Discom Business Models Require Changes to Promote Distributed Energy Resources

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In this third part of our distributed energy resources (DER) in India series, we look at changes to the current distribution company (discom) business models. These models can overcome the financial disincentives DERs often face. Instead, discoms can embrace and promote DERs to improve system efficiency, increase consumer savings, and address climate change goals.

This short paper discusses the reasons the current discom model should change and how regulators should listen to concerns many discoms have when it comes to the changes associated with promoting DERs.

The paper also discusses the steps regulators can take when it comes to transforming the current discom business model, including:

  • Require discoms to evaluate non-wires alternatives to meet system needs where practical and cost effective
  • Require discoms to create distribution system platforms
  • Require discoms to modify tariff design to send unbundled granular price signals to facilitate DERs
  • Require discoms to develop DER programs
  • Develop a process to effectuate changes to the discom business model

Read Part 1: Empowering Retail Customers: Improve Efficiency, Lower Costs and Reduce Emissions

Read Part 2: Facilitating Distributed Energy Resources Requires Policy Actions 

Facilitating Distributed Energy Resources Requires Policy Actions

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Distributed energy resources can provide key opportunities that would empower India’s retail customers to improve system efficiency, lower costs, and reduce emissions. In the first part of our DER series, we laid out the arguments for how deploying distributed energy resources (DER) in scale provides a key opportunity to empower customers.

DERs include elements such as energy efficiency, demand response, storage resources, distributed generation closer to load (such as rooftop solar), and more. DERs help customers modify their electric usage in ways that will save them money, offer reliability products to electric wholesale system operators and discoms to increase reliability and efficiency of the system, and help reduce emissions. The promotion of DERs, however, requires affirmative action by utility regulators and policy makers.

In the second part our series, we outline policies that will facilitate the entry of DER providers.

Modernizing Gas Utility Planning: New Approaches for New Challenges

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Significant new uncertainties and options for the gas industry are creating new challenges for regulators who are responsible for ensuring that utility investments are in the public interest.

Many of the unknowns relate to the potential for customers to switch from gas to electricity for heating and other uses and the potential for utilities to replace fossil methane with alternative gases. Gas customers could face higher costs if their numbers decline in favor of electrification or if investments in alternative gases far exceed current resource costs.

Yet current typical tools and processes for regulating gas distribution utilities do not give regulators complete information on which to make decisions about long-term utility investments in this context.

Commissions across the country are recognizing the need to review and update their planning approaches. This paper surveys current efforts to modernize gas utility planning and draws lessons for those considering similar work. At the heart of the paper are five principles for redesigning planning to restore confidence that utility investments will be in the public interest:

  1. Build equity into planning so decisions are made with equitable service and distribution of costs and benefits in mind.
  2. Consider an expanded range of investment and resource options.
  3. Establish integrated gas planning by combining integrated resource planning practices with gas distribution system planning.
  4. Use combined energy planning to take the broadest possible view of emissions reduction opportunities.
  5. Foster collaboration with state agencies that have expertise in emissions reduction.

EV smart charging: A golden opportunity for distribution system operators

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Electric vehicles (EVs) offer a cleaner, more energy efficient means of transportation than vehicles with internal combustion engines. Less well known is that they also provide a still largely unused resource to improve grid operation. Although the additional electricity demand from EVs will be manageable on a power system level, it may create the occasional challenge for parts of local distribution grids.

Smart charging of EVs can ease these periods of stress and increase overall efficiency. A “smart” charging process automatically adjusts the EV’s demand for electricity to periods of low stress on the grid – or to periods with an abundant supply of renewable electricity – and thus ensures lower costs for the user and the system.

As a result, smart charging can help avoid, or at least defer, costly investments in network capacity. With the growth of smart charging technology and services that turn the potential aggregation of residential flexibility from EV charging into a powerful, responsive system, distribution system operators (DSOs) have a golden opportunity to capitalise on EVs as a grid resource.

Smart tariffs pay off

In a 2022 study, the Regulatory Assistance Project (RAP) analysed nearly 140 tariffs and services for EV smart charging in Europe. Most of these services are based on dynamic time-of-use energy tariffs: when high renewable energy supply on the power system coincides with periods of low electricity demand, wholesale day-ahead prices drop. EV drivers save money by shifting charging to these cheaper periods, as their retail pricing follows these hourly wholesale rates.

European consumers face dramatically higher bills due to increases in energy and electricity prices over the last 12 months. Shifting EV charging to lower-priced periods has helped mitigate the rise in costs and improve the savings potential because the price spread within a given day grew even more in the last year. In Germany, for example, the difference between base and peak power prices grew from 17% to 52% between 2020 and July 2022. A reduction in levies on consumer bills counterbalanced the increase in the base prices almost entirely. Consequently, users who charge during off-peak hours can keep their charging costs stable, and those not yet using smart charging have been offered a strong incentive to do so.


DSOs are missing the boat

With growing incentives for EV drivers to use smart charging, the number of tariffs and services continue to grow too. However, RAP found that few – just 13 out of 139 – smart charging services and tariffs use data from local grid operators that reflects the actual system conditions. Without these signals, such as those provided by time-varying network tariffs or by market-based, aggregated residential flexibility, grid operators are missing out on an opportunity to optimise grid efficiency.

Basis for smart tariffs and services


Designing time-varying, or “time-of-use”, network tariffs can align consumer interests with those of grid operators: Similar to dynamic energy contracts that mirror day-ahead wholesale spot market prices, a dynamic network price could signal to consumers where and when to shift their electricity consumption. This can mean adjusting charging away from peak hours to limit demand peaks on the grid or shifting to times when renewables are plentiful. Simulations based on initial pilots of dynamic network tariffs suggest clear benefits for consumers with flexible resources such as EVs, and importantly, cost reductions for all other system users. EV charging, and the emerging market of smart charging services, serves as a great test bed for further trials of dynamic network tariffs.

Paving the way for flexibility

Even static time-of-use network tariffs – such as simple night and day rates – can go a long way towards improving grid efficiency, especially when combined with procuring market-based flexibility. The 2019 European Electricity Market Directive requires DSOs to use market-based flexibility wherever possible to avoid or defer grid upgrades or new connections. However, many member states still have not implemented this provision in their national legislation. The greatest flexibility resource in Europe is households, with EVs typically being their most flexible device. Without the proper regulatory framework, it will remain largely untapped.

Local system operators could use the aggregated flexibility offered by smart charging services to improve network operations. EV drivers benefit from their participation and DSOs gain access to a powerful distributed flexibility pool. Grid operators in the UK are leading in the use of market-based flexibility. Over just a few years, the contribution of EVs has grown as high as 22 megawatts of flexible capacity, the volume offered by smart charging service in Scotland.

The golden ticket

As more and more EVs connect to the grid, the flexibility of smart charging offers DSOs a formidable solution. Energy regulators can help grid operators make the most of this golden opportunity to improve system management and reduce costs by designing network tariffs that reflect actual conditions on the network to encourage flexibility. Creating the framework conditions for the best use of flexible resources in local grids will help lower the cost of the energy transition – and allow smart charging to shine.


A version of this article originally appeared on EnergyMonitor.

Empowering Retail Customers: Improve Efficiency, Lower Costs and Reduce Emissions

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As a tool in combating greenhouse gas emissions, India is aggressively adding renewable energy resources to its electric system resource mix to displace fossil fuel and meet future electric load growth. Much of this is being accomplished using competitive procurement processes and private capital for investment needs. At the same time the country is also rapidly implementing wholesale competitive electric markets to improve the efficiency of the electric system.

Deploying Distributed Energy Resources (DER) in scale provides another key opportunity to improve electric system efficiency and combat emissions. DERs empower customers to modify their electricity usage and help reduce emissions, as well as offer reliability products to electric system operators. The promotion of DERs, however, requires action by utility regulators and policy makers. There is a real need to allow private sector participants to assist customers and bring private capital in implementing DERs. Applying advanced metering, while not mandatory, would also be very helpful to facilitate full utilization of DERs. Advanced metering and sophisticated tariffs would allow customers to react to granular wholesale granular price signals, help reduce distribution utility operating and capital costs, and improve efficiency and system reliability.

This paper will be the first in a series about the benefits of DER. The first part describes the benefits of deploying DER and advanced metering for customers and the electric system, discusses different business models that can be used, and recommends key actions regulators and policy makers must take.

Future papers will delve into more detail on the specific regulatory actions that would be required to:

  • allow customers to participate in DER programs;
  • motivate utilities to actively facilitate and promote DERs; and
  • facilitate the entry of DER providers that would allow them to deploy their technical expertise and private capital in the space.

Unlocking India’s clean energy potential through demand flexibility and distributed energy resources

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India’s quest to strengthen the long ailing power distribution sector has largely revolved around proposals to restructure the sector and redesign retail tariffs with periodic financial bailouts. These proposals show promise in alleviating present issues. It becomes crucial, however, to deliberate and critique these ideas and proposals through different lenses, especially when the sector is evolving rapidly.

Electricity, although a homogenous product, is highly sensitive — as matters of both demand and supply side — to factors such as time, location and weather. These factors are responsible for the varying economic and environmental costs of serving electricity. Unless these varying costs of supply are revealed to either the discom (distribution company), consumer, or a third-party aggregator to respond accordingly, it is challenging to take advantage of the cheapest and cleanest available resources. Increasing variability requires flexible demand to follow supply at times when clean electricity is abundantly available at lower costs.

Furthermore, with increasing access to electricity and rising demand from rural and semi-urban consumers, distribution companies have a heavy task to invest in upgrading their distribution networks, along with their portfolio of transmission and generation contracts. Alternatively, distributed energy resources (DERs), such as  rooftop solar, bring multilayered benefits that include increased reliability to consumers and deferring capital investments for distribution companies. To aid their adoption, however, compensatory mechanisms that value their services are fairly important. In RAP’s Demand Flexibility and Distributed Energy Resources paper, we explore the efficacy of these different proposals keeping in mind two objectives – enabling demand flexibility and facilitating DERs.

Role of tariff design

Distribution companies have been growing wary of the increasing real-time demand-supply imbalance as generation from variable renewable sources increases. Similarly, electrification of various end-uses and rising demand for household appliances brings in variability from the demand side, but also presents an opportunity to take advantage of any flexible demand. In such a system, well-designed tariffs become crucial as they guide consumer behavior towards time periods where low-cost and clean power is amply available. This proposal isn’t novel and the proposition that ‘tariffs should be cost-reflective’ is often invoked, however, implemented for only select consumer categories with limited scope to be truly termed as cost-reflective.

The spectrum of cost-reflective tariffs is wide. Seasonal rates at one end of the spectrum simply have at least two averaged rates that the consumers face in a year. On the other end, a completely deaveraged real-time tariff reflects the time-varying cost of electricity every hour. Several tariff designs fall in between these two and the role of discoms is to align rates, so consumers are able to see their costs of service. The relationship between time-varying rates and demand flexibility is widely studied and largely presents a strong positive correlation. It is important, however, to bear in mind that demand cannot be made flexible solely by implementing these tariffs. Effectiveness of time-varying tariffs amongst different consumers, and barriers to their adoption, is critical to understand and evaluate. Consumers, in addition to facing dynamic prices, must be able to understand and respond to those costs.

Conceptual representation of the risk-reward tradeoff in rate designs

India retail tariff figure

Evidence from other markets reveal that peak consumption reduces as the peak-to-off-peak price ratio increases. Consumers with lower risk appetites are more inclined towards adopting tariff structures that provide rebates for reduced peak consumption as compared to consumption penalties. Enabling technology increases the ability of consumers to respond to price signals while reducing the financial risk associated with time-varying rates. Also, consumers’ interest in adopting such tariffs is dependent on their ability to understand the tariffs and potential risk-rewards.

Along with retail tariffs, well-designed compensatory tariffs for DERs are crucial in relaying value of production to “prosumers” (consumers who both produce and consume electricity) who install DERs versus the cost of consumption. These tariffs should also reflect the time-varying value of production in the same way retail tariffs would. Furthermore, to the extent possible, these tariffs should reveal the avoided costs of investments in generation, transmission and distribution, incentivizing the right form of DER deployment at locations where its most beneficial to the system and distribution companies. It is also equally important to implement a suitable metering and billing arrangement that influences the way energy flow is measured and financial benefits are communicated to the prosumer.

Looking towards a new market design with caution

Over the years, decision makers in have India visualized a market structure with multiple retail suppliers where the distribution business (or the “wires” business) remains with the existing distribution companies. To advance this, the Forum of Regulators had a devised roll-out plan, which detailed how the wires and supply business (also referred to as carriage and content, respectively) would be separated in the country. Similarly, privatization of state-owned distribution companies has been long debated with strong proponents on both sides. The driving force behind these proposals are usually legacy issues that have plagued the distribution sector for a long time. In addition to those (and as mentioned earlier), rapid developments in the sector also requires the decision makers to focus on newer objectives, such as demand flexibility and facilitation of DERs.

It is important to keep in mind that time-varying tariffs can be present in any structure, either through regulation or competition. Whether competition really leads to greater adoption of such tariffs is the real question. Experience in Texas and Australia suggests that tariff choices through competition alone may not lead to higher demand flexibility or higher adoption of DERs. For instance, offering multiple tariff options for all consumer categories may not be profitable for retailers and they would only be interested in creating tariff choices for large commercial & industrial (C&I) consumers. Even if retailers offer multiple options, consumers find it risky to adopt time-varying tariffs. Additionally, it is likely that the transaction costs of evaluating and shifting to a new tariff structure outweighs the potential rewards, therefore, few consumers voluntarily opt in. As a result, enabling technology and consumer awareness plays a significant role in ensuring that consumers are interested in and able to take advantage of dynamic prices.

For DERs, experience suggests that fair compensation requires strong policy guidance since markets alone cannot guarantee that prosumers are compensated for services provided to the grid. In Australia and Texas, not all states or cities mandate net metering or any other compensation to generation from rooftop solar. Retailers can choose to compensate prosumers as part of their pricing strategy. However, in the absence of compensatory tariffs that put a value on electricity from rooftop solar injected into the grid, prosumers are incentivized to only consume all generation to maximize their benefits. Regulators and policy makers do have a critical role, even in lightly regulated market structures, to ensure consumer interests are secure and there’s enough direction in place for the stakeholders to adopt strategies that aim towards a common larger goal.

Emerging transactive models

Innovators in the sector have been experimenting with newer transaction models that appeal to the changing dynamics of consumption and production directly. Several of these models are based on distributed ledger technology, which blockchain is a well-known example. The fundamental value proposition is that everyone in the system can interact with each other, responding to price signals in a transparent, secure and seamless manner. Such systems where consumers, prosumers, or “prosumagers” (prosumers with storage) can buy and sell electricity directly are termed as peer-to-peer (P2P) networks. For example, large C&I consumers in special economic zones or commercial parks can further take advantage of rooftop solar, thermal storage and battery storage, and the heterogeneity in demand between them to transact on such networks. These models are, however, in their nascent stage and countries are still experimenting through ‘regulatory sandboxes.’ Regulatory sandboxes allow these models to be tested in a controlled environment with freedom to relax existing regulatory norms, if required. So, while it is important for regulators and policymakers to stay updated with these developments, they must allow enough business models to flourish before they take steps to convert them into regulations and policies.

As India looks to unlock the full potential of cost-efficient clean energy sources, it will be essential to understand the role of demand flexibility and DERs. Currently, these objectives don’t stand out as India’s distribution sector is mired in legacy problems. It is important, however, to realize that their benefits extend beyond just renewable integration. Distribution companies can reduce peak power procurement costs and avoid or defer distribution network upgrades and other upstream costs. Enabling demand flexibility and facilitating DERs will complement rather than distract in resolving existing issues and allaying concerns regarding the changing power system.


Challenges facing distribution system operators in a decarbonised power system

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The transition to clean energy is changing the nature of Europe’s power systems. Increasing electrification in the heat and transport sectors, more active consumers and the need to accommodate greater shares of wind and solar are impacting the fundamental design and operation of distribution networks. With the rise in community energy and local markets for energy and services, traditional generation capacity is transferring from the transmission to the distribution systems. These and other changes create a wide range of challenges and opportunities for distribution system operators.   

To successfully navigate this shift, distribution system operators will need to embrace changes in their role and structure, while exploring the world of digitalisation and innovation to manage their networks. Philip Baker  explores areas where  it will be necessary for distribution system operators to adapt in the future to ensure  a successful energy transition.  

With domestic consumers generating more capacity, distribution system operators will need to take a more active role in managing the network by tapping into the inherent flexibility these resources offer. To achieve this, they will need to develop the skills and facilities required to maintain security and quality of supply as they procure and manage the contributions of even hundreds of thousands of active consumers. These developments will also change their interaction with transmission system operators, as responsibilities threaten to overlap at times. Policymakers can ease this tension by examining potential changes to the roles of both transmission and distribution system operators to ensure effective system security and management.  

Regulators can incentivise distribution system operators by focussing on outcomes that reflect consumer needs and energy policy priorities, rewarding them for delivering these results in the most cost-efficient fashion. The policies will also address the way operators recover network costs. We will need to rethink network tariff designs to ensure we incentivise consumer behaviours that are consistent with the energy transition.