A 'turning point' for DERs? Utilities, vendors praise new NARUC rate design manual
A new guide to DER rate design and compensation lays out the important questions but leaves the heavy lifting to state commissions
Distributed energy resources remain a small part of most utilities' fuel mixes, but that could be transformed by a new manual about how utilities can use them.
If electric utility regulators follow the recommendations for how to design rates and compensate distributed energy resources (DER), utilities and DER providers could together transform these new technologies from solely customer-serving resources into providers of services to the larger grid.
Like the precise definition of DER, numbers for their penetration are difficult to pin down. There were less than 18 GW of distributed solar generation in the 1,100-plus GW U.S. generation portfolio at the end of August 2016, according to the U.S. Energy Information Administration.
Aggregated Demand Response, often considered another DER, provided the seven leading U.S. grid operators just under 31 GW of peak demand reductions in 2015, according to GTM Research.
Combined heat and power and fuel cells provided 63 GW in 2016 and are expected to reach 95 GW in 2026. And battery energy storage, at 226 MW and less than 1 GWh at the end of 2015, could be over 2 GW and over 5 GWH by 2021, GTM Research also reported.
A key obstacle to the adoption of DER is the lack of utility consensus on how to seize the opportunity. Three-fifths (60%) of utility professionals surveyed by Utility Dive’s State of the Electric Utility 2016 said their utilities should partner with third party providers to deploy DER, but many opted for more than one avenue.
Nearly the same proportion (59%) said they see opportunity is in owning, operating, and rate-basing DER as a regulated utility themselves, a clear indication companies “are still weighing a variety of options for DER-centric business models and may even be pursuing multiple opportunities at the same time,” the survey concluded.
To help utility regulators and utilities find the best way forward, National Association of Regulatory Utility Commissioners (NARUC) President Travis Kavulla put the NARUC Staff Subcommittee on Rate Design to work.
“We need clear and economic price signals that do not overcompensate or undercompensate those customer-side actions,” Kavulla said in proposing the effort.
Chris Villarreal, policy director at the Minnesota Public Utilities Commission, led the manual-writing effort.
“The objective was to provide a better understanding of rate design and compensation for DER but leave the decision to each state’s commission, based on that state’s goals and situation,” Villarreal told Utility Dive.
The draft Distributed Energy Resources Rate Design and Compensation, released by Villarreal’s subcommittee in July, met with controversy. There was strong disagreement between DER providers and utility leaders over the guidance on utility cost recovery and the question of a cost shift (or cross-subsidy) from DER-owning customers to those without DER.
“We want DER, but we want to make sure the rate structure is right to minimize cost shifts,” Phil Moeller, senior vice president at the Edison Electric Institute (EEI) and a former FERC commissioner, said during a NARUC discussion on the draft version of the manual.
“There seems to be an assumption that revenue erosion from DER results in an inadequacy of cost recovery for the utility and therefore a shift of costs,” responded Sean Gallagher, state affairs vice president at the Solar Energy Industries Association (SEIA). “You can’t just assume that.”
The final version of the manual, approved by the organization’s Board of Directors this week, won tentative endorsement from Moeller, Gallagher, rate design experts, and DER providers, largely as a result of the subcommittee’s responsiveness to stakeholder input.
With record amounts of DER being integrated into the grid, Moeller said rate structures that both recognize the importance of the energy grid and minimize the cost shift are “crucial.”
Gallagher agreed. Well thought-out guidance is vital because rate design is not simple and “has far-reaching impacts,” he said. “The manual recognizes that hard data and evidence is needed before imposing new rate structures on customers.”
Ted Ko, director of policy at energy storage company Stem, said the manual does “a great job” of describing current DER compensation and rate design issues. It should “help regulators organize their thinking around the technologies that have been driving change.”
But, he added, the final manual does not “capture the paradigm shifts made possible by cost-effective distributed storage.”
Regulatory Assistance Project (RAP) Senior Advisor Jim Lazar, author of “Electricity Regulation In the U.S.,” also gave a favorable but mixed review. The final version is “excellent” in some ways, but “internally inconsistent” in others. But it is, he said, “a significant contribution to the science of rate design.”
It may also be a turning point in the way utilities view DER.
What’s in the manual
The manual begins with a primer for “general readers,” Villarreal said. Topics covered include rate design and compensation principles and what DER technologies are and how they are used. The primer is also “a foundation for considering how to evolve along with this transition,” the manual adds.
The manual's catalog of rate design and compensation options includes the pros and cons of each. One discussion examines the controversial topic of DER costs and benefits. That leads to a lengthy set of questions regulators can use to structure their decisionmaking processes on DER rate design and compensation.
The manual stresses it does not offer answers to rate design issues for regulators. Rather, it gives them questions on DER they should begin to ask as they evaluate rate design reform.
“A jurisdiction should not be content to wait until [DER] adoption levels start to increase,” it argues. Regulators should already “have the tools in place.”
The first group of questions the manual raises deal with assessing the current situation with DER.
“What is the current adoption level of DER in the jurisdiction?” the manual asks. That includes rooftop solar, electric vehicles, demand response programs, and other resources. “Where is the DER located? Does the regulated utility have sufficient visibility into its distribution grid to monitor impacts?”
Then come questions an adequate regulatory review must answer about any utility DER proposal. They include what data is available or obtainable for the proposal.
“What issues, if any, have already come to the utility’s or regulators’ attention concerning the effect of DER on the grid and regulation?” the manual asks. “Does the regulator have sufficient information about rate and cost impacts from DER on customer classes? How are the different types of DER currently treated in rate design, compensation, planning, and so forth?”
The manual includes substantive discussions on demand charges, fixed charges and minimum bills, standby and backup charges, and interconnection fees and metering charges.
The manual evaluates two primary DER compensation options, NEM and valuation methodologies. The valuation methodologies it examines are the value of resource, value of service, and transactive energy approaches.
Questions about rate design and compensation in the manual come after those on data.
“What role is expected of DER in the short and long term? What is the regulator’s vision regarding how these changes affect the industry? How does that role affect utility planning, revenue recovery, and investment decisions?” the manual asks. “How should a jurisdiction analyze costs and benefits of any particular DER technology or service? How does the jurisdiction minimize harm and optimize benefits?”
“The logic is that questions about data come before questions about rate design and compensation and those questions can lead to questions about costs and benefits,” Villarreal said.
The manual’s discussion of costs and benefits is intentionally left open-ended, he stressed. The manual offers two possible ways regulators can organize their thinking on this controversial topic.
“EPRI’s framework flow chart offers four types of DER impacts, those on the distribution system, those on the bulk system, those on customers, and those on society,” Villarreal said. “Another approach that could be useful are the five cost-effectiveness tests in the California Standard Practice Manual.”
Utilities are increasingly proposing demand charges and DER advocates are defending retail rate NEM in many states, but there is not enough penetration to definitively conclude what the costs or benefits are, Villarreal said. “That is a question each state will have to decide.”
Along with not being an answer book, the manual stresses it is also not the final word on rate design for DERs.
Forecasted DER growth will bring regulatory proceedings that will, over time, lead to DER implementation, the manual says. That will eventually lead to the need for a “next iteration.”.
“This is a snapshot of what the DER sector looks like in 2016 but it is clear we need more data,” Villarreal said. “We have mostly academic exercises at modeling costs and benefits because in most states DER has reached a less than 0.5% penetration.”
SEIA’s Gallagher strongly endorsed this. The manual states clearly that if DER penetration is under 10%, “large or non-coincident peak demand charges for an entire residential or small commercial rate class to counter perceived cost shifting from a limited set of actors would most likely be a disproportional response,” he pointed out.
“Commissions should be cautious about making big changes that are not justified by hard evidence,” he added.
Lazar also endorsed this point made in the manual. “Until solar saturation reaches a threshold — they use 10% — it is not a big deal.”
Changes and reactions
The final version of the manual was “significantly improved” from the draft by the subcommittee’s “willingness to be open to input from stakeholders,” Gallagher noted.
One of the key changes the subcommittee undertook in response to input on the draft manual was an effort to make the tone more neutral, Villarreal said. “This was in response to the solar industry’s concern that the draft used negatively-skewed language to describe NEM and to the utility industry’s concern it used negatively-skewed language to describe demand charges.”
Lazar noted “a huge improvement” in the new version's demand charge discussion. The manual reports that empirical data on mandatory rate designs for large investor-owned utilities is limited, he said.
The manual shows "that both non-coincident and coincident demand charges are problematic,” Lazar said. ““Regulators should be wary of counting on unsupported, promised benefits and cautious when plausible harm may represent itself."
The “greatly improved” discussion of fixed costs and fixed charges includes a passage that recognizes an important “disconnect” in the utility industry, Lazar added.
The manual notes that for higher usage customers, a higher volumetric rate and lower fixed charge could be used to recover utility costs. Changing the volumetric rate, instead of hiking fixed fees, "would send a more efficient price signal,” according to the authors.
But while the demand and fixed charge discussions improved from the draft manual, Lazar found a bone to pick with what he said is a failure to quantify the services DER can provide to the grid, particularly energy storage.
The final version of the manual clearly displays the services the wide range of grid services storage offers, Lazar said. But it fails to explain the impediment that poorly-designed rates can be to battery storage if they fail to recognize the value of these services.
“The goal should be to keep everyone connected, so that all of these resources can be optimized,” Lazar said.
The importance of keeping ratepayers connected is covered in a text box about the value of networks, Villarreal said. The final draft of the manual uses text boxes to summarize subjects that are essentially beyond its scope.
The text box on networks makes it clear that “the grid is transitioning into a network and policies that make it difficult for customers to do what they want to do become incentives to disconnect,” he said.
“On the electric utility side,” the manual’s text box notes, “it seems apparent that having more devices connected to the grid inherently enhances the value of the grid and the devices connected to it.”
Echoing Lazar’s concern, Stem’s Ko said the manual also “fails to capture the paradigm shifts made possible by cost-effective distributed storage.”
The manual does not, he argued, acknowledge how battery energy storage expands the capabilities of DERs, allows technology-neutral DER compensation, and promotes more “proactive grid planning.”
In response to stakeholder input, manual authors added the text box and a well-known storage chart from the Rocky Mountain Institute to show visually what might be a topic too extensive to cover in this text, Villarreal said. “The RMI wheel graphic shows the 13 identified services DER can provide for battery energy storage. The text box about aggregation shows how it can further enhance value and extract greater benefit from DER.”
Case studies of rates implemented by utilities in the rate design section were also added in response to stakeholder input “so readers can see the rate design under discussion in context,” he added.
At the release of the final version of the manual, EEI’s Moeller acknowledged it to be “an important tool for state commissions as they look to redesign rates to more appropriately reflect the realities of the growth of DER and the importance of the energy grid.”
At the same time, he called for rate design structures around the country “to be reformed now.”
Andrew Newbold, spokesperson for solar installer Sunrun and advocacy group The Alliance for Solar Choice, took a different approach. He highlighted the manual’s “thoughtful recommendations to regulators, including a call for more data gathering and information sharing between key stakeholders.”
Independent studies that identify how rate design changes will impact energy consumers before rate design changes are implemented could, Newbold added, “help find solutions that benefit consumers and providers alike.”
In the face of this divide between utilities and DER advocates, the NARUC manual puts emphasis on the need for more data and study on DER before instituting the reforms Moeller called for. The manual's questions for regulators include a wide range of things not yet well defined.
“Does the regulator have access to the number of DER, different types of DER, and locations; number of customers who have adopted DER, the costs and benefits associated with those DER; a recent cost of service study; or, an indication or study showing any cost-shifting, by class, geography, or socio-economic?” are a few among the questions the manual raises.
“This manual marks an important turning point,” SEIA’s Gallagher said. “It reflects the interests of all sides and starts to address the question of how to unlock the value of DER by recognizing they can provide grid benefits and are not just a problem to be solved.”
Gallagher sees the manual as the beginning of planning for a future in which utilities and DER providers can work together and DER “can provide real value to the grid by helping manage load and reliability.”