Microgrids as Utilities in D.C.? One Developer Pushes Forward While Others are Wary
Many microgrid developers balk at Washington, D.C.’s proposed ruling allowing microgrids to compete directly with Potomac Electric Power (Pepco). But one developer is pushing forward.
Under the rules proposed last year by utility regulators, microgrid developers in the district would need to form regulated utilities to create multiuser microgrids (Order 21172). Like investor-owned utilities, they would be required to obtain a certificate of public convenience and have the rates they charge customers approved by the commission.
The D.C. Public Service Commission (PSC) has yet to decide if it will go through with the rules. But anticipating that it will, microgrid developer Pareto Energy plans to file this week for a certificate of public convenience and necessity to compete against Pepco and distribute microgrid power in D.C., said Guy Warner, chairman and CEO of Pareto Energy.
Regulatory uncertainty stymies industry
For years, the microgrid industry has fought proposals that require developers to act as utilities, arguing that they would weigh down microgrids with a level of complexity incompatible with the size and resources of their operations.
Tim Hade, co-founder of Scale Microgrid Solutions, said his company is building microgrids in D.C. but not building or planning any multicustomer projects because of the uncertainty associated with the commission calling for certificates of public convenience.
“Setting aside the potential administrative costs associated with compliance, the uncertainty itself is the biggest barrier to moving forward from our perspective. It's virtually impossible to model the economic outcome of a multisite project for investors or customers because no one really understands what the requirements – and associated compliance costs – are going to be,” Hade said.
Other industry members said it might make more sense for microgrid developers and utilities to work together – rather than compete.
Pamela Hamblin, a consultant and CEO for NuEnergy Solutions, asked, “Do we want the independents to be working against the utility or should they be working hand in hand together?”
California utilities against microgrids becoming utilities
It’s likely investor-owned utilities will make it difficult for microgrid developers to compete with them under these types of regulations, said Dennis Garrett, CEO of Blue Lake Energy and a member of the Microgrid Consortium.
“Sunnova ran into this in California. They got attacked from all corners,” he said.
Sunnova Energy has proposed building microgrids for California communities and running the energy systems as microutilities. The California Public Utilities Commission has yet to act on the proposal.
Under the Sunnova plan, the public utility microgrids would use local energy and serve newly built neighborhoods of fewer than 2,000 customers. The company has said that opponents are trying to block it with “the sky-is-falling” arguments that lack precedent.
“There’s been tension between utilities deciding to become a partner and build and provide microgrids, or having customers decide to do it on their own and leave the utilities,” said Garrett. The utilities stand to lose revenue, especially when larger commercial and industrial customers exit their territories for microgrids, he added.
Why Pareto is moving forward
In spite of the challenges, Pareto Energy plans to move forward on its filing in D.C.
The filing will be to supply energy to St. Elizabeths East community, a campus located at the site of a former mental health community that’s now the focus of redevelopment, resilience and equity efforts. The filing will create four other microgrids in D.C., said Warner.
Warner believes Pareto Energy has the right to file for a certificate of public convenience – even though regulators haven’t finalized the proposed ruling – based on the proposed ruling. He believes his filing will “assist the commission by having a use case by which to finalize the regulations."
The location of Pareto Energy’s proposed microgrid is based in part on the fact that D.C. agencies received funding for a microgrid in the St. Elizabeths East community. In April 2022, the D.C. Homeland Security and Emergency Management Agency, along with other agencies, was awarded about $20 million in Federal Emergency Management Agency funding to design and construct a microgrid at the St. Elizabeths Hospital campus that will enhance community resilience. A request for proposals (RFP) was issued, and Warner said his company responded to the RFP.
The costs of filing and complying with regulations needed to create a public utility are outweighed by the lower costs of investor due diligence and the economies of scale associated with serving multiple customers, Warner said. He contends that a company with regulatory oversight is a less risky investment.
Rate making can be more efficient if microgrid rates are created that are a set discount below the amount established in a Pepco utility rate case, he said. In addition, in an ideal scenario for a public utility, 100% of consumers approve of the rates and favor the benefits provided by the utility formed under the program – employment opportunities, lower emissions and reduced grid congestion, plus benefits to low-income ratepayers.
“The United Kingdom enabled customers to choose an independent network operator in a similar regulatory framework as the District of Columbia order, and many companies have efficiently established rates and profited under that regulatory structure,” Warner said.
Warner’s company has developed a program, GridLink, that can provide a legal framework for managing microgrids. It includes power electronics that provide an interconnection to the utility grid. GridLink’s system can calculate ways to equitably share microgrid benefits among microgrid users and utility ratepayers, he said.
Pepco’s view on microgrids
Ben Armstrong, a spokesman for Pepco, said the utility supports the D.C. PSC’s proposed decision that considers multicustomer microgrids as electric companies subject to regulation as a public utility.
“Most notably, the order recognizes that multiple customer microgrids would serve various and unrelated customers that have individual meters owned by the microgrid, which is exactly what an electric company does,” Armstrong said.
Like the microgrid developers who don’t want to form public utilities right now, the Office of People’s Council for D.C. is approaching the PSC’s regulatory approach with caution.
In an August 2022 filing, the Office of People’s Council, which advocates for utility customers, said that the commission’s regulatory approach could “chill” the deployment of microgrids and undermine D.C.’s climate goals, without providing sufficient customer benefits.
The office recommended a “light touch” approach to microgrid regulation and asked the commision to withdraw the regulatory proposal and reissue one that allows for case-by-case regulation of microgrids. The goal would be to study best practices and develop the best regulatory approach to microgrids in D.C., said the Office of People’s Council filing.
Meanwhile, in Ohio, Cuyahoga County has taken another approach to deal with the microgrid/utility relationship. The county has an ambitious microgrid plan underway and recently achieved a significant milestone – the selection of a partner to help it form its own utility. The partner is Compass Energy Platform, a California-based clean energy developer and financing platform.
Cuyahoga County wants to become a microgrid industry hub in the US as part of its economic development plan. But it said rules and fees applied by its local utility are causing roadblocks.
That led the county to make the unusual decision to form its own microgrid-friendly, county-run utility.
Balancing act
It’s not simple balancing the needs of investor-owned utilities with the needs of their customers when it comes to deploying microgrids, said Garrett of Blue Lake Energy.
“Some utilities offer microgrids to their biggest commercial and industrial customers as energy as a service; they design, build and finance and get revenues,” he said. But if the customers leave their investor-owned utilities in order to be served by a microgrid, the utility loses money and may have stranded assets in the form of generation equipment.
What’s more, many questions remain about who should pay for microgrids owned by investor-owned utilities, given that the microgrids sometimes serve only a customer or a few customers – but provide additional benefits to the grid.
“There’s no easy answer,” said Garrett.
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