Why utilities should give up operational control of distribution grid

Greentech Media

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 operatorwhich 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.

Source: Greentech Media. Reproduced with permission.