When Bill Gates started Microsoft he set the goal of “a computer on every desk and in every home”. Up to that point computing had been highly centralized, based around powerful mainframes and “dumb” terminals that were limited to business settings. Gates’ vision largely came to be. Personal computers became widespread in business and home settings and spurred the rapid increase in labor productivity in the 1990s.
California’s tech sector had an outsized role in that evolution. Now the state’s electricity sector could be undergoing a similar decentralization. Over 1.2 million California households and businesses currently produce electricity from their own solar systems. Another million customers have agreed to adjust their electricity demand when called upon by the grid operator through demand response programs. The drivers of the state’s 400,000 registered electric vehicles could participate in similar programs in the future.
Collectively, customer-sited solar, electric vehicles and demand response are referred to as “distributed energy resources”. These are technologies that consumers use, or could in the future use, to do things that have traditionally been done by the centrally managed power grid. This includes producing energy with solar panels and quickly increasing or decreasing demand with smart thermostats or electric vehicle chargers. Small-scale utility-owned generators can also be referred to as distributed energy resources, but in this blog post I’m focused on resources controlled by utility customers.
According to recent California Energy Commission forecasts, a personal computing-style revolution is underway. The agency forecasts that from 2019 to 2030, behind-the-meter solar generation will grow by 260%, customer-sited energy storage will jump 770% and electric vehicle electricity consumption will grow by 370%. The hope is that these distributed energy resources will displace polluting fuels and could even reduce the need for the traditional centralized grid with all of its power plants, wires and other equipment.
In anticipation of these trends, the California Public Utilities Commission (CPUC) has opened a suite of rulemakings to update regulations and to prepare for and enable a more distributed energy future. The rules will govern how the future grid is planned and how much distributed resource owners get paid, or save, for their contributions. Policymakers are exploring a wide range of directions, I’d argue maybe too many. In this blog post I’ll discuss what research to-date suggests as the most promising directions for policymakers to focus.
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SOURCE: Enel
Lack of Evidence that Distributed Energy Resources Can Improve Grid Planning
Duncan Callaway and Meredith Fowlie described in a recent blog post how grid costs have been growing rapidly, and surprisingly. The CPUC has launched a new rulemaking focused on finding ways that distributed energy resources can reverse this trend. They will look at new approaches to coordinating investments and operations on the distribution grid. This includes a look at some radical, or innovative, ideas, such as restructuring the utilities and creating independent Distribution System Operators (DSOs). A study commissioned by the CPUC describes the DSO as an entity that would assume responsibility for planning and operations of the local grid from utilities. The DSO would also facilitate markets where distributed energy resources provide circuit-specific demand reductions, voltage support, or defer grid investments.
The vision of the DSO is exciting, but could be complex, time consuming and costly to establish. Policymakers should ask early on whether it’s worth it. Research so far suggests it may not be.
Research by Michael Cohen and Duncan Callaway shows that there are few parts of the grid where distributed solar (the most common type of distributed energy resources) can help defer capital investments. In the vast majority of locations, these resources provide very little value to the distribution grid. If these results hold up over time and more widely (they studied PG&E data) then policymakers should ask whether there are enough benefits to creating a DSO.
New research from Anna Brockway, Jennifer Conde and Duncan Callaway highlights another important dimension of distributed energy resources that would not be easily addressed by a DSO: inequality. They find disadvantaged areas have less capacity to accommodate distributed generation. This raises important policy questions about whether utilities should proactively expand grid capacity in disadvantaged areas so that a distributed energy future unfolds more fairly. Adding inequality reduction as a goal of a DSO would further complicate its difficult task, and could be more easily addressed by regulators through traditional rate cases.
Other potential value creation from distributed energy resources have yet to be studied, and should be. For example, the idea of establishing circuit-specific electricity prices that signal when consumers should use their resources to produce and consume electricity could be studied. But the research to-date does not make a strong case for creating a DSO or focusing on the grid planning benefits of distributed energy resources.
DSO
A Distribution System Operator Model. SOURCE: DNV GL, An Overview of Distribution System Operator Models, February 2020
Fixing Compensation
Research makes a strong case that policymakers should take action to change the compensation that renewable energy resources owners receive. Owners of distributed solar receive far more value in bill reductions than they are saving for the system, research shows. The growing number of owners of both distributed solar and energy storage pay utility rates that encourage them to minimize their consumption from the grid, but they receive no extra benefit from injecting energy into the grid at times when it would most benefit others. Drivers considering electric vehicles are faced with excessively high costs for electric fuel. Those that still buy an electric vehicle pay prices that offer little incentive to actively manage when they charge.
Consumers continue to invest in distributed energy resources at a rapid rate, and this will be further encouraged through new federal and state incentives. However, the flawed retail prices that distributed energy resource owners face are not encouraging investments in the resources that would be most beneficial to the environment or the wider grid. Fortunately, the CPUC is looking at some of these issues in current rulemakings and may initiate further efforts soon. The stunning projections for how quickly distributed energy resources could grow underlines how urgent these reforms are.