Unpacking Distributed Generation: The Alberta Utilities Commission’s Challenge

What is the AUC doing?

The Alberta Utilities Commission (AUC) has been requested by the Province to hold an inquiry into and report on matters relating to distribution system-connected generation (“DG”) in Alberta.  Facilitating significant growth in DG would help the Province achieve its goal of having 30% of Alberta-generated electricity be from renewable sources by 2030, otherwise known as “30 by 30”.  The AUC is required to provide the Minister of Energy with an interim report on DG by July 31, 2017, and a final report by December 29, 2017. The list of registered participants in the inquiry include an array of transmission facility owners (TFOs), distribution facility owners (DFOs), project developers, industry and consumer groups, retailers, municipalities, rural electrification associations and other stakeholders. On May 30, 2017 the participants filed written answers with the AUC to a number of DG-related questions posed to them by the AUC.  The participant answers highlight the diversity of views that exist in Alberta when it comes to DG, and the challenge facing the AUC as it tries to unpack DG for the Province.

What is DG?

DG refers to smaller-sized generation projects that are connected directly to a lower voltage electricity distribution system.  In Alberta, it includes both (i) the “behind the meter” projects of up to 5 MW that are currently constructed under Alberta’s micro-generation rules primarily to service the electricity needs of the project owners, and (ii) larger projects connected to the distribution system that are built primarily to sell electricity into the grid.  The latter are generally limited in size to 20 MW (usually much less) for safety and technical reasons given that they are connected to a lower voltage distribution system.  Small-scale community generation where a community receives the electricity, gets financial benefits or has equity in the project is also included within the rubric of DG.  Small natural gas generators, combined heat and power plants, energy (battery) storage, wind, small hydro, and solar photovoltaics (PV) on rooftops and on the ground connected directly to the distribution system are all examples of DG.

DG runs counter to the traditional one-way power flow model used in Alberta, and other jurisdictions, where a small number of large, central generation facilities are connected to grids of transmission lines that transmit the power to distribution networks that, in turn, deliver that power to customers.  Instead, DG results in a larger number of smaller generation facilities being embedded near the consumers.  DG also permits more consumers to generate electricity both for their own use and to supply the grid for use by other consumers – a two way power flow across the system.

What will we see in the AUC Report?

The AUC inquiry will identify the barriers that currently hinder the development of DG in Alberta. However, as evidenced by the AUC’s DG-related questions and the answers provided at the end of May by inquiry participants, the process will also be an opportunity for the AUC to identify for the Minister of Energy the factors (both positive and negative) that must be considered by the Province in developing policies applicable to DG:

  1. Investment in Distribution System: The distribution systems we have today were designed to deliver electricity from transmission systems to the consumer for consumption. They were not designed with generation connection in mind, certainly not for DFOs or the Alberta Electric System Operator (AESO) to monitor and control the generation. Prudent investment will be required to be made by DFOs to permit a greater penetration of DG and still maintain power quality and the reliability of the distribution and transmission systems. These DG system costs will have to be paid by someone, e.g. by project developers, by customers (system costs), by carbon levy revenues, etc., and costs will vary based on the penetration rate in a particular distribution system.  In the renewable context that DG penetration will also depend on the quality of the solar and wind resource in a particular distribution system.  For example, the FortisAlberta distribution system in southern Alberta is more likely to incur DG facilitation costs given southern Alberta’s better solar radiation and wind resources.

 

  1. Siting of DG: Developers need to know the areas where they can best site DG to minimize costs and maximize profits. The DFOs accordingly need to be transparent about where cost-effective hosting capability or capacity exists in their systems for developers. The DFOs know their systems and are the best ones to guide developers to the points that can accept increased DG with minimal system upgrades/investments, or where it might actually benefit the DFO and consumers by reducing congestion. Currently, the DFOs are reacting to developer requests and developers are making those requests without having much prior visibility into each DFO’s system.  This results in unnecessary time and money being spent on siting and connection studies for speculative projects that have no chance of proceeding.

 

  1. Cost of DG: A real question remains as to whether DG is a cost-competitive option for Alberta to achieve its 30 by 30 target. If the goal is to decarbonize the Alberta electricity market then doing it in a cost-effective manner is important or the Province may lose the support of the general public. The AUC is likely to provide some information to the Minister on DG costs and resulting electricity rate impacts that will help to shape government policies.  To this point, there has not been a lot of price discovery in Alberta, especially in the solar sector where the bulk of any increased DG is likely to occur.  Economies of scale and the experience in other jurisdictions suggest that very small DG projects, like rooftop solar, will be a lot more costly.  That said, the medium and larger sized DG projects may be able to compete with the larger utility-scale transmission-connected projects because the latter will have lower generation costs but will have higher connection costs than DG.

 

  1. Existing Transmission: Does it make sense to encourage rapid penetration of DG when we have a recently reinforced transmission system in Alberta that is capable of connecting more utility scale renewable projects? The AESO has indicated that the existing transmission system can connect 2,600 MW of new renewable capacity. Some TFOs assert that this existing transmission capacity should be utilized before rapid DG penetration is considered.

 

  1. Financing DG: There will only be a significant increase in DG if project developers can attract the financing needed to build the medium and large sized DG projects. This requires long term revenue sufficiency and certainty that will only come to fruition through either (i) government programs that provide long term agreements, like the current Renewable Electricity Program or the standard offer/feed-in-tariff programs used in other jurisdictions, or (ii) DG getting market value for and monetizing the electricity, capacity (including from the proposed Alberta capacity market), system benefits and environmental benefits (by selling emission offsets or RECs) they provide to the Alberta electricity market.

 

  1. DG Credits: The system benefits from DG include reducing strain on and deferring transmission and distribution system investment, displacing power that would otherwise have to be imported by the DFO from the transmission system, reducing congestion, lowering line losses, and enhancing reliability by having generation located closer to the consumer. However, there is no consistency among DFOs on how DG projects are compensated for these benefits. For example, Fortis (Option M), ATCO (D32) and ENMAX (D600) all differ in how they treat DG.  DG developers are encouraging Alberta to standardize, simplify and regulate these DG credits so that they are the same, whether the DFO is investor-, municipally-, or member-owned. Further, the way in which the DG credits are calculated results in their fluctuation over time which limits the ability of a project developer to use them to secure the long-term financing needed to build its DG project.

 

  1. DG Costs and Challenges: The AUC is also hearing about the costs and operational challenges that come from significant DG penetration including complexity in distribution and transmission planning and ancillary costs arising due to the variable nature of renewable DG, complexity in restoring the grid after an outage, and complexity in coordinating the transmission system with multiple distribution systems that have significant DG. The argument is that significant penetration of DG is not something that can be encouraged and financially supported by the Province without it first considering how it will impact the totality of the Alberta electricity system and market. This requires input from all stakeholders, including TFOs and the AESO.

 

  1. Micro-generation Rules: The scope of Alberta’s micro-generation rules currently require that a micro-generation project be sized to the metered load of the owner and only service the property on which it is located and adjacent properties owned or leased by the micro-generator. Developers have long lobbied for these restrictions to be removed because the rules are a barrier to community generation, and also prevent a person from maximizing the electricity that could be generated from his or her property. Others point out that the micro-generation rules are, in effect, a cross-subsidy (of the interconnection, installation of a meter and settlement costs) given to the micro-generator by the system (other customers), and should therefore be limited to generation for self-supply and not be made available to commercial generators.

 

  1. Socio-Economic Issues: There is sure to be a debate before the AUC on the socio-economic benefits of DG. Supporters of DG assert that DG results in more jobs than utility scale projects, that there is a greater ability for local residents to participate in and own DG projects, that DG inspires entrepreneurship like community cooperatives, and that placing renewable generation projects closer to the population is more likely to make renewables an acceptable reality for the public.  Others focus more on the monetary generation costs and the impact that increasing DG will have on electricity rates in Alberta.  Some also point out that, at least at the individual rooftop solar level, DG is really only an option for those Albertans who own their own home and have the financial means to install the solar panels.  If Alberta policy is going to indirectly pick winners (DG versus larger transmission-connected projects) then the government needs to understand and consider all of the socio-economic issues.
  1. System Cost Allocation: Discussion of DG always raises issues of bypass, back-up service and stranded costs. If more consumers and communities are going to unplug from the electricity system and generate their own electricity, then who is going to pay for the existing system?  Plus, unless and until energy storage becomes a reality, the variable nature of renewable DG will mean that even self-supplying consumers will have a wire to their doors and rely on the grid to provide them with some electricity.  What should they pay for that service?

 

DG is in its infancy in Alberta when compared to jurisdictions like California, Ontario and Germany. The AUC inquiry will unpack the DG issue for government. That will be a challenge given the diverse views of stakeholders on the topic of DG. That said, it is great to see Alberta reach out to the AUC, and facilitate stakeholder input, before adopting more policies that encourage DG.  We are technology and DG neutral here at AlbertaPowerMarket.com , but it seems to us that DG is likely to play an important role if Alberta is to achieve its 30 by 30 target. However, the size and pace of that role should only be determined after all of the costs and benefits of facilitating more DG in Alberta are better understood.  The AUC inquiry and its report to the Minister of Energy on DG should help in that regard.

Kent Howie and Joelle Dudelzak

Kent and Joelle both practice in the Electricity Markets Group at the Calgary, Alberta office of the national law firm Borden Ladner Gervais LLP.  Kent is the editor of AlbertaPowerMarket.com and Joelle is a regular contributor of articles to the site dedicated to Alberta electricity market issues.

 

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