California is rethinking how we incentivize consumers to manage their energy use. In September 2015, the California Public Utilities Commission (CPUC) declared its intent to create a regulatory integration framework to enable customers to effectively and efficiently choose from an array of distributed energy resources, such as energy efficiency, demand response, local solar and energy storage.
The CPUC found that “harmonization” of consumer benefits and “system” (grid and societal) benefits is necessary for integrating more distributed energy resources (DERs). This article explores how to harmonize these benefits with simple, scalable solutions that work for consumers and communities.
Originally published as an online "Industry Perspective" by Greentech Media, Nov. 13, 2015
Equalize or align benefits
Let's start with a fundamental question on the definition of "harmonization." Does that mean “equalization” of benefits – ensuring that benefits to consumers and the system are roughly equal? Equalizing benefits can serve two purposes – prevent ratepayers from paying more than the net value of DERs, and level the playing field for DERs to compete with distant power plants by compensating consumers for the additional locational system value of DERs. Or does harmonization mean “alignment” – adjusting consumer benefits to incentivize actions that are beneficial to the system?
The answer, of course, is "both." But when to apply one approach or another is a matter of much contention. Take the example of net metering policy, which is meant to do both things at once. Harmonization requires the application of the equalization principle, in the broader mandate to ensure that ratepayers at large pay no more than the net value of DERs. But harmonization also requires attention to maintaining steady DER growth, under state renewables and greenhouse gas reduction mandates, which means aligning customer choices via incentives for rooftop solar.
A key question is whether it’s currently possible to calculate the net value of DERs. Continuing the net metering example, California utilities and stakeholders are still working on quantifying the benefits of DERs, including location-specific and general carbon-reduction values. California could apply an alignment approach to harmonization during this bridge period where it is not possible to quantify a substantial portion of the benefits of DERs, and transition to an equalization approach once more DER benefits can be quantified.
Focus on performance, not proceedings
To encourage individual consumers to make DER choices that collectively benefit the grid, we can design financial signals in two ways. One option is to ensure that each separate solution-specific DER incentive is designed to encourage adoption of other complimentary DERs so the consumer’s combined system presents an optimized or flexible resource to the grid.
However, this top-down, solution-specific approach to regulation is likely too time-consuming and complex for regulators to implement or stakeholders to navigate. There are already separate, specific incentives, including tariffs or rebates for distributed generation, energy storage, energy efficiency and demand response. Adjusting each incentive to reflect the grid optimization of every possible combination of DERs, as well as adjusting for market penetration over time and other factors, is a nearly impossible task.
To illustrate this concept, let’s return to the example of net metering policy for distributed solar PV. Stand-alone net-metered solar is likely less valuable to the grid than a system enhanced by combining other DERs, including various energy efficiency measures, different types of demand response, managed electric vehicle charging, different amounts and types of energy storage, and optional advanced inverter settings. With each combination, the net metered value of the solar generation would have to be adjusted up or down, as would any incentives for the other technologies, to reflect the appropriate value of the combined DERs for both the consumer and the system. This adjustment would be difficult in any case, but is complicated by the many overlapping regulatory proceedings, attribution methodologies and cost-effectiveness calculations.
The simpler option is to incentivize consumers based on the capabilities and performance of any type or combination of beneficial DERs. Start with the premise that every consumer can better manage their energy use by adopting a range of clean DERs. Then, seek optimization of the suite of services they ultimately purchase by sending the right price and incentive signals for the capabilities and performance desired by the system. This would greatly reduce the complexity of harmonizing consumer and grid-wide system benefits. For example, the CPUC could develop technology-neutral use cases for DER operations to meet specific needs, such as load reduction, load shifting, voltage regulation and frequency response. Rather than separately approving and designing incentives for each new technology or new combination of DER solutions, regulators could approve a process for relying on aggregated consumer performance.
Demonstrate societal benefits
The CPUC has required regulated utilities to consider quantifiable societal benefits of DERs in distribution resource planning. To harmonize consumer and societal benefits, we will need new methods for quantifying societal benefits and sharing these benefits with consumers.
Regulated utilities know how to include compliance costs in cost-benefit calculations. However, many societal benefits do not fit neatly into this category. Good examples of local government initiatives that are not incorporated into regulated utilities’ plans include to increasing resilience, implementing zero net energy codes and standards, reducing greenhouse emissions beyond state goals, setting local clean energy and energy management goals, and increasing local economic benefits of clean energy and energy management.
Local efforts are critical to meeting state climate and clean energy goals. However, there’s no consensus among stakeholders about which local efforts should be supported with utility ratepayer dollars versus other local or state funds. One approach is to determine which local plans support statewide targets, such as climate goals, and which local targets primarily provide local benefits, such as local jobs requirements.
In addition to determining how much ratepayers should pay for statewide societal benefits of DERs, regulators must also decide how to harmonize consumer and local societal benefits. For example, consumers within a local jurisdiction could be given the option to pay more to meet local goals that primarily provide local benefits.
Local governments, consumer choice aggregators and DER solutions providers have been tackling these issues, and it’s time to connect these efforts with utility grid planning and resource planning. CSE recommends that regulators support demonstration projects to show how local entities can quantify and share societal benefits with community members.
Plan for communities, not power plants
CSE envisions that over time, grid and resource planners across the country will no longer view DERs as disruptive resources, but as how consumers manage their energy use. Rather than restricting how and where DERs provide system value, planners can focus on sending the right signals to consumers and DER providers to deliver innovative solutions across the grid. Similarly, planners can both leverage and support local efforts to meet the state’s climate and clean energy goals and tap societal benefits.