The electric utility industry often experiences episodes of marked change, during which operating practices and market structures are challenged, reconsidered, and sometimes transformed into fundamentally different business and regulatory models. We're in the middle of such an episode now.
The current change is driven largely by the growth of distributed energy resources — solar, wind, energy storage, etc. — as environmental concerns increase and as consumers want more of a say in how their energy needs are met.
What Does a Distribution System Operator Do?
The evolution of distributed energy resources and behind-the-meter activities raises questions about how to manage the markets and trading of energy sources. It's no longer a one-way street of utilities providing electricity to customers. Increasingly, customers are also putting energy back into the grid and requiring information and services that will help them better manage their energy use. These trends have led to the evolution of the Distribution System Operator or Distribution System Platform Provider concepts. (Some would distinguish DSOs from DSPPs, but as the similarities vastly outweigh the differences, I'm using DSO/DSPP as one concept).
A DSO/DSPP is a single entity that optimizes all available DERs and plans how they are dispatched to meet the demand for electricity.
The DSO/DSPP model has significant consequences for electricity distribution utilities in terms of operations, scope of services provided, planning, rate making, cost recovery, and customer service.
While already in use in some European countries, the DSO/DSPP model has not yet been fully implemented anywhere the U.S., but it is being widely discussed in trade publications, at industry workshops, and in regulatory proceedings. The model has perhaps advanced most in New York State's Reforming the Energy Vision program — a grid modernization effort to achieve renewable energy goals, in part, through rapid deployment of DERs. The DSO/DSPP concept is central to the REV, with functions and capabilities prescribed by the New York Public Service Commission. Implementation is under way.
Drawing from REV definitions and alternatives that have been offered, the major functions of a DSO/DSPP can include:
- Balancing supply and demand at the distribution level
- Dispatching DERs to meet system and customer loads
- Providing distribution platform services — customer and provider interface, data analysis, development and administration of access fees and other compensation mechanisms
- Planning the distribution system
- Ensuring distribution system reliability
- Developing, facilitating, and providing oversight of markets for DERs
- Coordinating with ISOs, RTOs or other wholesale markets
DSO functions may need to extend across multiple service territories.
Who Will Be a Distribution System Operator?
Who will play the role of DSO/DSPP? Should it be utilities or independent entities, like the regional transmission organizations and independent system operators for wholesale electricity markets?
If a utility is to serve in the DSO/DSPP role, should it be allowed to develop and own DERs? The concern has been raised that if a DSO owns generation, it would favor its own assets when determining which resources are called upon to provide services and when.
What Should Utilities Expect?
Differing views on the DSO/DSPP model can be tied to grid modernization and broader industry change. Some people envision a mostly decentralized grid coupled with primary reliance on DERs and advocate for a rapid transition to a comprehensive DSO/DSPP model. Others see a less dramatic, but still appreciable, trajectory for industry reforms proposing a lighter" version of the DSO/DSPP model.
While some reform will be industry wide, change will vary greatly across communities, states, and regions. However, all utility leaders should consider the potential impact of the DSO/DSPP construct.
First, there will likely be cost impacts. Utilities that take on DSO/DSPP responsibilities may face significant capital outlays for equipment to support communications, data collection, telemetry, system controls, customer accounting, and other services. The added functions may also require additional people, or people with specialized skills. These costs may or may not be offset by savings eventually but they will initially create direct burdens that will need to be managed. Even if an independent DSO/DSPP is formed, utilities may end up covering a good portion of the incremental costs.
New cost allocation and cost recovery mechanisms will have to be deployed which can have negative impacts, especially in the early stages when financial results will be uncertain and customers will need to adjust to new rate making practices and procedures.
There are also questions about the proper means of valuing DERs, allocating and recovering costs, and using incentives and subsidies to encourage particular resources or outcomes instead of relying on decentralized market responses to price signals.
With an independent DSO/DSPP model, distribution utilities might end up transferring substantive responsibilities to the DSO/DSPP, thus relinquishing some control and independence. Important aspects of the distribution utility business model could be subsumed by the DSO/DSPP.
Public power utilities may be affected differently than investor-owned utilities, but they will not be immune from the changes. In New York State for example, public power utilities are exempt from most of the REV directives, including the requirement for the state's IOUs to assume the DSO/DSPP role in their service territories. However, public power utilities should not become complacent, because broad-based change will ultimately affect all market participants. Remember, public power WAS affected by formation of RTO/ISOs, the development of centralized capacity markets and other wholesale market reforms.
There may be elements of change that public power utilities will want to adapt to their unique circumstances. For example, much thought has been given to the design of earnings-based financial incentives for IOUs to invest in or buy the output of DERs and other renewables on an unbiased basis. Public power utilities may want to suggest ways to modify these incentives to work in the context of a not-for-profit business model.
As always, the course of change is uncertain, but the DSO/DSPP model seems to be gaining traction and the implications for both public and private utilities, as well as other market participants and customers could be significant.
The American Public Power Association will monitor the trends and keep our members informed. Tracking the evolving utility business models is a key aspect of APPA's Public Power Forward strategic initiative to be implemented starting in 2016. Public Power Forward is an umbrella term that APPA has coined for the new and evolving energy technologies — distributed generation, energy storage, demand response, and innovative energy efficiency techniques — that public power utilities must be responsive to. APPA is here to help our members understand and deal with the rapid changes in energy technology, customer preferences, and utility business models."