that should aggregate DERs, for one simple reason: no one knows who to trust.  Utilities tend to believe that they can do the aggregation and would be willing to allow for some participation from vendor partners; conversely, DERs think they or their own third-party representative is best suited to oversee aggregation.  In all likelihood, utilities probably won’t stand in the way of DER growth. But they point out that they alone have existing relationships with customers – “a trusted partner is looked uponby its customers for expertise in deploying new technologies,” according to CPS Energy Senior Manager Rick Luna. “The utilities are, without a doubt, the entity who should be determining the aggregation that the system needs, and what types of ‘response’ could meet the need because no one else has the access to that information,” EnerNOC’s Tierney-Lloyd said.

The existing relationship that utilities have with customers, as well as the need for reliability, may suggest that utilities will eventually serve as the primary DER aggregator.  But much to the frustration of many DERs, the utilities seem to be dragging, waiting until technologies are mature or when markets have regulatory order.  That could be a very long wait.  DERs, on the other hand, don’t want to wait that long.  Some third-party service providers already have developed fully formed aggregation mechanisms, such as a few that are already serving as private-sector demand response aggregators for the Hawaiian Electric Company. DER providers believe they only need adequate access to the proprietary data held by utilities, but the reluctance of the utilities to hand over administrative responsibility to DERs is perhaps evidence that they aren’t interested in an openly competitive marketplace. Some DER management functions may have to end up under utility control, says Valerie Miftakhov, spokesperson for the DER eMotorWerks. But private third-party vendors might be better positioned to be the primary aggregators because they have a “deep understanding” of the distributed technologies that utilities lack. “For the utilities, these DERs will remain only fringe resources for a long time,” says Miftakhov, which is why the cautious approach of the utilities might seem justified to some.  On the other hand, Avista’s Kirkeby is confident that DERs are ready to oversee aggregation: “DERs provide locational value for multiple uses that when stacked can derive much higher economic return.”

350% growth highlights the growth of the Distributed Energy Resources market. Source:  The Energy Collective

Conclusions

The distribution system, the last miles of wires connecting substations customers, has been historically the least subject to competition, but even that is changing. Pilots such as the Brooklyn Queens Demand Management project indicate DERs can effectively replace or defer not only generation, but distribution assets such as substation upgrades.

New business models for distributed energy resources as grid infrastructure indicate DERs are increasingly up to the task. However, forcing central-station utilities to compete with DERs indicates no easy or obvious solution, even after almost two decades of experimentation. There are likely multiple ways to skin this cat. Perhaps it’s time to take advantage of all the different varieties of utilities and DERs to experiment and iterate in real-time to get aggregation and competition right. Finding states and utilities willing to generate and test new models will be key to advancing the conversation.  That being said, there is still one key unanswered questions that underpins the debate:

Should the generation side of a utility be separated from owning, operating, or marketing DERs like storage, efficiency, distributed generation, and demand response?

It’s known that demand-side resources are waiting to be unlocked to make electricity service cleaner, cheaper, and more reliable – demand response, energy efficiency, storage, and distributed solar each provide value to the system. But institutional factors, particularly utility business models and the regulation driving them, stand in the way of unleashing these products to make the system cleaner, cheaper, and more reliable. As such, defining and pursuing a role for utilities as distribution system optimizers is a win for consumers, businesses, and the environment.

And if there’s one point of consensus among utilities and DERs, it’s that everyone in the sector will have to learn by doing for a while.

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The full article can be found here at EnergyDive.

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