Putting Distributed Energy Resources to Work in Wholesale Electricity Markets

PUTTING DISTRIBUTED ENERGY RESOURCES TO WORK IN WHOLESALE ELECTRICITY MARKETS

Case Studies of Emerging Applications and Their Benefits for Customers and the Grid

September 2019

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INTRODUCTION

The deployment of different types of alternative solutions that limit the need for distributed energy resources (DERs) in regions costly infrastructure upgrades. across the United States has accelerated significantly in recent years, creating Competitive wholesale electricity markets were opportunities and raising important questions developed to incentivize innovation and about how they will be utilized to improve the facilitate robust competition among suppliers, current and future operation of the power while preserving overall system reliability at the system. In 2018, revenue from sales of plug-in lowest possible cost. However, current electric vehicles jumped 75%, the market for wholesale market rules are structured mostly energy storage grew 18%, and smart meter around the technical and operational investment exceeded $1 billion.1 Proliferation characteristics of traditional large central of customer-sited DERs has largely been driven station generators and monopoly load-serving by technological and manufacturing advances entities. Given the rapid deployment of DERs, that have led to major cost declines, and by federal regulators and regional market customer demand for solutions to improve the operators need to actively consider adopting reliability of their operations. Additionally, new rules and operating practices to account many states have enacted policies to for the characteristics and capabilities of new incentivize DERs to meet multiple goals, distributed technologies. Similarly, state including lowering the carbon intensity of their regulators and distribution utilities should power system, improving overall system consider how DERs being deployed on their resilience, and meeting customer demand for distribution systems can be fully utilized to more energy choices. provide multiple services in retail and wholesale markets. While many DERs have been deployed for onsite uses, they often have the technical DERs can be optimized to significantly enhance potential to quickly respond to market signals system reliability, improve resilience during and provide a wide range of valuable grid extreme weather events, and reduce the cost of services beyond their original use case, energy services, but only if they are able to including in wholesale energy, capacity, and participate and compete fairly in wholesale ancillary services markets. Integration of DERs markets. More coordination between federal in wholesale markets can save all consumers and state regulators and wholesale market money by optimizing overall asset utilization, operators and distribution utilities is needed to increasing competition, and providing ensure that DERs are deployed and operated in

1 Advanced Energy Economy, Advanced Energy Now 2019 Market Report (2019), available at https://www.advancedenergynow.org/aen-2019-market-report.

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a way that optimizes benefits to asset owners, programs to encourage the development of grid operators, and ratepayers. DERs to meet state policy goals and improve local reliability and distribution system Role of Regulators and Market resilience. They also have important roles in Operators regulating the interconnection of DERs to the distribution system, studying and planning for The Federal Energy Regulatory Commission distribution system reliability as DER (FERC), regional market operators, and state penetration grows, and establishing regulators are currently considering how rules mechanisms to ensure that any costs incurred and practices need to be revised to properly as a result of wholesale participation of DERs integrate DERs into both wholesale and retail are appropriately allocated and recovered. electricity markets. For several years, FERC has recognized the value of DER participation in the RTOs/ISOs and other wholesale market wholesale markets, ruling that removing operators and distribution utilities also have barriers to such participation is necessary to important roles, including coordinating ensure that wholesale rates are just and interconnection requirements (to speed reasonable, as the Federal Power Act requires. connection and avoid unnecessary duplication The Commission is actively considering how to of studies), facilitating communications direct Regional Transmission Organizations and between themselves and DER aggregators and Independent System Operators (RTOs/ISOs) to operators to improve visibility of DER update their market structures and operations operations, and ensuring that DERs do not face to ensure that aggregations of DERs are duplicative charges. eligible to provide wholesale services. Benefits for All Both FERC and state regulators have important roles in ensuring the cost-effective and reliable If structured properly, rules governing aggregated DER participation in wholesale deployment of DERs for wholesale and retail uses. FERC must ensure that DERs have the markets can create benefits for all participants in the electricity sector: ability to deliver all of the wholesale services they are capable of providing, and that Transmission Grid and Wholesale Market RTO/ISO market rules and operational Operators: DERs include fast responding practices do not erect barriers to market entry and flexible resources that can significantly for DERs. FERC can also establish the improve reliability and grid resilience. When foundation for efficient and reliable integration aggregated DERs participate in wholesale of DERs into wholesale markets by ensuring markets, RTOs and other transmission that RTOs/ISOs establish appropriate market operators gain visibility into the current and participation frameworks, clear communication future location and behavior of these protocols, and reasonable metering and important energy producing and telemetry requirements. State regulators have consuming assets. Further, by incorporating DERs into market dispatch, grid operators authority to design and approve retail

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gain the ability to utilize these assets to distribution-tied clean energy resources meet the needs of the larger grid. This and by increasing system flexibility and increased visibility can also improve enabling higher penetration of variable coordination and dispatch instructions at large-scale renewable resources. the transmission and distribution interface. Furthermore, distributed generation assets DER Consumers and Utility Ratepayers: are often deployed in areas that experience Many households and businesses purchase inconsistent service or long down times, DERs for reliability benefits and potential and their integration into wholesale markets cost savings on electricity and heating can limit congestion and line losses while services. By unlocking additional revenue improving system resilience. Finally, streams for asset owner-operators through allowing the growing number of DERs to wholesale market participation, customers fully participate in wholesale markets can see even larger cost savings when they improves wholesale competition and purchase or install DERs. Wholesale market ensures just and reasonable rates. participation can also increase and optimize asset utilization, which can improve project Distribution Utilities: When DERs economics and lower rates for all customers participate in wholesale markets, utilities by limiting the need for other higher-cost gain information that can help guide more resources or infrastructure. informed system planning. This includes better real-time load management, the Developers and Aggregators: Wholesale ability to reduce localized congestion, and market participation can improve DER the potential to defer expensive portfolio economics by adding new infrastructure investment over time. revenue streams, allowing developers to Importantly, DERs can improve the pass on cost savings and accelerate resilience of the distribution system against deployment. Additionally, the ability to disruption from storms and fires by participate in wholesale markets can limit reducing system downtime and providing the risk that asset managers face from emergency backup power supply. possible curtailment due to limits of distribution infrastructure. States: DERs support state goals to improve distribution grid resilience, and This paper provides five examples of existing or they allow greater consumer choice in potential use cases involving aggregation of managing electricity supply. Additionally, various DER technologies for participation in for states with renewable energy and/or wholesale markets across the country. These greenhouse gas-reduction targets, allowing use cases demonstrate that opening wholesale the aggregated capacity from DERs to be markets to aggregated DERs will unlock new bid into wholesale markets can increase business models that will benefit all deployment and expedite the realization of state goals by increasing penetration of stakeholders and improve the reliability and resilience of the grid.

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CASE STUDIES OF DER WHOLESALE MARKET PARTICIPATION

Case #1: Battery Storage for under demand response participation models does not currently allow them to offer the full Demand Charge Management range of grid services they are capable of and Other Market Options providing. Moreover, this narrow path to participation limits grid operator visibility into Battery energy storage systems are flexible DER locations and capabilities, presenting resources that can provide numerous services challenges for interactions between the to the electric grid. Increasing grid-connected transmission system and local distribution storage capacity can also indirectly enable systems. As deployment of battery systems deployment of more intermittent renewable accelerates, regulators should consider how generation. Accelerating deployment of market structures and coordination procedures battery storage capacity has become an can maximize grid benefits from new, important energy policy objective, and many customer-sited storage systems. Both grid states are incentivizing battery deployment operators and battery asset owners would likely with ambitious procurement targets, among benefit if batteries were granted access to a other mechanisms. Deployment to date has wider range of market participation avenues. included both large scale transmission- connected systems and small scale distribution- In addition to offering front-of-meter storage connected and behind-the-meter systems. solutions, Stem Inc. has been offering storage- Large scale systems are successfully as-a-service products to commercial and participating in frequency regulation markets industrial customers to help shift their load and have also helped utilities defer profiles and deliver cost savings by limiting infrastructure upgrades. Customer-sited consumption from the grid during times of peak systems are becoming popular investments for demand. Stem utilizes an artificial intelligence commercial and industrial buildings looking to platform to aggregate these distributed energy manage peak load charges, and sometimes as storage assets and participate in the California replacements for backup generation. ISO as demand response resources through the ISO’s Proxy Demand Resource (PDR) In some markets, using customer-sited battery mechanism.2 systems to facilitate the provision of demand response has provided a pathway for these In California, aggregated DER portfolios also resources to participate in wholesale markets. can participate directly in wholesale energy and However, using these battery storage systems ancillary service markets using a pathway

2 Conversation with Ted Ko, Director of Policy (Stem).

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known as a Distributed Energy Resource Ö Increased visibility of DERs for Provider (DERP). Despite this option, Stem and transmission and distribution grid other DER aggregators in the California market operators; have to date found it more advantageous to bid Ö Improved utilization of distributed into the PDR mechanism.3 While PDR restricts storage assets, lowering overall system costs; participation to load curtailment, it is a more Ö Enhanced resilience to infrastructure profitable participation option due to barriers threats (e.g., weather) through reliance within the DERP structure. Specifically, on local DERs; participants have noted that DERP’s 24/7 Ö Accelerated achievement of state policy settlement requirement precludes potential goals; participants from taking advantage of Ö Unlocking new revenue streams, opportunities outside the wholesale markets, lowering costs for developers and which is cumbersome, as DERs depend on customers; and multiple revenue streams. In addition, under Ö Improved competition and lower DERP, energy storage systems must pay twice wholesale rates, benefitting all for the energy they use to charge their systems, ratepayers. once at the retail rate and again at the wholesale rate. Furthermore, DERP requires the installation of detailed and expensive telemetry Case #2: Commercial Solar + in each individual DER, undermining the Storage for Corporate financial case for aggregating hundreds or Sustainability, Demand thousands of small assets into a portfolio. Charge Reduction, and These restrictions do not apply to PDR, and Wholesale Market Load Stem has provided fast responding and reliable demand response for years under that Reduction participation model. CAISO is further advanced Large commercial and industrial customers than most RTOs/ISOs in its efforts to facilitate often look to DERs to provide multiple benefits, aggregated DER participation in wholesale including operational improvements, cost markets, but both the CAISO grid and savings, and delivery on corporate customers stand to benefit from allowing sustainability goals, which increasingly include additional access to wholesale markets by carbon reduction targets. In New York City, correcting flaws like those in the DERP model. Glenwood Management, one of New York’s Doing so would bring multiple benefits: largest builders and owners of luxury rental apartments, has worked with Enel X since 2012

3 Gundach and Webb, “Distributed Energy Resource http://columbiaclimatelaw.com/files/2018/05/Gundlach-and- Participation in Wholesale Markets: Lessons from the California Webb-2018-05-DER-in-Wholesale-Markets.pdf. ISO” Energy Law Journal Vo. 39:1 (May 2018), available at

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to install and operate a range of DER solutions By participating in both retail and wholesale across 13 buildings, including both standalone programs, in addition to meeting onsite needs, storage and solar-plus-storage.4 Glenwood Management’s DER assets are able to deliver greater overall value, both to The DERs across Glenwood’s properties are Glenwood and to the grid and other customers. used to protect residents against disturbances Specifically, by participating in retail and in grid energy (e.g., brownouts due to voltage wholesale markets, these DERs bring multiple instability in New York City) and to reduce benefits: demand charges. In addition to these direct benefits, the assets also participate in retail Ö Increased visibility for transmission and programs offered by Consolidated Edison distribution grid operators; (ConEdison) as well as wholesale programs Ö Improved utilization of distributed offered by the New York Independent System storage assets, lowering overall system Operator (NYISO). These multiple uses are co- costs; Ö Improved reliability and resilience for optimized by Enel X through its optimization customers and increased customer software platform. choice and control; Ö At the retail level, Glenwood’s portfolio of Unlocking new revenue streams, lowering costs for developers and storage assets participate in ConEdison’s retail customers; and demand response programs. The assets are Ö Enhanced competition and lower aggregated but can be deployed individually wholesale rates, benefitting all according to ConEdison’s location-specific ratepayers. needs. The aggregated DERs are optimized to manage locational needs and also balance participation in ConEdison’s DR program Case #3: Residential Solar + against demand charge reduction to lower Glenwood’s electricity costs. Storage – Forward Capacity Market Participation In addition, Glenwood’s portfolio of resources participates in NYISO’s Special Case Resource For years, states across the country have (SCR) Program, which is available to end-use introduced policies aimed at incentivizing the loads that can curtail demand and local deployment of residential solar PV systems. As generators (100kW or above). Enel X bids these penetration of distributed PV has grown resources into the NYISO Installed Capacity rapidly, states have started to rethink how these market (ICAP) through the regular auction systems are compensated for energy they process. export back to the local distribution grid. Recently, several states have decided to move beyond policies like net energy metering and

4 Enel X, “Glenwood Management Earns Demand Response Storage,” https://www.enelx.com/n-a/en/resources/case- Revenue, Reduces Energy Costs with Intelligent Energy studies/cs-glenwood-management.

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have begun providing incentives for residential offer price rule (MOPR). This MOPR requires PV owners to incorporate battery storage and certain resources encouraged by state policy shift their energy exports to better align with programs that have not received an RTR peak system demand. One prominent example designation to bid at pre-defined minimum is in Massachusetts, where customers are prices, creating the risk that their capacity will offered significant benefits for installing energy not clear the auction and be recognized toward storage through the Solar Massachusetts regional capacity requirements. About 145 MW Renewable Target (SMART) Program. of resources were awarded capacity contracts under the RTR, which leaves about 300 MW of In 2019, ISO New England (ISO-NE), the New capacity remaining in the RTR exemption cap England grid operator, conducted its annual that will be carried over to next year’s auction. capacity auction for power system resources, The limited capacity available for RTR and residential solar installer Sunrun won a bid treatment could become a barrier to future to deliver 20 MW of capacity from distributed capacity market participation for aggregations 5 solar-plus-storage systems. This marks the first like Sunrun’s. time that a bid comprised of capacity from aggregated distributed solar-plus-storage This example demonstrates how both the grid systems has successfully cleared a U.S. forward operator and the DER asset developer can find capacity auction. According to ISO-NE, the additional benefits through wholesale market primary auction closed at $3.80/kW-month, participation for distributed solar-plus-storage which was the lowest clearing price in six years. systems that likely would have been deployed anyway, due to incentives provided through The successful bid has its origins in a state-level policies. Allowing such participation partnership between Sunrun and National Grid, ensures optimal use of these assets, and established in 2016 to identify and develop grid therefore brings multiple benefits: services with Sunrun’s distributed solar and storage assets. The San Francisco-based Ö Increased visibility for transmission and installer utilized this partnership to inform its distribution grid operators; bid and ensure that it met the rigorous Ö Improved utilization of distributed requirements for participation in the capacity storage assets, lowering overall system auction. costs (and in this example, avoiding the construction of additional unneeded Sunrun received the capacity supply obligation capacity); Ö under the renewable technology resources Accelerated achievement of state policy (RTR) designation, which allows a limited goals; Ö Unlocking new revenue streams, number of qualified resources to participate in lowering costs for developers and the capacity auction without having to meet the customers; and requirements of ISO New England’s minimum-

5 Utility Dive, Iulia Gheorghiu, “Residential solar+storage breaks 2019, https://www.utilitydive.com/news/residential-solarstorage- new ground as Sunrun wins ISO-NE capacity contract,” Feb. 8, breaks-new-ground-as-sunrun-wins-iso-ne-capacity/547966/.

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Ö Enhanced competition and lower response to an economic, environmental, or wholesale rates, benefitting all operational signal. Vehicle-to-building and ratepayers. vehicle-to-grid connections involve two-way flows of electricity, allowing car batteries to act as energy consumers or generators to provide Case #4: Electric Vehicle behind- or front-of-the-meter grid services.

Fleets for Demand Response Today, VGI services are primarily provided Electric vehicle (EV) sales are projected to through smart EV charging for utility programs that focus on ensuring charging occurs during increase rapidly in the coming decades. This beneficial times. While highly valuable on their growth will be driven by declining battery costs and by federal and state incentives for adoption own, V1G services represent only one set of the broad scope of grid services EVs can of both vehicles and EV service equipment (EVSE), like charging stations. High penetration provide. Policymakers have thus begun focusing on catalyzing the marketplace for VGI of EVs will present challenges and services, which in turn can spur technology opportunities for distribution grids and grid development for things like V2G to respond to operators. In the United States, 80% of EV expanded grid service revenue opportunities. charging happens at home.6 Charging one EV California’s proposed SB 676 (2019), for can increase household electricity consumption example, would require the California Public by 50% and non-coincident peak consumption by a factor of 10.7 Without careful planning and Utilities Commission to establish strategies and quantifiable metrics to maximize the use of coordination, high penetration of EVs could cost-effective VGI through 2030. As EV market destabilize the grid or cause other issues. share increases, regulators should consider On the other hand, if well-coordinated, EVs how market structures and coordination become a flexible resource that can provide a procedures can maximize grid benefits from number of grid services in both retail and EVs while reducing the need for grid upgrades wholesale markets, including energy, on crowded feeders. generation and distribution capacity, ancillary services, and voltage regulation. EV grid Beyond utility programs, Enel X e-Mobility services fall into two categories of vehicle-grid (formerly eMotorWerks) currently manages over integration (VGI): managed or smart EV 35 MW of “virtual battery” capacity contained charging, or V1G, or bi-directional EV charging, in EVs and EV chargers, a portion of which is which spans vehicle-to-building, or V2B and offered into the California ISO (CAISO) day- vehicle-to-grid, or V2G. Smart EV charging ahead and real-time energy markets. Stopping, involves a one-way flow of electricity and entails starting, modulating, and delaying charging modifying the timing or rate of EV charging in

6 U.S. Department of Energy, “Charging at Home,” 7 Letter from David Schlosberg, VP, Energy Market Operations, https://www.energy.gov/eere/electricvehicles/c eMotorWerks (Feb. 2018), available at https://ebce.org/wp- harging-home. content/uploads/EBCE- DR-Assessment-Comments-eMotorWerks-2-7-18-FIN.pdf.

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this network of EVs and EV chargers allows Enel Ö Accelerated achievement of state policy X e-Mobility to provide automated, goals for EV deployment; dispatchable energy through California’s Proxy Ö Unlocking new revenue streams, Demand Resource (PDR) model for demand lowering costs for developers and response resources. Through the PDR model, customers; and Ö Enhanced competition and lower Enel X e-Mobility receives market award wholesale rates, benefitting all notifications from the CAISO for intervals when ratepayers. the market clearing price is greater than its bid price and is compensated for its measured load reduction during those intervals. As discussed Case #5: Microgrid for District in Case Study #1, CAISO’s DERP model could theoretically unlock even greater value from Heating and Cooling and batteries, including those within EVs, Electricity Export During particularly through compensation for the high Extreme Weather Events value service of frequency regulation. However, DERP non-generator resources (NGR) are Deployment of microgrids – self-contained settled at wholesale prices for charging (and systems of electricity generation, storage, and discharging) 24 hours, seven days per week, management that can operate separately from which prohibits providing other services (as is the power grid – has accelerated in recent years inherent to the PDR model), and behind-the- thanks to cost declines for various DERs meter resources face duplicative costs for (including energy storage) and advances in consumption at wholesale prices for the DER software solutions to improve scheduling and Provider and retail rates for the site host. These coordination of various DER assets within a barriers make the DERP-NGR pathway microgrid. Companies that require an infeasible for behind-the-meter DER uninterrupted supply of electricity and aggregators, including EV and EV charging communities concerned about grid resilience fleets. CAISO continues to refine its market are increasingly considering microgrids as a participation models for DERs through the reliability solution with more economic and Energy Storage and Distributed Energy environmental upside than conventional (ESDER) initiative. Still, Enel X e-Mobility’s technologies like back-up diesel generators. successful provision of demand response to CAISO markets is a concrete demonstration However, some microgrid operators have that aggregated EV fleets can provide expressed concerns that they are compelled by meaningful grid services. Some benefits of their distribution utility to pay the full cost of aggregated EV grid services include: standby service and interconnection infrastructure upgrades even when the grid Ö Increased flexibility for transmission and operator sees significant benefits from utilizing distribution grid operators to manage the microgrid assets as a power supply in times new loads; of grid stress. Allowing microgrid operators to aggregate their resources and participate in

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wholesale energy and demand response rooftop solar, but without changes in standby markets, as well as retail level programs, could charges, there is a convincing economic help improve project economics and accelerate argument to sever Co-op City’s grid the deployment of both cooperatively owned connection, which would adversely affect utility and privately owned microgrids at vulnerable operations.8 points on the grid. Market reforms and opportunities for wholesale Co-op City in the Bronx owns and operates one market participation could resolve these of the largest residential end-use microgrids in misaligned incentives, greatly improve the world, serving nearly 50,000 residents. The microgrid project economics, limit the need for system, which centers around a combined heat major infrastructure investments, and improve and power (CHP) facility with a total capacity of overall system reliability and resilience. about 40 MW, was originally installed in the Allowing increased participation by CHP- mid-1960s as a district heating and cooling powered district heating and cooling DERs system, but it now provides 90% to 95% of the would bring multiple benefits: community’s electricity needs. Co-op city sells Ö excess power back to Con Edison through the Increased visibility for transmission and utility’s buy-back tariff and receives the distribution grid operators; Ö Improved utilization of distributed wholesale locational marginal price, which dispatchable generation assets, means they are compensated similarly to an lowering overall system costs; independent power producer. Importantly, Ö Accelerated achievement of state policy thanks to CHP’s ability to serve the goals for climate resilience; community’s thermals loads, Co-op City has Ö Unlocking new revenue streams, been able to export power during both the lowering costs for developers and polar vortex and summer heat waves, making it customers; and a valuable power supply and resilience resource Ö Improved reliability and resilience for for ConEdison during times of grid stress. Co- customers, and limits expensive op City is looking to expand the facilities served infrastructure upgrades where are by the microgrid assets and incorporate microgrids deployed at vulnerable additional DERs, including up to 5 MW of points on the system.

8 Navigant, prepared for New York State Smart Grid content/uploads/CommunityMicrogridCaseStudyandAnalysisRe Consortium, Community Microgrid Case Study and Analysis port_2015-08-133.pdf. Report (Aug. 2015), available at http://nyssmartgrid.com/wp-

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CONCLUSION

Aggregated DER portfolios can provide many benefits across the system, including increased useful services to the energy system. As the reliability and resilience for both customers and number of deployed DERs grows, regulators the grid, greater customer choice regarding and grid operators should work to ensure that their energy supply, enhanced competition to these valuable resources can be fully utilized to ensure just and reasonable rates, and lower provide grid services and to lower costs for overall system costs through avoidance of more consumers. costly investments.

In particular, growth in DER deployment and FERC, regional grid operators, and state the imperative to more fully utilize them regulators all have important roles to play in heightens the need for aggregated DER ensuring the reliable and cost-effective portfolios in wholesale markets. Today, DER integration of DERs into wholesale markets. participation in these markets is minimal, Working together, these actors can establish limiting overall asset utilization and frameworks that allow DERs to provide retail optimization. The case studies in this report and wholesale services while ensuring point to examples where aggregated DERs are distribution system impacts are effectively providing reliable and cost-effective wholesale addressed. Taking these steps would capture services while also providing retail services the full promise and value of the growing and/or meeting the needs of host customers. adoption of DERs, allow for greater innovation Ensuring that aggregations of DERs have viable in energy technology and the provision of pathways to provide all the wholesale services energy services, and increase reliability and they are capable of would bring numerous lower costs for consumers.

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