How locational value is transforming energy policy across the U.S.

What changes are driving an increase in the use of locational value for distributed energy resources? Policymakers across the United States are struggling to determine the best model for optimizing electric power distribution that meets their priorities and grid needs. Senior Associate Meegan Kelly and Senior Manager Matt Robison share ICF's perspectives on the current dynamics and where things are going.

Kyle Saukas: Welcome to this episode of "The Spark" podcast. I'm your host, Kyle Saukas.

Today, we're talking about distributed energy resources (DER) and determining their value. A Utility Dive article inspired this conversation on how the energy industry is facing challenges identifying the value of these resources. We're going to dive deeper into this topic with two of our experts here today, Meegan Kelly and Matt Robison to share ICF's perspectives on their value and where things are going.

Let's get started. Meegan, I'd like to start with you. Can you give a quick overview of what the article was about?

Locational value’s growing impact on electric utility planning

Meegan Kelly: The article gives readers a really good look at the current state of locational value, which has been a pretty hot topic in the electric sector in the last couple of years. From a high level, it's essentially a review of the hard work that different states and policymakers are putting in locational value. And it's more than just New York and California now.

It's clear that efforts are increasing across the country in terms of work to develop tariffs that incorporate locational value work to design utility programs that guide DER deployment with locational value. And also, work to try out newer stuff like non-wires alternatives. I think the problem that the article points out is that states haven't quite settled yet on a good consistent way to express locational value or to turn it into non-wires alternatives.

Kyle Saukas: Matt, for our listeners, can we just pause a second and explain what's meant here by locational value and non-wires alternatives?

What is locational value?

Matt Robison: The idea with locational value is that the resources on the system can be more or less valuable depending on where they are and when they're operating. And there's a version of this at the wholesale level. For a while organized markets used locational marginal pricing.

But in the past few years at the distribution level, as we have seen really massive growth in a number of markets for resources like solar and energy efficiency and demand response, there has been sort of this commensurate growth in interest in understanding how much value those kinds of resources are providing to the system by being at the right place at the right time.

Kyle Saukas: Does it really make a big difference where resources are?

Matt Robison: It can. Some of those differences can be pretty substantial. We did a study and I think we did a paper on this about a year ago about our work with one utility just as an example that show that the locational value of energy efficiency on one distribution feeder was about 140 percent higher than the value on another one. When we talk about locational value, we're talking about that kind of analysis of how resource outputs are matching local needs. One other thing that you can use locational value to do is what Meegan was just referring to and design better tariffs.

What are non-wires alternatives?

Kyle Saukas: What about NWA?

Matt Robison: NWA, non-wires alternatives, sometimes called non-wires solutions...what we mean by that is when utilities target their programs or procurement of distributed energy resources, again, things like solar, batteries, energy efficiency, demand response, they target those resources to meet local-grade needs instead of more traditional poles and wires solutions. In other words, we're referring to concentrating resources in order to avoid the need to build more distribution capacity.

Kyle Saukas: We're trying to get how utilities identify the need and opportunity for investments on the distributed grid based on specific locations. Got it. Meegan, what are some of the main takeaways you got from the article?

Approaches to locational value for the distribution of energy resources: Planning vs. compensation

Meegan Kelly: One of the things that just in reading it for myself that I thought was kind of clever or helpful framing was this distinction around how you can think about some of the issues surrounding locational value. It's a pretty big topic. The article talked about two ways, kind of, planning on the one hand and compensation on the other.

On the planning side, the locational value issues are more about finding and forecasting locations where distributed energy resources are gonna be cost-effective alternatives to traditional ones. That encompasses all kinds of interesting work around distribution level planning and integrating that with other planning processes to accommodate DERs on the system.

Kyle Saukas: That's more the focus Matt was talking about around NWA, right?

Meegan Kelly: Exactly. Or, at least, to use locational value to think about how to get resources to the right places and times to create value. That's the planning part. On the compensation side, it's more about trying to find approaches that do a better job than say traditional net-metering is doing or has done. There's lots of different policy options and tariff structures that states are trying out to better align compensation for DERs with the value they create.

I think that distinction between planning and compensation might not have been the main theme for everybody but I thought it was kind of a simplifying way to recognize that you can approach the locational value topic from a lot of different angles. It can be kind of a bridge between distribution system planning on the one hand and solar compensation efforts on the other. And we might start to see these come closer together.

Kyle Saukas: Matt, what about you? What was your biggest takeaway?

Matt Robison: First of all, I totally agree with Meegan's framing of those two issues here. I think that's a really useful way to think about this. They are two related but somewhat distinct set of issues.

With that in mind, my biggest takeaway was that the article's identifying that it seems like we have encountered a lot more challenges in both of those threads to date than we might have anticipated a few years ago, both in terms of using locational value for planning and for compensation in tariffs to replace net energy metering which is a lot of what Meegan has been working on.

What is net energy metering?

Kyle Saukas: Matt, quick description of what you mean by net energy metering.

Matt Robison: Net energy metering (NEM) is the predominant approach in most states for valuing and compensating distributed generation usually, solar. It's a tariff that basically says that you can get compensated for your generation at about the same rate or the exact same rate as you would pay to consume that electricity. In most cases, NEM rates are the same as retail consumption rates.

That assumption that there is an equivalence there is something that's been open to a lot of debate but that's the way most states have gone initially as a policy around compensating those resources.

Why states are changing utility incentives for better electricity distribution

Kyle Saukas: Meegan, Matt referenced states utilizing net energy metering a lot in the past. Are they looking to do new things now?

Meegan Kelly: I think states...they're definitely looking to do new things. They are searching and they are trying all kinds of different approaches. A lot of states have landed somewhere around the idea that NEM was an effective strategy for boosting the market for distributed solar but things are starting to change.

Kyle Saukas: Can you describe those changes?

Meegan Kelly: Net metering was really widely adopted when technology costs were higher and solar penetration was lower. This was the policy approach that was a really simple and effective way to get some solar deployed.

Now, we're starting to see higher penetrations and lower costs and some noticeable effects on the grid. That kind of leads to some recognition that a new kind of tariff that is more precise or some other method of guiding deployment in a way that optimizes the system is something that's worth pursuing.

A lot of states start by conducting cost-benefit studies on the impacts of net metering or exploring the value of solar tariffs. Then they end up using these studies to form the basis, the analytical justification for a path forward beyond NEM.

We recently did an in-depth review of a whole bunch of the most recent of these studies. That gave us a pretty good window into some of the different approaches that states are trying.

Kyle Saukas: I see. So as a result of studying the value proposition, it sounds like states are doing some things differently. But what exactly are they trying?

State-level policy strategies to optimize power distribution

Meegan Kelly: You see a few different things going on, and might be able to think about them in three different buckets.

1. In the first bucket we see different types of rates or different structures for rates. These are things like adding fixed charges or demand charges to customer bills or moving customers with solar to time of use rates.
2. In the second bucket, we see NEM alternatives and they look kind of like a NEM tariff but not quite because they use some rate other than retail like Matt was describing. There's maybe a new methodology that calculates an avoided cost or value of solar tariff is something that I think could fit in that second bucket.
3. Then the third bucket, which is maybe cheating a little bit as a kind of a catch-all but I think its approaches that look totally different. I think buy-all, sell-all is one that might fit in that category.

Either way, without getting into the weeds on how each of those mechanisms work, the common thread really is that there is a clear shift away from net metering policies towards frameworks that try to use locational value concepts to better align what people are charged for electricity with the cost they create for the system and also what they are paid for producing or even avoiding electricity use with the benefits that they bring to the system.

The policy problem with locational value

Matt Robison: Kyle, if I could add something in, I think all this work that's going on in the state—that Meegan just gave a great overview on—sort of sets up this fundamental question, which is what problem are you trying to solve ultimately by redesigning rates to align the locational value?

As Meegan was saying before, states agree that NEM was an effective strategy for boosting the solar market. If your policy objective is to promote adoption of solar or other distributed generation and that's a very worthy policy objective then these kinds of volume-based volumetric tariffs like net energy metering where you're paid for each kilowatt-hour that you produce are a great tool because they are very easy for consumers to understand and they provide a pretty robust level of compensations which stimulates adoption.

Kyle Saukas: I sense a "but" coming here at the end of your comment.

Matt Robison: There is a "but". Everything has a downside.

Purely from the locational value viewpoint the challenge you have with the volumetric tariffs is that, by definition, you are creating an average that administratively determine a figure which the experts that will then review the net utility dive article really so it would point it out. It's really hard to do that in a dynamic and fast-changing system.

That's one of the reasons why, for example, in New York, regulators had put in this mechanism in their NEM successor tariffs to recognize locational value right on the distribution system where you could avoid capacity. Just recently the staff there proposed eliminating that component that was meant to capture that value at specific high-need barriers of the distribution system.

It seems like it's hard to get it right with these kinds of tariffs. That really suggests that what you're trying to do is express and compensate locational value. Tariffs just may not be the best way to do it especially volumetric tariffs no matter how much you tweak them to align better with locational value.

Kyle Saukas: What would you say are the alternatives?

Matt Robison: It gets back to that question of what problem are you trying to solve?

If the problem you're trying to solve is how do you use locational value from a planning standpoint along the lines of distinction that Meegan was drawing earlier, and that planning viewpoint of getting the right resources to meet grid needs at the right time and location, that's where we have seen more of this focus around non-wires alternatives.

NWA are a good solution if you want to have a precisely-tailored market that gets the right DER right place, right time, and really critically operates under a set of contractual terms that from a planner's standpoint guarantee or at least incentivize performance. That helps to give you the needed verifiable reliability that planners are looking for and the assurance that you are paying for performance.

Why are states prioritizing tariff reforms over non-wires alternatives?

Kyle Saukas: So why do we see so much continuing focus on reforming tariffs rather than just doing lots of non-wires alternatives?

Matt Robison: We're definitely seeing a lot more non-wires alternatives than we were even two or three years ago, a lot more focus on NWA around the states.

But as I said, everything has a downside. One thing that the article does a very good job of making clear and we have a similar perspective, we just covered this in a webinar a few weeks ago that these are really early days for NWA. There's a lot that's still being worked out around the country through pilots about how to make NWA work. It's not clear, for example, that there is quite as many suitable opportunities as might have been hoped.

There's still a lot that's being figured out about those contractual terms about procurement approaches, about the analytics that underlie identifying needs and the right portfolio of distributed energy resources to meet those needs.

In deregulated markets, there is questions about dual participation rules for resources that could be providing services at both the distribution and wholesale level. There is a whole bunch of barriers when it comes to NWA that are being actively worked on but we're not quite there yet.

What is the future of locational value?

Kyle Saukas: Meegan, I want to turn back to you. What do you think is the way forward for locational value? Is there a best approach or a more promising avenue?

Meegan Kelly: It's really hard to say. I'm afraid there isn't one best approach. I wouldn't really expect a single best way to tackle this to emerge.

Policymakers should definitely keep trying to address and use locational value in efforts going forward. I really do appreciate how hard it can be for stakeholders to spot the differences in all the sort of different approaches that are being tried and pick a model that is most suitable for their priorities and their grid needs. That's one of the biggest issues. Policymakers can come at this from all different directions. I have seen that from talking with people in different corners of our industry.

Some people see proliferation of DERs as causing problems on the grid and others see DERs as providing a solution to what the grid needs. Some people see the loss of net metering as an attack around solar and others look at it as a kind of fix to overcompensation for a particular resource. All of those things could be true in a certain situation.

Work on locational value is a nice way to try to sort out the signal from the noise and end up in a place on the other side where you're making more targeted grid investments that really optimize what your priorities are.

I think that's really the key. That's what Matt has been driving at...is that you've got to take stock of your priorities and use that to inform what the best approach for you is gonna be.

The method that looks most appealing really depends on what you're most interested in optimizing for. When you hear states prioritizing greenhouse gas emissions reductions or some of them are maybe prioritizing cost-effectiveness, like Matt was saying, those are valuable policy goals.

But the most important question for policymakers when trying to tackle locational value is really what do you wanna use it for?

Kyle Saukas: Matt, same question. Where do you see things going on locational value?

Matt Robison: The tone, even the very title, of that Utility Dive article that we started off with as a launching point for this discussion really suggests that there is some skepticism and some disappointment about where locational value is currently. Some of that is definitely warranted.

Another way to think about the story here is that states are currently acting as labs for locational value and actively trying to figure it out.

One of the things that emerged in the course of Meegan's review, is that over the last few years, since 2015, you're seeing two-thirds of the states in the U.S., 37 states, have undertaken some form of study whether it's adjusting from NEM to a NEM 2.0 or a value of solar tariff or extending that valuation to other DER.

And as I mentioned earlier, we're seeing a lot more activity on non-wires alternatives. We're seeing pilots in half the states in the U.S. now. Then there is all this other work, time of use rates, leveraging AMI data from smart meters to understand consumption patterns and netload shapes to help design rates and incentives.

There is a consilience of work around the best mechanisms, the best way to leverage locational value, how to work in demand-side management resources, and we're seeing that beginning to shape tariffs. We're seeing it shape non-wires alternatives. We're even seeing it shape the next evolution of programs, energy efficiency programs, in a way that wring more value out of those kinds of programs.

In some, I see a little bit more of a positive view on where locational value is and where it's going. There is a lot of work underway.

It's turning out to be a little bit harder to get a handle on and reflect accurately than might have been hoped a few years ago. But I think that the way is paved to see a lot of progress on all of those avenues, tariffs, and programs, and non-wires alternatives in the next few years.

Kyle Saukas: That's a good note to end our discussion today. Thank you, Matt and Meegan, for sharing with us the current state of the industry in our search for a locational value. Thanks for everyone listening in. If you want to learn more or have comments on how utilities in states are approaching locational value, reach out and tag us @ICFEnergy on Twitter or on LinkedIn and Facebook. We'll see you next time.