Get Ahead of the IDER Wave or Be Crushed By It

At the Business of Local Energy Symposium in June David Hochschild, a Commissioner at the California Energy Commission, and Mark Ferron, a Board Member of the California Independent System Operator, agreed that Community Choice Agencies (CCAs) are “the most innovative and exciting development in the United States” in the clean energy sector. They are also the most rapidly growing part of California’s electric service providers in terms of customers served and if current trends continue will control a dominant share of the generation market in California.

But what will the movement look like in five years? Will it still be a low cost service provider that delivers a larger percentage of clean energy than the investor owned utilities to customers? How will CCAs respond to a very dynamic market in California, with market and regulatory changes, new technologies, and will their strategies be successful?

One line of argument is that CCAs should begin to accelerate their support and/or deployment of integrated distributed energy resources (IDERs). Not just solar, energy storage, energy efficiency, demand response, microgrids and electric vehicles, but all of these technologies integrated in an optimized system. But CCAs have other competing priorities like providing reliable service, meeting state requirements, and building up their financial reserves. Many CCAs also have relatively lean staffs and do not have the expertise in house to initiate or manage IDER projects.

So is the best approach to go slow, or accelerate planning and implementation in the early life of a CCA? There are a number of trends right now that suggest that CCAs and load serving entities of all stripes will need to be able to better accommodate and integrate DERs into their operations. Ben Kellison, Grid Edge Director at Greentech Media Research, recently suggested that DERs are poised for “explosive growth” across the United States over the next five years. He emphasized that U.S. utilities “need to change, and are slowly changing” how they plan, operate and maintain their distribution grids to adapt. He looked at DERs which together contributed 46.4 gigawatts of impact on the U.S. summer peak in 2017. By 2023, that figure is expected to more than double to total 104 gigawatts of flexible capacity.

DERs are scaling up. These are all customer side of the meter resources, so the question is will utilities and CCAs create programs to integrate them effectively to better serve their customers and grid stability? What CCAs and utilities alike should be doing is incentivizing Integrated Distributed Energy Resources (IDER) which will add value to the overall system.

There are plenty of trends that suggest that DER will become more functional, cost effective and necessary in the next few years. Here are a few:

  • Time of Use Rates are coming in 2019, customers will be looking for ways to reduce their cost of electricity
  • Lack of storage is putting the brakes on solar production in the middle of the day and this issue has to be addressed if we want to continue to decarbonize our energy supply
  • Decreasing cost of storage – as soon as 2020 residential storage may be economically viable and it is already so for many commercial applications
  • Need for significant upgrades to the grid to meet California’s ambitious Renewable Portfolio Standard is going to be very expensive, and DER will provide opportunities to avoid these costs
  • Replacement of natural gas peaker plants in California with local resources is already happening and is likely to accelerate
  • Increasing intensity of climate chaos disasters, particularly wildfires means communities need more control over the local distribution grid and more resilience in the system in times of stress.
  • The need to electrify everything in order to decarbonize buildings and transportation
  • New sophisticated applications in big data management and grid mapping are helping to optimize the locational value of DER
  • A State mandated 100% Renewable Portfolio Standard is here – what will be the long term impact on CCA’s market advantage of offering a higher content of renewables at a slightly lower price?
  • CCAs using the full extent of their statutory authority developing energy efficiency programs and rate design

The convergence of these trends means that the energy landscape that CCAs will find themselves in five years from now will look very different from the present. Let’s look at a few of these trends in more detail to get a sense of how big those differences may be.

But before we do, a quick caveat about the PCIA, the exit fee intended to address costs incurred by IOUs for procurement of power for customers departing for CCA service. This issue is presently being negotiated at the California Public Utilities Commission. There are two proposals that are being considered by the CPUC and one of them would be quite damaging to CCAs by increasing their costs significantly, making it more difficult for them to compete at all, let alone invest in DER and other local projects. The assumption for this article is that this damaging proposal for CCAs will not be the one to prevail in the final decision.

Storage

According to Greentech Media customer-side-of-the-meter energy storage system prices are projected to decline at a rate of 8% annually through 2022. A total of 1.4 gigawatts and 2.3 gigawatt-hours of energy storage was deployed globally in 2017. Lithium-ion held 98.8 percent market share in Q4 2017.

Tony Seba, an instructor in entrepreneurship, disruption, and clean energy at Stanford University’s Continuing Studies Program has also done some analysis that suggests that the cost of Lithium-ion batteries will decline significantly in the next few years. He predicts that the cost will drop below $200 kWh, making it possible for residential customers to store a day’s worth of electricity $1, which will unleash widespread adoption of customer-side-of-the-meter storage.

McKinsey & Co produced a study released in Aug. 2016 that shows it is already profitable to provide energy-storage solutions to a subset of commercial customers in each of the four most important applications—demand-charge management, grid-scale renewable power, small-scale solar-plus storage, and frequency regulation.

Finally, AB 2514 (Skinner, 2010) mandates that all load serving entities procure 1% of peak load in energy storage by 2020, but that is just a starting point. CCAs could incentivize solar plus storage for commercial customers and help them curtail demand charges. Retaining these customers is worth the investment for CCAs, since they make up a disproportionate amount of the load. For example, in Sonoma Clean Power’s service territory commercial and industrial (C&I) customers make up 12.4% of total customer accounts, but represent approximately 43% of the load. Recently, Sonoma Clean Power has started working with the energy storage company Stem on a storage program for their larger C&I customers. As a retention strategy CCAs could target their largest C&I customers and incentivize them to install solar plus storage offering to be an off-taker for surplus generation in exchange for demand response and other grid services.

Grid Upgrades

The California Energy Commission has estimated that to reach the State’s 50 percent renewable goal by 2030, will require at least $5 billion in transmission grid infrastructure upgrades. This figure may be low, Southern California Edison already expects to spend $2 to $4 billion per year in its service territory for the foreseeable future to support California’s RPS 50 percent goal. Now that we are moving toward a 100% renewable powered electric system, these costs are likely to go up, perhaps dramatically. Thoughtful IDER deployment could significantly reduce the need for expensive transmission and distribution upgrades and also, the overall cost of electricity services to customers.

Protecting Communities During Disasters

This summer California was hit by the second year in a row of devastating and record breaking wildfires. In 2018 alone there were over 5,500 fires that scorched 1,044,770 acres and the fire season is not over yet. Some have taken to calling this the new normal, but the truth is we do not know what the new normal is, because greenhouse gases in the atmosphere are still increasing.

Given the increasing frequency and intensity of wildfires, storms and floods as the result of climate change, being able to close down parts of the distribution grid, or to island critical facilities will become increasing important as the fires that ravaged Northern and Southern California demonstrated. Working with utilities, local governments and agencies will be expected to provide these services.

New RPS

SB 100 calls for eligible renewable energy resources and zero-carbon resources to supply 100% of retail sales of electricity by 2045. This bill is now the law in California. Once it begins to be implemented, it will erode CCAs’ value add of offering cleaner power than the utilities over time. What unique value can they offer to their customers instead?

Some have argued that CCAs had very fortunate timing in terms of the pricing of renewables on the market between the launch of the first CCA in 2010 and the present, and that the private utilities locked in long term contracts on renewables at higher prices to meet the state mandated RPS. This gave the CCAs at least a temporary advantage on their ability to offer cleaner power at lower rates. Eventually, as the utilities are able to renew contracts at more favorable prices, this advantage will go away. So while CCAs will still likely have leaner operations than the utilities going forward and do not have to pay shareholders, the margin of their cost advantage will likely be reduced over time. This is another area where steady investment in IDER over time could help. By increasing the amount of generation that is under local control, it will reduce the risk of their customers to price spikes and market volatility, stabilizing rates in the long run.

CCA Operational Development

CCAs have the statutory authority to do a number of things that only a few have explored so far. For example, CCAs are entitled to use the public purpose program money provided by ratepayers to implement energy efficiency programs for their customers. Currently only two CCAs are exercising this authority, and several others are considering it. It is a great way to initiate tailored programs that address efficiency measures not covered by current IOU-run programs, and to educate customers about other DER related projects and opportunities.

CCAs set their own rates, but they can also design rate structures. The Center for Climate Protection, along with TerraVerde Energy and other partners is working with the National Renewable Energy Lab, Lancaster Choice Energy and Peninsula Clean Energy on a project that will develop a tool that can produce rate structures to incentivize optimized deployment of IDERs. The project will create an IDER rate structure design tool that captures the value of IDER projects; can be readily adopted, customized, and updated by electricity providers in response to load management imperatives, policy directives, technological advances, and customer demands; and enables informed and expedited deployment of IDER resources.

Yes, But…

Some CCA operators assert that it is not their business to invest in the distribution grid. The maintenance and operation of the distribution grid is the private utility’s business and responsibility, so any DERs on the customer side of the meter that have distribution system benefits, or utility side of the meter DER measures, are not their concern. Clearly the operation of the distribution grid is the utility’s primary responsibility. But it is also the case that CCAs’ ability to deliver their service to their customers depends on the smooth functioning of this grid and that they have a real interest in its reliability.

Furthermore, most CCAs have as a goal significant greenhouse gas emissions reduction. Given the constraints on solar production referenced above, if CCAs want to increase the renewable content of their power supply through solar, then they will need to invest in storage on both sides of the meter, in demand response, and energy efficiency. If we are going to completely decarbonize our power supply, we will need a more complex, but also flexible system, which will require the cooperation of all the key players to operate and optimize.

While it is true that there are risks around IDER deployment, it is also true that IDER can help mitigate risk. Chris Sentieri of Blue Strike Environmental, who worked on the Local Development Business Plan for East Bay Community Energy, offers the example of “a prolonged heatwave that might send a CCA on the spot market incurring significant unanticipated costs. If the CCA had dispatchable assets, this could help them shed load when they need to. In this case, IDER could serve as ratepayer protection, a hedge against conditions beyond the CCA’s control.”

Sentieri recently argued on a Clean Power Exchange webinar that in addition to risk management, DER can help CCAs with core operational needs, shedding load, shaping load, managing costs, and meeting Resource Adequacy needs.

The skeptical among you may be saying yes, but what about costs? Storage is not that cheap yet, and the ancillary services market does not really exist, so why invest now? I am not suggesting that every investment in IDER makes sense now or in the future. What I am suggesting is that given the confluence of these trends, CCAs should lead and help create these markets or at least prepare to join them as they mature. They should start planning now, experiment, choose projects that make sense and be ready when prices and markets open up to provide services that will add value to their customers.

Another reason to act now is the availability of state and federal incentives like the Investment Tax Credit, the Production Tax Credit, and the California Self Generation Incentive Program, SB 700, which was signed by Governor Brown last week. All of these programs make it cheaper to finance DER projects reducing costs between 30 to 50% and they will all be expiring eventually.

This analysis also suggests that CCA current advantages in the price of power and percentage of clean power will erode over time, but they have other advantages over the utilities. They are able to customize programs to meet local needs, they are more agile in project and program initiation, and they can work with other local agencies to maximize the benefit of the projects they invest in. DERs are all about responding to local conditions and CCAs are positioned to understand and take advantage of this characteristic.

In a very dynamic and uncertain environment, CCAs are public agencies and as such should be thinking about long term investments for their customers that will provide new services, long term price stability and resilience. Sometimes you have to take a little risk to manage a much bigger risk.

What Can CCAs Do?

Here are some basic steps that even CCAs that are just starting up should consider implementing:

  • Include IDER in Integrated Resource Plans from launch date
  • Hire appropriate staff and consultants with IDER project management experience
  • Hire appropriate staff and consultants with data management experience
  • Build relationships with third parties through RFQ or RFP process
  • Learn from and collaborate with other CCAs on IDER projects
  • Invest in pilot projects that deploy IDERs
  • Collaborate with local agencies on projects that support that boarder community like microgrids for critical emergency services in your community
  • Participate in proceedings at California Public Utilities Commission for IDER
  • Monitor the state legislature to ensure that these markets stay open to CCA participation
  • Use IDER projects to build CCA brand

The data and trends affirm that a wave of IDER deployment is coming, the question is how well will they be integrated into the overall system to enhance its performance. CCAs are positioned to play a vital role in maximizing the benefit of IDERs to the public and the environment. Playing this role is not only sound public policy, but a good business strategy as well.

 

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