Distributed Generation: What You Need to Know
Last month we broke down demand response, what it was and why it was important in the cleantech space. In this week’s CleanTech Memo I try and get a handle on distributed generation.
After Peter Kind's 2013 report on the state of utilities prompted dozens of challenges to the utility status quo, Ian Adams delves into what the future of utilities might look like
Initially posted on Midwest Energy News:
The utility death spiral and contentious debates over fixed charges and who pays for the grid have been debates central to the utility industry over the last several years.
In some ways, these recent debates were inspired by actions taken in response to a pivotal industry report published by Peter Kind in 2013. If Kind’s 2013 paper inspired dozens of challenges to the status quo by utilities in cases at utility commissions and a host of conference panel discussions, what will the impact of his new report be?
The 2013 report, Disruptive Challenges, was developed on behalf of Edison Electric Institute (EEI) – an association that represents U.S investor-owned utilities and a highly trusted source by utilities for strategic insights. This was the “utility death spiral” conversation starter.
This utility death spiral is the concept that customers equipped with solar panels and storage units would choose to disconnect from the grid and stop paying for utility service altogether – “grid defection.” If this were to happen, the utility would have to spread the fixed costs of its assets over a smaller number of customers, leading to increased costs which would drive still more grid defection. The paper warned that this day was coming and recommended ways to ways to avoid this future.
Utilities heard this message loud and clear. In dozens of states, fixed charges cases appeared. Utilities argued these charges were necessary to prevent residential solar customers from burdening the public by not paying their fair share for the grid, sometimes in areas where there was barely any solar penetration.
While the logic and timing of these cases was sometimes shaky, the issue raised represented legitimate questions of who pays for the grid and how. However, in practice, these debates were fights between utilities on one side, and ratepayer advocates, solar installers and environmental advocates on the other, and they were often very acrimonious. With a few exceptions (notably in Wisconsin), this wave of cases was largely rejected. Yet this doesn’t mean that the underlying issue has gone away.
What comes next is an open question. More bare-knuckled utility commission dockets on fixed charges? New innovation regulatory pathways such as the NY REV process? Kind’s November 2015 report, Pathways to a 21st Century Utility, may provide some clues.
This report covers a similar set of issues, but the recommendations for utilities are very different. In many ways, this new set of recommendations are exactly the approaches that are well matched to dealing with these tricky and substantive long-term cost allocation questions.
Commissioned by Ceres, the report proposes comprehensive reform measures, including forward-looking regulatory reform and aligning rate structures and price signals with long term clean energy policy objectives. It strikes a different tone from the 2013 report, encouraging utilities to be collaborators, partners and trailblazers identifying new models and mechanisms to ensure a robust and dynamic grid going forward.
These approaches have many benefits, including the potential alignment of utility and advocate interests. It is worth remembering that advocates and solar companies aren’t trying to eliminate the utility or avoid paying for the grid altogether, rather they want utility regulation to be more collaborative in pursuing a shared set of policy goals. Further, everyone recognizes the way a utility will be compensated in the future will need to change.
Interestingly, there’s actually a lot of agreement about the future of rate design. A recent GTM Squared survey found that utilities, regulators and the solar industry responded remarkably similarly regarding how distributed solar would be valued.
It’s too early to say how this will all play out. Utilities may heed this advice but move slowly or have trouble adapting to a new paradigm. The recent ITC extension may spur utilities to lobby for changes to net metering policies in the near future. Both these paths and others may develop simultaneously.
Frankly, the vision that Peter Kind lays out in this more recent report sets the bar for what the future look like. Advocates of a clean and smarter electricity system are not fundamentally at odds with ensuring distribution utilities are compensated appropriately. Collaboratives and proceedings on the utility of the future will be an important venue to discuss what are legitimately complex issues. How do we fairly allocate the costs of new grid investment? How can we ensure that the investments utilities are making are appropriately forward-looking?
These efforts will be good for the cleantech community, as regulations are adjusted to align incentives to invest in more clean energy, distributed generation and advanced grid technologies. Fundamentally, the driver will be the changing nature of electricity production consumption and how we utilize and value the grid; the spark may come from the pages of Peter Kind’s report.
For more on this subject, I recommend Herman Trabish’s excellent summary of Peter Kind’s recent report on Utility Dive, which inspired this piece.