State Utility Incentives for Non-Wire Alternatives
Author: Maeve Masterson is a Sophomore at the University of Pennsylvania studying Sustainability and Environmental Management and Economic Policy. Her research and interests focus on equitable climate policy, climate risk management, and private environmental governance. She is an undergraduate fellow at the Wharton Risk Center.
In 2018, carbon dioxide (CO2) emissions from the electric power sector contributed up to thirty-three percent of total U.S. energy-related CO2 emissions. Almost three-quarters of all US utility customers get their electricity from investor-owned utilities (IOU). Massive dominance over American electricity distribution and transmission grants IOUs the opportunity (and responsibility) to spur a clean energy transition, which is required by the 2018 Intergovernmental Panel on Climate Change to reach net zero emissions by 2050 and remain below 1.5°C of warming. Utilities across the country are recognizing both the urgency and inevitability of clean energy development and their role as dominant electricity providers to modernize the grid to make way for a low carbon future.
The Non-Wire Alternatives Solution
A low carbon electricity grid requires utilities to adapt traditional transmission and distribution (T&D) models to allow for the proliferation of low-carbon, energy-efficient distributed energy resources (DER). Utilities can use DERs—such as energy efficiency, demand response, storage, or distributed generation—to meet electricity demand during peak load and thus reduce the need for typical wires-and-poles expansion. Non-traditional distribution solutions that defer the need for traditional T&D upgrades, also known as non-wires alternatives (NWA), are critical in driving the deployment of demand-reducing distributed clean energy resources, including distributed generation from mostly small-scale renewable energy projects. NWAs thereby present one of the most effective ways for utilities to accelerate the transition to a low-carbon electricity grid. By choosing NWAs in place of costly grid infrastructure investments, utilities can significantly reduce the carbon intensity of the grid and save ratepayers billions of dollars.
Despite these promising alternatives, IOUs have been slow to adopt NWAs in distribution system upgrades. Since 1991, utilities have developed about 130 NWA projects in California, NY, and Oregon, reaching a mere 2 GW of total capacity. Sluggish adoption by IOUs is largely because they operate under cost-of-service regulation, receiving a rate of return on capital investments.
Unlocking NWA Potential for Distribution Utilities
Utilities are increasingly inclined to consider no-wire alternatives in place of traditional T&D upgrades as the rapid deterioration of an aging grid places pressure on utilities to modernize the grid system. Many utilities view non-wires measures—with their capability to modernize the grid, manage loads, and reduce peak congestion—as “cutting-edge” grid technologies. With a looming clean energy transition on the horizon, utilities want to stay ahead of the curve. Backward looking maintenance no longer takes precedence over forward looking modernization.
Case studies from Smart Electric Power Alliance point to a few reassuring examples of successful NWA implementation across the U.S.:
Given that NWAs are gaining reputability among climate policy analysts and grid operators, some utilities may also be motivated by reputation al improvement. Southern California Edison’s Preferred Resources Pilot and Con Edison’s Brooklyn Queens Management Program offer evidence for the reputational benefits from the deployment of DERs to meet increasing energy demands in place of costly substation upgrades. Additionally, no-wire alternatives allow utilities to better forecast and cost-effectively prevent outages or power quality issues that may hinder their ability to meet reliability and capacity targets.
Emission Reduction Potential of NWA
By adopting non-wire solutions in response to distribution constraints, utilities will improve efficiency from demand-side management, reduce line loss from lower distribution congestion, decrease emissions from lower electricity demand, and offer more options for alternative energy technologies, which replace the operating capacity of traditional highly-emissive, fossil fuel-driven power plants. The Solar Energy Industry Association predicts that NWAs “will play an important role in cleaning up our grid and helping drive the oldest, dirtiest, and often most expensive plants off the system”.
DER deployment stimulated by NWAs allows distribution-level system benefits to accrue financial savings and emission reductions across the country. The Rocky Mountain Institute finds that DER projects (via non-wires solutions) improve distribution systems’ energy efficiency and demand flexibility measures by 30% and battery storage over 100%. Using an average value of peak reduction for transmission and distribution, avoided costs amount to approximately $17 billion through 2030. In addition to these findings, analysts conservatively estimate that, on a national scale, enabling distribution system revenue via nonwire solutions could avoid approximately 300 MT of CO2 over an assumed 20 year lifetime of DER assets.
Barriers and Solutions for NWA Deployment
While operating under cost-of-service regulation, utilities are largely incentivized to maximize spending on infrastructure, such as wires, poles, and other distribution system upgrades. As this profit-motive still stands, New York and California’s regulatory pilot programs demonstrate how state regulators can offer utilities compensation for cost-effective non-wires solutions. States are able to influence utility investment decisions by determining what is included in their rate base and the permitted rate of return on those investments. For example, higher rates of return from NWA projects can help offset potential profit margin reductions from allowing more energy resources access to the grid. Central Hudson Gas and Electric incorporated an innovative incentive model to split NWA investment savings between the utility and its customers, where 70% of benefits go to ratepayers through reduced rates and 30% of benefits would be given to the utility.
However, given proper incentives, utilities continue to face challenges with NWA implementation. Further measures are necessary for NWAs to become cost-effective alternatives to traditional distribution upgrades:
- Utilities’ integrated resource planning process should evaluate project success over a longer period of time, as NWA results are predicted to materialize over multi-year timeframes.
- Many new NWA projects today are pilot projects. Under increasingly urgent grid constraints, rapid NWA research development and assessment methods must be made available to utilities to accelerate the implementation process.
- A DER revolution requires utilities to manage the expanding technologies on the grid. To maximize DERs, utilities need software platforms, such as Advanced Distribution Management Systems, to be able to forecast, model, and operationalize data from new grid technologies. These can make non-wire alternatives more viable compared to traditional power system investments.
- Utilities operate under varying regulatory environments, and would therefore benefit from a standardized method (or business model) to implement and enforce NWA projects. Despite the existence of comprehensive legislative and regulatory policies in New York, California, Vermont, Nevada and Minnesota, many NWA policies are not always acted on or adequately enforced.
Addressing these challenges and encouraging state regulatory authorities to provide proper incentive structures will accelerate utility adoption of NWA projects. Emerging from a growing body of climate policy research, NWA case studies, and pilot programs is a rising imperative for utilities to seek out low-carbon alternatives and modernize the grid to mobilize the low carbon transition. With the appropriate incentives, no-wires alternatives offer utilities a promising first step.
Originally published on April 28, 2020.