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Distributed Energy Resources (DERs) - Utility Response

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As DERs supply a greater and greater portion of the total energy used, the utilities are going to have to respond to a situation where they will be losing market share but yet expected to continue to provide 100% electricity supply security.

Integrated utilities historically have supplied capacity(C) and energy(E) to customers on their grid.  The regulators and the utilities themselves have not spent a lot of analytical time separating out the cost of capacity and energy.  The traditional method for determining a fair and acceptable electricity rate within a jurisdiction has been to add up all the utility costs (C and E related) on an annual basis and assign these costs to their customer base.  Normally this has been done separately for residential and business or commercial customers.  For residential customers, their usually has not even been an attempt to separate out C and E costs and, for business customers the separation has not been very precise.  In a monopoly situation where an integrated utility supplies all of the C and E for a jurisdiction, separating out the cost of these two items has not been that important. 

Another factor is time of delivery in terms of when capacity and energy are delivered to customers; during the day, week or season.  The utilities and regulators do spend some effort in aligning the costs of delivery with time.  However, in a monopoly situation this analysis does not have to be that precise as long as residential, small business and large business rates are separated out so that one set of customers does not subsidize another set.  However, if DERs supply a portion of the C and a portion of the E to a set of customers the picture is much more complicated.

The chart below summarizes the key aspects of rates in a before DERs and after DERs scenarios.

Table 1 - Determining Utility Rates Before and After DERs

Before DERs

After DERs

Combined Cost of Energy and Capacity

Energy Costs

Capacity Costs

The combined cost of capacity and energy is distributed to customer classes.

The cost of the quantity portion of the energy that the utility supplies to customers needs to be calculated.

The cost of the portion of peak capacity from the utility needs to be determined.

Rates in terms of time of delivery do not have to be very precise.

Rates in terms of time of delivery have to be more accurate.

Rates should be based on the times when utility supplies the peak capacity.

This new rate calculation is further complicated by the following two background considerations:

  1. DERs often offer an environmental advantage over traditional utility energy sources.  For example, solar panels on roof tops contribute less greenhouse gases than coal, oil or gas utility power projects.
  2. Monopoly utilities tend to want to keep their position of control within a given jurisdiction.

These two background conditions significantly complicate the situation for regulators and government institutions as they try to come up with rates that are fare to utilities, customers and at the same time promote environmentally benign energy sources.

It is important that there is a balance between the energy and capacity security that utilities supply and the environmental benefits that DERs can bring to society.  The biggest challenge in obtaining a reasonable balance is the time nature of investment.  Utilities make investments in infrastructure in order to provide capacity backup on a 24-hour continuous basis for its customers.  DERs make their investments expecting that regulators will not allow monopoly utilities to compete unfairly with them in order to protect the utility’s position.  Both utilities and DERs are making their investments assuming that they will receive a return over a number of years.  Accordingly, in striking this balance between the environment and supply security the investment period of both utilities and DERs should be considered.

It is suggested that battery technology can and will supply relief to the situation and it is in the interest of utilities to be leaders in this technology.  In the long term energy storage provided by batteries could supply much of the energy and capacity security that utilities have provided.  For example, a house normally with a 200 amp service could have a 100 amp service combined with solar panels and battery storage. 

I see the following two future scenarios (table below), one accommodating DERs and secure backups and an ongoing role for utilities and one where existing utilities are pushed dragging and screaming into the background.

Table 2 – Potential Outcomes to Utility Response to DERs

Positive

Negative

  • Utilities reduce their infrastructure needs by promoting 100 amp service for residential services and less than absolute peak demand requirements for business services.
  • Utilities provide 200 amp service for residential customers and the absolute peak capacity service for business customers.
  • A certain portion of the backup service normally provided by utility grid infrastructure, that is rarely fully used, will be provided by battery energy and capacity storage.
  • A portion of the energy requirements are provided by DERs.  The utility is still obligated to provide 100% capacity backup.
  • Utilities could offer a battery storage service to their customers and at least make sure such service was available in their region.
  • Regulators and government institutions force utilities to accommodate DERs in a variety of ways such as 100% backup and require utilities to purchasing off-peak power produced by DERs.
  • Customer facilities even residential ones would have their electrical system divided into base and peak.  For a residential facility, typically the utilities would ensure that the 100 amp base capacity is provided.  A DER/battery would be responsible for the additional capacity.
  • Utility rates continue to rise because of their cost of supplying 100% backup while selling less electricity.  This will initiate a difficult financial dilemma for utilities where as their rates increase DERs obtain a larger and larger share of the energy revenue.

It should be noted that the current trend is towards the negative outcome.  Utilities used to a monopoly situation build more infrastructure than they need and customers pick up the cost of the extra capacity.  One way that regulators can address this situation is to require rates where customers pay much more for higher capacity.  A 200 amp service for example could cost 8 times the cost of a 100 amp service; note that the cost of supplying a 200 amp service versus a 100 amp is much more than the direct cost of the wires to the house.  There has to be capacity structure from the street all the way back to the generator to support the capacity required by individual customers. By charging a fair amount for the initial capacity build utilities would be compensated for the infrastructure that is installed and at the same time DERs would be encourage in new construction plans.  For example if a 100 amp service cost $1,000 and a 200 amp service cost $8,000, the $7,000 saved by going for a 100 amp service could be put towards a solar panel/battery installation.

An accompanying change in business structure is that less utility revenue is going to becoming from capital investments in capacity and more in service to customers.   A variety of services will be needed to ensure a smooth operation of a utility grid and a network of DERs and utility companies can provide some of these services.  As electric vehicles (EVs) become more prevalent the situation will become even more complex as DERs, the grid and EV charging will need to be integrated with respect to normal service and during emergency situations.  Utilities are in a very good position to supply the large variety of services that will be required.  It seems that utilities if that have not done so already will need to setup business entities separate from their monopoly business so that as their monopoly business declines their unregulated business expands.   It will be interesting to see how various utilities will adapt to the changes that DERs,  EVs and the drive for reducing greenhouse gas will bring.

Paul Willis's picture

Thank Paul for the Post!

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Matt Chester's picture
Matt Chester on Aug 26, 2019 1:44 pm GMT

It will be interesting to see how various utilities will adapt to the changes that DERs,  EVs and the drive for reducing greenhouse gas will bring.

Indeed-- I don't think there's ever been a more exciting time to be in this industry!

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