By Robert Mullin

SANTA MONICA, Calif. — Attendees at last week’s Infocast California Distributed Energy Summit received a crash course in the complexity of developing policies on distributed energy resources in a state that already boasts nearly 5,000 MW of rooftop solar.

The takeaway: Conflicting regulatory drivers and misaligned utility business models must be addressed to ensure the value of DERs is maximized and that consumers aren’t saddled with the costs of stranded assets.

Moderating a panel on regulatory issues, Brandon Smithwood, California state affairs manager at the Solar Energy Industries Association (SEIA), let panelists weigh in on the “alphabet soup” of agency proceedings intended to foster the integration of DER.

“To us, DER is anything that’s connected to the distribution level,” said Tom Flynn, storage and DER policy manager at CAISO. “Any resource of any type, any technology. It doesn’t matter to us whether it’s in front of the meter, behind the meter — but it’s connected to the distribution grid, connected to the grid below the ISO’s grid.”

A few years ago, DER advocates expressed interest in aggregating those resources to participate in CAISO’s wholesale market, which requires participating resources to be at least a half-megawatt in capacity, Flynn said.

In response, the ISO allowed DERs to aggregate as a “virtual resource” distributed across multiple pricing nodes within the ISO’s system. That program, known by the acronym DERP — or Distributed Energy Resources Provider — was approved by FERC in June (ER16-1085). (See CAISO Tariff Change Would Extend Market to DER.)

Since then, the ISO has started another initiative called Energy Storage and DER — or ESDER. Among other things, that effort would allow developers to use storage to offset load behind the meter. Unlike other DERs such as rooftop solar, that storage could then bid demand response into the wholesale market.

Storage, “in effect, creates one of the first multiple-use applications,” Flynn said, noting that it can simultaneously participate as a supply- and demand-side resource.

Flynn noted that the California Public Utilities Commission has initiated a proceeding that explores similar issues, such as multiple-use applications; the ability to provide services to multiple entities; station power for storage; and interconnection processes and metering rules for DERs participating in wholesale markets.

More Letters for the Regulatory Soup

Will Speer, director of electric system planning at San Diego Gas and Electric, tossed a few more letters into the regulatory alphabet soup, bringing up the CPUC’s Integrated Resources Plan and Distributed Resources Plan.

The IRP seeks to help California utilities find the least-cost mix of resources, including DER, to meet the state’s greenhouse gas reduction goals. (See Integrated Resource Planning on the Horizon for California.)

The goal of the DRP is to determine the ability of a utility’s distribution system to accommodate DER, Speer said.

“The first requirement was to complete an integration capacity analysis,” he said. “The next big piece of this is a locational net benefits analysis. It’s really looking at — for the locations of feeders — what is the locational net benefit of DERs in those spaces?”

Another component of the plan: demonstration projects to examine the locational benefits of DER and the use of microgrids.

Jim Baak, director of grid integration at nonprofit policy advocacy group Vote Solar, said the number of acronyms indicates the complexity of the regulatory landscape.

“In typical public utility code fashion … we’re very good at parsing issues into siloed proceedings and programs,” Baak said.

To provide a sense of the complexity, Baak listed the topics being treated under separate and overlapping proceedings: electric vehicles, DR, energy efficiency, interconnection rules, the renewable portfolio standard, time-of-use rates, net energy metering, general rate cases, integrated resources planning and energy storage.

That creates a lot of “conflicting drivers” for DER, Baak said.

One of those drivers is the traditional utility planning process, which focuses on loads, resources and forecasting.

Another driver is state policy objectives, which seek to reduce GHG emissions, support jobs and enhance customer choice in energy supply.

And then there’s yet another layer: customer demand and the market forces responding to it.

‘Evolving Customer Preferences’

Although the industry recognizes consumer demand in terms of forecasting and deployment of DER, the planning process is not fully factoring in long-term changes in consumer behavior, Baak contended.

New industry entrants such as Google, Microsoft, General Electric and ADP are seeking to provide services to consumers about how they “consume, produce and think about energy,” Baak noted, asking how that development fits with the traditional utility planning structure and business model.

“If you think about it for a while … there’s not a real good fit,” he said. “We’re sort of trying to overlay this existing infrastructure that we have in the regulatory process with market forces that are happening.”

DER is comparable with the “disruptive” technologies and processes that gave rise to businesses like Uber and Airbnb, and something that can’t be forced into traditional utility structures, Baak said.

“And the one piece that I feel is missing in California is the vision for this,” he said.

Baak acknowledged that the technical proceedings seeking to identify ideal locations for implementing distributed resources are necessary for maintaining reliability. But he also wondered how well equipped they are for meeting state policy objectives and consumer needs.

“What happens when a customer wants to put in an electrical vehicle or solar system in an area of the grid where there are not necessarily grid benefits for doing so?” Baak asked.

And Baak pointed to the elephant in the room: the need to reform the utility business model, an effort that requires regulatory input and oversight.

“We do need to recognize that there’s a misalignment between the utility’s financial objectives and the policy objectives that we have here for DER,” Baak said. Utilities are being asked to defer investment in infrastructure on which they could earn a rate of return for shareholders and instead procure third-party DERs.

In May, New York regulators approved an order revamping their utility business model, creating new revenue streams tied to utilities’ willingness to become “distribution system platform providers” that plan, operate and administer markets for distribution-level services. The order creates incentives based on how well utilities meet goals for GHG reductions, system efficiency and energy efficiency. Customer satisfaction surveys of DER providers also will be a factor. (See NY REV Order Revamps Utility Business Model.)

California has put no such mandate in place, just a set of incentives and “a vague idea of where we think this should go,” Baak said.

“We have to make sure the utilities are structured in a way, and financially awarded in a way, that they support the policy goals of the state as well as the market forces that are driving this,” Baak said.

Speer concurred with Baak up to a point, contending that the state’s support of DER is focused on a goal.

“It’s not just to promote DER to promote DER, it’s to achieve reductions in GHGs,” Speer said. “I do think that vision’s out there, but there is a lot of work to be done.”

“I get a sense in everywhere that we go that we want it to happen today,” Speer continued, adding that customers will suffer without proper planning.

Baak said Vote Solar feels “a sense of urgency,” both because of the state’s climate goals and an anticipated increase in consumer demand for DER as prices decline.

CAISO’s Flynn acknowledged that “evolving customer preferences” — and not just public policies — are driving the adoption of DER.

DER owners’ desire to maximize their investments led the ISO to begin developing ways for DERs to access its wholesale markets.

The ISO is starting to see DER as a more significant supply resource, something that can both offset and serve more load.

Keeping Distribution in the Loop

But with that trend comes increased effects on the utility distribution system, which “are going to more and more affect the transmission system — and vice versa,” Flynn said.

Distribution utilities are developing the capabilities to manage those effects, but increased participation by DER in wholesale markets will require improved data transfers between CAISO and utilities, he said.

Flynn pointed out that an ISO dispatch order to a DER market participant — which puts power on the distribution grid hosting the resource — leaves the distribution utility “completely out of the loop in terms of information.”

“They don’t know what that DER is offering to provide us in the wholesale market,” Flynn said. “They don’t know that we’ve issued a dispatch instruction to them.”

That has alerted CAISO to a “major gap” in its processes: the need to improve data exchange with utilities — something just as important to the ISO, which needs to ensure a predictable response by a DER.

“I think everyone’s goal here is to optimize the use of DER,” Flynn said. “We don’t want to leave value on the table.”

Baak brought the consideration of that value into the context of the regulatory process, noting that Southern California Edison has submitted a rate case proposing more than $2 billion in distribution grid investment to facilitate increased deployment of DER.

While Baak acknowledged the need to modernize the grid, he contended that some of that investment could be displaced by using DERs more cost-effectively.

His organization is concerned that without a utility business model reformed to accommodate DER, regulators will sanction unnecessary investment in utility infrastructure that will remain as a fixed cost in the rate base for 20 years. As the growth of DER allows more customers to supply their own energy, the utility rate base will decline.

“Well, what happens to that fixed-cost recovery?” Baak asked. “Now you’re exacerbating the problem of fixed-cost recovery over a diminishing rate base. What happens to rates?”

Those issues will have to be resolved in a way that supports the state’s energy and environmental goals, Baak contended.

“We’re concerned that, because these proceedings are moving forward independently without that vision, we’re going to end up with a solution in the end that’s less cost-effective for consumers.”