Distributed Energy Resources
Issue Brief

Distributed Energy Resources

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Summary

In a shift from the traditional electric power paradigm, utilities and utility customers are installing distributed energy resources (DERs), including distributed generation (DG) facilities that employ small-scale technologies to produce or dispatch elec­tricity closer to the end use of power. Driving this exponential growth is the dramatic decrease in the price of DER technol­ogy, as well as state, federal, and utility incentives for DER installations and state renewable portfolio standards (RPS). Use of DERs may offer numerous benefits, including avoided generation capacity costs (e.g., less need to build new genera­tion), avoided transmission costs, less need for backup power, and reduced air emissions, but it may also pose operational and economic challenges to electric utilities and their customers.

The American Public Power Association (APPA or Associa­tion) believes that DERs can play an important role in helping meet energy needs and achieving environmental goals so long as customers pay their fair share of the costs of keeping the grid operating safely and reliably. However, rate design and regula­tory requirements for DERs must take into account a utility’s technical limitations and geographic considerations. APPA also believes that DER implementation policy and rate design are matters of state and local retail regulation and therefore Con­gress and federal agencies should refrain from imposing federal standards, such as mandating that DERs be allowed participate directly in wholesale electric markets without the consent of state and local regulators.

Background

Distributed energy resources include demand response, ef­ficiency programs, and other demand-side management tools, as well as DG resources, such as solar photovoltaic installa­tions, small wind turbines, combined heat and power, fuel cells, micro-turbines, and storage devices (e.g., large lithium batteries or grid-connected electric vehicles (EVs)). Use of DERs may reduce the need for new utility generation assets and ancillary services, allow utilities to avoid higher transmission costs by reducing peak demand, reduce air pollution emitted by tradi­tional fossil fuel-fired generation, and assist utilities in hedg­ing against widespread power outages. Despite these potential benefits, DERs may also create operational and economic issues for electric utilities and power customers, each of which should be addressed at the local and state level.

For example, too much DG can create excess demand at a substation, causing power to flow from the substation to the transmission grid and increasing the likelihood for high voltage swings and other stresses on electric equipment. DG may also threaten lineworker safety. One such example is “islanding,” when the DG continuously energizes a feeder even though the utility is no longer supplying power due to an outage or other cause. In addition, DG is more difficult to monitor and may impact load forecasts. Finally, DG customers may introduce ad­ditional operational complexities for transmission, distribution, and generation systems more than non-DG-owning customers. Utilities will have to make capital investments to address these potential strains on the system, and these costs may be borne by both DG-owning and non-DG-owning electric customers.

Increased DG use may cause economic issues as well. For example, subject to applicable state or local laws, most elec­tric utilities compensate DG producers through net metering. Under a net-metering program, a utility will credit customers with on-site generation for their kilowatt-hour (kWh) sales to the grid and charge them for periods when electricity consump­tion from the grid exceeds their generation (or the net difference between consumption and generation). Under many net-me­tering programs, the customer is both charged and credited at the utility’s full retail rate of electricity, thus potentially over-compensating distributed generators with a value of generation that is higher than the utility’s avoided cost. Some states and non-regulated utilities have designed alternative compensation schemes to appropriately value the full costs associated with DG production, including: increased customer charges for fixed costs, residential demand charges according to peak kW usage, time-based pricing, and standby rates. Additionally, some utili­ties have developed net billing or buy-all, sell-all arrangements where excess solar generation is compensated at an avoided cost, wholesale, or value-of-solar rate. Still, some regulators (states, localities, and non-regulated utilities) have not implemented compensation schemes that properly account for certain fixed charges, and this may create an economic burden for both utili­ties and power customers. Community solar projects owned, in part, by consumers of the electricity produced by these facili­ties, may allow utilities to more accurately apportion costs and reduce variability on the system, thus addressing several of the issues associated with using solar DG. These economic issues may also arise in the future with the growth of storage and EVs.

These reliability, operational, and economic challenges may be even more severe if DERs are permitted to participate in wholesale electric markets without the consent of state and lo­cal regulators. APPA has raised this concern in response to the Federal Energy Regulatory Commission’s (FERC) 2018 rule allowing electric storage resources located on the distribution network or even behind a retail customer meter to participate in organized wholesale electric markets without the consent of state and local regulators. The Association, along with state regulators and other electric utility trade groups, has challenged this aspect of FERC’s storage rule in federal appeals court on jurisdictional grounds. FERC is currently considering additional rule changes to facilitate DER participation in organized wholesale markets, which could raise similar jurisdictional and practical concerns for APPA members.

Congressional Action

Several bills related to DERs were introduced during the first half of the 116th Congress, with legislation intended to incent the development and deployment of energy storage technology especially prevalent. Senator Martin Heinrich (D-NM) and Representative Mike Doyle (D-PA) introduced the Energy Stor­age Tax Incentive and Deployment Act of 2019 (S. 1142/ H.R. 2096), which would expand the investment tax credit (ITC) for solar to include energy storage with a capacity of at least 5 kWh and expand the tax credit for residential energy efficiency prop­erty to include battery storage with at least a 3 kWh capacity. Similarly, Representative John Curtis (R-UT) introduced H.R. 5409, the Incentivizing New and Valuable Energy Storage (IN­VEST) Act of 2019, which would establish a new, 30 percent ITC for energy storage property.

In addition, the Senate Energy & Natural Resources Committee passed a bipartisan, comprehensive energy stor­age package in September 2019. The bill, S. 1602, the Better Energy Storage Technology (BEST) Act, introduced by Senator Susan Collins (R-ME), includes several energy storage measures, including provisions from S. 1593, the Promoting Grid Stor­age Act of 2019. Introduced by Senator Tina Smith (D-NM), the Promoting Grid Storage Act would boost energy storage research and development efforts at the Department of Energy (DOE) and make public power utilities eligible for storage tech­nical assistance and grants. APPA supports S. 1593 as a stand-alone bill and its incorporation into S. 1602. The Association also supports S. 1602 as approved by the committee.

The Senate Energy & Natural Resources Committee also passed S. 2657, the Advanced Geothermal Innovation Leadership (AGILE) Act of 2019. Introduced by Committee Chairman Lisa Murkowski (R-AK) and Ranking Member Joe Manchin (D-WV), the legislation would reauthorize DOE’s geothermal research and development program for the next five years and add geothermal, including heat pumps and waste heat, to the definition of renewable energy for federal renewable en­ergy purchase requirements. The committee also passed bills to reauthorize DOE’s Solar Energy Technology Program, S. 2668, by Senators Martha McSally (R-AZ) and Kyrsten Sinema (D-AZ), and DOE’s Office of Wind Energy, S. 2660, by Senators Tina Smith (D-MN) and Susan Collins (R-ME).

Finally, Senator Martin Heinrich (D-NM) and Represen­tative Paul Tonko (D-NY) introduced the American Energy Opportunity Act (S. 2447/ H.R. 5335). The bill would require DOE to create a “Distributed Energy Opportunity Board” tasked with creating a voluntary, streamlined process for local permitting and inspection of distributed renewable energy, energy storage, and electric vehicle (EV) charging infrastructure. APPA is concerned with the one-size-fits-all approach, even if voluntary, envisioned in this legislation.

American Public Power Association Position

APPA believes that DERs can and should play an important role in public power’s energy portfolio, and it supports member utilities’ efforts to safely and effectively install and facilitate the use of DERs. To continue fostering the growth of DERs, the Association believes that it is important that all customers pay their fair share of the costs of keeping the grid operating safely and reliably. Thus, rate structures should be designed to reflect costs and assure that those who benefit from the grid are sharing the costs associated with building and maintaining it. Because community solar projects may address several issues associated with DG usage, APPA supports this type of ownership structure for solar DG facilities. The Association opposes attempts by the federal government to nationalize rate design and distribu­tion-related matters that have traditionally been governed by state and local laws. Finally, APPA believes that FERC should recognize the authority of state and local regulators to deter­mine whether DERs on the distribution systems they regulate should be permitted to participate in FERC-regulated wholesale electricity markets.