By: Constance Douris, Lexington Institute
Demand is increasing on the nation’s electric grid and electricity shortages, power quality problems, rolling blackouts and electricity price increases have motivated many customers to seek more reliable electricity through a variety of sources and technologies. Distributed Energy Resources (DERs) provide alternatives to or enhancements of the electric grid and have been around since Thomas Edison built the first power plant in 1882.
Examples of different types of DERs include solar photovoltaic, wind, combined heat and power, energy storage, demand response, electric vehicles, microgrids, and energy efficiency. Strategies incorporating DERs can provide all or some electric and power needs and can be used to reduce demand or provide supply to satisfy the energy, capacity, or service needs of the grid.
The California Public Utilities Commission approved a pilot program in December 2016 aimed at incentivizing utilities to adopt DERs in place of traditional infrastructure investments to save money. This is the first time a California regulator has approved a proposal with an alternative economic structure to resolve the conflict of bringing more DERs online while protecting utilities’ financial profits. This pilot could potentially be implemented in others states to boost the adoption of DERs.
The pilot includes a four-percent financial incentive mechanism to be applied to the annual payment for the resource to allow the commission to study whether the adoption of DERs will be effected. Several stakeholders commented on this pilot prior to the decision including Pacific Gas and Electric, San Diego Gas and Electric, Southern California Edison, the Environmental Defense Fund, the California Energy Storage Alliance and others.
The new pilot program consists of a seven-step process. The first step of the pilot begins with the utilities selecting a Distribution Planning Advisory Group (DPAG) and an independent engineer. The Commission’s Energy Division will select an engineer from a pool of candidates selected by the utilities. All three utilities must retain one engineer to evaluate distribution plans and guide the DPAG, and the engineer will be expected to sign a nondisclosure agreement. The DPAG will advise the utilities on electric-distribution pilot projects and contingency plans in case the DER is unviable, and, along with the engineer, will advise the utilities on distribution activities. This step is to be completed by February 2017.
Market participants’ involvement in the DPAG was a point of concern for some parties. These stakeholders fear market-sensitive information shared with third parties could harm customers or the competitive process. The Commission found third parties’ involvement reasonable because they are able to provide technical sophistication to the advisory group beyond the expertise of the utilities. However, the third parties are excluded from discussions involving market-sensitive information such as potential costs that may be avoided by DERs, and are not permitted to participate in reviewing proposal bids to ensure fair market competition.
The second step includes Pacific Gas and Electric, San Diego Gas and Electric, and Southern California Edison identifying 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 allow for a better understanding as to whether utilities are incentivized to deploy more DERs. The utilities are to work with the advisory group and the engineer to determine how many and which projects to pursue and must be completed by April 2017. Ideally, a diverse set of DER projects will be tested in a variety of situations.
After the selection of projects takes place, the utilities have six months to file a Tier Three Advice Letter by June 2017. This letter requests approval to procure the DER and includes an estimate of expected administrative costs for the application process.
There is a process for the Commission to grant the request of a utility to procure a DER. The Commission’s Energy Division will host a workshop to discuss the details of the advice letter. The workshop will allow the utilities to explain their proposal in detail and permit stakeholders to understand the products and/or services the utility is applying for. After the workshop, a schedule will be created to allow for feedback on the advice letter. Finally, a proposed decision will be developed for the Commission to consider. This process allows for formal and informal stakeholder input. The commission will reach a decision by October.
Application requirements in step five must include information regarding the specific geographic area where DERs will be deployed, customer makeup of that area, and information on how to request specific customer information. The utility must create a customer web presentation during each application period to increase customer awareness. This process must be completed by February 2018. The utilities requested an additional two months to complete this process and were denied by the Commission with the aim to streamline the process.
The utilities are to review contracts with the Procurement Review Group in step six of the pilot. After this review, the utilities must file a Tier Two Advice Letter that requests approval for the contracts. The review and letter should be completed in 60 days. If the rules of the framework are not followed, the advice letter will be rejected and the utilities will have 360 days after the proposal to evaluate contracts and to refile the advice letter.
The utilities must write a two-part report to fulfill step seven. The first part will focus on the performance of the application process and is due 90 days after the approval of the Tier 2 Advice Letter. The second part of the report will focus on the performance of the DERs and must be filed 15 months after the approved projects are implemented. Before filing the report, the utilities must host a workshop to discuss its findings and stakeholder comments will be included in the final report. The report will be analyzed by the Commission with a final evaluation of the pilot projects and process through the use of workshops and stakeholder feedback.
One topic of concern regarding this pilot is how to tally services to avoid double counting. A good method will protect ratepayers from paying twice for the same service and will ensure reliability of the service. The method also will recognize that DERs are able to provide multiple services and will be compensated for each while remaining flexible and transparent to bidders. Additional work is needed before selecting the best approach to avoid double-counting. As a result, each of the utilities may pursue a different approach and work with the DPAG to finalize the method. This will allow the Commission to evaluate which approach provides the best outcome for ratepayers and customers, and the Commission will determine which approach to adopt after the evaluation of the pilot.
Distributed energy resources could balance the electric grid in real time, and maintain reliability by assuring that electricity loads do not exceed supply. The approved pilot is the first of its kind in the state. Gaining more clarity as to whether utilities are more motivated to deploy DERs with a financial incentive could provide insight for California and other states as to how to increase distributed resource adoption in the future.