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. Many utilities see DER ownership as a natural extension of their traditional business model and themselves as best suited to provide cost-effective solutions. Conversely, many non-utility DER providers view DER as belonging in the competitive market.
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 existing customer relationships through monopoly service, a regulated way to recoup investments, unique knowledge of their service territories, and a 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. Unregulated companies must also compete with each other to continually improve on costs, technology, and service quality in an effort to attract value-seeking customers. 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 may 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 customer-sited 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, Arizona 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. 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, and may tilt the competitive landscape in Arizona.
Things have gone differently in New York. As part of the Reforming the Energy Vision proceeding, the Public Service Commission (PSC) drew a clear line on DER ownership, prohibiting regulated 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, particularly in comments we have submitted to the New York PSC, we have stated that owning DER and providing DER services to individual customers should generally be left to the competitive market. Unregulated affiliates of utilities should be considered part of the competitive market and should be able to own DER, contingent on the enforcement of rules to ensure that they do not benefit unfairly from their business relationship with the regulated utility. (For a full list of those rules that we suggested in New York, see pgs. 46-47 in our NY REV Initial Comments on the Track 1 Straw Proposal.) However, we recognize that regulated utilities do have a role to play in spurring the adoption of DER, and therefore could also own some DER and provide some DER services as long as they do not use their unique market position to achieve an unfair competitive advantage. Specifically, AEE has stated that regulated utility DER ownership 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 certain types of microgrids serving multiple customers
- Programs that address underserved customer segments that could benefit from involvement by regulated utilities until a competitive market emerges
- DER demonstration projects to test new technologies or innovative solutions.
We also believe that regulated utilities, when considering DER solutions to traditional grid needs, should rely as much as possible on the competitive market to procure those solutions, before building and owning the DER themselves.
In short, at AEE we don’t view regulated utility DER ownership as a black or white issue, and see opportunities for utilities to own DER in some circumstances. Utilities will also have opportunities to invest in a modern grid that can integrate, and benefit from, greater DER deployment overall. 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.
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