Pricing for the Integration of Distributed Energy Resources

The ability to connect DER to the grid and have unconstrained ability to export electricity –  particularly in some parts of the existing network – is becoming more difficult. The introduction of standards and operating restrictions is being considered.

Pricing and market options are always better for customers if they can be made to work and provided in a manner that allows customers to make informed decisions.

Oakley Greenwood recently conducted a project that developed pricing structures that could be used to signal how DER that is provided in the right place, at the right times and in the right quantities can reduce costs in the electricity supply chain and thereby benefit all consumers.  Using these structures could allow market-based approaches to shape the economically efficient integration of DER within the grids.

The project was conducted in consultation with electricity retailers, networks, consumer groups, DER providers and market bodies (including the ESB, AEMC, AER and AEMO).  The project was partially funded by ARENA.

The Executive Summary of the Project Summary Report appears below.  The full Project Summary Report and the three topical reports produced during the course of the project are available at the base of this article.

1. Executive summary

1.1. Objective of the study

Distributed energy resources (DER) such as rooftop PV with and without battery storage, electric vehicles and stationery behind the meter batteries, depending on where they are located and when and how they are operated, can either impose or reduce costs on the overall electricity supply chain.

The central focus of this study was the development of price signals that could be used to better integrate DER with the central generation and grid electricity supply chain. Such price signals would need to inform DER owners and their agents (e.g., aggregators) about the costs and benefits that DER can pose for the supply chain and, hopefully, incentivise:

  • Investment in DER
    • at the right scale, at the correct location, and
    • at the right time, and at the least cost; and
  • Operation of DER in such a way that it is allocated to its highest value use in its location at any specific time, so as to maximise its economic value.

The price signals developed in the study focus in particular on providing price signals that reflect the benefits that DER can provide to – and the costs it can impose on – the electricity supply chain.

Input to the project was provided from a variety of stakeholder perspectives via two reference groups that reviewed and commented on the various stages of the work as the study progressed.

1.2. Ways DER can reduce costs in the electricity supply benefits1

The primary way in which DER can provide benefits to the electricity supply chain is by reducing costs. The study identified the following areas in which DER can do that. Specifically:

DER can reduce network costs in the following areas:

  • Direct connection costs
  • Extension of the existing shared network
  • Augmentation of the existing shared network
  • Replacement of the existing shared network
  • Costs of managing voltage within required levels within the existing shared network
  • Managing bushfire risk2.

At present, however, the pricing structures used by DNSPs do not reflect DER’s ability to reduce these costs.

DER can reduce costs in the wholesale market in the following areas:

  • The investment in and operation of the generation fleet required to meet aggregate consumer demand, and
  • The cost of managing the operation of the wholesale electricity market.

The wholesale market already provides price signals in several of these areas (for example, the wholesale market provides a very transparent price signal for the value of putting energy into the grid, and the FCAS3 market provides a similarly transparent price signal for the value of the services that can assist in managing system frequency. However, these price signals cannot be readily accessed by DER owners and their agents.

The potential for DER to reduce greenhouse gas emissions associated with the provisions and use of electricity was not explicitly considered in the study precisely because those costs are not directly included in the price of electricity4.

1.3. Price signals to integrate DER and the grid5

In developing alternative pricing structures for the various ways in which DER can provide value by reducing costs within the electricity supply chain we considered four independent parameters:

  • The form of the price signal – specifically whether the price signal should be a charge, a rebate or a payment;
  • The time at which the service is provided, specifically whether the level of the price signal should be static or dynamic;
  • The basis of the price signal, specifically whether it should be based on the short- or the long-run marginal cost of the service being provided; and
  • Location, specifically whether and to what extent the price signal should vary by location.

These different parameters were mixed and matched to provide a ‘menu’ of candidate pricing structures for each of the DER services that had been identified. This mix and match approach resulted in there being anywhere from 2 to 6 candidate pricing structures for each DER service, ranging from simpler structures that are somewhat similar to current pricing approaches, to more sophisticated and complex structures that are considerably different to the approaches currently in use.

The Stakeholder and Market Bodies Reference Groups (SRG and MBRG) were generally very supportive of the suite of pricing approaches that were developed. However, the SRG expressed a general preference for:

  • Location-specific, as opposed to DB-wide, DER price signals, with a number of members expressing the view that a DB-wide, or postage-stamped, price signal would deliver very few if any economic benefits, given that future network costs will differ significantly by location; and
  • Posted price signals, as opposed to “market-driven” outcomes through which DER service providers would offer services into a market (and a dispatch schedule and market-clearing price would be established via that process). Posted price signals were felt to be preferable, particularly in the short-to-medium term due to their relative simplicity.

Examples of the pricing structures that reflect the preferences of the SRG and MBRG are provided in Section 4 of this report. The full set of candidate pricing structures can be viewed in our report entitled Pricing structures to assist the economically efficient integration of DER (April 2019).

The SRG and MBRG also noted that price signals reflecting the value of DER to the electricity supply chain would, in most cases, be responded to by third-party aggregators on behalf of DER owners, rather than the DER owners themselves. This has implications for the acceptable level of complexity of the pricing structures, as the value proposition of such third-party aggregators can be expected to be their ability to understand how DER technologies operate, monitor the price signals available to those technologies and operate the DER technologies of their customers on their behalf (or provide advice to DER owners that prefer to operate their technologies themselves).

1.4. Benefits and costs of pricing structures that reflect the value of DER

A high-level assessment was conducted of the costs and benefits of the pricing structures developed in the study. The results indicated that the benefits of offering these types of price signals can be expected to exceed the costs. The table below shows the results at the state level.

For a summary of estimated costs and benefits refer to the project summary report.

*All potential benefits are in NPV terms, based on a pre-tax real WACC of 5% and a 10-year evaluation period. Totals may not add due to rounding.

It is important to note that the assessment itself was quite conservative in that it did not quantify all of the potential benefits that could be provided by DER. Network cost reductions in voltage management and asset replacement were not quantified due to their highly situation specific nature, and wholesale market and FCAS cost reductions were not included due to the need for the sophisticated modelling required for their estimation, which was beyond the scope of this study.

Click here for the full Project Summary Report June 2020.

Topical Report 1 – SRG Paper Cost Drivers with Responses to SRG

Topical Report 2 – DER Pricing Approaches

Presentation from DER Pricing Webinar 15 Oct 2019

Topical Report 3 – DER Price Signals ‘Fit’ with Market Rules, International Experience and CBA

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