Policy Implications Around Microgrids

This is the 5th and final installment in our series of blogs on microgrids.  Previously we have:

In this installment, we discuss regulatory and policy considerations related to microgrids.   A comprehensive regulatory and policy paradigm for microgrids does not currently exist in Hawaii (this is the case in many other states as well).   As with most disruptive technologies, the policy considerations are interrelated and it is therefore wise to approach policy making from a holistic rather than piecemeal basis.

When moving into the policy realm, a strict technical definition of a microgrid does not necessarily apply; the legal definition of a microgrid can be as broad or as narrow as desired.   With that in mind, here are a few of the regulatory and policy issues that must be decided with respect to microgrids: 

  1. Renewable energy.  Hawaii’s Renewable Portfolio Standard (RPS) calls for 100% renewable energy by 2045.  Lawmakers and regulators must assess whether or not the enabling of microgrids will increase the options for achieving this goal.  For example, a microgrid set up to provide high reliability will likely rely on non-renewable, "must-start-no-matter-what" generators, utilizing existing technologies like reciprocating engines.  On the other hand, policy makers may wish to frame the rules for microgrids in a way that makes renewable energy resource components of the microgrid more attractive to the end-user, for example, providing microgrids with special status only if they include renewable components above a given threshold. 

  2. Customer choice.  The Public Utilities Commission has expressed a clear preference for more customer choice.  Arguably, no new regulations are necessary for a customer to avail itself of microgrid technologies (or any other behind-the-meter option).  For generation, existing interconnection rules apply.  Demand-side programs might be able to interface with utility demand response and time of use rate programs.  Overall however, the economic feasibility of building and operating a microgrid depends on what kinds of programs are available that allow the microgrid to be monetized (e.g. can the microgrid exchange power with the utility?)  

  3. Regulation of utilities.  One emerging business model for microgrids is called “microgrid-as-as-service.”  Under this model, a third party plans, develops, operates and in some cases, owns the microgrid, providing a service (e.g. energy, reliability) to the end-use customer.  Because such providers are selling a service, there is a question regarding the “public utility” status of such an entity.   If the entity is deemed to be a public utility, it could be subject to all of the regulations, including rate regulation and reporting requirements, applicable to the incumbent utility.  On the other hand, policy-makers could exempt such providers from being regulated as a public utility. Such an exemption would remove barriers to entry for microgrid-as-a-service providers; however such an exemption also leaves the court system – not the Public Utilities commission – as the venue for resolution of disputes (including price) between a customer and such a provider.  

  4. Interchange / interconnection.  For microgrids that remain interconnected to the power grid, there must be a set of rules that governs both the physical interconnection and the rates and charges for the flow of power across the interconnection.  In Hawaii, there are well-established interconnection rules and standards that have been applied to customer-side generation and independent power producers.  If the microgrid can be islanded, the rules must provide for the operational procedures for such islanding.  In normal operation in an interconnected mode, it is possible for power to flow bi-directionally across the interconnection (known in the utility world as "interchange").  How should each party (the utility and microgrid operator) be compensated for interchange transactions?  A typical interchange agreement defines different types of transactions that can occur (including both scheduled and inadvertent interchange transactions) and the price determination for each type of transaction.  Defining interchange between the utility and the microgrid is a key element in ensuring the viability of the microgrid and fairness to other customers. 

  5. Standby power charges.  A subset of interchange is the notion of standby power charges.  Should the utility be able to charge a fee to the microgrid customer for standing ready to back up a microgrid?  Such a standby fee allows the utility to recover the fixed cost associated with maintaining the ability to serve the microgrid customer.  This of course could cut the other way as well i.e. should the utility pay the microgrid for providing ancillary services like regulation, black-start, etc.? 

  6. Multiple customer aggregation / wheeling.  Generally speaking, larger microgrids deliver their service at a lower per unit cost compared to smaller microgrids.   Thus, a microgrid established to serve several customers might be economically feasible, where a microgrid for any one of those customers might not be feasible.  This could be true even if the customers are not contiguous because there is no physical geographical constraint on the act of balancing loads and generation using microgrid technologies; however such aggregation of non-contiguous customers would imply “wheeling” of power between and among the microgrid participants.  Wheeling raises substantial policy issues beyond the scope of this article. Either way, such aggregation could have the unintended consequence of shifting cost to other customers because utility cost allocation for rate design purposes is typically based on individual customer non-coincident peak demands.  In order to avoid unintended cost shifts resulting from customer aggregation, a complete overhaul of utility rates would be required, not a trivial undertaking.  

  7. Stranded cost.  Some customers may be contemplating using a microgrid to allow them to disconnect altogether from the grid (referred to as “grid defection”).  To the extent that leaving the grid “strands” utility assets and leaves remaining customers responsible for paying the cost of purchased power contract obligations previously approved by a regulator, It might be appropriate for the departing customer pay an exit fee to ensure that remaining customers do not bear the cost of these assets that were procured to serve the departing customer.

What is striking about these issues is that they transcend the topic of microgrids, with implications for the overall structure of Hawaii’s power market.  Unfortunately, none of the bills introduced to deal with microgrids, and not even the so-called “Inclinations” document issued by the Hawaii Public Utilities Commission in April 2014, provides a prescriptive solution for the market structure.  Rather, these efforts are either one-issue (e.g. microgrid legislation) or a series of ideas with no cohesive framework for implementation (the “Inclinations”).   Thus, the current microgrid bills before the 2017 Hawaii Legislature raise more questions than they answer, and their passage would leave an already overburdened Public Utilities Commission to sort out the details of implementation.  

A successful regulatory paradigm for microgrids and the larger issues raised by technological change and customer choice must be considered holistically in the context of:

  • Fairness for customers and utility infrastructure investors (utility shareholders, IPP lenders and equity providers, distributed resource financing providers, etc.),

  • Maintaining a safe and reliable power grid as the backbone of the State’s economy, and

  • Cost effectively achieving the State’s renewable energy goals.   

This is the challenge that our lawmakers, the PUC, and other policy makers must address.   Are they up to the task or will they continue to (sub-optimally) piecemeal utility regulation around a series of single issues?   Only time will tell. 

Thank you for reading our blog series on microgrids.  We welcome your questions and feedback.  You will hear from us again soon on other topics. 

Email us at info@hdbaker.com if you would like to be notified when our next blog is posted.  

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