IEEE Power & Energy Magazine - May/June 2016 - 72

DSO
Capacity
Markets
DER
Adoption
Rates
DER
Economics

Retail Rates
Peak Reduction T&D Reliability
DER Total Penetration

Customer
Reliability

DSO
Markets
T&D Capex
Wholesale Market
Economics

DER
Production

T&D Rates
Customer DER
Investment

Customer Energy
Cost Savings

Customer
Benefits

figure 1. A conceptual view of the major relationships in the retail energy ecosystem.

greatly affect how things play out as all parties decide on
investments over time. The policy maker who is trying
to improve overall customer economics and maintain or
improve reliability has to understand these relationships
before "turning the dial" on available tools: feed-in tariffs,
DER incentives, the application of real-time pricing, and
how to operate the DSO capacity markets and (probably)
energy and ancillaries markets. DER costs are a big driver
since the DER economics are wrapped around how long the
customer/investor will take to recoup the investment in the
resource. Some DERs, such as photovoltaics (PVs), are on a
rapidly decreasing cost curve already; some, such as combined heat and power (CHP), are dependent upon fuel costs
(not shown) and are mature technologies; and others, such
as electric vehicle (EV) and energy storage, are emergent
technologies today. Some DERs have only positive effects
on the wholesale markets and grid; others will have negative
effects on the grid in terms of operational impacts such as
voltage fluctuation and power flow variability. Some will be
a little of both; EVs, for instance, can create additional load
(negative at peak) but can also provide increased demand
response (DR) via smart charging.
Another important aspect of DER deployment in the
ecosystem is that some DER deployment and operation can
literally destroy the value that the owner sought to monetize as DER penetration goes up. A great example is the
deployment of a generation (or storage) resource that is
intended to relieve congestion costs in the wholesale market. The wholesale price of power at the transmission station feeding a group of distribution circuits may be high
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as a result of inadequate transmission capacity to bring
cheap power (for instance, from hydroelectric units or
wind farms) to the area, so that more expensive combustion turbines have to be used. By providing local generation
from DERs, this effect can be reduced, lowering the wholesale price for everyone in the region. But if the wholesale
price is reduced, the ability of the DERs to earn money
is reduced. Storage earns money by buying cheap power
at night when wholesale costs are low and then discharging it at peak load when prices are higher; having enough
storage destroys the difference and eliminates its source
of revenue. Society benefits but the investor loses out. So
capacity markets or long-term congestion relief or arbitrage
products are needed in the market to give investors a return
and ensure the societal benefit.
In all other commodity markets, storage is routinely
used across the value chain to match supply to demand
over time and distance. Electricity has not had this option
until recently due to the high cost of electric energy storage. The industry is wrestling with the market role and
market products for storage; in some markets, when storage is charging it has to behave like a load, and when it is
discharging it has to look like a generator. If investment in
storage is only to come about via the time or space arbitrage against energy spot prices, it faces the problem that
deployment at scale will destroy the value that it monetizes.
This is a real barrier to investment. We already see this in
the wholesale markets as merchant generation without long
term purchase power agreements can have difficulties in
getting financing.
may/june 2016

Table of Contents for the Digital Edition of IEEE Power & Energy Magazine - May/June 2016