Challenge

Current utility planning often fails to adequately value (or entirely omits) distributed energy resources (DERs), such as solar+storage, which can lead to a preferential treatment for utility-scale investments to provide energy services. The repercussions of inadequately considering DER solutions include 1) investments in utility-scale projects even when distributed energy is lower in cost, driving up bills; 2) insufficient compensation for customer-side adoption of technologies such as solar+storage, not only under-paying adopters but contributing to lower-than-optimal adoption rates; 3) redundant infrastructure investments, due to inadequate consideration of existing and future DERs; and 4) underutilization of DERS to meet broader grid and societal goals, such as reliability and resilience—and underperformance in these areas.

Policy Solution

A regulatory requirement for utilities to include, properly value, and adequately compensate DERS within utility planning and ratemaking processes can help realize the benefits of DERs and achieve broader affordability, resilience, and reliability goals. Fully incorporating DERs throughout utility decision-making processes will require a suite of efforts, which can be approached piecemeal or as a package, such as research to better characterize location-specific DER value (e.g. value-of-solar studies); requirements to optimize DER adoption in long-term resource planning; inclusion of DER integration in performance-based regulation [hyperlink PBR policy]; and inclusion of non-energy benefits in cost-effectiveness tests for DER programs [hyperlink non-energy benefit policy]. Such directives could be specified by a state legislature, executive order, or directly addressed in the regulatory process by a utility commission.

Model Policy Features

Fully valuing, utilizing, and compensating DERs within utility decision-making may be addressed comprehensively—e.g. as a directive across all relevant utility commission proceedings—or within individual proceedings. It can also be directed by a state legislature or by executive order, or taken up directly by the utility commission. Below, we address some core examples of how to effectively value and utilize DERs; principles described below can also be applied to other areas of utility decision-making.

• Quantifying the Value of DERs
  • Allocate funding for an independent study to evaluate the value of DERs to 1) provide grid services (e.g. to meet peak demand and capacity requirements, reduce transmission costs, increase reliability, etc.) and 2) provide societal benefits (e.g. climate mitigation, public health, energy affordability). The most common examples are Value-of-Solar studies used to design compensation for behind-the-meter solar.
  • Ensure that the study evaluates specific benefits by location and time—such as deferring the need for local distribution upgrades to meet peak demand. 
  • Include quantification of societal benefits, even when non-monetizeable or hard-to-monetize (e.g. resilience benefits, or reduction of air pollutant emissions in overburdened communities), and the equitable distribution of those benefits. 
  • Use findings to design compensation structure for DERs (e.g. net metering or tariffs for solar) and, when appropriate, identify where DER benefits could or should be funded by non-rate sources such as taxes (e.g. additional incentives for low-income resilient storage investments).
• Long-Term Resource Planning
  • Require that DERs—including solar, storage, demand response, microgrids, and energy efficiency—be included up front as a candidate resource in the techno-economic modeling (such as capacity expansion modeling) used by utilities in their long-term resource planning. This replaces the approach currently used by many utilities, which either omit DERs, or project a fixed DER growth rate based on historic trends or existing funding for measures such as energy efficiency. 
  • Require that existing DERs are fully valued in the baseline evaluation of resource capacity, such as including distributed storage capacity within quantification of utility capacity requirements to meet reliability standards.
  • Use the value-of-DER quantification (above), inclusive of non-energy and location-specific benefits (e.g. distribution system investment deferrals), within long-term planning; ensure that both DER and non-DER resources are valued using the same set of metrics in order to make them easily comparable. Current value-of-solar studies, for example, often integrate a more comprehensive set of values than are typically used to compare utility-scale investments. 
  • For non-monetizeable or difficult-to-monetize DER benefits such as resilience, consider setting targets up front in long-term resource planning—coordinated, when appropriate, with Performance Incentive Mechanisms (PIMs) [hyperlink PBR policy].
  • Develop DER programs and incentives to meet capacity and locational goals for DER adoption within the long-term planning framework.
  • Coordinate with non-ratepayer-funded programs for DERs (e.g. low-income solar programs) to ensure investments are accounted for in long-term planning and redundant utility-scale investments avoided.
• Cost-Effectiveness Tests
  • Ensure that “cost-effectiveness” tests used to evaluate the suitability of programmatic investments in energy efficiency, demand response, or other DERs include the full value stack of DERs—for example, that energy efficiency measures are not only valued for energy savings, but also for avoided grid costs (e.g. distribution or transmission investments) and societal benefits (e.g. household energy affordability and indoor air quality).
  • Include consideration of distribution of benefits—e.g. whether energy efficiency savings are reducing bills for wealthier or less affluent households—and approaches to improve equitable outcomes (e.g. targets, increased incentives, or “adders” within cost-effectiveness tests).
• Performance Incentive Mechanisms and Transparent Data and Reporting
  • Facilitate DER interconnection by requiring regular analysis—and public sharing (e.g. interactive maps)—of grid hosting capacity for DERs, as well as requiring distribution investments to ensure historically underserved or low-income communities have adequate hosting capacity [hyperlink see: DER Interconnection Barriers].
  • Conduct regular data analysis and transparent sharing of current adoption levels of DERs and interconnection speeds—by census tract or zip code, adopter type, and demographic information as appropriate—to better inform equitable DER program design. 
  • Regularly analyze, track, and publicly report the growth of DER benefits (as outlined in the value-of-DER study) using standardized metrics for reporting. 
  • Set up Performance Incentive Mechanisms (PIMs) under a Performance-Based Regulation framework [hyperlink PBR policy] to set and enforce the realization of DER targets (which could be based on either a target adoption level, a target set of DER-related benefits achieved, or both). PIMs can be used to further advance goals such as reducing DER interconnection delays and increasing grid resilience using DERs.

Potential Policy Drawbacks and Pitfalls

• Identifying the many values—economic and societal—of each DER based on time and place can be very complicated, and compensation mechanisms reflecting those values may be very opaque to the public. If location-specific values of DERs are incorporated into ratemaking or incentives, there will be tradeoffs between incorporating accurate locational values and simultaneously ensuring that policies and regulations are considered clear, transparent, predictable, and fair by the public.
• Many of the values of DERs are important, but cannot easily be valued in monetary terms, such as reliability and resilience. Setting targets for achieving these goals, through common agreement in a public stakeholder process, may be required in lieu of assigning them a dollar value.
• DERs inherently provide different value to different people, depending where they are adopted; analysis and planning must include the distributional impacts and benefits of DERs and ensure they are equitable. A broad stakeholder process is required to come to a common agreement on how to assess these values.  
• Comprehensive DER valuation is often introduced within a single proceeding (e.g. a value-of-solar study), leading to misalignment in how energy resources—including their societal impacts and benefits—are evaluated in different proceedings. For example, the DER valuation used to design solar+storage tariffs should also match how DERs are valued in long-term planning, and in turn utility-scale resources should also be evaluated for their performance on these metrics so distributed and utility-scale resources can be compared fairly.
• Clear DER valuation approaches can offer certainty to developers, investors, and others to support market adoption of DER, but too-rapid implementation of policy changes to reflect new DER valuation can disrupt programs, markets, and the distributed energy workforce.

Complementary Policies

Complementary policies to help realize the full value of DERs include:

• DER interconnection reform to reduce barriers to DER integration.
• Performance-based regulation, data collection and transparency, and integrating non-energy benefits into decision-making to ensure grid and societal DER values are measured, consistently tracked over time, and integrated into utility planning and performance evaluation.
• Residential solar+storage, residential demand response, community solar, balcony solar, and residential electrification to facilitate household adoption of DERs.

Inclusion of front-of-meter solar+storage and microgrids within long-term planning to provide broader options for distribution-connected resources.