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STATEMENT OF WORK

Project Title:

Creating and Demonstrating Incentives for Electricity Providers to Integrate Distributed Energy Resources

Contractor:

Massachusetts Division of Energy Resources
100 Cambridge Street, Suite 1020
Boston, MA 02114
(617) 727-4732

Program Area:

Distributed Energy Resources

Partners:

Massachusetts Division of Energy Resources

Massachusetts Technology Collaborative

California Energy Commission

Electric Power Research Institute

San Diego Gas & Electric Company

Southern California Edison

National Grid

RealEnergy

New Jersey Board of Public Utilities

Solar Turbines

Project Description:

The project will create new business models and regulatory approaches that reward electricity providers for integrating DER into their systems where there are demonstrable benefits, by developing state-or utility-specific business and regulatory strategies, demonstrating the most promising approaches through actual pilot projects in Massachusetts and California, and conducting outreach in public and industry forum.

Management Plan (Approach):

The unique nature of STAC requires that projects be supported by multiple State entities, and to the extent necessary any other entity. As indicated in the STAC Agreement, it is the Contractor’s responsibility to coordinate the execution of work under the Contract, incorporated by reference hereto. Contractor, in conjunction with the other State entities, and to the extent necessary any other entity, shall conduct the project in accordance with the Management Plan (approach) described below.

Task 1 - Create Innovative Business Models and Regulatory Templates through Stakeholder Collaboration

Task 1.1 - Develop Business Models and Regulatory Templates

This task will design a comprehensive set of business models and regulatory templates to actively engage electricity provides in integrating DER solutions into their systems.  'Business models' refer to mechanisms and structures by which an electricity provider can generate revenue and profits;¹ examples include owning and operating distributed generation units, providing service to customers who operate them, or providing system integration services to gain a return on avoided capital expenditures.  'Regulatory templates' refer to approaches that regulators can approve to enable electricity providers to implement particular business models while ensuring fair treatment for all stakeholders; examples include protecting non-utility developers against anti-competitive behavior, protecting ratepayers against undue cost shifting, or compensating utilities for some types of DER-related revenue reductions.²

To design successful business and regulatory approaches, selected regulators and utilities will be brought together through email and conference calls with a small group of DER economists, attorneys and business professionals, and their work facilitated to refine and prioritize promising business models and regulatory templates (collectively referred to below as 'solution sets').  The group will identify the highest priority solution sets for evaluation by stakeholders in Task 1.2, and analyze their costs and benefits for affected stakeholders.  Subtasks are to:

1. Gather and analyze existing information on the characteristics of state and utility programs that have successfully engaged electricity providers in evaluating and implementing DER business solutions.
2. Survey current literature describing alternative business and regulatory models designed to align the interests of electricity providers and customers with DER deployment that serves broad societal interests.  Sample topics include:
   1. Electricity provider revenue and earnings impacts (including 'lost revenue' concerns) from various forms of DER.
   2. Conditions under which demonstrable cost-shifting will occur, its magnitude, and its relation to other forms of cost allocation (such as rate avenging) permitted or required by regulators.
   3. Potential impacts of reducing conventional utility infrastructure investment, and permitting or encouraging alternative utility investment in DER solutions.
   4. Effects of regulatory initiatives such as rate-of-return adders for specific resources, revenue-capped performance-based ratemaking, targeted incentives that allocate DER savings among key stakeholders, and distribution credits that signal high-value DER opportunities.
   5. The need for advanced metering and monitoring of infrastructure and who will pay for it.
   6. The role of dynamic pricing as an element of cost and value allocation.
   7. Uncertainty over utility DER ownership and operation.
   8. Uncertainty over long-term revenue needed to facilitate DER infrastructure investment.
   9. The need for simple mechanisms to recognize local DER value at different places within the distribution grid.
   10. The need to develop a DER portfolio approach that facilitates significant DER installations over a multi-year planning horizon within a large utility planning area.
3. Interview selected electricity providers concerning the viability and appeal of alternative approaches.
4. Refine EPRI cost-benefit methodology to separately compute utility shareholder and non-participant impacts of proposed solution sets.
5. Coordinate expert input to finalize solution sets of business models and regulator templates for presentation to stakeholders.

Task 1.2 - Facilitate Stakeholder Evaluation of Business and Regulatory Solution Sets

Assemble stakeholders representing utilities, regulators, government agencies, DER providers and developers, and end-use customers.  Facilitate collaborative assessment and practical refinement of the solution sets presented as a result of Task 1.1, using workshops and conference calls.  Develop stakeholder recommendations for alternative approaches to be adapted to individual state and utility circumstances in Task 2, and tested through demonstrations or pilot programs in Task 3. Subtasks are to:

1. Assemble a manageable group of stakeholders representing utilities, regulators, government agencies, DER providers and developers, and end-use customers.
2. Facilitate stakeholder workshops and conference calls to evaluate solution sets presented as a result of Task 1.1.
   1. Workshop #1 (1.5 days) Massachusetts
      • present proposals to all stakeholders
      • facilitate discussion of pros and cons of each proposal for each stakeholder
      • eliminate any proposals that stakeholders agree not to pursue
      • identify and organize key issues identified by stakeholders from remaining proposals
      • assign issue groups to address key issues
   2. Issue group conference calls (1 per month for 6 months)
      • assign issue group members to propose solutions to specific issues
      • facilitate issue group issue discussions
      • coordinate and finalize issue group recommendations to full stakeholder group
   3. Workshop #2 (1.5 days) California
      • reconvene all stakeholders
      • facilitate discussion of issue group recommendations
      • define agreed elements for final stakeholder group recommendations
3. Prepare draft and final reports documenting stakeholder group process and recommendations
   1. Prepare draft report describing stakeholder recommendations for specific alternative business models and regulatory templates to be adapted for state and utility use in Task 2, and demonstrated through pilot programs in Task 3.
   2. Submit to stakeholders for comment and revision.
   3. Incorporate comments and revisions as appropriate, and prepare final report.

Task 1 Deliverable: Report recommended alternative business models and regulatory templates designed to reward electricity providers for integrating DER where it creates societal value, and documenting the process that produced the recommendations.

Task 2 - Adapt Recommended Business and Regulatory Solution Sets to State Environments to Develop State- or Utility-Specific Pilot Approaches

Task 2.1 - Identify Key State-Specific Business and Regulatory Barriers and Promising Solution Sets

1. Assemble state-specific stakeholder groups that include the regulators, utilities, state agency representatives, end-use customers and DER manufacturers and developers from states that participated in Task 1 (e.g., Massachusetts and California), and possibly additional end-use customers and others from each state.
2. Facilitate group collaboration to select solution sets that address high priority business or regulatory barriers to DER integration under specific conditions presented by each state's electricity market.  Perform cost-benefit analyses to evaluate impacts on all stakeholders from these approaches.

Task 2.2 - Customize Selected Solution Sets to Address the Distinct Needs of Individual States and/or Electricity Providers

1. Organize and manage collaborative interaction through meetings and conference calls, to adapt selected business models and/or regulatory templates to the specific circumstances of each state and electricity provider's market structure, legal environment and regulatory context.  Engage the expertise of local utility rate and planning departments, state regulatory agencies, end-use customers, and DER providers to tailor selected solution sets to local conditions.  Consider how the recommended business models and regulatory approaches can be tested in pilot or demonstration projects.

Task 2 Deliverable: Business models and regulatory templates customized by each state's group to address state- or utility-specific barriers to integrating societally beneficial DER.

Task 3 - Test Business and Regulatory Solution Sets through Pilot Projects

Utilities in Massachusetts have begun discussions with the Massachusetts Technology Collaborative to implement technology demonstration projects that begin to address barriers and obstacles to widespread DER adoption.  In this task, those projects will be leveraged and used to create a set of pilot projects that use State monies for hardware and related support while using STAC funding to enhance the pilots by applying the business, market and regulatory solution sets developed in previous tasks above.  Using EPRI's proven stakeholder process, electricity providers, regulators, state agencies, customers and DER project developers will be facilitated to contribute specialized expertise to enhance pilot projects in each state.  Professional support will be provided to key stakeholders to implement pilot solutions that lead to deployment of additional CHP, renewables and demand dispatch capacity, and that can be replicated elsewhere, thus allowing the pilots to become templates for adoption across the country.  Specific subtasks in Task 3 include the following:

Task 3.1 - Enhance Pilot Projects to Test Business and Regulatory Approaches

Assist each state's stakeholder group in identifying existing or planned projects that are good candidates to empirically test the customized solution sets developed in subtask 2.2.

In addition, to the hardware installation development and support that will occur in these projects, additional work will be make possible to address business, market and regulatory constructs that are preventing the widespread adoption of DER solutions.

1. Massachusetts - The Massachusetts Technology Collaborative has begun discussions with distribution utilities in the State to establish Utility Congestion Relief Partnerships (UCRP).  The goal of this program is to test realistic, representative cases of customer-sited renewable energy generation that will provide congestion relief and related benefits to the distribution and transmission systems, as well as to host customers and other entities.  Each pilot project is intended to demonstrate the potential and the technical and economic feasibility of such resources, together with energy efficiency, demand-response controls, load shedding, and storage, to relieve the pressure of load growth and infrastructure aging on local capacity limits, when cooperatively sponsored with the active involvement of the distribution company.  Success in the complex process of prototype design and implementation will lead to a replicable model of "Clean Distributed Resources" (CDR) with acceptable benefit/cost ratios for participating utilities, ratepayers, end-use customers, and the general public.

   Additional funding will allow the testing of potential business models and accumulation of experience in support of the equitable allocation of costs and benefits among distribution companies, customers, ratepayers, and society (I.e., win/win/win outcome with net benefits greater than costs for all stakeholders).  The pilots and associated research will identify and quantify a wide range of costs an benefits of DG to provide data and other input to the Massachusetts DG Collaborative as appropriate regarding the extent to which DG can contribute value to distribution planning and meeting customer needs.

   STAC funding will leverage up to $650,000 in MTC funding in support of the UCRP projects to test how business and regulatory solutions customized in Task 2 can actually work in this specific environment.  Included here will be solutions to:

   • Allay utility concerns that DER proliferation would erode earnings.  A successful pilot could lay the groundwork to propose a model tariff or incentive program to Massachusetts regulators that would streamline similar activities in other utility territories.
   • Determine the total costs and benefits of the projects including utility cost and revenue changes, and any reduced capital investment attributable to DER.
   • Track and evaluate end-use customer response to the pilot.
   • Concerns by state regulators and NE-ISO managers that the separation of distribution utilities from the cost accountability of wholesale power purchasers has led to a decrease of demand response resources.
2. California - California utilities have expressed interest in utilizing DER technology pilots in their territory as test cases to explore the contract and process issues that are slowing the adoption of DER in the State.  Other stakeholders such as the California Energy Commission, DER developers and equipment suppliers, customer trade associations such as the Silicon Valley Manufacturers Group, have also been recruited to participate.  Funding from STAC would allow the private and public monies that are available for hardware and technical solutions to be leveraged so that business and regulatory issues can be addressed in the context of real projects.  Existing funding in the State could be leveraged with STAC funding in the following areas:

• DER Market Integration Within an Advanced Energy Portfolio

Southern California Edison's 2004 collaboration with EPRI's DER Partnership to develop a process to solicit DER - joined enthusiastically and given very positive feedback by other stakeholders - concluded that the traditional RFP process is unduly burdensome and costly for proposers and utilities alike when used to solicit small amounts of DER for a few circuits or substations.

With the addition of STAC funding, a template could be developed for a multi-year, multi-resource, large area solicitation that prioritized resources according to State policy goals.  This would enhance the California resource planning and procurement process by enabling California utilities to target DER technologies and applications where they deliver least-cost T&D solutions as well as generation benefits.  It would also help them implement the state's established priority 'loading order' for procuring energy efficiency, renewables, demand response, distributed generation, and central station generation.

• CHP/Efficiency Market Integration

Increasing the number of megawatts of CHP has been adopted as a goal by state and national policy makers but very little activity has occurred recently.  In addition to technology and cost issues, there is no recognition in existing energy and distribution market structures of the value that a strategically located CHP project can bring.  By leveraging the work being done in California through the self generation incentive program, creative approaches to value recognition will be developed.  Included here will be the development of programs for demand response and CHP/efficiency with approaches for monitoring the value of measures, structure of the resource requirement, development of CHP credits, etc.

Task 3.2 - Support Key Stakeholders in Implementing Pilot Solutions

Provide legal, regulatory, business and/or economic expertise as needed to support presentations and written submittals to utility management, state regulators, customers, ratepayer advocates, DER providers, and other affected parties, regarding the rationale for proposed pilot approaches and their anticipated costs and benefits to different stakeholders.

1. Support utility rate personnel in analyzing the impacts of the selected pilot approaches on utility revenue requirements and financial health.  EPRI's cost-benefit tool, as defined in Task 1.1(d), will be used to assess pilot project impacts on utility shareholders.
2. Support regulatory staff and ratepayer advocates in examining the impacts of pilot approaches on all ratepayers, using the same cost-benefit tool.

Task 3.3 - Monitor and Evaluate Pilot Solutions

Monitor the progress and experience of each pilot project as it proceeds.  Evaluate the effectiveness of business models and regulatory templates applied in each case.

Task 3.4 - Prepare draft and final reports documenting pilot process and results

1. Prepare draft report describing the selection process for pilot projects, the implementation support provided to key stakeholders, and the progress and results of each pilot project.  The report will include evaluation of the effectiveness of pilot business and regulatory approaches in motivating electricity providers to encourage and adopt DER solutions where they create societal value.
2. Circulate draft report for comment by key stakeholders.
3. Incorporate comments and revisions as appropriate, and prepare final report.

Task 3 Deliverable: Task report evaluating the effectiveness of pilot business and regulatory approaches in motivating electricity providers to encourage and adopt DER solutions where they create societal value, and documenting the pilot process.

Task 4 - Conduct Outreach Activities to Gain Adoption in Participating and Other States

Use the experience gained in each state to evaluate the process for developing state- and utility-specific business models and regulatory templates, and distill it into a model process for others to follow.  Tie the model process to pilot project results to demonstrate its value and build confidence.  Develop a presentation package for all stakeholders to use in public and private forums.  Recommend the model process for action in the participating states and in other states.  Prepare a final report to document the research, results, and recommendations of this project.  Subtasks are:

Task 4.1 - Develop Model Process

Using the results of the evaluation, develop a simplified model process that can be used in participating states and others to launch programs that motivate utilities to integrate DER that yields net societal value.  Develop a presentation that documents and describes the model process.

Task 4.2 - Conduct Outreach to Share Model Process and Results

Develop an outreach plan for EPRI, including audiences and venues for presentation of the model process.  Examples include workshops with state regulatory and research agencies, utility forums such as conference and EPRI advisory meetings, meetings of national organizations such as National Association of Regulatory Utility Commissioners, National Association of State Energy Officials, and Association of State Energy Research and Technology Transfer Institutions.  Gain agreement by stakeholders to make presentations to their audiences.  Track activities and accomplishments.  Document results of presentations, such as action in a state to adopt the model process.

Task 4.3 - Prepare Final Project Report

Draft the final report documenting the research process, findings, results, recommendations, and model process.  Include outreach and results of outreach that have been accomplished by the end of the project period.  Seek stakeholder and project management review of draft report.  Incorporate comments and finalize report.

Task 4 Deliverable: A presentation that documents and describes the model process for developing programs to motivate utilities to integrate DER where it brings value.  An outreach plan, summary of activities, and results of outreach.  Final report documenting the program research, results, and recommendations.

Task 5 - Stakeholder Participation

Utility and supplier representatives will participate in the process of creating the business and regulatory solution sets, both general and state-specific, and evaluating them through pilot projects by activities such as attending workshops and participating in conference calls.

¹Attributes of a business model may include the value it creates for users; the way it delivers that value; the customers it targets; the cost structure and profit potential of the provider; and its position relative to other entities in the DER value network.

²Through mechanisms such as rate-of-return adders, performance-based rewards for efficiency and environmental improvements, shared system savings, or other incentive designs that allocate costs and benefits to achieve societal goals.

Project Tasks, Status, and Deliverables

Last Updated: 11/01/06