Estudio Utility of the Future

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1 Estudio Utility of the Future Dr. José Pablo Chaves Ávila Dimensiones económicas del nuevo modelo energético en España Pamplona,12 de junio 2018

2 Contents 1. A power sector in transition 2. A framework for an efficient and evolving power sector 3. Insights into the value of Distributed Energy Resources

(>10MW, 50 MW) 0-1 kv 1-36 kv 36-72.5 kv 72.5-145 kv 145-400 kv Others Source: own eleboration based on CNE data Source: NYISO, 2016.

3 More Distributed Energy Resources Which are there? & how are they changing the electricity system? 100% Distributed generation by voltage in Spain (end of 2012) 75% 50% 25% 0% Cogeneration Solar PV CSP Wind power Mini-hydro ( Medium hydro 10MW) (>10MW, 50 MW) 0-1 kv 1-36 kv kv kv kv Others Source: own eleboration based on CNE data Source: NYISO, Distributed Energy Resources Roadmap for New York s Wholesale Electricity Markets Source: Utility of the Future Study Source: NYISO, Distributed Energy Resources Roadmap for New York s Wholesale Electricity Markets

4 The electricity sector is digitalizing as ICT costs decrease Average selling prices of various MEMS devices Advanced Metering Infrastructure deployment as a % of metered sites in the U.S. 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Left image source: McKinsey, The Internet of Things: Mapping the Value Beyond the Hype ; Right: MIT analysis of EIA data Transport Industrial Commercial Residential Total

5 The power sector is increasing interconnected with other sectors

6 The conditions for massive EVs deployment are starting to take place Superchargers deployment (Tesla) Source: IEA (2016) Chargers points (Spain) Source: Tesla Source:

7 Not always efficient policies are promoting DERs: net metering Financial compensation related to feed electricity into the grid in the EU countries Source: European Commission 2017

8 Changing roles and responsibilities for distribution network utilities as well rate reforms have been proposed

9 Penetration of solar PV can significantly change the load curve California ISO net load, last week of March

10 In PJM, nearly 11 GW of demand-side resources cleared in the capacity market for delivery in 2019 and 2020 (7% of cleared capacity) Meanwhile, ~450 MW of demand-side resources provided secondary operating reserves (PJM, 2017) Source: PJM (2017)

11 Third-part solar owned business model reduces barriers for high capital costs 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 80% or more of 2014 residential installations in states like California, Colorado and Arizona are third-party owned Installations of the California Solar Initiative program by ownership 0% Source: California Solar Initiative Third party owned Direct Sale

12 A diverse range of new actors and business models are emerging to harness distributed energy resources Solar PV Energy Storage Demand Response/ Aggregation

13 Business models: new actors and strategies Major utility restructurings Major acquisitions and investments Billion dollar companies and bankruptcies

14 L'avenir, tu n'as point à le prévoir mais à le permettre Citadelle, Antoine de Saint-Exupéry, 1948 The future, you do not have to foresee it, but to enable it

15 The Utility of the Future used advanced modeling tools to derive its recommendations

16 A framework for an efficient and evolving power system 1. An Efficient System of Prices and Regulated Charges for Electricity Services 2. Improved Incentives for Regulated Distribution Utilities 3. Restructuring Revisited: Electricity Industry Structure in a More Distributed Context 4. Updating Short- and Long-Term Electricity Market Design

17 1. An Efficient System of Prices and Charges for Electricity Services

18 Distributed resources and incumbent resources are substitutable new mechanisms are needed to coordinate investment and operation The best way to create a level playing field (and thus more affordable electricity) is to dramatically improve prices and regulated charges for electricity services.

19 Power Consumption 1. Ensure that all prices and charges are nondiscriminatory, technology neutral, and symmetrical Electricity rates should be based only on the injections and withdrawals of electric power this requires the use of improved metering infrastructure ?

20 Spatial granularity 2. Progressively improve the granularity of price signals with respect to both time and location Distribution nodal LMPs (DLMPs, real & reactive) Intermediate DLMPs (substation/zonal/other) Wholesale LMPs + distribution losses Wholesale nodal LMPs Wholesale zonal LMPs Time-of-use pricing Critical peak pricing Day-ahead hourly price Real-time spot price Temporal granularity

21 $/kwh 3. Implement forward-looking peak-coincident network charges and scarcity-coincident generation charges to align consumer decisions with system costs Energy charge Generation capacity charge 1,50 1,25 1,00 0,75 0,50 0,25 0, Hour

22 4. Recover residual network and policy costs without distorting marginal consumption or production incentives

23 5. Carefully consider which costs are included in fixed electricity tariffs to avoid inefficient grid defection Grid defection savings Grid defection costs

24 6.Explore new methods for addressing distributional & implementation challenges without sacrificing efficient signals that reduce costs for all 1. Cross subsidies: Lump-sum bill credits or surcharges can restore desired cross-subsidies 2. Spatial and temporal variability: Pre-payments and hedging arrangements can address bill variability 3. Low income support: Assistance to those that can prove need can augment subsidies built into today s tariffs

25 2. Improved Incentives for Regulated Distribution Utilities

26 Revisiting DSO incentive regulation Under the new context, is every cost increase inefficient? Does past information reflects future needs? Are efficient investments encouraged in short regulatory periods? Is purely ex-ante regulation flexible enough? Forget about the X-factor as efficiency factor through which cost reductions must be achieved Evaluate forward-looking investment plans with a long perspective (conventional and smart grid investments) Conventional backward looking benchmarking is not enough Integrated remuneration of OPEX & CAPEX to allow DSOs for potential tradeoffs Flexible remuneration schemes (profit-sharing contract menus) to dealt with uncertainty (ex-ante evaluation & ex-post correction) Output regulation for specific targets (QoS, efficiency, innovation) R. Cossent, T. Gómez, "Implementing incentive compatible menus of contracts to regulate electricity distribution investments", Utilities Policy. vol. 27, pp , Dec 2013 J.D. Jenkins, I. Perez-Arriaga, The remuneration challenge: New solutions for the regulation of electricity distribution utilities under high penetrations of distributed energy resources and smart grid technologies MIT CEEPR WP , Sep 2014.

27 3. Electricity Industry Structure in a More Distributed Context

28 New challenges for DSOs Distribution networks will become active networks instead of passive and DSOs become in real System Operators DSOs have a crucial role as market facilitators providing transparent information and keeping a neutral position respect new and existing actors Smart meters would allow new tariff systems for incorporating demand side response and market participation Aggregators and suppliers would enter into the market providing new services for clusters of customers

29 4. Updating Short- and Long-term Electricity Market Design

30 1.Enable wholesale market transactions to be made closer to real time This rewards flexibility and incentivizes improvements in forecasting and balancing Wind power forecasts from 48hrs to 1 hour before real time

31 2.Enable new resources to play in existing and emerging markets Update wholesale market rules (such as bidding formats) to reflect the operational constraints of new resources

32 Operating reserve value [$/MW/h] Optimal capacity mix [GW] 3. Align reserves & energy markets & establish the flexibility requirements for participation Energy prices should reflect the increased probability of scarcity events as reserves are dispatched 10, , Peaker 6,000 4, Midload 2, ,000 4,000 6,000 8,000 10,000 12,000 Operating reserve level [MW] Baseload

33 4. Minimize the interference of support mechanisms for clean technologies in electricity markets Production-based subsidies distort marginal incentives and can cause undesired outcomes Frequency of 5-minute negative price spikes in CAISO Source: CAISO, Quarterly Report on Market Issues and Performance

34 Insights on the Value of Distributed Energy Resources

35 The value of locational services vary depending on the location of service provision Locational Non-locational Power system benefits Network capacity Constraint mitigation Loss reduction Voltage control Power quality Reliability and resiliency Energy Firm capacity Operating reserves Price suppression Price hedging Other public benefits Land use Employment Others* Emissions mitigation Energy security *Private values; do not need to be reflected in prices and charges The ability of DERs to provide these services puts them in competition with traditional network investments & centralized resources

36 What is the value DERs can provide? Where is it coming from? 1. The value of a distributed energy resource is highly dependent on the specific location of that resource in the power system. 2. Locational value can vary dramatically within a given power system. Efforts to define a single value of solar etc. will prove futile. 3. The marginal value of DERs can decline rapidly as locational value is exhausted. 4. Economies of scale still matter. Smaller isn t always better.

DER deployment can add value beyond simply generating or consuming energy Feeder-level congestion heat map across PG&E territory Network capacity

37 DER deployment can add value beyond simply generating or consuming energy Feeder-level congestion heat map across PG&E territory 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, 2016

38 Locational value can vary significantly in a electricity system Distribution of 2015 Average Nodal LMPs in PJM More than three quarters of nodes between $21-40/MWh 50,4% 26,2% Approximately 3 percent of nodes with very high locational value, 3-10 times the average 0,1% 0,1% 8,4% 7,3% 2,3% 0,9% 0,4% 0,4% 0,5% 2,9% < >100 USD per MWh The Utility of the Future Study

39 Levelized Cost of Electricity (2015 USD/MWh) Economies of scale matters even for distributed resources Incremental cost relative to $48 $98 $ MW Utility-scale1.5 MW Community 1 MW C&I Rooftop 5 kw Residential Rooftop

40 Average value per MWh produced High locational value can outweigh distributed incremental costs $180 Comparison of locational value and incremental unit costs for solar PV systems: Long Island, New York example, high value case $160 $ $120 Distributed opportunity costs $100 $80 $60 $40 $ $0 Locational energy value: transmission Locational energy value: distribution losses Conservation voltage reduction Network investment deferral Locational value Generation capacity premium Reliability Total locational value 1-2 MW system 1-10 kw system Incremental unit costs relative to MW system The Utility of the Future Study

41 Average value per MWh produced But not always. Smaller is not always better $180 $160 Comparison of locational value and incremental unit costs for solar PV systems: Mohawk Valley, New York example, average value case $140 $120 Distributed opportunity costs $100 $80 $ $40 $20 $ Locational energy value: transmission Locational energy value: distribution losses Conservation voltage reduction Network investment deferral Generation capacity premium Reliability 7.9 Total locational value 1-2 MW system 1-10 kw system Locational value Incremental unit costs relative to MW system The Utility of the Future Study

42 The marginal locational value can be rapidly diminishing

43 Full report available at:

44 Preguntas? Dr. José Pablo Chaves Ávila

La regulación del incierto futuro de los sistemas eléctricos

La regulación del incierto futuro de los sistemas eléctricos Foro XM-2017 El futuro de la energía eléctrica en Colombia 25 de mayo, Cartagena, Colombia Carlos Batlle https://energy.mit.edu/profile/carlos-batlle