Assessing the latest revisions for valuing the benefits of distributed energy resources

New approaches to net energy metering (NEM) are expanding across the U.S.

Nationwide, lawmakers and regulators are setting aggressive clean energy goals and targets, and the integration of distributed energy resources (DERs) on the customer side of the meter will be a significant tool toward achieving these. In many cases, this is driving a shift to new valuation methods for DERs in order to:

1. Delay or potentially avoid more costly grid infrastructure expansion and upgrade projects; or

2. Provide specific benefits such as lower system costs, resiliency, savings for customers and utilities, and emissions reductions

In 2017, the New York Public Service Commission (PSC) issued two orders to introduce such a new valuation method for DERs–the Value of Distributed Energy Resources, or VDER (Order 1; Order 2). The goal of VDER is to transition from the basic volumetric credit used in traditional NEM, where all kWh are compensated equally, to a monetary credit approach that more appropriately compensates for each kWh of distributed generation based on its actual benefits to the grid. Specifically, Phase One introduced the Value Stack Tariff, a specific method for calculating the monetary value of each kWh fed back to the grid based on the time and place the energy is injected.

Locational System Relief Value (LSRV) – This component of the Value Stack is not available for all DER projects. DERs that produce excess energy and interconnect in congested load areas, determined by the utilities, will receive this extra award.

Demand Reduction Value (DRV) – This value is determined by how much a DER project reduces the utility’s peak demand.

Environmental (E) – Compensation for the environmental benefits that DERs provide. The value awarded is based on the higher of the state’s renewable energy certificate (REC) price or the federal societal cost of carbon (SCC).

Capacity (ICAP) – Value in energy pricing that ensures there is enough electricity supply during peak demand. ICAP is included in energy supply rates customers pay on the electricity bill. This portion of the Value Stack is similar to a credit received under net metering.

Energy (LMBP) – The wholesale price of energy as determined in the New York Independent System Operator (NYISO) Day Ahead zonal locational-based marginal price.

Challenges of the VDER approach

There are different methods for valuing DER under these alternative NEM approaches. In NEM 2.0, California has established a top down approach to adjusting NEM – starting with a time of use (TOU) rate to align value of energy used or generated with system peaks, and adding interconnection fees and non-bypassable charges to avoid redistribution the costs of the grid from those with DERs to other customers.

The approach in New York is bottom up, and more complex. It starts with the wholesale energy price, and then adds to that based on capacity, environmental benefits, demand impacts, and locational benefits. Each of these elements can be unique to a project, and the overall bill calculations for this type of rate are complex. While this is probably the best way to incentivize DER installations that further the NY’s energy and environmental goals, this method does bring challenges for investment and predictability for DERs and utility billing.

VDER 2.0 – Improved predictability with continued complexity

In April 2019, the PSC issued an order with updates to VDER and the Value Stack Tariff that were intended to enable the solar project financing, more predictable compensation, and extend the eligibility of net metering for smaller projects. The most significant changes include:

• Transition of demand reduction value (DRV) payment being determined by a utility’s 10 peak demand hours to a payment for performance in predetermined peak windows

• A new community credit for certain community distributed generation projects that replaces the market transition credit

• Modifications to the alternative capacity value calculations to better reflect NYISO monthly prices, PV load curves, and actual peak hours

• Customer choice to opt-in to Standby rates; an alternative to the Value Stack

• Provision for certain projects under 750 kW to be eligible for phase one net metering

At the same time, the PSC ordered utilities to file tariff changes implementing the modifications to VDER and Value Stack. The state’s utilities are challenged to analyze and design the appropriate approaches to bill these complex DER rates. For utilities to implement these modifications will likely require investments in distribution planning, technology, and customer billing.