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The Move to Granular Electric Pricing

The Move to Granular Electric Pricing

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EDITOR'S NOTE: Geoffrey Parker, co-author of "The Platform Revolution," will keynote the Empowering Customers & Cities executive utility and energy conference in Chicago November 1-2. He prepared this executive summary of the energy revolution now underway in New York state at the request of The Energy Times.

The utility of the future envisions a dramatic, sustained increase in the use of distributed energy resources by retail customers as well as by the distribution utilities serving those customers.

That new framework will require changes in policies and regulations in three major categories - utility support for and procurement of DER, distribution utility cost recovery and retail rate design. The new policies and regulations in each of these areas are inter-related and thus should be internally consistent.

A recent report, White Paper on Developing Competitive Electricity Markets and Pricing Structures, explores an economic and market-based approach for the integration of distributed energy resources  into the distribution systems of the state of New York.   The proposed approach would be implemented on an economic platform defined as:

a business ecosystem that matches producers with consumers, who transact directly with each other using resources provided by the ecosystem itself… The platform ecosystem provides outside parties with easy access to useful products or services through an infrastructure and a set of rules designed to facilitate interactions among users. A platform’s overarching purpose is to consummate matches among users and to facilitate the exchange of goods and services, thereby enabling value creation for all participants.  

The paper begins with the definition of the core electric products from DER as being real energy, reactive power and reserves. It then describes the market and price formation through which DER owners would sell those core electric products to distribution utilities and other customers; and specifies the functionality of the financial platform required to facilitate and support those transactions.  A key element of this approach is “granular pricing” under which these core electric products would be priced based upon their value at the time of and location of their production/ consumption. 

These granular prices, referred to as Distributed Locational Marginal Prices (DLMP), would be set at thousands of locations (nodes) within the distribution system.  DLMP are required to ‘‘get the prices right’ given that the value of these core electric products varies by time and location within all distribution systems.

The TCR white paper prepared for the New York State Energy Research Development Authority (NYSERDA) and the New York State Department of Public Service (NYDPS) describes this approach in detail.

The NYDPS filed the report in April as a resource for stakeholders in Case 15-E-0751 of the Reforming the Energy Vision or REV initiative.  

Scott Weiner, NYDPS deputy of markets and innovation, stated, “TCR lays out its view of how to develop distributed energy resource (DER) through the application of modern platform-based market principles.”

“TCR’s platform is a hypothetical future digital marketplace that would allow direct financial transactions between large numbers of buyers and sellers of electricity based products and services where prices are anticipated to reflect the value of products and services at a specific location and point in time,” he said.

The 2015 New York State Energy Plan relies heavily on market forces to achieve its statewide targets, and in particular on significant private investment in distributed energy resources.

“Enabling private capital investment to drive self-sustaining independent clean energy markets is a prerequisite to deliver true scale to the clean energy sector, the report said.

That position is supported by experience with the regulation and deregulation of the natural gas and electric industries over the past  forty years.  The proposed Platform Market would facilitate and support the market forces required to achieve the level of reliance on DER envisioned in a utility of the future. 

It would expand the market for core products from DER, support new combinations of products and services in that market and enable utilities to improve the economic efficiency of their distribution systems.  

Geoffrey Parker is a visiting scholar at the MIT Initiative on the Digital Economy and professor of engineering at Dartmouth College.

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