Considering the Costs and Benefits of Grid Alternatives

Despite significant media attention, distributed energy resources (DER) are only beginning to make an impact on the grid in certain areas. While DER have the potential to transform the electrical grid and provide significant value to multiple stakeholders, they are not properly understood and valued. This is partially due to the diverse array of technologies included in the DER classification. Solar PV, conventional generators, fuel cells, energy storage systems (ESSs), and load management devices all have distinct operating characteristics as well as costs and benefits. Both utilities and industry regulators are working to address these issues using differing approaches. New York is one of the leading states to tackle this issue through the state government’s Reforming the Energy Vision (REV) initiative.

Costs vs. Benefits

A recent REV program development is helping shape the future of DER in the state. In February, the New York Public Service Commission introduced the Benefit Cost Analysis Order. The order includes a methodology for how electric utilities should evaluate the costs and benefits of proposed grid investments and calculate the net benefits of traditional infrastructure investments compared to portfolios of DER. This is an important development because under the REV initiative, utilities are prohibited from owning DER in most circumstances. The utilities will have to determine where on their systems DER can provide the most value and identify the best way to work with customers and third-party providers to deploy those assets.

A key feature of this order is that the environmental benefits of DER, such as reduced emissions, must be taken into consideration and should help determine the value of DER and compensation paid to system owners. For example, a network of aggregated solar PV plus storage systems can provide the same grid capacity constraint relief as upgrading an existing power plant, only with no added emissions. Although there may be some issues with the proposed valuation methods (such as how to properly compare upfront versus lifetime costs of certain investments), this is certainly a step in the right direction.

Utilities in New York have already been looking into DER alternatives as they are faced with growing populations and rising electricity demand necessitating significant new investments. A notable example of this is Consolidated Edison’s Brooklyn Queens Demand Management Program. The program seeks to defer the construction of a new substation and other investments that would be expected to cost around $1 billion. As an alternative, the utility is making smaller equipment upgrades and investing around $200 million in new demand-side management programs and DER incentives that are expected to reduce grid demand in the area sufficiently to defer the new substation until at least 2024. This includes increased payments for demand response programs and incentives for the installation of distributed ESSs.

Advantages of Flexibility

As a result of this new order, it is likely that utilities may be supportive of and incentivize most flexible DER, particularly ESSs. Unlike other forms of DER, customer-sited ESSs of all sizes can provide a highly reliable form of load reduction for grid operators, as they can be called upon to reduce a customer’s demand without affecting their comfort or operations. Additionally, ESSs provide significant flexibility—when not needed to reduce demand, they can be used to help integrate distributed solar PV and improve reliability for customers. Guidehouse Insights’ recent report, Market Data: Commercial & Industrial Energy Storage, explores the benefits and business models for customer-sited energy storage. While New York’s efforts will help bring clarity to the value and benefits of DER, there remains much uncertainty over the most effective business models to realize the full potential of these technologies.