Faced with the rapid growth of distributed energy resource (DER) options, much has been said and written about the need for new electric utility business models. Although the cry for a new way forward has been sounded for years, little of any import has actually been accomplished.
In many regulatory jurisdictions, battles are raging between utilities and solar industry supporters over solar incentives, net metering, cost shifting and utility ownership. While these issues are important and indeed critical to the long-term health of grid, they are focused on a single technology and largely ignore the extensive energy technology portfolio that makes up DER. At best, they represent a piecemeal approach.
These solar fights are also doing little to address the underlying utility business model structure. If any real progress is to be made, it is critical that new models be developed.
California and New York are the current exceptions. These states have borrowed a line from the mission statement of the starship Enterprise and are boldly going where no one has gone before. While they are both pursuing a comprehensive approach to DER deployment and exploring new business models, they are taking divergent paths to get there.
The national leader in installed solar photovoltaic capacity, California is sticking with the playbook that got it there. Historically, California has used energy policy mandates to accomplish its energy system goals and is continuing in that vein. New York, on the other hand, believes that its “Reforming the Energy Vision” (REV) process will establish new market structures that will deliver DER options that will benefit customers and the grid.
Some common ground does exist. Both states are seeking to enhance DER integration and participation in wholesale markets by reducing barriers to DER adoption. Both are considering the use of an independent distribution system operator to facilitate distribution and DER operations. They are also seeking to increase customer awareness, interest and confidence in DER in general and in potential DER markets. Of course, both are pursuing these actions as a means to increase renewable energy usage and lower carbon emissions.
California’s effort is in response to Assembly Bill 327, which directed the state’s investor-owned utilities to create distribution resource plans aimed at improving DER integration in the grid. These resource plans will include scenario-based planning and integration analysis to determine DER optimal location criteria. Utilities will determine DER valuation and define how much DER can be added safely.
New York is seeking to encourage DER deployment through market mechanisms. It is seeking to create this market with a distributed system platform provider (DSP) that will function similar to an independent system operator but at the distribution level. Real-time price signals at the distribution level would be used for DER market settlement. Writing in the Rocky Mountain Institute blog, authors Matthew Crosby and Dan Cross-Call likened the role of the DSP to the function of a smart phone. A smart phone’s operating system supports numerous applications that the customer can select and use. In a similar way, the authors contend, the DSP will support various DER options that customers could adopt.
Crosby and Cross-Call also summed up the differences between the two approaches this way: “The fundamental distinction at this point in the proceedings is that while in California utilities must consider privately financed DERs in their planning, the process is technically focused and still largely utility directed. In New York, by contrast, REV seeks to enable market forces to influence customer and third-party DER deployment and valuation, which utilities would therefore have to take into account in the marketplace.”
Will one state be right? Will both approaches work or will both fail? It is far too early to tell. Both states are in the early stages of their respective efforts. There will be much more stakeholder and regulatory work needed before each system is finalized and we will know their full potential.
While it is too early to predict a winner, I believe that future utility success will be tied to providing value for electric customers. I say this because customers increasingly have more energy choices. For utilities to remain a viable choice, they will need to provide more value for their customers. I also view properly structured markets as being the best mechanism for the creation and delivery of value for customers. Given that bias, I feel that New York, with its market focus, may have a leg up.
The only thing that is certain for now is that the bets being placed are enormous. Misplaced bets could negatively impact electric customers and the affected state economies for decades. One way to avoid this outcome is to make sure that the goal is not just about increasing the deployment of DER. As Dr. Mani Vadari, president of Modern Grid Solutions, wrote in a recent Intel blog, “Developing a road map that will make the grid more flexible, reliable, resilient, efficient, sustainable and affordable all to support the customer’s changing needs should be the objective.” I couldn’t agree more.