(Photo by CeeDave via Creative Commons)
(Photo by CeeDave via Creative Commons)
(Photo by CeeDave via Creative Commons)

Cross-posted from Greentech Media with permission

By Martin LaMonica

Utility industry pros often say Thomas Edison and Nikola Tesla would recognize today’s electric grid because the basic architecture has changed so little over the past 100 years. The same could be said for electricity pricing.

And that’s a problem if distributed energy is to be deeply integrated in today’s power grid, according to a report from the Electricity Innovation Lab.

The paper, released on Tuesday, seeks to offer a way forward for electricity pricing, an arcane issue for most consumers but vitally important to how several emerging distributed technologies are valued. That includes solar, storage, demand response, efficiency, microgrids and home automation.

The Electricity Innovation Lab was convened by think tank the Rocky Mountain Institute (RMI) and includes representatives from utilities, environmental advocacy groups and renewable energy industry associations.

The report’s authors argue that distributed grid technologies are already taking root but pricing reform is needed to recognize their full value to the grid.

“We’re heading to a future with a higher penetration of distributed resources than many would’ve envisioned just a few years ago,” said James Newcomb, managing director at RMI. “To get to higher penetrations, you’ve got to deploy them as effectively as possible, and price signals are the most basic architecture to make that happen.”

In many places, consumers pay the same price at all times of day, or there are two or three rates that correspond to blocks of time that are several hours in duration. The paper argues that pricing structures should become more sophisticated to recognize how, where and when power is generated. The report also suggests electricity should move toward real-time pricing to reflect how the cost of power varies all day long.

“A lot of what we’re calling for is to take elements of rate design that have been used for a long time with large commercial and industrial customers and to move them into the mass market of residential and small business users,” said Owen Smith, a principal at RMI and co-author of the report.

Consumers, for instance, could start to pay demand charges, or fees that reflect their maximum power draw — something businesses already do. Similarly, consumers could be compensated for providing ancillary services to the grid. For example, smart inverters coupled to solar panels could provide voltage support to distribution networks with a high penetration of solar. The problem now is that there aren’t rules in place that would compensate a homeowner for these services.

Rate structures should recognize the benefits of providing energy in certain locations or times of the day, too. An energy storage system could be compensated for the avoided cost of upgrading a substation or west-facing solar panels could have more favorable net-metering rates for providing power late in the afternoon.

But for the consumer who has a simple flat-pricing rate, what’s the incentive for moving to a more complicated rate plan? Smith and Newcomb think that third-party service providers will play an important role in showing consumers and small-business owners the economic benefits of distributed energy technologies. Also, control systems can hide much of the complexity of rates from consumers.

“With the expanding capabilities of distributed resources and automated controls, a lot can be done so that it’s still back-of-mind and the mass market can respond to price signals without a person having to make a decision,” said Smith. Already, commercial buildings can take advantage of more sophisticated rate structures to earn money during peak hours; smart thermostats and home automation is the next step, he says.

Another obvious challenge to rate reform is devising new rules in a collaborative way. Utilities and state regulators typically set rates, but Newcomb said they need to consider the benefits that distributed resources provide to the grid as a whole and start developing price structures with technology providers and other stakeholders.

Change traditionally happens slowly in utilities, but Newcomb and Smith are optimistic that a lot can be put in motion within a few years. Introducing a time-of-use pricing plan is a relatively simple way to start, followed by more sophisticated plans, according to Smith.

“That’s a strategy within reach for large portions of the country to begin planning for that transition,” he said.