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The Argument for Why Utilities Should Give Up Operational Control of the Distribution Grid

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Stephen Lacey is a Senior Editor at Greentech Media, where he focuses primarily on energy efficiency. He has extensive experience reporting on the business and politics of cleantech. He was...

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control of the distribution grid

Regulators in New York are about to make one of the most important changes to the modern electric grid. But is it enough?

As part of the state Public Service Commission’s ongoing effort to reform the electricity system, distribution utilities may soon be turned into Distribution System Platform Providers with an explicit mandate to acquire more demand response, solar and storage, while encouraging as much energy efficiency as possible in order to avoid building new grid infrastructure.

Compared to the status quo, in which utilities have little structural incentive to invest in these technologies as part of a long-term growth strategy, the plan is quite radical. But some are calling on regulators to go further.

Clean Power Finance (CPF) has teamed up with former FERC Commissioner Jon Wellinghoff to push for an even more disruptive plan for utilities: taking distribution system operations out of the hands of the power company and putting them fully in the control of an independent body.

The idea is disruptive in the sense that it’s a big change to current operations. But Wellinghoff and James Tong, CPF’s vice president of government affairs, argue that the end outcome will be a far more stable and less costly system for utilities.

“Diminished reliability and unfair rates are not inevitable consequences of disruptions to the regulated utilities that own the grid. Nor are grid operations and ownership inextricably linked. In fact, new technologies, changing regulatory priorities, and shifting customer needs indicate that dissociating grid ownership from grid operations will greatly benefit the public and arguably the utilities, too,” write Wellinghoff and Tong in a piece outlining the concept in Public Utilities Fortnightly.

The proposed body, referred to as an Independent Distribution System Operator (IDSO), would function just like an independent system operator which manages the flow of electricity across regional transmission networks. Utilities would still own assets on the grid — they just wouldn’t be responsible for balancing all the disparate systems to meet demand.

In a growing number of states, the distribution grid is becoming an ever-more-complicated network of solar PV, digital meters, electric vehicles and demand response assets. Microgrids, smart buildings and battery storage are also emerging to make the system even more transactive. This presents logistical challenges for even the most forward-thinking utilities, which must ensure that all these disparate systems reliably match changing local conditions. They’re also potentially a drain on revenue as demand growth is diminished — giving utilities a reason to fight high penetrations of distributed resources.

An IDSO would, in theory, strip these problems from the utility. By maintaining system reliability, dispatching distributed resources, setting fair incentive mechanisms and opening up the grid to third-party competition, the independent body would take over the most complicated tasks, thus enabling the power company to focus on selling electricity and building new projects.

Wellinghoff also partnered with Katherine Hamilton and Jeff Cramer at 38 North Solutions to request that New York regulators consider the idea.

“Just as traditional management of the grid by vertically integrated utilities was inadequate to support the changing needs of the transmission grid, we posit that management of the New York distribution system by utilities alone will not be sufficient to sustain a resilient, clean, least cost, and innovative grid,” they write in a recent filing made with the New York PSC.

Utilities could still maintain grid assets, develop their own projects and retain their billing relationships with customers — all while getting compensated through a regulatory commission.

But would they really be open to giving up such a big piece of their operations? Wellinghoff and Tong think so. 

“Utilities don’t make money operating the system,” said Wellinghoff in an interview. “If utilities really think through this, they’ll understand there’s a huge advantage.”

The first financial advantage for utilities would be shedding a major cost center. The second technical advantage would be less concern about managing a complex network of distributed generation and intelligent energy efficiency assets. 

Those two benefits would create a third opportunity for all: more competition and a fairer set of rules.

Rather than relying on a utility to figure out the value of distributed resources, the IDSO and the local regulatory commission would be responsible for establishing incentive structures that accurately reflect their contribution to the network. And because the goal of the IDSO would be to encourage distributed resources, their value would likely increase.

“The entity advocating would be independent, not the one with financial gain. There would be a lot less skepticism about whether those investments are appropriate,” said CPF’s Tong. 

Naturally, the solar industry would likely see much greater financial gain. But Tong argued that the system would help solar installers and utilities become better partners. Utilities already have built-in channels for customer outreach and billing, which the power companies could use to make money off solar transactions. And IDSO could also simplify the interconnection process, taking the tracking burden away from utilities.

“I’ve always believed that if utilities were promoting solar, it would bring much better cost savings,” said Tong. “It also creates predictability and helps the customer know that solar is something truly proven.”

Although transmission ISOs offer a real-world example of how the model might work, applying the concept to the distribution system is mostly theoretical. But New York’s utility reformation process could be the first opportunity to put the idea in action — assuming regulators and utilities are receptive to the idea.

As more states start seriously considering an overhaul to the way power companies are regulated, the concept of an IDSO may become more influential, said Wellinghoff.

“It’s really refreshing to have this clean slate. I think there’s potential here,” he said.

Photo Credit: Control of the Grid/shutterstock

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Robert Bernal's picture
Robert Bernal on Aug 21, 2014

Mandates? Really. I’m totally against such social (and monetary) inefficiency… If there are any mandates, they should be in the use of molten salt reactors (or other meltdown proof nuclear) because they don’t need fossil fueled bakup, don’t need people to “conserve in this already highly effieicnt age and can charge many billions of electric cars and trucks (much less power ten billion people at high standards).

Grid operaters manage the flow of electrons over vast wires. I think that’s cool.

As technology continues to progress, there is less need for clean energy to be expensive.

I hear of RE people promoting wind and solar (and now, expensive but trivial amounts of storage) as a jobs creation program, well… same goes with actual good ole fashioned grid expansion, right? Besides, a beefed up grid consisting of thicker wires and stronger poles is the only way “everybody” could charge electric cars and trucks at home. Again, (since charging would mostly be done at night) the power should be from molten salt or other meltdown proof nuclear reactors. This is the quickest way to fossil free (without RE’s required fossil fueled backup)!

Bas Gresnigt's picture
Bas Gresnigt on Aug 22, 2014

“… taking distribution system operations out of the hands of the power company and putting them fully in the control of an independent body. … “
In NW-Europe (NL, Germany, etc) also ownership was taking out of the hands of the power companies in the nineties. So the grid is now owned and operated by fully separated entities, closely controlled by government as the grid is a natural monopoly.

It took some years, but the situation delivers now benefits for the citizen. Sharp competition between electricity suppliers now.
I can now choose between many different electricity suppliers: cheapest, 100% wind generated electricity, 100% renewable, 100% nuclear generated, local supplier, major big supplier, (local) cooperation, supplier that pays a good price for my rooftop solar, etc.

Even supply reliabiltiy (which was already quite good here) has been improved, though less than in Germany (here total customer outage time is ~30min/a, Germany ~15min/a, UK and France ~60min/a)..

Btw.
The 100% wind implies that the supplier generates via wind turbines at least the same amount of electricity (MWh) as I consume during the year (supplier may also buy wind electricity). Most of this type of suppliers are cooperations.

Robert Bernal's picture
Robert Bernal on Aug 23, 2014

I must add that renewable energy has the potential to continue its exponential growth past the quoted “requirement” of fossil fueled backup. It is a shame that RE advocates continually insist that they need NG and (intrinsically limited) biofuels as major back up (instead of insisting that we need to reduce clean energy’s storage costs by furthering the advancements of machine automation).

Bas Gresnigt's picture
Bas Gresnigt on Aug 25, 2014

“…RE advocates continually insist that they need NG and … biofuels as major back up…”
Robert,
All RE advocates insist they do not need natural gas.
The majority also insist they do not need biofuel as major backup.

The share of biomass (wood) in the German Energiewende was recently scaled down strongly (nearly no expansion now). Considering the high costs of biomass, I expect Germany will scale down much further after next elections (replace it with more solar+storage).

In many countries flexible hydro & pumped storage can act as backup (even Denmark, using neighouring countries). Furthermore batteries, with their strong price decreases, are scheduled (flow batteries, etc).

For the long term power2gas is in development (8MW pilot plant in Germany) as well as power2fuel.

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