Distributed energy resources (DERs) are becoming an increasingly important element in the U.S. electricity system, capable of driving us toward a more flexible, reliable, resilient, affordable, and clean grid. However, when any industry goes through a substantial change, there are questions that must be answered. What entities should be allowed to own, operate, and control DERs and DER services? Should a monopoly (i.e. the utility) be allowed to compete against private advanced energy companies given their inherent competitive advantages? In places like Arizona and New York, answers are starting to emerge, but are not yet settled.
Flat load growth resulting from improvements in energy efficiency and from the adoption of customer-sited distributed generation are stressing the traditional utility business model. As a result, utilities are looking for new ways to grow their revenue streams. This is where the expanding DER market, both in front of and behind the meter, comes into play. Utilities see DER ownership as a natural extension of their traditional business model and themselves as best suited to provide cost-effective solutions.
There is no doubt that utilities have a big role to play in a DER future, but in terms of owning and rate-basing DER, there are several potential implications that must be taken into consideration. Utilities have many built in advantages over potential non-utility competitors, such as captive customers, existing relationships, a regulated way to recoup investments, unique knowledge of their service territories, and low cost of capital. If allowed to own DER installations and services, a utility would be able to exercise its market power and achieve an unfair competitive advantage. This could in turn disrupt and stifle the development of a thriving competitive market.
Competition provides a different set of advantages. Freestanding advanced energy companies bring to the table innovation, financial creativity, and opportunities for customer choice, all while saving customers money. If a regulated utility, with its inherent competitive advantage, steps in to provide a DER solution before the competitive market gets a chance to develop, it will have a chilling effect on private sector investment - and customers may never know what they are missing.
States in both vertically integrated and restructured markets, have been grappling with these questions.
Rewind two years ago to Arizona, where Arizona Public Service (APS) and Tucson Electric Power (TEP) each received approval to implement utility-owned solar programs. Regulators allowed APS to build 10 MW of solar on 1,500 homes and approved TEP’s request to develop 3.5 MW of rooftop solar in its service territory. Both utilities justified these programs as giving them a vehicle to study the impact of rooftop solar on their distribution systems, while solar advocates objected that the utilities were looking to squeeze third-party solar out of the Arizona market, and that these limited programs would be just the beginning.
On March 1, APS, Corporation Commission Staff, industry representatives, and solar advocates filed a settlement agreement in APS’s general rate case which included, among other things (most notably a successor net metering tariff), an expansion of the utility-owned solar program AZ Sun by $10 million to $15 million per year for three years. If approved by the Commission, the program would be limited to low- and moderate-income residential customers, nonprofits that serve low- and moderate-income residential customers, schools, and rural government customers. A final decision on the full rate case, including the AZ Sun expansion, is expected by April 24. If this settlement agreement is any indication, utility ownership of DER in Arizona, while still limited and circumscribed, may be allowed to grow over time, ultimately threatening the competitive third-party market.
Things have gone differently in New York. As part of the Reforming the Energy Vision proceeding, the Public Service Commission drew a stark line in the sand, prohibiting utility ownership of DER except under three circumstances: 1) when integrating energy storage on the utility’s distribution system for reliability purposes or integrating variable renewable resources; 2) when implementing programs that address underserved segments of the market (e.g. low- to moderate-income customers; and 3) when establishing demonstration projects to accelerate market understanding and develop innovative business models.
These restrictions are not too different from those constraining utility-ownership of solar in Arizona, but the intent of New York’s PSC is very different: to establish tight - and permanent - restrictions on utility ownership, so as to allow a competitive market for DER to grow and flourish.
At AEE, we believe that owning DER and providing DER services should generally be left to the competitive market and that regulated utilities should be prohibited from exercising their unique market position to achieve a competitive advantage. However, we recognize that utilities do have a role to play in spurring the adoption of DER, but it should be limited to the following circumstances:
- Sponsorship and management of energy efficiency and demand management programs
- Ownership of distributed generation (DG) assets on utility-owned property for purposes of maintaining reliability, providing balancing and ancillary services, and performing other related grid functions
- Development of microgrids and community DG systems
- Programs that address underserved customer segments that could benefit from involvement by regulated utilities until a competitive market emerges
- DG demonstration projects to test new technologies or innovative solutions.
As penetration on the grid increases, utilities will be looking to DER as an additional revenue source. To ensure a fair market opportunity for all providers, it is important for states to clearly delineate the roles that utilities and non-utility providers should play in owning and offering DER products and services.
States are taking the lead in creating markets for advanced energy. Join us April 19 for a free webinar examining how states are leading the way.