A serialized version of our new report, Democratizing the Electricity System, Part 5 of 5.
Click here for:
- Part 1 (The Electric System: Inflection Point)
- Part 2 (The Economics of Distributed Generation)
- Part 3 (The Political and Technical Advantages of Distributed Generation)
- Part 4 (Regulatory Roadblocks to Democratizing the Electricity System)
- Download the report.
The electricity grid system has become host to a distributed generation phenomenon that has developed in a largely hostile environment. It’s possible that distributed generation has enough inherent economic and political advantage to be sustainable, but new policy could significantly expand distributed generation in the electricity system.
The following policies illustrate the many ways that the electricity system can incorporate the benefits of distributed energy generation.
Distributed Generation or Solar Power Carve-Outs
With nearly 30 states already mandating the development of renewable energy, more states should focus on power that can be generated locally and with greater economic returns to the state. Already 16 states have carve-outs in their renewable mandates for either distributed generation or solar power, specifically.1 These carve-outs reduce competition between large and small projects and create a domestic market for distributed generation that can support more local ownership and in-state economic value.
Clean, Local, Energy, Accessible, Now. The CLEAN name highlights the distributed energy potential of a guaranteed, long-term contract and a price for renewable energy sufficient to attract investment (the same deal offered to regulated utilities). This policy (under various names, such as feed-in tariffs) is responsible for half of the world’s installed wind power and three-quarters of its solar PV. It’s the dominant energy policy in most of Europe as well as a growing number of places in North America (Ontario, Vermont, Oregon, Gainesville, FL).
In Ontario, a robust and comprehensive feed-in tariff is encouraging the development of over 2,500 MW of renewable energy, much of it distributed generation. In Germany, home to some of the most effective renewable energy policies in the world, more than half of its 27,000 MW of wind are in projects 20 MW and smaller.2 Over 80 percent of the 3,000 megawatts of solar PV added to the German grid in 2009 were put on rooftops, most less than 100 kW.3
CLEAN contracts can be used in concert with renewable energy standards but also as a standalone policy for encouraging the development of renewable energy. Their signature success is reducing risk for renewable energy development with a guaranteed and transparent contract, reducing the costs and time to project developers to obtain financing. In general, CLEAN contracts have a lower total cost for renewable electricity than renewable mandates due to fewer stranded costs associated with auctions or solicitations (see below).4
Every state should adopt a CLEAN contract policy.
In lieu of a CLEAN contract policy, the California public utility commission (CPUC) recently opted to develop a renewable auction mechanism to encourage the development of 1 to 20 MW distributed generation projects. While this program is admirable for its focus on the distributed generation segment, the auction mechanism has its own liabilities.
Utilities like auctions outside their control no moreso than any requirements to purchase third-party generated electricity and have challenged CPUC’s implementation order.
According to CPUC data, approximately 97% of projects bid into auctions under the state’s renewable energy standard have failed to win a contract from the utilities.5 This failure rate of 97% represents millions of dollars in stranded costs, costs that developers have to ultimately try to pass on to utilities and their ratepayers. It’s an incredible waste of human energy in pursuit of “lowest-cost” renewable energy.
Renewable Energy Incentives (Federal)
The most important change to federal renewable energy incentives, short of adopting CLEAN contracts, would be to transition away from tax credits and toward cash payments. The cash grant program – effective 2009 through 2011 and passed as part of the economic stimulus bill – has significantly increased local ownership of renewable energy projects.6 But the cash grant program is intended to be temporary, even though President Obama’s proposed budget would extend it through 2012.
The cash grant program was adopted because the major renewable energy developers were unable to find tax equity partners to use the tax credits during the recession, but it’s a band-aid on a deeper problem with using the tax code for renewable energy incentives.
One alternative for the federal government is to make the tax credits refundable. This would allow anyone eligible for the tax credits to maximize them even if their tax liability was limited. It would also avoid the problem of a shrinking tax liability market during a major recession.
An even better strategy would be for the federal government to permanently shift its incentive payments to cash, and to base them on the output of renewable energy systems (like CLEAN contracts). In addition to opening access to incentives for community-based and nontaxable entities (e.g. municipalities), paying for production would increase the efficiency of government dollars by paying for output, rather than reducing capital costs on potentially low-performing projects. The cash payment option also reduces tax law problems for community ownership. Unless an investor in a wind or solar project takes an active role in project oversight, they can only use their tax credits against passive income (from a business or investment income), and most Americans have no passive income. A cash payment can be used by any investor, in any project structure.
Transmission Incentives and Regulatory Policy (Federal)
A second area of focus at the federal level is regulatory policy, set by FERC. Currently, high-voltage transmission projects are eligible for (and in fact routinely receive) bonuses to their return on investment; bonuses that are not given to power plant construction. The bonus incentives distort a state-based comprehensive planning policy that asks utilities to consider many options, not just transmission, for meeting their reliability and safety goals. Instead, investor-owned utilities and transmission developers have an incentive to encourage the development of transmission at the expense of more cost-effective alternatives. This program should be terminated.
Congress should also clarify that FERC should give great latitude to states in energy planning, that FERC does not have the authority to overturn state transmission related decisions and that FERC’s analysis must analyze alternatives to transmission not simply alternative routes for transmission lines.
Renewable Energy Incentives (State)
In addition to a comprehensive policy like CLEAN contracts, there are other renewable energy incentives. States should focus their dollars on projects that provide the greatest economic advantage for the state, and incentives for renewable energy should prioritize distributed generation that has a higher likelihood of local ownership. A good example is Minnesota’s now-expired incentive for small wind projects that offered 1.5 cents per kilowatt-hour for wind projects smaller than 2 MW.
Community Choice Aggregation and Municipalization
There are few better opportunities for energy self-reliance than local authority. Community choice aggregation (CCA) allows cities, counties, and collaborations of local governments to govern their electricity supply contracts. In some cases, like California’s Marin County, more than three-quarters of the electricity supply to local customers is renewable. Other CCA organizations have succeeded in achieving lower rates for their customers with new local supply and or competitive contracting.
A step further (especially for the 46 states without CCA laws) is municipalization. Over 2,000 municipal and state-owned utilities serve 45 million Americans, and they provide communities with local determination over their electric supply. The power of municipalization is enormous. When Boulder, CO, recently decided not to renew their franchise with Xcel Energy to study municipalization, they found the possibility of enormous economic opportunity (and lower rates), as well as getting a bid from Xcel to provide 90% of Boulder’s electricity from wind by 2020.
Communities should consider the benefits of local control of their electricity system to maximize the potential for local, distributed renewable energy development.
Solar Access Laws
One of the biggest barriers to distributed solar in residential areas isn’t financial, but rather the obtuse rules of homeowners’ associations that bar the installation of rooftop or ground-mounted solar PV systems. States should pass solar access laws giving every property owner the right to put a solar PV system on their roof. Exceptions can be (and are) made for historic areas, but energy self-reliance shouldn’t be subject to outdated aesthetic concerns.
Model Net Metering Rules
In most states, customers who generate energy on-site can essentially roll back their electric meter, receiving a 1:1 credit for every kilowatt-hour they generate. Strong net metering laws make grid interconnection simple, allow for systems of significant size (up to 2 megawatts), and ensure customers get reimbursed at the retail electricity rate for each kilowatt-hour of demand they offset (even if production modestly exceeds consumption). In the best case, rules provide compensation for excess energy at premium rates (more like a CLEAN contract).
The cutting edge of net metering laws includes virtual or aggregated net metering. The former allows customers to share the output of a community-based energy installation even if it isn’t physically connected to their meter. Essentially, the law requires utilities to replace hardware with bookkeeping. The latter policy – aggregated net metering – allows customers to aggregate their meters (e.g. a college campus with multiple buildings, each with its own meter) so that an on-site electricity source, like a wind turbine, can be credited against the consumption from the entire campus, instead of just one building.
Every state should adopt model net metering rules to encourage more on-site renewable energy generation.
Model Interconnection Rules
With interconnection posing a major roadblock to greater expansion of distributed generation, model rules can provide states with guidance in establishing more effective policy. In their 2010 report, Freeing the Grid, the Interstate Renewable Energy Council details the various components of an effective interconnection policy.7
The following list highlights the more important components:
- Generators up to 20 MW allowed with multiple size “breakpoints” in the interconnection process (e.g. 10 kW, 2 MW, 10 MW, 20 MW) to segregate and fast-track minimal impact projects from those requiring more study.
- Shorter timelines than FERC federal interconnection standards.
- Interconnection fees capped (and waived entirely for net metered customers), engineering fees fixed to prevent uncertainty.
- Safety standards consistent with major electrical safety standards (Underwriters Laboratory and IEEE).
- Use of federal “technical screens” to fast-track review of projects with many similarities.
- Standard interconnection agreement.
- Rules apply to all state utilities.
California Assembly Bill 1302 also provides an example of model legislation for distributed generation. The law requires every major utility to provide maps and other information outlining zones that are optimal for the deployment of distributed generation. The law would also require utilities to take distributed generation into account when making investments in the electric grid, would require a third party audit of the interconnection process, and provide more transparency of the queuing process for renewable energy projects.
States and public utility commissions should adopt these interconnection rules and laws to drastically simplify and remove uncertainty from the process of developing distributed renewable energy projects.
Net zero energy buildings are an increasing part of building codes in Europe, transforming building efficiency codes into a more comprehensive policy for energy balance. These policies require that buildings be operated without using fossil fuels, have a net zero energy balance (by balancing on-site generation with load) or have a positive energy balance. Most would take effect by 2020.
Since even the most efficiently designed building uses some energy (especially in colder or humid climates), a net zero energy building code is a de facto incentive for distributed generation. States and local governments should use the building code to reduce on-site energy consumption, allowing the cost of energy efficiency and distributed generation to be integrated into the first mortgage, one of the most cost effective financing tools.
Identification of Existing Grid Capacity (“Sweet Spots”)
Utilities should be required to publish data on their distribution networks to allow distributed generation developers to identify areas with available capacity where interconnection costs may be lower.
Grid-lock: the monopolistic lock on power of existing utilities
Minnesota was the first state to conduct an engineering-level analysis of the capacity of the existing state sub-transmission network to interconnect additional distributed generation. The first study found up to 1,400 MW of additional distributed wind energy could be injected into the existing grid in the West-Central part of the state. The cost for integration was less than 10 percent of an equivalent amount of new, high-voltage transmission line.8
A subsequent, legislature-ordered state-wide study confirmed the first regional study and suggested that Minnesota had sufficient capacity in its existing transmission system to interconnect sufficient renewable electricity to meet its 25 percent renewable portfolios goal.9
California’s statewide grid operator is conducting its own analysis of the capacity of the existing transmission network to interconnect significant quantities of distributed generation. At the same time, California’s Public Utilities Commission has ordered two of the state’s largest utilities – SCE and SDG&E – to provide a map of capacity on distribution level circuits to developers. Every state should require its utilities to do the same.
The Moment for 21st Century Energy Self-Reliance
Distributed generation offers a cost-effective and fast-scaling alternative to centralized generation of electricity, and at a cost competitive with centralized renewable energy development. Most importantly, it offers an opportunity to democratize the electricity system, dispersing power generation and its attendant economic benefits.
The technical barriers to the transformation are surmountable. In the short run, much more distributed generation can be added to the existing grid system without substantial difficulty. In the long run, new technical expertise and cheaper energy storage will transform the static, centralized grid into a dynamic and primarily decentralized renewable energy system.
While the transformation is a technical one, the largest barriers are political. From the federal to the state to the local level, policies shield the legacy electric grid from a democratic transformation.
New policies are needed to level the playing field for local, distributed generators. Rules are needed to change the historic paradigm of a few large-scale, fossil fuel power plants supplying a grid connected by long-distance transmission lines. Rules are also needed to prevent regulators from forcing the same paradigm on inherently distributed renewable energy production. These rule changes range from ending perverse and unnecessary incentives for new high-voltage transmission lines to transforming federal incentives to cash and production-based payments to tearing down interconnection barriers to the democratization of the grid.
The need for new rules is ultimately driven by the need for a new energy model. If new wind and solar power plants are built in the outdated, centralized model with significant new infrastructure, it will preclude local ownership and the spreading of economic benefits. Without these local benefits, the centralized strategy generates more resistance than a distributed system, a bane in both politics and electricity systems.
The urgency of action on global climate change only magnifies the disadvantages of pursuing a centralized model of renewable energy development. Community-based and distributed renewable energy production builds a political constituency to support the expansion of renewable energy and the retirement of fossil fueled generation, helping step away from a carbon-based electricity system.
The political advantage of distributed generation is obvious. The technological and economic dynamics have moved in favor of distributed renewable energy generation, but without new rules the opportunity will be lost.
5 Lewis, Craig. Driving Clean Local Energy and Delivering the New Energy Economy. (Four Corners Green Living Expo Presentation on CLEAN Programs, April 2011). Accessed 6/9/11 at http://tinyurl.com/3rj6y6x
7 Freeing the Grid: Best Practices in State Net Metering Policies and Interconnection Procedures. (Interstate Renewable Energy Council, December 2010). Accessed 6/14/11 at http://tinyurl.com/64p89ph.
8 Bailey, John, et al. Meeting Minnesota’s Renewable Energy Standard Using The Existing Transmission System. (New Rules Project and North American Water Office, November 2008). Accessed 3/23/11 at http://tinyurl.com/49pk5uv.
9 Analysis of the Phase II Report of the Dispersed Renewable Generation Transmission Study. (North American Water Office, 11/18/09). Accessed 3/23/11 at http://tinyurl.com/6bn3boe.