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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.

 

Grid Modernization and New Utility Business Model

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​​​At a Clean Energy Legislative Academy virtual conference, Janine Migden-Ostrander and Camille Kadoch explored the important part that legislators can play in furthering grid modernization.

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. 

Quantifying and Maximizing the Value of Distributed Energy Resources

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​In a webinar for the Oregon Public Utility Commission, John Shenot explored policies, regulations and approaches that optimize the function and value of distributed energy resources.

Performance Incentives for Cost-Effective Distribution System Investments

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This policy brief, a generic version of a memo provided for a state public utility commission, considers starting points for how to apply performance-based regulation and associated performance incentive mechanisms to distribution system investments by utilities.

Ensuring that such investments are cost-effective begins by outlining goals that a state utility commission might want to achieve regarding two core regulatory functions: ensuring distribution system reliability and controlling costs. Those goals can then be refined into performance criteria, which specify how the goals will be monitored or achieved from an operational standpoint. The final step is to settle on metrics to be used to measure progress toward those performance criteria, and thus outcomes consistent with the broader regulatory goals of ensuring reliability at a just and reasonable rate.

Transport sector transformation: Integrating electric vehicles into Turkey’s distribution grids

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With global electric vehicle (EV) sales on the rise, policymakers around the world are accelerating efforts to facilitate development of the necessary charging infrastructure and to integrate EVs into the power system at least cost. Turkey is just starting down this path, with around 1,000 electric vehicles on the road. However, as the population grows and car ownership increases, the considerable potential to reap the benefits electric vehicles offer grows in parallel. EVs can help reduce air pollution and, provided the electricity is supplied from renewable energy sources, help decarbonise both the transport and power sectors.

Integrating EVs into the power system can be a daunting task. Uncontrolled charging of large numbers of vehicles can have negative impacts on distribution grid operation, creating the need for unnecessary network expansion. SHURA Energy Transition Center, in collaboration with Epra Engineering, Procurement, Research and Analysis and the Regulatory Assistance Project, has released a groundbreaking report demonstrating how high levels of electric vehicles can be successfully integrated into Turkey’s distribution grid.

Epra modelled grid data in four representative “first mover” regions — the Aegean, Central Anatolia, Marmara and Mediterranean regions of Turkey — to develop a scenario for up to 2.5 million EVs by 2030. The authors conclude that the vehicles can be integrated into Turkey’s distribution grid with almost no additional investments and with only limited impact on distribution grid operation. Our findings suggest that Turkey’s grid is already well prepared to accommodate growing road transport electrification without increasing levels of grid investment.

To achieve this goal, policymakers, the market regulator, distribution grid companies, the automotive industry, charging infrastructure developers and investors, urban planners and academia must work in close concert. It will be critical to capitalise on the benefits of distributed renewable energy and storage systems, particularly in summer. Policies to promote smart charging of EVs will play a pivotal role by harnessing the benefits of intelligent technology, incentivising owners to charge their cars during off-peak hours, and distributing charging points to locations that are optimal for consumers and for use of existing grid infrastructure.

This study led by SHURA also has wider implications for global EV integration, highlighting the importance for governments in countries with low EV uptake to prepare for transport electrification by assessing its grid integration at the same time. Where car ownership and population numbers are increasing, integrated transport and energy planning can unlock their benefits for both sectors, reduce emissions and pollution, boost integration of renewable energy sources, lower costs and increase the flexibility of the power system.