Lessons from the MIT Utility of the Future Study

Prices and Incentives for an Efficient Integration

of Distributed Energy Resources

Imagine Energy, December 12th, 2016 Santiago, Chile

Claudio Vergara Massachusetts Institute of Technology

cvergara@mit.edu

Agenda

2

1. Why distributed PV and storage?

2. Getting prices and incentives right

3. Regulation of the distribution network company

Why a distributed deployment of

solar PV & energy storage?

3

4

DER adoption and its capacity to add value across the system is ultimately linked to its economics at various scales – The realities of economies of scale are well illustrated by

the variation in contemporary PV costs

5

Then why distributed? – Distributed energy resources can deliver a broad suite of

benefits to the power system, some site specific and some system wide. Locational

values may add sufficient value to justify distributed opportunity cost

6

Locational Non-locational

Power system benefits - Network capacity

- Network constraint

mitigation

- Loss reduction

- Voltage control

- Power quality

- Reliability and resiliency

- Energy (excluding losses

and congestion)

- Firm capacity

- Operating reserves

- Price suppression

- Price hedging

Other public benefits - Land use

- Employment

- Emissions mitigation

- Energy security

Source: MIT Analysis

Locational values are highly idiosyncratic – they vary tremendously across

and within a given power system. Consider the case of network capacity deferral

benefits for solar PV systems in California…

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Network capacity benefits:

90% of feeders:

$0/kW-yr (zero)

10% of feeders:

$10/kW-yr to $60/kW-yr

1% of feeders:

>$60/kW-yr

Source: M.A. Cohen, P.A. Kauzmann, D.S. Callaway, Effects of distributed PV generation on California’s distribution system, part 2:

Economic analysis, Solar Energy, Volume 128, 2016, 139–152

Feeder-level congestion heat map across PG&E territory

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$0

$20

$40

$60

$80

$100

Locational energyvalue: transmission

Locational energyvalue: distribution

losses

Conservation voltagereduction

Network investmentdeferral

Generation capacitypremium

Reliability Total locational value

Avera

ge

valu

e p

er

MW

h p

rod

uc

ed

24.0

5.6

11.1

41.2

2.9 0.0 84.7

Locational value of distributed solar PV – Long Island, New York, high value example

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Locational value of distributed solar PV – Long Island, New York, average value example

$0

$2

$4

$6

$8

$10

Locational energyvalue: transmission

Locational energyvalue: distribution

losses

Conservation voltagereduction

Network investmentdeferral

Generation capacitypremium

Reliability Total locational value

Avera

ge

valu

e p

er

MW

h p

rod

uc

ed

2.3

3.1

1.7 0.0

0.9 0.0 7.9

10

Comparison of Locational Value and Incremental Cost for Solar PV Systems in New York State Example

Getting prices & charges right to let the best solutions emerge

Any cost-reflective component of prices & charges should be exclusively based on the individual

injection & withdrawal profiles at the network connection point

“Technology neutrality”

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How far to go in time and location differentiation will depend on the trade-off between efficiency gains and implementation cost

Spatial & temporal granularity matters

13 Possible progression of time and locational granularity of energy price signals

Getting closer to the end network user

• Send network users energy prices in different formats • Calculate most profitable investments in DERs • Assess impact of those investments on network conditions • DLMP = LMP + Losses + Congestion

Assessing user response to different energy prices

0

50

100

150

200

250

Month 2 Month 2 Month 3 Month 4

$/M

Wh

DLMP(@ congested node)

LMP

Flat

Congested region

Starting Conditions: Peak-hour nodal prices ($/MWh)

DER investments in response to flat rates

Solar PV

HVAC Controls

Batteries

Area of congestion

DER investments in response to bulk hourly LMP

Solar PV

HVAC Controls

Batteries

Area of congestion

DER investments in response to 11 kV LMP

Solar PV

HVAC Controls

Batteries

Area of congestion

What happens to the profitability of DER investments after network constraints have been relieved?

Average DLMPs pre-DERs Average DLMPs post-DERs

DER Economics

-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

Net

Pre

sen

t V

alu

e o

f In

vest

men

t

Initial Investment After other investments

Profitability of DERs declines after other investments

(Expected profitability) (Actual profitability)

How to recover the cost of the

distribution network?

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Objectives of network charges: 1) Send efficient economic signals beyond LMPs (if they exist); 2) contribute to the recovery of regulated network costs; 3) remaining regulated costs should be recovered in a minimally distortive manner (perhaps outside the tariff)

DLMPs are used to price energy

consumption/ injection at each

node.

The surplus is used to partially

recover part of the network costs.

(implicit in energy charge €/kWh)

Allocate to network users

following cost-causality

principle

€/ kW (at critical hours)

Allocate as a common good

(some “Ramsey-like”

approach)

€/ Network User

DLMP

Surplus

Total

Remaining

Network

Cost

(TRNC)

Incremental

Network

Cost (INC)

Residual

Network

Cost (RNC)

Figure: Components of network cost recovery

Getting Prices Right: Distribution network charges

Allocation of other regulated costs

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Belgiu

m

France

Germ

any

Italy

Neth

erland

s

Spain

UK

Califo

rnia-Sce

Co

nn

ecticut

Main

e

Massach

usse

ts

New

Jersey

New

York

Texas

Can

ada -O

ntario

Au

stralia

Brasil

% o

f el

ectr

icit

y b

ill

Wholesale Networks Other costs Taxes

Breakdown of residential electricity bills in different jurisdictions in 2014-2015

Implications for grid defection

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Cost recovery in an era of “grid defection” — the marginal cost to customers of “grid defection” creates an upper limit on the recovery of regulated and policy costs via fixed charges

Getting Prices Right: Implications on grid defection

Distribution regulation

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1. A forward looking revenue trajectory

• The future does not look like the past

2. Efficiency incentives via earnings sharing mechanisms

• Align utility’s business model with finding new solutions

3. Equalize incentives between OPEX and CAPEX

• Put “wires” and “non-wires” solutions on a level playing field

4. Create mechanisms to adjust for inevitable forecast errors

• Manage uncertainty, improve regulatory certainty and allocative efficiency

5. Set performance-based incentives for quality of service

• Reward utilities for delivering better service & achieving policy objectives

6. Create incentives for long-term innovation

• Accelerate learning about capabilities and diffusion of best practices

The regulated network utility business model

Conclusions

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1. The competitiveness of distributed energy resources depends on the balance

between locational value and economies of scale

2. Spatial and temporal granularity matters

3. There is a need for coordination between DER investments and network planning

4. Align incentives to the distribution network company with emerging opportunities for efficiency acknowledging for uncertainty

Thank you for your attention

Stay tuned, December 15th 2016 http://energy.mit.edu/research/utility-future-study/