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Locational value: A key to unlocking grid benefits of distributed energy resources

By Alana Lemarchand

Nexant’s work with the Smart Electric Power Alliance (SEPA) on our recent paper, “Addressing the Locational Valuation Challenge for Distributed Energy Resources,” was rooted in what both organizations saw as a key obstacle to utility integration of these distributed technologies on the grid.

Distributed energy resources (DERs) are at the center of a range of policy conversations across the country, propelled by the growing potential of these distributed technologies – such as solar, storage and demand response — to shape energy and grid investments. Some of the more developed efforts aim to establish or unlock DER value through various combinations of markets and regulatory innovation. The key examples here are New York’s Renewing the Energy Vision (REV) proceeding, and the Distribution Resource Planning (DRP) and Integrated Distributed Energy Resources (IDER) proceedings in California

But in order to integrate DERs into distribution system planning, it is first necessary to value them against, or in comparison with, more traditional distribution resources. A common metric or approach is needed for assessing locational value – that is, the potential to defer traditional “wires” investments — that various DERs provide, so their individual values can be stacked and combined. This metric must also be translatable in terms of the traditional distribution capacity investments that may be deferred or avoided.

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A universal, common methodology has yet to emerge; rather, DER valuation efforts to date have largely focused on enumerating various potential value streams, including distribution capacity deferral. Key papers on locational DER value have highlighted the need to “move beyond conceptual frameworks” and have noted that locational capacity deferral valuation is “an area that merits research to devise a more universal methodology.”

Moving forward from these views, it became increasingly apparent that approaches seeking to boil DER value down to a single benefit-cost ratio or average value per kilowatt-hour have been missing the temporal and locational attributes inherent in DERs. High profile and recent discussions of DER valuation have recognized the importance of filling this gap with an approach for locationally differentiated distribution value:

• The New York REV proceeding, which places DERs in their own category with their own common valuation frameworks, such as the Benefit Cost Analysis Handbook
• California’s DRP and IDER proceedings, and the EPRI Integrated Grid project, which has included collaboration with utilities in both New York and California
• SEPA’s upcoming “Distributed Energy Resources Capabilities Guide”

The methodology Nexant developed to fill that critical gap is a real-world decision-making tool that has already been applied at multiple utilities to evaluate DER alternatives to traditional distribution investments. At the same time, it is universal enough that it could be adopted by any utility for assessing locational capacity value.

Central Hudson Gas & Electric has used the methodology as part of its Targeted Demand Response program, as well as in many components of its Distribution System Implementation Plan (DSIP) filed with the New York Public Service Commission on June 30, 2016. Our methodology is also similar to the approach used by Southern California Edison for its multiyear Preferred Resources Pilot, another significant example demonstrating how DERs can be used to defer or avoid distribution capacity investments.

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We recognize that ours is not the only valid approach; however, we believe it may spur additional discourse and promote sharing of real-world experience for a better understanding of DERs’ value in the context of the electric grid.

At the core of our approach are proposed methodologies for quantifying two key valuation concepts, as illustrated in Figure 1:

•  Locational capacity value is directly driven by the characteristics of local peak loads — represented by the blue shaded area — and by the deferral of planned distribution investments.
• The allocation of locational capacity value to DERs is directly dependent upon the unique operating characteristics of individual DERs and the ability of a DER to actually defer a planned locational capacity investment, here represented by the lines showing various DER load profiles.


Nexant methodology for locational valuation of DERs aims to quantify peak load and DER operating characteristics. (Courtesy of Nexant)

These concepts can be quantified and fed into an iterative process that recalculates the peaking risk allocation as least-cost resources are layered into the portfolio. Such a portfolio will leverage and combine the unique strengths of different resource options—including DERs and traditional distribution investments—resulting in a comprehensive and diverse portfolio that is more effective than its individual parts.

Accurately valuing DERs’ locational capacity value is one building block toward holistically integrating DERs into various utility functions, including distribution planning, bulk power planning and customer strategy. As solutions for determining locational valuation evolve, future challenges will include:

• How can locational value be included in integrated benefit-cost analyses?
• How can capability gaps in integrated distribution planning be addressed?
• How can the need for contractual obligations and guarantees be reflected in competitive mechanisms?
• How can distribution planning reflect uncertainty and risk planning?

While these future challenges remain unanswered, our work helps address locational valuation with a common metric that moves the conversation from exploration of concepts to discussion of real-world, quantitative approaches.

Alana Lemarchand is a Senior Consultant at Nexant. She can be reached at [email protected].

Lemarchand will be talking about “Addressing the Locational Valuation Challenge for Distributed Energy Resources” in a free webinar hosted by Nexant, 1-2 p.m., EDT, Oct. 11.