New Distribution Market Structures Needed as DERs Grow
by Bob Shively, Enerdynamics President and Lead Facilitator
As we prepare to enter a new decade, the electric industry is having a flashback to the 1990s. Going into the 90s, policy makers and stakeholders searched for ways to effectively establish wholesale competition. Different states and different regions went in various directions. Some created multi-state ISOs with common rules that crossed a large footprint; some created single-state ISOs; and some chose not to join the world of organized ISO markets and instead kept the traditional model of the vertically integrated utility.
Among the ISOs, different models prevailed. Some created capacity markets, others didn’t. Some relied on a nodal pricing model called locational marginal pricing (LMP) and others implemented zonal pricing. California created two centralized market facilitators – a Power Exchange, which facilitated day-ahead energy transactions, and an ISO that facilitated ancillary services and real-time energy transactions.
So why does it feel like the 1990s again? Now states and regions are beginning to debate how to structure markets to utilize distributed energy resources (DERs). DERs, which include energy efficiency, demand response, distributed generation, and distributed storage, are growing rapidly in many regions. These resources will create new grid challenges but also will offer solutions to issues like the need for flexibility to absorb expanding renewable energy and managing the costs of maintaining reliable grids. Owners and aggregators of DERs are increasingly demanding ways to attain revenues via participation in energy markets. Integrating DERs into markets will require restructuring not unlike the wholesale market restructuring in the 90s.
Initially, DERs have participated in markets through adaption of existing ISO wholesale markets to allow participation by either larger-sized individual resources or by blocks of aggregated resources. FERC required ISOs to allow participation by demand response in Order 719 issued in 2008, and by storage in Order 841 issued in 2018. A future order concerning participation by aggregated DERs of all types has been pending for over a year. But as numbers of DERs grow, ISOs and distribution utilities are realizing that new distributed markets will be required to manage DER resources. Three potential structures for distributed markets are under discussion:
Under the Total ISO model, the role of the ISO as a market facilitator is extended into the distribution system. The ISO provides the current function of facilitating markets and optimizing resource use to distribution systems as well as the current wholesale system. A single regional centralized market determines which distributed resources are utilized in a similar way to how centralized resources are currently scheduled and dispatched through ISO markets. All resources, centralized or distributed, participate in ISO markets and their utilization is optimized across the ISO footprint.
On the other end of the spectrum, new state-level or utility-level entities called Distributed System Operators (DSOs) are created. The DSOs are independent market facilitators and system operators like today’s ISOs, but they focus on distributed markets. These entities create local distributed markets and optimize across their locale. The DSO is responsible for coordination and aggregation of all DER services and local load requirements into a single resource at each T-D interface. In some cases the DSO offers supply into the ISO markets, and in others they bid net load required to serve customers. ISO markets function similarly to how they do today, with the addition of the DSOs as distribution side market participants.
A possible middle ground between the two above models is the hybrid DSPP, or Distribution Services Platform Provider. In this case, DER owners and aggregators have two options. They can directly participate in ISO wholesale markets in direct competition with wholesale resources, or they can participate in distributed markets run by the DSPP. The DSPP msy be a DSO like in the Total DSO model, or may be a platform facilitated by the distribution utility.
Like in the early 1990s, different entities and different energy industry experts have disparate visions of what is the right way to structure markets. And no one knows what will work best or if different models will work better in different situations. In the coming decade there will be much discussion and experimentation with different models. This has begun in various states and regions of the U.S. and across the world in areas such as Australia, the European Union, Japan, and the United Kingdom. It will be an interesting time to be an industry insider or even just an industry observer as these models are tested in 2020 and beyond!
Want to educate your workforce or stakeholders on the many issues associated with growing penetrations of Distributed Energy Resources? Enerdynamics offers online classes and classroom seminars. Check out our catalog of online energy courses and live energy seminars that depict DERs for your business, as well as many other energy industry trainings. We are your #1 source of energy education. See www.enerdynamics.com for more information.