DER Monetization Strategies

A recap of the February, 2021 meeting of the Utility Business Model (UBM) working group hosted by Grid Forward.

Even as distributed energy resources (DERs) proliferate across our region, the country and the world, a looming question remains: how will grid operators find viable business models to not only effectively integrate them at scale, but how to make money doing so. We explored this topic in the February meeting of the UBM working group.

We started with general perspectives and a framework for considering DER monetization from advisory firm Strategen. Then we heard from an investor utility (Portland General Electric) on their perspectives to move these efforts forward in relation to their regulatory processes, including a distribution system planning docket. Next, public power utility Holy Cross Energy discussed efforts they are working on with their community in their process to power their grid with 100% clean energy. We ended the session with an international utility (ENGIE) that is work as a deregulated energy provider in a number of jurisdictions.

Executive Takeaway – Experiment to Find the Best Path to Monetization

There are multiple paths for how DER monetization can or should work for utilities. Market structure, regulatory environment, grid constraints/priorities, customer interest and other factors all influence the options that could fit any number of circumstances. In addition, there are many value streams available to both grid operators and customers. In light of the diverse possible paths, one way to move ahead by creating lightweight and rapid experiments that can test various business model assumptions. Using multiple strategies simultaneously to leverage different assets types, reach different customer classes, and address various system needs may be the best approach.

It has become clear that we will have to look towards more flexible, adaptive models to accommodate decentralised “in community” energy assets. Portending this insight was the announcement of FERC 2222 which would incentivise hyper-localised energy markets (though the session only briefly touched on the FERC order). With the market pressures rather clearly established, it becomes clear that this topic of DER monetization is a key issue.

The examples shared below cover a wide view the ways this is being explored in the industry today. This information has been abbreviated; for deeper details contact Grid Forward.

Strategen

Ron Nelson, Director at Strategen started the session. Ron has over ten years of experience exploring various DER monetization strategies, including regulatory market overhaul in Hawaii and Minnesota. Ron provided us a taxonomy and review of the various options open to grid operators for monetizing the DER revolution.

There are four focus areas by which to consider monetization revenue streams. The extent to which a utility can leverage a revenue stream will depend on its contextual regulatory framework, structure and technology vision. They are represented as quadrants (see slide) but are more continuous and mingle into one another. The axes represent the overriding strategy by the distributor, but multiple strategies can be undertaken by an operator in parallel.

• Direct Ownership – PPL Corp, a deregulated distribution utility, has a three-year pilot in which all its customers use a behind-the-meter connectDER device that complies to IEEE standards. PPL gets many operational improvements including voltage management. Similarly, Arizona Public Service has allocated $45M to create the nations first utility owned deployment of residential solar rooftops.
• Performance Mechanisms – To align utility incentives with DER deployment, utilities can look at two mechanism categories: Performance Incentive and Shared Savings. The first uses financial rewards and efficiency incentives, the second provides a structure for sharing savings between stakeholders and rate payers. Ron cited Xcel Energy in Minnesota that has a demand response program in place to help incentivize use of EV’s that leverage performance mechanisms. The recent order in Hawaii lays out performance incentive mechanisms there as well.
• Return on OPEX – Traditionally utilities are organized for returning revenue on capital expenditures (CapEx) but given that DER grid services incur operating expenses (OpEx) a way has to be found to earn revenue from OpEx. New regulatory frameworks can realign incentives by capitalizing prepaid contracts and allowing the utility to earn a return on payments for DVR service solutions. Examples from New York, California and Illinois were given. There is still a vast opportunity to gain returns on OpEx while regulatory models consider this area.
• Million Rate Base Model – Here the utility leverages its balance sheet to lower the cost of DER assets so that they can be rapidly deployed. It uses a marketplace to connect customers to DER solutions and leverages more precise controls of DERs through the marketplace. The model creates more customer touchpoints that the utility can leverage. This model was first seen at 21^st Century Utilities in an attempt for a Hawaii Utility purchase.

Portland General Electric

Portland General Electric (PGE) has long been doing innovative work at the cutting edge of DERs for a number of years. Angela Long, manager of distributed resource planning, heads that strategy. Many of her remarks were in context to the regulatory pathways that PGE sees opportunity for DER expansion

• PGE is very committed to a future that integrates DER’s and to that end they have specifically constructed innovation teams with people that come from outside the industry with refreshing perspectives to meet that vision sooner – analysts, financiers, telecoms, etc.
• In Oregon’s Distribution Systems Planning (DSP) process with the Oregon PUC regulator, PGE is working with the communities they serve to come up with two or more community benefit projects that implement DER’s.
• DER is changing the way the utility does business so they have to evolve the utility business model to recover the capital and indirect cost of deploying DER. Customers are getting involved in feedback on deployments for iterative improvement.
• PGE summarizes its tactical plan for the DSP planning process in these slides.

Here are some additional insights from Angela’s remarks:

• Community interaction and outreach are critical throughout the process.
• The company has customer, strategy, grid engineering etc. under one VP as that increases the speed and accuracy that they can operate.
• Early, lightweight and anticipatory experimentation has been critical in making fast progress and helping to resolve problems early and quickly.
• The recent Smart Grid Testbeds are providing guidance on leveraging distributed assets to as grid assets.

Holy Cross Energy

Holy Cross serves Western Colorado with 44,000 members and 265 MW Peak demand. The utility has established an ambitious objective of 100% carbon free power by 2030. Bryan Hannegan, CEO, said they are already halfway there and DERs will play a key role in getting to the finish line. As they focus on the community and its needs they are working on a range of initiatives.

• Challenges from environmental events like wildfires and severe weather can hamper their efforts to serve their customers, especially ones in the distributed communities with restricting topography such as a narrow valley.
• One key element of their tactical plan is acquiring clean energy resources. Their focus is on increasing resilience by placing generation resources in the communities where the resiliency is needed most.
• DER planning is not just about cheap power, but also in actualizing the communities they serve through increased resilience, community development and job creation and other value streams. They built a 12MW biogas in one community and planning a “mesogrid” microgrid in another community.
• Grid flexibility and grid reliability are key outcomes they are looking for from increased DER.
• Their DER cost recovery strategies are outlined in the following slide:

• First Attempts at monetizing DER’s came from partnerships with EV charger companies.
• A new battery storage pilot program has begun that is already showing strong demand in their customer base. With no advertising they have over 700 interested customers. Customers get 13kWh of storage for $30 a month for 10 years.
• They also have a remarkable affordable housing project for low income teachers and service workers. See the “Basalt Vista” project slide as follows.

ENGIE

Our closing speaker was from the French energy conglomerate ENGIE. Doug McMahon, Managing Director of the Sustainability Solution Business Unit discussed examples from markets in the US and Europe.

• His business unit is a deregulated arm of the French company working for decarbonization with cities, governments and corporations around the world.
• ENGIE at one point contributed 1.5% of all Global GHG emissions, more than some countries, but has dropped that down to < 0.5% through various significant strategic efforts. Part of that success is due to Doug’s core belief that Zero Emissions has to be driven from the inside of utilities outwards.

A major project testbed with Ohio State University is helping them innovate new financial models to enable decarbonization as a service. The project has propagated innovations and foresight throughout the Engie hierarchy – especially in scaling practices across territories globally. The project provides a working template for as to how a utility can engage with a campus size /corporate campus size project and what sort of incentive mechanisms and business models will work.

• Given ENGIE’s global scope, they see many innovations and learning crossing borders and coming to the US. They are testing the V2X (vehicle to everything) concept in a handful of places including a 700 car VPP in Mirafiori, Italy and a California SCIF program with 150 stations connected to solar and storage. Also, they are seeing expanded value from storage efforts including 60MW of storage in the UK for various grid value streams with Kiwi Power

Credits:

• Surj Patel contributed significantly to the writing of this article.
• Top photo sources: Holy Cross Energy and Powertech Labs.