Advanced Energy Perspectives

A New Approach to Valuing the Benefits and Costs of Distributed Energy Resources

Posted by Ryan Katofsky

Sep 25, 2014 11:08:00 AM

    

NASA-nycIn a recent post, we updated you on the status of the “Reforming the Energy Vision” (REV) proceeding in New York State, through which the Public Service Commission (PSC) is seeking to fundamentally reshape the electricity sector to meet a range of challenges, including the need to replace aging infrastructure, make the system more resilient, and reduce greenhouse gas emissions. Tackled separately, addressing each of these needs would impose new costs that would lead to higher rates for customers and put at risk a basic tenet of utility regulation: provision of safe and reliable electricity at just and reasonable rates. At the same time, electricity sales in New York are flat to declining (due in part to increasing levels of efficiency and wider deployment of customer-sited solar), which limits the revenue growth available to utilities with which to finance modernization of the grid, unless rates go up.

But with challenges come opportunities. The success of REV rests upon taking advantage of important technology and business developments, namely, the potential for distributed energy resources (DER) to make the system more efficient, customer-focused, clean, reliable and resilient. By DER we mean:

  • Energy efficiency (doing more with less by using efficient technologies and helping customers change behavior to reduce energy use)
  • Demand response (controlling when electricity is used, to make much better use of existing assets instead of building more power plants to meet peak demand)
  • Distributed generation (small-scale electricity generation, including rooftop solar, fuel cells for uninterruptible power, small wind power and other options for generating power close to load)
  • Energy storage (advanced batteries and other options for storing and delivering energy to optimize system operations and integrate increasing levels of variable renewable electricity generation, from small-scale solar to large-scale wind)

DER technologies, products and services have the potential to transform the way electricity is generated and used, but widespread DER deployment poses significant challenges for current utility business models, regulatory frameworks and electricity system design and operation. In some sense, DER is both the problem and the solution. Hence REV. 

For REV to be successful, utility regulators need a new framework for benefit-cost analysis (BCA) to accurately assess the full value of DER and to compare it to traditional solutions. Historically, utilities have applied a range of tests to energy efficiency measures and programs, in order to determine what was cost effective, and thus worthy of ratepayer funds. In the future, New York’s utilities will need to apply more comprehensive tests to a wider range of DER technologies and programs, in order to determine where investments should be made and which programs to offer. The notion of cost-effectiveness will need to be broadened from mainly dollars and cents (e.g., energy savings compared to initial investment) to include all costs and benefits in the context of how to best meet a range of policy objectives. This will include things that are hard to quantify and monetize but are still important, such as greenhouse gas reductions, and in the case of REV, goals such as “market animation.” Said another way, the new comprehensive BCA needs to determine what investments are in the public interest.

The NY PSC’s Straw Proposal (users of PowerSuite can track and collaborate on this vital regulatory proceeding here) clearly outlined the need for this type of BCA, a position supported by Advanced Energy Economy Institute (AEEI) and its state and regional partners in this proceeding, Alliance for Clean Energy New York and New England Clean Energy Council, in comments recently filed with the PSC. Knowing that many of the details still need to be worked out, AEEI commissioned a study from Synapse Energy Economics, a consulting firm based in Cambridge, Mass., to flesh out the key elements of such a BCA framework. 

Synapse draws on new thinking by energy efficiency experts to propose innovative screening mechanisms to determine whether various forms of DER (and portfolios of DER) deserve ratepayer-funded support to meet electric power system, economic, and societal objectives. The paper, “Benefit-Cost Analysis for Distributed Energy Resources,” is available here.

The Synapse paper recommends abandoning the traditional Total Resource Cost Test, which undercounts many benefits for meeting state policy goals, in favor of a Societal Cost Test, which takes a wider range of benefits into account. A Societal Cost Test is currently used in several jurisdictions, including Arizona, Vermont, and Washington, DC, though one would have to be developed specifically for New York, to reflect the policy objectives set by the state.

The paper also outlines various ways to approximate benefits of DER that are not traditionally accounted for in utility benefit-cost analyses, including monetary values, proxies, and other methods. The paper also addresses the issue of risk and the need to be a better job at accounting for risk in decision-making. For example, investing in traditional “poles and wires” to meet peak load growth may seem reasonable, but if in the future, customer deployment of DER makes those investments unnecessary, then those traditional investments become “stranded” and customers are left paying for them without deriving any benefit. 

In addition, the Synapse paper recommends an innovative approach to assessing customer impacts, one that considers all three ways that impact can be measured:

  • Rate impacts, which would apply to all consumers;
  • Bill impacts, which might vary between participants in DER programs (who would see their electric bills go down because they are using less electricity from the grid) and non-participants (who might see their electric bills rise due to rate impacts); and
  • Participation impacts, which would show how many customers are enjoying lower bills due to participation versus higher bills because they don’t participate.

Finally, Synapse recommends a Societal Discount Rate for financial accounting of benefits over time. Current discounting methods, based on the weighted average of utility cost of capital cost, reflect utility shareholder interests by deeply discounting long-term benefits, rather than the public interest in benefits that persist over time from utility investments. Such a Societal Discount Rate would range from zero to 3 percent per year in real terms, similar to other low-risk investments and significantly lower than the 5.5 percent discount rate now used for investments by NY electric utilities. This would provide a more accurate accounting of the value of future benefits from DER investments as they relate to meeting goals that are in the public interest.

The report by Synapse is not the end, but the beginning of a process that will bring together a wide range of stakeholders within the REV proceeding, in order to flesh out the details of the BCA that will ultimately be adopted in New York. One of our hopes is that this report will contribute to similar discussions being had around the country on how to value DER as it becomes an increasingly important component of the electricity system.

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Image credit: NASA.

Topics: 21st Century Electricity System

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Advanced Energy Perspectives is AEE's blog presenting news, analysis, and commentary on creating an advanced energy economy. Join the conversation!

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