How One Midwest State Aims to Create More Value from Distributed Energy

If states are to fully unlock the value of distributed energy resources (DERs), utilities will have to pay customers for all the grid services they can provide with their DERs.

Regulators in states such as Illinois are exploring how to calculate the value of DERs so that utilities can maximize their benefits through effective system planning and efficient operational control. Such effectiveness and efficiency are often lacking in current state policies, but the opportunity to unlock value for both the grid and customers can and should be taken.

“Although utility-scale assets benefit from economies of scale and lower levelized costs, by virtue of their proximity to demand, distributed energy resources (DERs) can provide unique system benefits (e.g., reduced losses, congestion, and curtailment, and deferred infrastructure investment) and thus higher value per kilowatt-hour (kWh) generated. However, many of these benefits are not fully incorporated into electricity markets or compensation structures,” wrote the authors of a research paper about DER value that was published in Energy Policy.

Investigating DER Value and Compensation in Illinois

In Illinois, regulators are considering a two-pronged approach to compensation for components of DER value such as benefits to energy and capacity markets and ancillary services.

Enacted in 2021, the state’s Climate and Equitable Jobs Act (CEJA) required the Illinois Commerce Commission (ICC) to initiate an investigation into the value of, and compensation for, DERs by no later than June 30, 2023, which the ICC did last year. The ICC has held several related workshops since August 2023.

The Commission has been identifying the various components of DER value and which are compensated. It has also been considering whether DERs can provide additive services and determining the terms and conditions for such services.

In a March 2024 workshop, the ICC began developing a framework for calculating and compensating DER value and working towards a strawman model for DER valuation. The Commission’s goals in designing the framework include fairly compensating DERs for their value, making it simple for customers to understand their compensation, allowing utilities to administer the framework without burdensome cost and complexity, and enabling the framework to be updated annually with consistent results.

Although the ICC is mandated to formulate a base rebate specific to distributed generation, the development of a compensation mechanism for additive services is encouraged but not technically mandated by the statute.

As a result, since the additive services portion of the law is not a required output of the Commission’s implementation of CEJA, there is a risk that it may not receive the attention it deserves. That outcome would not only be a mistake, but it would also be a gigantic, missed opportunity that would hurt Illinois customers.

If regulators do not develop compensation for additive services, the state’s utilities will not get the full value of DERs because customers will not be incentivized to help the grid by providing much-needed flexibility services.

Vast latent resource potential exists today amongst customers who have inherent flexibility in the way they use electricity. That vitally important and valuable potential is growing every day and should be leveraged to assist in distribution system planning and operation. Therefore, it is critically important that regulators develop the state’s base rebate in tandem with additive services compensation.

The base rebate would incentivize the development of distributed generation like solar photovoltaic systems, batteries, wind turbines and electric vehicles, while additive services payments would compensate customers for helping the grid with their DERs. Examples of additive services could include using DERs to respond to distribution system emergencies, managing distribution congestion or deferring investments in distribution infrastructure.

CPower presented suggestions for valuing additive DER services to the ICC at a November 2023 workshop.

Capturing the Value of DERs

The additive services available through DERs correlate with their multiple value streams at multiple levels.

For example, DERs improve reliability by helping grid operators avoid outages when the grid is stressed, and energy prices are high. They also mitigate increases in energy prices by eliminating the need to buy extra electricity.

Furthermore, DERs provide flexibility that helps grid operators balance the grid with operating reserves or regulation programs at the wholesale level or relieve congestion in distribution flows at the distribution level. Grid operators can also defer investments in transmission or distribution infrastructure and avoid burning fossil fuels to bring on peaker plants when the grid is stressed, which helps the environment by avoiding carbon emissions.

While some of these benefits, like those in reliability and flexibility, might be more obvious than others, they all provide value to the grid and should be compensated accordingly. Customers can be compensated at different levels, like by either a wholesale market operator or a utility, to avoid double counting.

Multiplying Grid Services

Distribution programs sometimes conflict with wholesale markets. If the programs are incompatible, customers would have to decide which to enroll their DERs in to avoid simultaneous participation, and therefore double compensation.

Regulators should account for compatibility when designing programs so that customers can participate at multiple levels, and thereby generate multiple value streams. States would then reap the full stream of benefits at both the distribution and wholesale levels.

New York is at the forefront of such layered dynamic load management programs, which increase benefits for customers and grid operators while guarding against double payments for the same MW of grid service.

Customers in New York can extract the full value of their electricity load because they provide distinct grid services across different levels. Perhaps most notably, New York customers can participate in both the Distribution of Load Relief Program (DLRP) and Commercial System Relief Program (CSRP).

Both the DLRP and CSRP programs provide seasonal payments for load curtailment, but they meet different distribution needs. The DLRP program is more emergency-based, while the CSRP is more about delaying infrastructure investments.

Both programs allow for participation in PJM programs because the PJM programs compensate for capacity, while the DLRP and CSRP programs do not. So, there is no issue of double compensation.

With 15 years of harmonious participation by New York customers, the DLRP and CSRP programs offer an example of what Illinois and other states could do in adopting and compensating additive services.

Paying for Grid Services

Lastly, when it comes to incentivizing grid services, paying customers directly for lending their DERs is the most effective motivation for getting energy users to help. Although some states use rebates or bill credits, direct payments work best for compensation because they create more flexibility for customers and encourage broader participation in grid services programs.

For example, if Illinois were to use direct payments to participants for both the base rebate and additive DER services, customers would be more willing to deploy DERs because they could get third-party help in financing projects. DER developers would be more likely to finance projects for energy users in exchange for a steady stream of income from direct payments.

Similarly, customers could use aggregators like CPower to monetize DER assets. This would also encourage broader participation because aggregators make it easier for customers to benefit from helping the grid.

Rules for grid services programs are complex and customers are often not as attuned to the specifics as an aggregator. An aggregator can simplify participation and increase returns by navigating program complexities on a customer’s behalf.

Additionally, by participating through aggregators, customers’ risk of penalties for non-performance is largely taken on by the aggregator, since the aggregator absorbs the penalties and manages its portfolio of customers to minimize or eliminate the expenses.

On the utility side, aggregators eliminate the need to build out the capability of working directly with customers, thereby saving money. This would be particularly true in Illinois, where there is a competitive market for aggregators. There would be no shortage of aggregators willing to step in and connect customers to utilities for grid services.

Illinois and other states can further increase the benefits that DERs provide, particularly in reliability, by leveraging additional DER services through aggregators that collectively dispatch energy resources owned by different customers to help balance the grid. In properly compensating customers for the value of their DERs, regulators will smooth the transition to a clean, flexible, and dependable energy future.

Call us at 844-276-9371 or visit CPowerEnergy.com/contact to explore how you can monetize your DERs and earn revenue for helping the grid.