How to Build a Green Distributed Power Market Restructuring Roundtable Boston, MA June 21, 2002

1
How to Build a Green Distributed Power
MarketRestructuring Roundtable Boston, MAJune
21, 2002

• Fran Cummings
• Principal
• XENERGY Inc.
• Burlington, MA
• [phone] x 202
• fcummings_at_xenergy.com

2
Main Points Today

• Why does this issue keep coming up?
• DP DG storage DR EE
• most small renewables fuel cells.
• Time is ripe -- proceedings, pilots, papers
• Other states (CA, TX, NY ).
• DTE MTC ISO NERTO FERC
  Discos.
• Trade association interest (NECA, SEBANE ).
• Focus on two of DTEs issues
• Disco Involvement in Distributed Resources.
• Standby rates and other charges.

3
Whats New?

• Grid Enhancement Communication Technologies
• ISO LSE Demand Response Programs (NEDRI)
• Transmission System Planning Expansion (NERTO)
• Distribution Planning Pilots
• MA
• NY
• Renewables (MTC, RPS, GIS)
• Solar to Market Initiative
• Premium Power DG
• Security Focus
• Next 2 slides key points from Cowart talk for
  today

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Security Policies for a Resilient Network

• Risks
• Site Security Risks
• Proximity of Resource to Load
• Fuel Delivery and Storage Risks
• Size as a Security Consideration
• Technological and Multi-Systems Vulnerability
• What is a Resilient Network?
• Inherent deterrence
• Focused protection of critical features
• Accent on distributed resources
• Graceful failure and recovery.

Source RAP, Electrical Energy Security
Policies for a Resilient Network, Part II, April
2002 (www.rapmaine.org)
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Security The Cowart Efficient Reliability Rule

• Proposed PUC, FERC, or RTO security upgrades and
  reliability investment decisions that will, by
  administrative action, impose substantial costs
  on consumers and other market participants should
  first be tested by the following standard
• 1. The relevant market is fully open to
  demand-side as well as supply-side resources
• 2. The proposed investment or standard is the
  lowest cost, reasonably-available means to
  correct a remaining market failure and
• 3. Benefits from the investment or standard will
  be widespread and thus appropriate for support
  through broad-based funding.
• To ensure that these standards are met, proposed
  investments should be tested in an open season
  bid process that is genuinely open to competitive
  applications from supply, wires, and demand-side
  resource providers.

Source www.rapmaine.org/EfficientReliability.pdf
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Disco Involvement in Distributed Resources
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Disco Views of the Future Threats
Opportunities
Disco Role in Distributed Resources

• No sources of new revenue
• More responsibilities without due compensation
• Continual cost cutting
• Competitive bypass
• New revenue sources
• Positive stakeholder relations
• Significant investment
• Reduction of social obligations

CROSSED WIRES SCENARIOS FOR THE FUTUREOF THE
ELECTRICDISTRIBUTION BUSINESS XENERGY Scenario
Workbook
Source Crossed Wires, XENERGY Electric
Distribution Business Study (EDB)
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Disco Views of the Future (selected) -- from
XENERGY Crossed Wires Study
Disco Role in Distributed Resources

• Distribution will continue to be a monopoly, but
  with the risk of by-pass.
• Competition customer choice will continue to
  expand, but
• 10 years from now, the regulated company will
  still be responsible for a large share of the
  load, and power cost adjustment clauses will be
  the norm.
• Regulated distribution companies will own DG
  storage devices on their systems in 5 years.
• Virtually all customers will be under time-of-use
  pricing and metered hourly.
• Technology will be more intelligent on both sides
  of the meter

Source Crossed Wires, XENERGY Electric
Distribution Business Study (EDB)
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wires.net - 1 of 4 Future Scenarios
Disco Role in Distributed Resources

• In this future, technology advances result in
  lower costs and substantially improved prospects
  for distributed generation and electricity
  storage.
• These new technologies appeal strongly to
  consumers, since they offer an economic
  alternative to central power production.
• These alternative technologies finally become
  disruptive enough to the electric distribution
  business that the need for traditional regulation
  is challenged.
• As DP begins to increase its market share, discos
  recognize for the first time a real threat to the
  monopoly franchise.
• Such competitive threats simultaneously spark new
  technology innovations in power delivery and in
  central plant production.
• With full competition, the marketplaceinstead of
  regulatorsbegins to sort out
• where distributed generation makes the most
  sense, and
• where network service continues to be the most
  economic means to provide electric service to
  customers.

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Scenario Matrix
Disco Role in Distributed Resources
Source Crossed Wires, XENERGY Electric
Distribution Business Study (EDB)
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Summary of 4 Scenarios
Disco Role in Distributed Resources
Source Crossed Wires, XENERGY Electric
Distribution Business Study (EDB)
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wires.net Scenario
Disco Role in Distributed Resources
Source Crossed Wires, XENERGY Electric
Distribution Business Study (EDB)
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wires.net Scenario
Disco Role in Distributed Resources
Source Crossed Wires, XENERGY Electric
Distribution Business Study (EDB)
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wires.net Scenario
Disco Role in Distributed Resources
Source Crossed Wires, XENERGY Electric
Distribution Business Study (EDB)
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Can distributed benefits offsetstandby
charges? (All DG is local?)
Disco Role in Distributed Resources
Source Distribution-Level Opportunities
Barriers for Distributed Renewables, XENERGY,
12/2001 (actual values will depend on location
other factors).
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Illustration of potential distributed benefits
(rough calc based on EPRI method)
Disco Role in Distributed Resources
Source Distribution-Level Opportunities
Barriers for Distributed Renewables, XENERGY,
12/2001 (actual values will depend on location
other factors).
17
Illustration of potential distributed benefits
from renewable DP
Disco Role in Distributed Resources
Source Zaininger Engineering Co., Inc.
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Role of Disco (any parallels with RTO/ITC roles?)
Disco Role in Distributed Resources

• Over what should the Disco have a monopoly?
• Should regulated investment be only a backstop?
• Should Disco wait for competitors? Issue RFP?
• Is it possible to compare the alternatives (level
  field)
• regulated TD owner,
• merchant distribution companies,
• generation (central, distributed) demand
  response?
• How to achieve independence from Disco owners
• ISO ---gt IDO - Independent Distribution
  Operator?
• RTO ---gt LDO - Local Distribution Organization?
• Or how far should RTO planning extend toward
  local level?

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Standby Rates and Other Charges
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Nature of the Conflict between TD and DP
Standby Rates

• The economics of most DP projects depend to some
  degree on avoiding some TD costs.
• (Its tough to compete with large central
  generation.)
• New DP facilities can offer important economic
  benefits to the distribution system.
• When -- and where -- these distributed benefits
  are high enough, then win-win outcomes are
  possible in which all parties can share in the
  net benefits. However,
• A zero-sum game emerges to the extent these
  benefits are insufficient to offset the standby
  charges.
• Challenges assessing goals allocating costs
  benefits.

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Principles when a Win-Win is available
Standby Rates

• Need to share the benefits to the TD system
• DP owner?
• Disco?
• Other ratepayers?
• Need to measure the distributed benefits
• Methodologies?
• Collect publish info?
• Need to determine process, responsibility of
  disco
• Disco respond to customer DP proposals?
• Disco issue RFP to attract DP activity where TD
  expansion is needed?

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Principles for Zero-Sum part of the problem
Standby Rates

• If cost-based standby rates are applied to DG
  capacity, an adjustment is needed to reflect the
  diversity of generating resources on the feeder
  or system.
• Need to consider risk of worsening impact if high
  rates induce uneconomic physical disconnection
  from wires.
• Policy should be based on the full range of
  public policy benefits, including
• customer choice,
• energy efficiency fuel diversity,
• technological innovation,
• avoidance of local -- global -- environmental
  impacts.

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How much TD cost doesa DG owner cause? Pay for?
Standby Rates

• What level of TD capacity is required to back up
  the customers DG?
• Capacity of on-site DG (one generator? all?)
• Contract Demand (required level? customer
  election?)
• ( customer must specify maximum demand it
  plans to impose on the Company .)
• Load expected to be imposed on grid in case of DG
  outage(s)?
• Based on probability of outages for all
  generators on the feeder or system.
• Load actually imposed on grid, if any?
• Based on actual frequency of outages for
  customers DG, after offsetting generator outage
  with load reductions successfully arranged within
  the affected portions of the TD system.
• This could be a penalty that makes possible a
  lower base charge for the rest of the time.
• This would provide an incentive to minimize grid
  use during times of peak TD load.
• Highest of the above? (rachet over how many
  months?)

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Need to start with broad goals principles
Standby Rates

• Existing/previous auxiliary tariffs differ, and
  pre-date restructuring (WMECo Cambridge).
• More recently, a standby rate was deferred by
  National Grid settlement of EUA merger
• Non-dispatchable, non-fossil fuel renewable
  energy facilities were exempted.
• DTE accepted an interim approach for recovery
  of lost revenues from some new DG, but did not
  make any findings on appropriateness of an
  Auxiliary Rate. However, DTE identified the
  following issues
• (1) method to quantify the economic impact of
  new on-site generation
• (2) potential impact of Aux. fees on the
  emergence of new beneficial technologies
• (3) extent to which revenue losses should be
  recovered from DG owners and the ratepayers
  within the designated rate classes.

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Toward Principles for DP Ratemaking
Standby Rates

• Overall goal(s) need to be framed
• To protect Disco /or its ratepayers?
• Maintain gross revenue (win-lose) or share
  distributed benefits (win-win)?
• Short-term or long-term?
• To encourage investment in distributed power that
  is economically efficient compared to utility TD
  investments?
• How do market players compete with utilities?
• How facilitate a competitive market for
  distribution expansion?
• To maintain flexibility for site-by-site
  negotiation -- or maintain uniformity of
  treatment by Disco?
• To facilitate -- or leave room for -- innovation?

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Concluding Observations Find the Win-Win

• Zoom out to the big picture
• Distinguish renewable, CHP, price-response,
  backup, etc.
• Dont underestimate new tech. (e.g., fuel cells,
  SMES).
• Take the long view (e.g., who will be using DG).
• Consider changing basic incentives rate
  structures.
• Consider public policy needs environment,
  security, . . .
• Do the homework (reading, math . . . )
• Estimate ( measure) economic environmental
  impacts.
• Build on -- go beyond -- other states (
  countries).
• Collaborate invent -- set up working groups.
• Develop test planning methods, business models,
  etc.

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Reminder Some Next Steps

• July 10 - MTC Meeting
• 3 pm at MTC, Westborough
• Notify MTC by June 26 alpher_at_mtpc.org
• August 1 - Initial Comments to DTE in 02-38
• See 6/13 Order at http//www.state.ma.us/dpu/
• August 21 - DTE Public Hearing in 02-38
• 10 am at DTE, Boston