How APS, APPA, and NRECA would design a 'blank' electricity market
SEPA asks stakeholders to design the "51st State." Here are the utility proposals.
For months, the Solar Electric Power Association (SEPA), an educational nonprofit advancing utility integration of solar onto the grid, has been petitioning stakeholders for submissions to its 51st State initiative. The idea is to bring together the important players in the electric utility industry to design a hypothetical electricity market — the “51st state” — from scratch.
Last week, SEPA released the first submissions from stakeholders outlining their ideas for this new market structure. Three proposals came from the utility sector — one from an investor-owned utility and two from trade groups. The rest of the 12 total submissions were from consulting firms, research groups, academics, or energy nonprofits, including papers from the Wisconsin Energy Institute, Institute for Local Self Reliance, America’s Power Plan, and law firm Stoel Rives.
All of the submissions are available at the 51st State website and are worth reading in full. But the utility proposals caught our eye, in particular. Today, Utility Dive will outline the finer points of these proposals here, with a special focus on issues surrounding distributed energy resources and the edge of the distribution grid. Next week, we will take a closer look at the proposals of the grid reformers.
Utility proposals: More continuity than change
Unsurprisingly, the one electric utility and two utility trade groups that submitted comments to the 51st State initiative envision a regulatory structure with relatively small changes to their business models. According to the Arizona Public Service, the Rural Electric Cooperative Association and the American Public Power Association, the existing regulatory framework for their companies has worked rather well in getting them to deliver reliable, low-cost electricity.
Even so, the utility proposals recognize the need to alter regulatory and business models to compensate for the rapid rise of DERs, especially rooftop solar, and ensure that all the new technologies on the grid are optimized to work together. But in contrast to many of the proposals from grid reformers, these plans keep the electric utility firmly at the center of the distribution grid, and the electricity system generally.
As Utility Dive has reported, regulators in proactive states such as California, Hawaii and New York are reconsidering the utility’s role on the distribution grid. Whereas the utility has owned and operated the distribution system in the past, some grid reformers are calling for alternative models. For example, Jon Wellinghoff, former FERC chair and current partner at Stoel Rives, advocates for an Independent Distribution System Operator (IDSO) that gives operational responsibilities beyond the substation over to an independent entity — like an RTO or ISO for the distribution system.
As you might expect, this sort of wholesale change to the utility's role on the distribution grid doesn’t always sit well with the incumbent utilities. From the submissions here, it’s clear the utilities feel they are best positioned to both own and operate the grid, while their views on DER ownership vary.
Arizona Public Service: Utilities should own DERs
The fact that Arizona Public Service (APS) submitted a 51st State report can be taken as an encouraging sign for utility-solar dialogue. The Phoenix-based utility has wrangled with the state's booming rooftop solar industry, last year attempting to raise fixed charges on solar owners while this year receiving approval for its plan to directly own and rate-base rooftop solar.
The APS submission is among the shortest at only five pages and unlike other proposals, it focuses specifically on rooftop solar and its impact on the utility system. From the beginning, the utility outlines an aggressive model of rooftop solar ownership — one where the utility companies own DERs on the grid.
“In order to firm up the renewable power supply, conventional generation must be on hand to deliver power at night and even during peak periods. Enter the role of the utility,” the proposal reads. “By owning and operating many power plants, including a utility-scale or distributed solar fleet, the utility can reliably provide electricity to all consumers all while being environmentally conscious and fiscally sound.”
That’s a decidedly different market structure than the one that prevails today. Currently, third party installers such as SolarCity commonly own the rooftop solar arrays on customers’ rooftops — or sell them directly to the customer, sometimes under a loan agreement. Under the APS model, that market would be changed to one where utility ownership of DERs is the norm. If a customer wanted to install rooftop solar on their house, “the utility [would] ensure channels are available to help safely install a new system.”
“The utility will work closely with the consumer as well as installation professionals to ensure proper installation, and that any added costs to the electricity grid are properly allocated,” the proposal reads.
What role does this leave for third party providers? Although the APS proposal never explicitly closes the door on third parties owning distributed generation, the utility appears to see the third party role as one that assists the utility in installing and servicing DERs, under a model of utility ownership.
The APS proposal envisions a system where solar installers would contract with the utility to build utility-owned rooftop solar systems. There’s still plenty of business for solar companies, the utility says, even if they have to work in a system where utility companies own the generation assets, whether distributed or not.
“[I]s there room for third parties to work directly with said consumers?” the utility asks. “In short, yes. Forward-thinking utilities in the 51st State welcome innovative products and services that make their systems more efficient and satisfy consumer demand."
“During development of new CS plants,” it continues, “the utility relies heavily on third parties to install megawatt-and-above sized systems, and as more CS solar becomes interconnected into the electricity grid, new business opportunities like maintenance could be provided by third parties.”
APS sums up its perspective on the solar industry's role: “We see a role for third parties working directly with consumers to install customized solar arrays that answer consumer demand for more choice in the way they receive electricity.” But, under APS' vision for the 51st State, answering consumer demand would only come within the model of utility ownership of DERs.
With many utilities raising concerns about possible cost shifts that occur with adoption of rooftop solar, there is much debate over the right rate design. APS itself went through a prolonged battle with the solar industry last year when it tried to raise fixed charges for solar owners.
For the 51 State, APS envisions a hybrid model for rate recovery.
“The utility will function in a cost based model, and a cost of service (CoS) will be utilized to understand how grouping of consumers pull electricity from the electricity grid,” the APS proposal states.
But while cost allocation would “provide the most transparent way to develop rates,” there will be other charges as well.
“Consumers in the 51st State will expect several different rates in order to reflect their daily habits or desires,” APS writes. “Time-of-use (TOU) rates as well as Demand-based rates will be instrumental to help deliver price signals that convey electricity is a dynamic commodity and using electricity wisely will help ensure a more favorable bill.”
Customers with DG “will even have the opportunity to sell generation to the electricity grid at the avoided cost rates per PURPA rules,” the utility writes.
While APS says it recognizes that incentives like net metering “greatly facilitate the development of small-scale, customer-sited solar plants,” it envisions a regulatory regime where net metering rates are lower and, from the utility’s perspective, more equitable to non-solar customers.
“[I]n order to ensure equity among all consumers, CS and DG must be developed with an understanding of cost efficiency and investment independence from other grid users,” the proposal reads.
“In other words, to the extent that costs are socialized for the installation, integration or operation of systems, any related benefits (including financial) should be socialized as well. Unless mandated by regulatory policy, a specified benefit of DG should not come at the expense of socialized costs.”
The utility appears to be arguing that both the benefits and costs of rooftop solar should be socialized. In other words, the costs of a distributed solar fleet will paid by the full customer base, instead of just solar owners. But APS suggests the benefits of solar should be similarly shared by all ratepayers.
APPA: Disruption not an end unto itself
The American Public Power Association is the trade group for the nation’s municipal utilities, which number over 2,000 and serve more than 48 million Americans. If the APS proposal is the most controversial of the utility submissions, the APPA’s paper dials it back a few notches. In fact, the APPA proposal is more an endorsement of today's market structures than a push for wholesale reform, especially when compared to some of the other proposals.
“APPA believes that the broad market overlay for the 51st State should retain key elements of existing industry structure for both production and delivery,” the proposal reads, “with modifications designed to facilitate the development of modern, efficient energy resources, including distributed energy resources (DER), larger-scale renewables, traditional supply resources, along with energy efficiency and demand-side management programs.”
The trade group makes it clear the utility should own and operate the grid, acting as a distribution system operator “with responsibility for coordinating and dispatching DER and other resources available to serve or manage load.”
While the APPA proposal does not take utility ownership of DERs off the table, it clearly does not share the APS perspective that utility companies should be the primary owners of DERs in the 51st State.
“Market mechanisms should facilitate resource procurement through arm’s-length, competitive processes (including bilateral contracts and utility self-supply) or through organized residual (e.g., ISO, DSO) markets,” the group writes. Utility companies should “undertake resource portfolio and cost of service studies” to determine which resources are best for them to procure.
A competitive process for resource procurement means that subsidies for particular generation resources “should be avoided,” APPA writes, and if a utility or a DSO implements them, they should be temporary and based on “broad societal consensus.”
Because APPA is a trade group with thousands of members across the country, much of its proposal calls for individual utilities and their ratepayers to make decisions about rate structures, procurement and fuel mix.
“When designing rates, it must be recognized that one size does not fit all due to the diversity of resources and the characteristics of customer demand in any particular region,” the trade group writes, “Community preferences should play a significant role in the prioritizing of objectives and balancing tradeoffs.”
In all, APPA’s proposal can be taken as a call for restrained, step-by-step reforms of the electricity system. "If it ain’t broke, don’t fix it," seems to be the message here.
“Disruptive change should not be pursued as an end in itself,” the proposal’s conclusion states, “but ‘disruptive’ technologies and processes should be part of thoughtful, goal directed change that recognizes the interests of various stakeholders and serves a balanced set of needs."
NRECA: Local needs, local wants, local control
The National Rural Electric Cooperative Association represents 904 rural electric cooperatives across the nation, serving more than 42 million Americans. Its proposal extends the electric cooperative model to the 51st state, arguing that it is the best system to ensure reliability and accountability for ratepayers.
“As a consumer-owned, consumer-directed, not-for-profit entity, the cooperative’s only goal is to provide long-term reliable, affordable electric service to its member-owners,” NRECA writes. “Because cooperatives are governed by a board of directors democratically elected by consumers in local districts served by the cooperative, co-ops are very responsive to local consumer desires on issues such as distributed generation (DG).”
In our State of the Electric Utility 2014 survey, respondents from rural electric cooperatives tended to answer more conservatively than their peers from other types of utilities, meaning they were less likely to support policies that boost renewable energy, combat emissions, or enhance distributed energy resources. That trend seems to hold here, with NRECA calling for an end to renewable energy subsidies in the 51st State and instead leaving resource decisions to the local level.
“The 51st State should not be designed to achieve higher penetrations of any specific technology,” the group writes. “Instead, it should be designed to provide consumers unbiased, transparent information regarding the cost effectiveness of various technology options in the local area ... It comes down to local needs, local wants, and local control.”
Like APS and APPA, NRECA sees the utility owning and operating the distribution system in the 51st state.
“As consumer-owned, consumer-controlled, not for-profit private entities, cooperatives are todays 'DSOs' of choice,” NRECA writes.
Where the co-op group differs from the two other utility-sector proposals is in its approach to distributed generation. Perhaps because most NRECA members are not yet dealing with high penetrations of rooftop solar on customer rooftops, it focuses less on that part of the solar industry. Instead, it puts its emphasis on grid planning of DERs and larger-scale solar arrays, like community solar, which would be owned by the utility.
“Data regarding the cost of solar facilities consistently shows that utility/community scale solar can be built at significantly lower cost than rooftop solar,” NRECA writes.
The trade group offers an appendix to its report outlining four of its member co-ops that are aggressively integrating community solar onto their grids. Well-designed community solar programs, it says, “provide a solution to the challenge of cross-subsidization by covering the full costs of solar deployment through voluntary participation.”
Community solar projects are especially valuable for co-ops because they are more cost effective than rooftop solar and can be scaled up and down according to consumer interest. And finally, “the utility takes care of all of the installation, operations, insurance, and maintenance.”
‘This arrangement makes community solar more cost-effective, offering more bang for the buck and providing a win-win for all ratepayers,” NRECA writes.
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