Distributed Generation’s Future Impact on the U.S. Electricity Grid
The impact of distributed generation on market operations and system reliability becomes increasingly dire as penetration levels increase in those regions where capacity market mechanisms provide the primary vehicle maintaining resource adequacy, according to a just-released white paper from ICF International. The variability of the resource and its location on the low-voltage grid undermine efficient market operation at high penetrations by effectively decoupling price formation from supply/demand fundamentals. While regions such as California at the forefront of variable resource integration can provide useful lessons, the provision of flexibility by way of state procurement mandates is untenable in the context of organized markets that rely on capacity market constructs for resource procurement.
Although such solutions might work well in other regions, they would only further compromise the integrity of price formation in markets such as PJM and New England. Indeed, if one central aim of the organized markets is to shift the risk of efficient investments to investors and away from consumers, the integrity of the capacity market construct must remain a necessary prerequisite for the future design of the system.
The future of the utility industry has become a central focus for many as the sector grapples with several existential threats. Among the chief threats looming on the horizon is the large projected growth in distributed energy resources (DERs) and its potential to compound the impacts of the anemic growth in net load observed in many regions today. But this growth in DERs is relatively recent. While the resource base has certainly grown significantly for specific resources in particular regions such as the solar photovoltaic (PV) generation in California or the demand response in PJM, on a national basis these resources still occupy a relatively small fraction of the overall mix. Nevertheless, the conditions for growth for this class of resource are approaching a tipping point toward widespread viability in many more markets and there is growing enthusiasm around the potential for growth of DERs in the years and decades to come.
Despite a great deal of discussion around DER trends and their prospects for growth, the impact of these resources on generation assets and price formation in the market has been largely overlooked. The impacts of these resources on system operation and load growth have received a great deal of attention through the volumes of integration and impact studies in the literature. But while the impact on the diurnal load profile and the continuing uproar surrounding net metering policies have received extensive media interest, the sometimes subtle discussion of the impact of these resources on market structure and on the future viability of generating assets more broadly has not received the attention it deserves.
Because of the geographic distribution of distributed PV resources, their place in the power system topology, and the variable nature of their output, the traditional market constructs built around fixed-load and dispatchable power begin to break down in fundamental ways. While some might characterize this as the triumph of new technologies over the power plants of the past, the truth is much more complex and the stakes for addressing these changes to the market are much higher than such a simple narrative suggests. In fact, the ability of the markets to ensure reliable power delivery rests on the efficient operation of these market, and so the need to find solutions to these issues is far more important than the relative economics of any given fuel source or technology .
These market impacts will be felt most acutely in organized markets with well-developed capacity market mechanisms. In those regions, the adequacy of system resources for meeting the demand for electricity depends on effective mechanisms for price formation to provide market signals to incent investment in new resources when conditions of supply and demand warrant it. These mechanisms are critical to both the integrity of the market and to the maintenance of resource adequacy. To understand the impact of distributed energy resources on price formation, it is important to understand not only the scale of these resources but their output characteristics and their place in the power system topology.
The white paper concludes that the variability and location of distributed generation resources mean that their growing participation in organized markets undercuts many of the assumptions around a dispatchable resource base and fundamentally alters the definition and scope of what must be considered in the context of resource adequacy. The California experience offers a view as to the challenges likely to be faced by existing generators as DER penetrations increase in PJM and ISO-NE, but the lessons learned will not be directly applicable and the solutions will need to be unique.
There remain significant challenges in these markets to address the market integrity and resource adequacy challenge that these resources pose to the system. Whether policies and market conditions favor distributed resource to the extent that they reach significant penetrations is still largely uncertain, but the improved economics of these technologies suggest that in select areas participation is poised to accelerate rapidly. As it does, market design must adapt to accommodate this swiftly changing landscape to ensure that sufficient resources come online and that the market efficiently allocates capital to bring online those resources equipped to address the full scope of future system needs.
