3 ways utilities can leverage DER strategy to de-risk climate efforts
States are taking aggressive new steps in energy and climate policy: 24 have set explicit climate goals and over 90 cities have launched 100% renewable energy mandates. As a result, 50 investor-owned and large municipal utilities across the U.S. are now under stringent obligations to meet climate targets…and that number will only climb.
Many of these obligations will likely be met by procuring or building large-scale, central station renewables. There are, after all, solid economies of scale on the side of larger installations that may outweigh the locational value advantages of distributed energy resources (DER).
But, DER will also be a major and increasing factor in climate efforts. From a utility standpoint, this can be a good or bad thing.
On the one hand, DER penetration complicates forecasting, which increases the risk of stranded generation or transmission and distribution assets. It requires more complex and labor-intensive planning and operations that can raise costs, exacerbate rate pressure, and crowd out other needed capital investments. Plus, it introduces new market entrants into the utility’s traditional ownership of its customer relationship.
On the other hand, utilities can take steps to address these challenges, reaching productive outcomes by working closely with regulators and stakeholders and enhancing customer relationships. A smart strategy for leveraging DER can help utilities navigate certain risks of the transition to low-carbon generation, as well as new market realities.
DER will be a big part of the mix
Why will DER be such a large factor in jurisdictions pushing on climate?
Three reasons:
- Customers: More than 16 gigawatts (GW) of total annual photovoltaic (PV) capacity alone are predicted by 2021, not to mention growth in storage, electric vehicles, combined heat and power, and managed load programs. Consumers want these products, and markets are responding in every state.
- Incentives: Many—though not all—state-based incentives tied to climate policy value distributed resources equally or higher than large-scale renewables (the federal ITC applies equally). For example, New York’s value of distributed energy resources (VDER) tariff includes a mechanism that values distributed solar above retail net energy metering (NEM). In fact, all NEM and most value of solar tariffs implicitly assess these resources at higher than pure-economic worth based on time and location of use. Growth in these kinds of pro-DER policies is more widespread than most realize, with 172 new state distributed solar policy actions taken during Q2 2019 alone. Due to incentives like these, markets will continue to select, and perhaps over-select, for DER.
- Economics of demand-side management (DSM): Demand response and energy efficiency are inherently distributed resources. They’re usually among the most cost-effective solutions available, especially when there are existing utility or state programs to tap into or expand. Most state and local climate policies include DSM-tied components for this reason.
So, what should utilities do?
DER growth in these climate-aggressive jurisdictions can result in positive or negative consequences for utilities, depending on whether they have a strategy to leverage it. Here’s what utilities can do to de-risk the process:
1. Invest in sophisticated forecasting methods, load disaggregation analytics, and program design
The growing risk of getting things wrong puts a premium on analytics, especially for DSM. There is widespread industry recognition that forecasting challenges—which utilities and others have faced for years—are only growing in the context of increased DER penetration. Utilities need to know how much they can rely upon DSM programs and other DER as part of their planning, as well as what localized impacts these resources will have.
Aggressive climate goals increase rate pressure and change the value of system assets. Thus, utilities face a higher risk of missed forecasts and investment mistakes—including more stranded assets (i.e., long-term investments in larger thermal units or even renewable installations).
This is why we see utilities investing in more sophisticated forecasting methods, load disaggregation analytics, and smart program design. By better understanding load drivers and DSM program impacts and, in many cases, leveraging better meter data, utilities mitigate risks. They can ultimately right-size resource procurement and benefit from more cost-effective programs.
2. Start developing expertise in integrated demand management through NWA pilots
Growing interest in leveraging DER is leading to a harder push from regulators and interveners. Hand-in-hand with policy mandates on climate and renewables, there is an increasing recognition that distributed resources can defer or replace the need to invest in traditional distribution infrastructure. In some instances, we see this recognition realized through non-wires alternatives (NWA) or equivalent tariff mechanisms that steer DER to “beneficial locations”. As a result, interest from regulators and interveners in testing NWA solutions has ballooned, and half of our states now have NWA activity.
We’ve seen some early successes and real promise to distribution NWA. ICF has worked on pilots where DER solutions helped defray traditional investment costs and left more funds for other measures to cut emissions or invest in the system. However, these are early days. Some regulators and interveners are pushing for much more aggressive use of NWA or other DER-led solutions—even to the point of removing planning functions from utilities. There is still much to be learned about how DER can effectively complement utility distribution planning, whether by leveraging third-party procurement or ongoing programmatic efforts for strategic integration of DER.
In the longer term, integrated planning and program management are likely to be primary business functions for utilities—but we’re not there yet. The best thing utilities can do today is to develop expertise in integrated demand management through NWA pilots to nail down methodology and assess opportunities in their system.
By working proactively with regulators, utilities can proceed at a productive pace, develop a shared understanding of what DER and NWA can (and can't) do, and generate savings for system investments. These pilots also help utilities understand the types of grid modernization investments and operational advances needed in a higher DER environment.
3. Provide the DER services customers want, using data to improve program delivery
DER are undercutting utilities’ biggest asset—their customer relationship—but this can be prevented. They may not have the same impact on the system as their large-scale relatives, but DER are typically much more visible in daily life—and that matters. Customers have a different, and often much closer, relationship with DER.
So, while total grid defection remains a threat to the utility business model, DER familiarize customers with new vendors: solar installers, electric vehicle dealers, and lighting and appliance manufacturers. Jurisdictions with aggressive climate goals often have more engaged consumers with higher renewables and energy-saving interests—many goals pass in referenda. They also have a harder thumb on the energy market scale for DER in terms of incentives.
Utilities should want to be part of these daily interactions as an avenue for expanding their services, strengthening customer loyalty, and building a better understanding of what customers want. If utilities aren’t on top of providing desired services around DER to meet targets, they may quickly fall behind other market players.
Fortunately, many utilities are actively working to stay in the game and using their best assets to do so. Utilities are leveraging the wealth of customer data they’re generating to deliver higher-value products and energy services. They also have effective DSM programs in place and actively work to pair data insights with delivery, so consumers get the services and environmental impact they want.
The upshot: If you’re not at the table, you’re on the menu
The climate push will only accelerate market trends that are expanding DER customer interest and penetration. If they haven’t come to your jurisdiction yet, they will soon. These changes present real system and market risks. The best solution is to lean into your DER strategy early—sharpening analytics, designing DSM programs, participating in regulatory discussions on leveraging DER through NWA, focusing on integrated planning, and enhancing the use of data. With such efforts in place, utilities can decrease risk, improve investment decisions, and deliver the climate action that regulators, policymakers, and consumers demand.
