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Copyright © 2016 ScottMadden, Inc. All rights reserved. Report _2016
51st State Roadmap:
Leveraging the Natural
Advantages of the Electric Utility
Chris Vlahoplus
John Pang
Paul Quinlan
March 2016
Copyright © 2016 by ScottMadden, Inc. All rights reserved.
Table of Contents
■ Key Insights
■ Current State
■ Future State
■ 51st State Roadmap
• Roadmap Overview
• Stage 1: Develop Standards, Protocols, and Codes of Conduct
• Stage 2: Define Retail and Wholesale Interactions
• Checkpoint #1
• Stage 3: Reform Rates and Regulations
• Checkpoint #2
• Stage 4: Modify Utility Operations and Business Model
• Stage 5: Iterate and Improve Framework
• Signposts
• Alternative Current State
1
Copyright © 2016 by ScottMadden, Inc. All rights reserved.
Key Insights
Distributed energy resources (DER) can provide net benefits to the electric system (e.g., congestion relief) and broader society
(e.g., emission reductions); however, despite these advantages, the deployment of high penetrations of DER has proved
challenging for the following reasons:
■ Newness of Technology – Despite some high-profile markets, DER assets are relatively new to the electric grid. Electric utilities and
grid operators continue to learn how to efficiently integrate these technologies
■ Lack of Granular Information and Data – Historically, the electric grid consisted of a small number of centralized generation units.
Electric utilities and grid operators did not require granular information and data to safely and reliably operate the grid
■ Misaligned Regulatory Model – A regulatory model focused on long planning cycles, and risk aversion is ill-suited to manage the rapid
growth of DER assets and technology innovation. In addition, the current model includes inappropriate or lacking price signals and
incentives
Against this backdrop, the electric utility is often singled out as a fundamental barrier to deployment of DER assets. To overcome
the perceived electric utility shortcomings, many stakeholders conclude that a completely new model is needed for the electric
industry. We disagree with this assessment and instead believe electric utilities maintain natural advantages that can be
leveraged to deploy renewables and DER assets as well or better than some models being offered. Specific natural advantages
of the electric utility include:
■ Customer Relationship – After providing a reliable and valuable service for decades, the electric utility is well positioned to introduce
and educate customers about DER assets and other new technologies
■ System Management – The electric system will continue to exist, continue to provide value to customers, and continue to require active
management. In addition, the laws of physics will continue to dictate where and how electricity moves through the system. The utility has
long managed this dynamic system and is best positioned to continue to serve in this role
■ Reliability and Security – Along with system management, the electric utility is responsible for the reliability and security of the grid. As
the composition of the grid changes, the electric utility needs to continue to meet reliability and security standards
■ Transaction Costs – The electric utility is in the best position to “balance” transaction costs during operations. The alternative is the
implementation of costly administrative overlays
2
Copyright © 2016 by ScottMadden, Inc. All rights reserved.
Key Insights (Cont’d)
ScottMadden believes DER assets can be deployed at high penetrations without creating a whole new model for the electric
industry. Instead, we propose leveraging the natural advantages of the electric utility in order to accelerate the deployment and
penetration of DER assets
■ Our roadmap demonstrates this desired outcome can be achieved by: (1) developing standards, protocols, and codes of conduct, (2)
defining interaction between retail and wholesale markets, (3) reforming rates and regulations, (4) modifying utility operations and
business model, and (5) iterating and improving the framework
■ Properly sequencing these steps will encourage long-term innovation, promote competitive and strategic deployment of DER, ensure
cost-effective and reliable grid operations, and provide financial stability and expansion opportunities to electric utilities
■ To ensure a successful outcome, our analysis was structured around the following principles:
• Future State Adheres to Comprehensive Guiding Principles – Guiding principles are structured to enable high penetrations of
DER assets in the future state while ensuring the safe and reliable operation of the electric grid. Further, the principles expand
customer choice while defining the critical role of the electric utility and ensuring proper compensation
• Roadmap Facilitates Progress and Stability through Incremental Change – The future state and desired outcomes can be
implemented through a sequence of incremental changes, as opposed to dramatic shifts to regulatory environment and utility
business models. The approach allows the market to continue to deploy DER assets while providing flexibility to modify market and
regulatory constructs based on early lessons learned. This also allows the financial community to adjust to new business models so
that risk-return are aligned with the new business model. It also provides a framework to innovate and test new technologies
• Future State Relies on Precedent from Existing Utility Business Approach – A useful model to examine is existing utility
outdoor lighting programs. Customers seeking outdoor lighting may choose a third-party service provider to install outdoor lighting
or, alternatively, select the electric utility to install, own, and operate outdoor lighting. The customer pays for the utility outdoor
lighting through a rate rider on their electric bill. Outdoor lighting is an interesting case study because the model expands customer
choice, relies on a simple rate rider, and offers new business opportunities for the electric utility. A second important model comes
from local natural gas distribution companies. A residential customer using natural gas for heat may have a different rate structure
than a similar customer using natural gas for heat and water. The different rates recognize the different impact each type of
customer has on fixed cost recovery
3
Current State
Copyright © 2016 by ScottMadden, Inc. All rights reserved.
Current State Characteristics
■ The current state assumes an investor-owned distribution utility operating in a deregulated market. The utility serves a combination of
urban and rural customers who may select their energy provider. The utility may not own any generation assets and serves as the
provider of last resort. The wholesale market is managed by an RTO/ISO
■ The current state does not include aggressive state-level policies supporting renewable energy. In particular, there is no renewable
portfolio standard nor state tax credit. Third-party ownership of distributed generation is not permitted in the current state
■ The only policy mechanism supporting DER is net metering. Regulations require electric utilities and energy providers to offer net
metering. There is no cap to the number of net-metered assets permitted on the system. Customers earn monthly bill credits at retail
rates for net excess generation. At the end of an annualized period, the utility or energy provider compensates customers for excess
generation at the avoided cost of wholesale power
■ The policy environment in the current state has resulted in a small, but growing base of distributed solar PV systems. Growth can be
attributed to declining technology costs making distributed solar PV attractive to customers willing to accept long payback periods and
customer tastes and preferences for green, distributed energy
■ A summary of the current state is provided in the following table:
Current State
5
Market Feature Description
Service Territory Mix of urban and rural
Utility Type Investor-owned utility
DER Penetration Small, but growing
Utility Structure Distribution only
Wholesale Market Organized market (RTO/ISO)
Retail Market Fully deregulated
State Renewable Policy None
Net-Metering Policy
Monthly retail credit; annual compensation
at avoided cost of wholesale power
Third-Party Ownership of DER Not permitted
Future State
Copyright © 2016 by ScottMadden, Inc. All rights reserved.
Guiding Principles
■ Guiding principles can be used ensure the future state is sustainable and meets long-term objectives
■ In this 51st State Roadmap, the future state must align with the following guiding principles:
• Expand customer choice and access to DER in a manner that promotes competitive and strategic deployment based on value,
benefits, and costs while ensuring cost-effective and reliable grid operations
• Maintain a simple, easy-to-understand basic service with simple rates. Offer alongside it additional services with differentiated
pricing—as occurs with almost any other good or service. For additional services, minimize complexity in market design and
transactions
• Promote least-cost operation of the electric system. When customer choice does not result in least cost, price accordingly using an
equitable, cost-causer-pays basis
• Ensure the electric utility retains an obligation to serve all customers and remains the energy provider of last resort
• Ensure the electric utility retains the opportunity to earn a return on prudent investments and is neither constrained nor advantaged
in offering new services
• Ensure third-party DER service providers are granted non-discriminatory access to the distribution grid. Conversely, allow the
electric utility to leverage comparative advantages (e.g., low cost of capital) when offering new services
• Ensure safe and reliable operations of the electric grid while encouraging testing and deployment of new technologies that improve
operational performance
Future State
7
Copyright © 2016 by ScottMadden, Inc. All rights reserved.
Future State Characteristics
Key Features
■ Customers connecting DER to the distribution grid receive a payment or incur a charge through a rate rider on their utility bill as
authorized by DER rate schedules. The payment or charge is commensurate with the positive or negative value the DER asset provides
the electric system
■ The value of a particular DER asset is influenced by the time and location at which the asset is installed. DER rate schedules may
include caps (e.g., maximum MW of distributed solar on the system or a circuit) and are updated at regular intervals (e.g., annual
update). Rate rider values may change significantly between updates, thereby reflecting current grid composition and value of DER.
While the rate rider may change for new customers, existing customers are grandfathered on their original rate
■ DER rate schedules may include a wide range of services, including energy efficiency, solar PV, EV charging stations, microgrids, and
demand response assets. Depending on the DER, rate schedules may allow unmetered resources similar to utility outdoor lighting
programs. DER rate schedules may also include flexibility to accommodate the interests of large commercial or industrial customers
■ Customers may obtain a portfolio of DER assets from the electric utility or third-party service providers. The electric utility may install,
own, and earn a return on investment on DER assets in their service territory. Regulations establish size limitations (or other criteria) to
ensure a utility does not own utility-scale generation. Third-party service providers may also install and own DER assets
■ The introduction of DER rate schedules is coupled with the phasing out of full retail rate net metering. In addition, a system charge (or
similar mechanism) is implemented to ensure the electric utility is being adequately compensated for the reliability, backup ancillaries,
and other values of the grid that are essential to the economy. This includes maintaining and operating the distribution system
■ Retail and wholesale markets interact by allowing DER assets to be aggregated and providing services to the RTO/ISO operating the
wholesale market. Despite the interaction, a clear line of demarcation remains between these markets in terms of administration and
jurisdictions
■ In summary, the future state allows the electric utility to earn revenue in three ways:
• A system charge provides the revenue and return necessary to adequately maintain and operate the distribution grid
• The DER rate schedule may provide revenue, but only in instances where DER assets result in a net increase in grid operating
costs. In this case, the customer compensates the utility for the incremental cost associated with operating the DER asset
• The utility may also own and operate DER assets or provide unregulated services to electric customers (e.g., insurance products) or
DER services providers (e.g., rooftop solar lead generation)
Future State
8
51st State Roadmap
Copyright © 2016 by ScottMadden, Inc. All rights reserved.
Roadmap Overview
■ Stages represent the major steps required to transition from the current state to the future state. The 51st State Roadmap includes five
distinct stages:
• Stage 1: Develop standards, protocols, and codes of conduct
• Stage 2: Define retail and wholesale interaction
• Stage 3: Reform rates and regulations
• Stage 4: Modify utility operations and business model
• Stage 5: Iterate and improve framework
■ Checkpoints represent a concrete set of criteria that should be met before advancing to the next stage. There a two critical checkpoints
in the 51st State Roadmap:
• Checkpoint #1: Before proceeding to Stage 3, stakeholders must confirm (1) standards, protocols, and codes of conduct are
comprehensive and ensure safe and reliable grid operations and (2) retail and wholesale market interaction will promote high DER
penetration and efficient system operations
• Checkpoint #2: Before proceeding to Stage 4, stakeholders must enact rate and regulatory reforms
■ Finally, signposts are items outside of the control of those driving the change and signal when the transformation should be sped up,
slowed down, or when a new path needs to be adopted. The following signpost should be monitored during implementation of the 51st
State Roadmap:
• Emergence of new technologies or major advances in existing technology
• Acceleration of DER penetration
• Change in public policy
■ The following pages provide a summary of the 51St State Roadmap as well as specific details on stages, checkpoints, and signposts
51st State Roadmap
10
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Develop and maintain
robust cybersecurity
standards
Develop and maintain
grid interconnection
and integration
standards and
protocols
Require DER providers to
comply with standards,
protocols, and codes of
conduct
Establish rules for utility
ownership and returns on
investment in DER
Permit stakeholders to
aggregate and leverage DER
assets in wholesale market
Design system charges to
cover fixed operating costs to
accommodate DER
Replace net metering with
DER rate riders
Develop infrastructure and
processes to allow robust
data analytics
Refine utility
operations to reflect
growth of DER assets
Identify utility-owned
DER opportunities and
business models
Market test utility-
owned DER business
models
Select successful
utility-owned DER
business models
Develop processes and
methodologies that
integrate DER into
long-term ISO/RTO
planning
Develop processes and
methodologies that
integrate DER into
long-term distribution
planning
Modify market and
regulatory rules based
on early lessons
learned
Develop methodologies to
price the value of each type of
DER asset on the distribution
grid
Identify DER assets to be
aggregated and provide
services to RTO/ISO
Develop mechanisms and
markets for aggregated DER
assets in the wholesale
electricity market
Identify DER assets to be
supported by retail customer
rate riders
Roadmap Overview (Cont’d)
11
51st State Roadmap
Develop
Standards,
Protocols, and
Codes of Conduct
Define
Retail and
Wholesale
Interaction
Reform
Rates and
Regulations
Modify Utility
Operations
and Business
Model
Iterate and
Improve
Framework
Checkpoint #1
 Confirm standards, protocols, and codes of
conduct are comprehensive and ensure safe and
reliable grid operations
 Confirm retail and wholesale market interaction
will promote high DER penetration and efficient
system operations
Checkpoint #2
 Enact rate and regulatory
reforms
Signposts
 Emergence of new technologies or
major advances in existing technology
 Acceleration of DER penetration
 Change in public policy
Stage 1 Stage 2 Stage 3 Stage 4 Stage 5
Swimlanes
RM Retail Market Design
WM Wholesale Market Design
UB Utility Business Model
AD Asset Deployment
IT Information Technology
RR Rates and Regulation
Update utility code of
conduct to ensure fair
competition if utility
owns DER assets
KEYACTIONS
R R
Develop third-party
code of conduct for
customer data
Copyright © 2016 by ScottMadden, Inc. All rights reserved.
Stage 1: Develop Standards, Protocols, and Codes of Conduct
Swimlane Key Actions
Retail Market Design ■ None
Wholesale Market Design ■ None
Utility Business Model ■ None
Asset Deployment
■ Develop and maintain grid
interconnection and integration
standards and protocols
Information Technology
■ Develop and maintain robust
cybersecurity standards
■ Develop third-party code of
conduct for customer data
Rates and Regulation
■ Update utility code of conduct to
ensure fair competition if utility
owns DER assets
51st State Roadmap
12
Develop Standards, Protocols, and Codes of Conduct
Description
Objective ■ Develop and maintain grid integration and
cybersecurity standards and protocols
■ Develop and update codes of conduct for
customer data and utility DER ownership
Outcome ■ Development of grid integration and
cybersecurity standards and protocols
ensure the safe, reliable, and secure
operation of electric grid
■ Development of codes of conduct ensures
third-party service providers protect
customer data and the electric utility
provides non-discriminatory access to the
grid
Challenges ■ Interfacing with national organizations who
have responsibility for grid integration and
cybersecurity standards
■ Finalizing and integrating standards into
state regulations so they are enforceable
Standards, protocols, and codes of conduct are essential to provide clear and transparent guidance to third-party service
providers and the electric utility on a range of system control issues. Key topics include data communication protocols, grid
operations, and grid visibility (e.g., knowing the location and operating status of DER assets)
Copyright © 2016 by ScottMadden, Inc. All rights reserved.
Stage 1: Develop Standards, Protocols, and Codes of Conduct (Cont’d)
Developing and maintaining grid interconnection and integration standards and protocols is essential to ensuing safe operations
of the electric grid
■ Utility interconnection standards and protocols must be updated to ensure the safe interconnection, operation, and utility interaction with
DER assets. In addition to utility interconnection standards, the Institute of Electric and Electronics Engineers (IEEE) recently launched
a working group to complete a full revision of the IEEE 1547 standard, which is a national standard addressing the interconnection of
distributed resources. IEEE is also developing the IEEE 2030 standard to address smart grid interoperability. These national standards
are critical because they provide clear guidance on how DER assets should be integrated and operated on the electric system
Developing and maintaining robust cybersecurity standards is essential to protect the grid as internet connectivity and the
number of access points increases at a rapid pace
■ In November 2013, the Federal Energy Regulatory Commission (FERC) approved Version 5 of Critical Infrastructure Standards (CIP)
developed by the North American Electric Reliability Corporation (NERC). These standards require all bulk electric system cyber assets
be subject to at least some reliability standards. In addition to CIP standards, the National Institute of Standards and Technology (NIST)
developed Guidelines for Smart Cybersecurity, which provides a comprehensive framework organizations can use to develop effective
cybersecurity strategies. NIST has also developed the Framework for Improving Critical Infrastructure Cybersecurity in response to
Executive Order 13636 – Improving Critical Infrastructure Cybersecurity. Stakeholders must evaluate if current standards are adequate
or if additional advances are required before proceeding with rate and regulatory reforms (i.e., Stage 3). Standards must also be
continuously updated to protect against new cybersecurity threats
Developing third-party code of conduct for customer data will ensure third-party service standards meet the same privacy
requirements as electric utilities
■ Third-party service providers connecting or owning DER assets should be held to the same data privacy standards as the electric utility.
Therefore, the regulator—with input from the utility and third-party service providers—should develop a third-party code of conduct for
customer data. The code of conduct should outline how third-party providers may gain access to customer data, how they may use
customer data, and how the customer data will be protected
The electric utility will be permitted to own DER assets in the future state. The utility code of conduct should be updated to
ensure fair competition if utility decides to own DER assets
■ If the electric utility decides to own and operate DER assets, the company should not have an unfair advantage when competing against
third-party service providers. The regulator will need to update the utility code of conduct to account for the new market opportunities
available to the electric utility
51st State Roadmap
13
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Stage 2: Define Retail and Wholesale Interaction
51st State Roadmap
14
Define Retail and Wholesale Interaction
Swimlanes Key Actions
Retail Market Design
■ Identify DER assets to be
supported by retail customer rate
riders
■ Develop methodologies to price
the value of each type of DER
asset on the distribution grid
Wholesale Market Design
■ Identify DER assets to be
aggregated and provide services
to RTO/ISO
■ Develop mechanisms and markets
for aggregated DER assets in the
wholesale electricity market
Utility Business Model ■ None
Asset Deployment ■ Develop infrastructure and
processes to allow robust data
analyticsInformation Technology
Rates and Regulation ■ None
Description
Objective ■ Ensure interaction between wholesale
markets and DER resources located on
the distribution grid maximizes the value of
DER assets
Outcome ■ Identification of DER assets to be
deployed with rate riders
■ Understanding of how DER assets will be
valued on distribution grid
■ Understanding of how assets will be
aggregated in the wholesale market
■ Identification of IT infrastructure and
processes required
Challenges ■ Aligning multiple jurisdictions will be the
most significant challenge, especially if the
wholesale market is managed by an RTO
covering multiple states
■ Developing clear and transparent
methodologies that assign DER value
The interaction between retail and wholesale markets is critical in order to achieve a high DER penetration and efficient
system operations. The regulator, electric utility, and RTO/ISO play key leadership roles in defining DER assets eligible for
rate riders, developing methodologies that assign value to DER assets, linking aggregated DER assets to the wholesale
electricity market, and building IT infrastructure and processes required for robust data analytics
Copyright © 2016 by ScottMadden, Inc. All rights reserved.
Stage 2: Define Retail and Wholesale Interaction (Cont’d)
The regulator—with input from the utility, customers, and third-party vendors—must identify DER assets to be supported by
retail customer rate riders
■ Building a functioning marketplace requires an understanding of the available products and services. In this case, stakeholders must
identify the portfolio of DER assets that will be available to customers. The regulator should open a proceeding that includes a Request
for Information to identify the merits of different DER technologies. The proceeding should also include public comment and hearings to
identify customer interests. Key considerations should include DER availability, current penetrations, technology readiness levels, capital
costs, and system life. The regulator selects initial DER assets to be supported by retail customer rate riders
Under the guidance of the regulator, the electric utility—with input from stakeholders—develops methodologies to price the value
of each type of DER asset to be supported by retail customer rate riders
■ The value assigned to each DER asset should reflect the net benefit or cost the technology provides to the distribution grid, with specific
consideration given to the time (e.g., 2016 v. 2026) and location of an individual installation. The methodologies should avoid excessive
complexity and overhead. They should assume that the value of the rate rider is fixed for existing customers (i.e., existing customers are
grandfathered on their original rate), but may change for new customers with annual updates due to local constraints (e.g., maximum
solar capacity on individual circuit). Ultimately, the net benefit or cost is reflected in the DER rate rider available to each retail customer.
The regulator approves each DER methodology
The regulator and RTO/ISO lead a stakeholder group to identify DER assets to be aggregated and provide services into the
wholesale electricity market
■ The interaction between retail and wholesale markets is critical to achieve a high DER penetration and efficient system operations. The
regulator and RTO/ISO should sign a memorandum of understanding to lead a stakeholder group to identify a subset of DER assets that
can be aggregated and provide services to the wholesale electricity market (e.g., ancillary services or demand response). The
stakeholder group should represent the electric utility, electric generators, third-party vendors, and electric customers
The RTO/ISO develops mechanisms and markets for aggregated DER assets in the wholesale electricity market
■ Proper market signals will encourage the participation of aggregated DER assets in the wholesale market. Market protocols, pricing
mechanisms, and market processes must be developed by the RTO/ISO to ensure fair competition, competitive prices, and
transparency. In addition, market mechanisms must prevent double counting of energy services in both retail and wholesale markets
The RTO/ISO and electric utility must develop IT infrastructure and processes to allow for robust, real-time data analytics
■ The growth of DER assets will require the RTO/ISO and electric utility to analyze large volumes of operations data from disparate
sources. In particular, developing IT processes and infrastructure will allow real-time exchange of data between grid operators, inform
operational decisions impacting grid reliability, and provide accurate price signals to market participants
51st State Roadmap
15
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Checkpoint #1
Rationale Considerations
■ Standards, protocols, and codes of conduct provide the ground
rules for connecting and operating equipment on the electric grid
■ Reforms to rates and regulations should reference and require
clear standards, protocols, and codes of conduct for both the
electric utility and third-party service providers
■ Consequently, reforms to rates and regulations (i.e., Stage 3)
may not begin in earnest until these items are clearly defined
■ A key challenge is the time required to develop standards,
protocols, and codes of conduct (e.g., multi-year effort). Slow
progress could delay reforms to rates and regulations (i.e., Stage
3) and modifications to utility operations and business model (i.e.,
Stage 4)
■ Changes to rates and regulations can occur before finalizing clear
standards, protocols, and codes of conduct; however, this
approach runs the risk of requiring significant updates at a later
date
51st State Roadmap
16
Confirm standards, protocols, and codes of conduct are comprehensive and ensure safe
and reliable grid operations
Rationale Considerations
■ As noted earlier, the interaction between retail and wholesale
markets is critical in order to achieve high DER penetrations and
efficient system operations
■ Selecting DER assets eligible for rate riders and understanding
their aggregation into the wholesale market is a prerequisite to
reforming rates and regulations (i.e., Stage 3)
■ Stakeholder alignment on the DER portfolio and wholesale
market interaction will reduce the potential for contentious
debates when reforming rates and regulations (i.e., Stage 3)
■ Stakeholders should simultaneously develop standards,
protocols, and codes of conduct (i.e., Stage 1) and define retail
and wholesale market interactions (i.e., Stage 2)
Confirm retail and wholesale market interaction will promote high DER penetration and
efficient system operations
R
R
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Stage 3: Reform Rates and Regulations
51st State Roadmap
17
Reform Rates and Regulations
Swimlanes Key Actions
Retail Market Design ■ None
Wholesale Market Design ■ None
Utility Business Model ■ None
Asset Deployment ■ None
Information Technology ■ None
Rates and Regulation
■ Require DER providers to
comply with standards, protocols,
and codes of conduct
■ Establish rules for utility
ownership and returns on
investment in DER
■ Permit stakeholders to aggregate
and leverage DER assets in
wholesale market
■ Design system charges to cover
fixed operating costs to
accommodate DER
■ Phase out net metering and
establish DER rate riders
Description
Objective ■ Transform rate and regulatory environment
to guide DER deployment in a manner that
best supports grid operations
Outcome ■ Implementation of a flexible rate and
regulatory construct that supports strategic
deployment of DER assets and efficient
system operations
■ Implementation of a clear definition of
responsibilities and market opportunities for
the electric utility and third-party service
providers
Challenges ■ Building stakeholder support for a
framework that replaces net metering and
institutes system charge for all customers
■ Transitioning to a rate rider model where
geographic location impacts the
compensation offered to or costs borne by
customers (and may change over time)
■ Ensuring low-income customers are not
disproportionally or adversely impacted
■ Addressing “seams” issues between
jurisdictions
Reforms use market signals to encourage targeted and incremental deployment of selected DER asset, thereby mitigating
stranded costs. Different rate rider payments within a customer class is a break from traditional ratemaking
Copyright © 2016 by ScottMadden, Inc. All rights reserved.
Stage 3: Reform Rates and Regulations (Cont’d)
Regulations must be updated to require DER providers to comply with established standards, protocols, and codes of conduct
■ Standards, protocols, and codes of conduct are not mandatory unless required by state regulation. Consequently, a key step is updating
regulations to integrate and require standards, protocols, and codes of conduct. Third-party service providers must also meet operating
protocol requirements. This action ensures a level playing field between third-party service providers and the electric utility. The
requirement also ensures third-party service providers meet the same standards required of the electric utility and, conversely, the
electric utility does not gain an unfair advantage over third-party service providers
Regulations must establish rules for electric utility ownership and return on investments with DER assets
■ To ensure robust competition, the electric utility is allowed to own and rate base DER assets. The electric utility may also develop
strategic partnerships that leverage their comparative advantage over third-party service providers. For example, one comparative
advantage is existing customer relationships that could be leveraged to lower acquisition costs
Regulations must ensure stakeholders can aggregate and leverage DER assets in the wholesale market
■ Any barriers preventing customer-owned, third-party-owned, or utility-owned DER assets from being aggregated and providing services
to the wholesale electricity market should be removed
Rates will need to be updated to include a system charge designed to cover the fixed costs required to operate an electric grid
with a higher penetration of DER assets
■ Transitioning to a system charge is critical because it provides certainty that the electric utility will be compensated for meeting the
obligation to provide all customers with reliable electricity service. Customers will be encouraged to pursue energy efficiency and other
DER options through new DER rate riders. The system charge can differ between customer classes, and special provisions or discounts
may exist to protect low-income customers. The system charge should allow for review and update without a full rate case
The final regulatory reform is replacing net-metering policies with the new DER rate riders
■ Customers installing DER that provide net system benefits receive fixed, long-term compensation through the DER rate rider. Similarly,
customers installing DER that provide net system cost pay fixed, long-term charge through the DER rate rider. The rate rider value is
proportional to the net value provided to the system. While the value of rate rider is fixed for existing customers (i.e., existing customers
are grandfathered on their original rate), it may change over time for new customers at the same location (e.g., value of new rooftop
solar may decline as circuit penetration increases). All DER assets must also meet operational parameters that improve system
performance (e.g., utility visibility of DER asset). Overall, the DER rate ride is similar to the value of solar credit offered by Austin
Energy; however, the value of the rider depends on location and can result in a customer charge. The electric utility may only offer the
DER rate rider; the company may not require customer adoption. Existing renewable energy systems are grandfathered under old net-
metering policies until the system is no longer operational
51st State Roadmap
18
Copyright © 2016 by ScottMadden, Inc. All rights reserved.
Checkpoint #2
Rationale Considerations
■ Rate and regulatory reforms must be finalized before the utility
operations and business model can be modified with certainty
■ Critical rate and regulatory reforms include adding a system
charge, establishing rules for utility ownership of DER assets, and
replacing net metering with DER rate riders
■ Enacting a full suite of rate and regulatory reforms could take a
substantial amount of time (e.g., multi-year effort)
■ Further, changes in DER technology, DER penetrations, or public
policy could require significant modifications to reforms
■ As a result, modifications to utility operations and business model
should not begin in earnest until rate and regulatory reforms are
fully enacted
51st State Roadmap
19
Enact rate and regulatory reforms
R
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Stage 4: Modify Utility Operations and Business Model
51st State Roadmap
20
Modify Utility Operations and Business Model
Swimlanes Key Actions
Retail Market Design ■ None
Wholesale Market Design ■ None
Utility Business Model
■ Refine utility operations to reflect
growth of DER assets
■ Identify utility-owned DER
opportunities and business
models
Asset Deployment
■ Market test utility-owned DER
business models
■ Scale successful utility-owned
DER business models
Information Technology ■ None
Rates and Regulation ■ None
Description
Objective ■ Adapt utility operations and business
model to account for regulatory reforms
and a future with high DER penetrations
Outcome ■ Implementation of improvements in
operations, processes, and customer
outreach allow the electric utility to
become an enabler of high DER
penetrations while ensuring safe and
reliable grid operations
■ Implementation of new utility business
opportunities that include ownership of
DER assets
Challenges ■ Implementing change management in
utility operations in order to accommodate
high DER penetrations
Modifications to the utility operations and business model do not require any regulatory action; reforms in previous stage
authorize changes to rates and new business models. In this stage, the electric utility will need to address real-time
operations, review organizational structure and processes, and conduct customer outreach. The development of utility DER
business models should include customer engagement and pilot projects.
Copyright © 2016 by ScottMadden, Inc. All rights reserved.
Stage 4: Modify Utility Operations and Business Model (Cont’d)
Once rate and regulatory reforms are enacted, the electric utility operating model will need to refine utility operations to reflect
the addition of DER assets to the electric grid, especially third-party DER assets. Ensuring third-party DER assets meet
standards, protocols, and codes of conduct requirements will be essential to move to high DER penetrations
■ Critical components in this step include updating real-time operations, reviewing organizational structure and processes, and conducting
customer outreach. Real-time operation updates may require expanding grid visualization and further distribution automation tools to
provide more granular insight into grid operations. In addition, the utility must develop open and transparent forecasting and planning in
order to allow stakeholders to make informed investment decisions. A review of organizational structure and processes will ensure the
company is prepared to efficiently manage high DER penetrations. Finally, the utility will need to conduct comprehensive outreach to
educate customers about the transition to system charges, addition of DER rate riders, and phasing-out of net metering
With a broad portfolio of DER rate riders available to customers, the electric utility must identify utility-owned DER opportunities
and business models
■ Important criteria for the utility to consider include customer interests, competition from third-party vendors, comparative advantage
offered by the electric utility (e.g., low capital expenses), potential strategic partnerships, and ability to remain the primary energy point
of contact for customers. Customer engagement—through focus groups or surveys—can provide valuable insights when evaluating
potential new utility business models
The electric utility should conduct market tests of utility-owned DER business models
■ Market tests or pilot projects provide the electric utility first-hand experience marketing, installing, and operating a variety of DER assets.
This knowledge can be used to adjust business models, scale promising endeavors, or discontinue poor-performing efforts
The electric utility should scale successful utility-owned DER business models that best fit with their strategic and business
plans
■ While rate reforms provide sufficient revenue for core operations (i.e., delivery of electricity), the electric utility can grow revenue by
offering DER assets. Market tests or pilot project outcomes should inform the utility on which business models to scale to a broader
segment of customers. The utility should also ensure these new business models align with the company’s broader strategic and
business plans, including changes in the utility cost structure
51st State Roadmap
21
Copyright © 2016 by ScottMadden, Inc. All rights reserved.
Stage 5: Iterate and Improve Framework
51st State Roadmap
22
Iterate and Improve Framework
Swimlanes Key Actions
Retail Market Design
■ Develop processes and
methodologies that integrate
DER into long-term distribution
planning
Wholesale Market Design
■ Develop processes and
methodologies that integrate
DER into long-term ISO/RTO
planning
Utility Business Model ■ TBD
Asset Deployment ■ TBD
Information Technology ■ TBD
Rates and Regulation
■ Modify market and regulatory
rules based on early lessons
learned
Description
Objectives ■ Modify market and regulatory constructs to
account for early lessons learned
■ Update long-term distribution planning and
RTO/ISO planning to account for high
DER penetrations
Outcome ■ Implementation of improvements that
contribute to long-term sustainability of
DER markets and revised regulatory
constructs
■ Implementation of long-term planning
accurately forecasts and adequately
accounts for DER growth
Challenges ■ Developing new long-term planning
methodologies may be time consuming
and require multiple iterations
■ Coordinating between the electric utility
and RTO/ISO to ensure use of similar
market and DER assumptions
The final stage ensures long-term success by evaluating early lessons learned and incorporating DER assets into long-term
planning. A cycle of continuous improvements will allow the addition of new DER assets and manage changes in broader
market or policy conditions
Copyright © 2016 by ScottMadden, Inc. All rights reserved.
Stage 5: Iterate and Improve Framework (Cont’d)
Regulators and the ISO/RTO review early market performance in order to modify market and regulatory rules based on early
lessons learned
■ Improvements to the market and regulatory construct will be needed once stakeholders begin deploying and managing DER assets.
Lessons learned should be compiled one or two years following rate and regulatory reforms. Market and regulatory modifications should
be enacted if they expand growth of DER assets and improve system operations. This process may also include expanding the portfolio
of technologies supported by DER rate riders. The state regulator should be the primary lead in this effort; the RTO/ISO providing
updates to the wholesale electricity market
Long-term success and efficient grid operations will require the electric utility and RTO/ISO to develop processes and
methodologies that integrate DER into long-term planning
■ The final step updates long-term planning activities and tools in order to forecast and account for high DER penetrations. More
specifically, the RTO/ISO and electric utility should develop methodologies to account for DER assets in long-term distribution and
ISO/RTO planning. These methodologies should consider the current DER outlook and the impact of alternative scenarios. This step will
also require processes that facilitate coordination between the utility and RTO/ISO to ensure alignment in assumptions, methodologies,
infrastructure upgrades, and probable outcomes. Processes must also be developed to ensure long-term planning results become an
input into the annual update of DER rate riders
51st State Roadmap
23
Copyright © 2016 by ScottMadden, Inc. All rights reserved.
Signposts
The following signposts should be monitored during the implementation of the roadmap. Changes in any of these signposts
could require significant adaptations to the 51St State Roadmap.
51st State Roadmap
24
Signpost Description Implications
Emergence of New
Technologies or Major
Advances in Existing
Technology
■ Innovation can produce new technologies
(e.g., integrated home energy management
products) or new applications for existing
technology (e.g., EVs offering demand
response)
■ Major advances in existing technology (e.g.,
increasing PV efficiency) can improve
performance and reduce costs of DER
■ The emergence of new technology could result in
new solutions available for grid operators. However,
retail and wholesale market designs would need to
be modified to accommodate these technologies
■ Major advances in existing technology could make
DER assets more attractive to consumers and
ultimately accelerate adoption and increase long-
term penetration
Acceleration of DER
Penetration
■ The roadmap assumes modest growth of DER
assets, thereby allowing ample time for rate
and regulatory reforms and modifications to
utility operations and business models
■ An acceleration of DER penetration would
indicate market forces are driving increased
customer interest in DER
■ In particular, consumer tastes and preferences
may change over time or there may be
significant shifts in the market ecosystem
■ In this instance, stakeholders would need to
expedite rate and regulatory reforms and
modifications to utility operations and business
model
■ This approach would be needed to ensure DER
assets are strategically deployed in a manner that
provides the greatest benefit to grid operations
■ Otherwise, a larger number of DER assets providing
little value to overall system could become
grandfathered under the old regulatory regime
Change in Public Policy ■ Changes in state or federal public policy could
accelerate or stall DER deployment
■ For example, DER deployment would be
supported by increasing Clean Power Plan
targets, extending renewable energy tax
credits, and/or enacting a state renewable
portfolio standard
■ Public policy changes may impact the composition
and penetration of the long-term DER portfolio
■ Distribution and RTO/ISO long-term planning
methodologies and outcomes should be updated to
account for any changes resulting from shifts in
public policy
Copyright © 2016 by ScottMadden, Inc. All rights reserved.
Alternative Current State
Alternative Current State: Vertically Integrated Investor-Owned Utility Operating in Cost-of-Service Regulated Market
■ The alternative current state considers a vertically integrated investor-owned utility operating in a cost-of-service regulated market. The
utility owns generation assets, owns and operates transmission, and delivers electricity to retail customers. The alternative current state
does not include an RTO/ISO
■ The alternative current state retains other core aspects from the original current state. The service territory consists of a mix of urban
and rural customers with a small, but growing penetration of DER assets. The alternative current state does not maintain a renewable
energy portfolio standard and does not allow third-party ownership of distributed generation. Customers owning distributed generation
may sell excess electricity to the electric utility through net metering. These customers receive a monthly bill credit at retail rate for
excess generation and an annual payment for net excess generation at the avoided cost of wholesale power
Modifications to the 51st State Roadmap
■ The alternative current state requires modifications to Stage 2: Define Retail and Wholesale Interaction and Stage 5: Iterate and
Improve Framework. These stages are impacted because the utility—as opposed to an RTO/ISO—is responsible for planning and
maintaining both the retail and wholesale markets. Consequently, the alternative current state results in changes in two swimlanes: retail
market design and wholesale market design
■ The objective of Stage 2 remains the same: ensure interaction between wholesale markets and DER resources located on the
distribution grid maximizes the value of DER assets. However, in this instance, the primary stakeholder managing day-to-day operations
is the electric utility. The utility—in coordination with regulators, customers, and stakeholders—is now responsible for ensuring
interaction between retail and wholesale markets. The lack of an RTO/ISO should reduce complexity compared to the original roadmap
■ The objective of Stage 5 remains the same: update long-term planning to account for high DER penetrations. However, instead of an
electric utility and RTO/ISO being responsible—and coordinating—on these tasks, the exercise will be conducted solely by the electric
utility. Again, this should reduce complexity compared to the original roadmap
■ There are no changes to the other stages or swimlanes. In addition, the checkpoints and signposts remain relevant and unchanged
51st State Roadmap
25

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The 51st State Initiative

  • 1. Copyright © 2016 ScottMadden, Inc. All rights reserved. Report _2016 51st State Roadmap: Leveraging the Natural Advantages of the Electric Utility Chris Vlahoplus John Pang Paul Quinlan March 2016
  • 2. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Table of Contents ■ Key Insights ■ Current State ■ Future State ■ 51st State Roadmap • Roadmap Overview • Stage 1: Develop Standards, Protocols, and Codes of Conduct • Stage 2: Define Retail and Wholesale Interactions • Checkpoint #1 • Stage 3: Reform Rates and Regulations • Checkpoint #2 • Stage 4: Modify Utility Operations and Business Model • Stage 5: Iterate and Improve Framework • Signposts • Alternative Current State 1
  • 3. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Key Insights Distributed energy resources (DER) can provide net benefits to the electric system (e.g., congestion relief) and broader society (e.g., emission reductions); however, despite these advantages, the deployment of high penetrations of DER has proved challenging for the following reasons: ■ Newness of Technology – Despite some high-profile markets, DER assets are relatively new to the electric grid. Electric utilities and grid operators continue to learn how to efficiently integrate these technologies ■ Lack of Granular Information and Data – Historically, the electric grid consisted of a small number of centralized generation units. Electric utilities and grid operators did not require granular information and data to safely and reliably operate the grid ■ Misaligned Regulatory Model – A regulatory model focused on long planning cycles, and risk aversion is ill-suited to manage the rapid growth of DER assets and technology innovation. In addition, the current model includes inappropriate or lacking price signals and incentives Against this backdrop, the electric utility is often singled out as a fundamental barrier to deployment of DER assets. To overcome the perceived electric utility shortcomings, many stakeholders conclude that a completely new model is needed for the electric industry. We disagree with this assessment and instead believe electric utilities maintain natural advantages that can be leveraged to deploy renewables and DER assets as well or better than some models being offered. Specific natural advantages of the electric utility include: ■ Customer Relationship – After providing a reliable and valuable service for decades, the electric utility is well positioned to introduce and educate customers about DER assets and other new technologies ■ System Management – The electric system will continue to exist, continue to provide value to customers, and continue to require active management. In addition, the laws of physics will continue to dictate where and how electricity moves through the system. The utility has long managed this dynamic system and is best positioned to continue to serve in this role ■ Reliability and Security – Along with system management, the electric utility is responsible for the reliability and security of the grid. As the composition of the grid changes, the electric utility needs to continue to meet reliability and security standards ■ Transaction Costs – The electric utility is in the best position to “balance” transaction costs during operations. The alternative is the implementation of costly administrative overlays 2
  • 4. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Key Insights (Cont’d) ScottMadden believes DER assets can be deployed at high penetrations without creating a whole new model for the electric industry. Instead, we propose leveraging the natural advantages of the electric utility in order to accelerate the deployment and penetration of DER assets ■ Our roadmap demonstrates this desired outcome can be achieved by: (1) developing standards, protocols, and codes of conduct, (2) defining interaction between retail and wholesale markets, (3) reforming rates and regulations, (4) modifying utility operations and business model, and (5) iterating and improving the framework ■ Properly sequencing these steps will encourage long-term innovation, promote competitive and strategic deployment of DER, ensure cost-effective and reliable grid operations, and provide financial stability and expansion opportunities to electric utilities ■ To ensure a successful outcome, our analysis was structured around the following principles: • Future State Adheres to Comprehensive Guiding Principles – Guiding principles are structured to enable high penetrations of DER assets in the future state while ensuring the safe and reliable operation of the electric grid. Further, the principles expand customer choice while defining the critical role of the electric utility and ensuring proper compensation • Roadmap Facilitates Progress and Stability through Incremental Change – The future state and desired outcomes can be implemented through a sequence of incremental changes, as opposed to dramatic shifts to regulatory environment and utility business models. The approach allows the market to continue to deploy DER assets while providing flexibility to modify market and regulatory constructs based on early lessons learned. This also allows the financial community to adjust to new business models so that risk-return are aligned with the new business model. It also provides a framework to innovate and test new technologies • Future State Relies on Precedent from Existing Utility Business Approach – A useful model to examine is existing utility outdoor lighting programs. Customers seeking outdoor lighting may choose a third-party service provider to install outdoor lighting or, alternatively, select the electric utility to install, own, and operate outdoor lighting. The customer pays for the utility outdoor lighting through a rate rider on their electric bill. Outdoor lighting is an interesting case study because the model expands customer choice, relies on a simple rate rider, and offers new business opportunities for the electric utility. A second important model comes from local natural gas distribution companies. A residential customer using natural gas for heat may have a different rate structure than a similar customer using natural gas for heat and water. The different rates recognize the different impact each type of customer has on fixed cost recovery 3
  • 6. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Current State Characteristics ■ The current state assumes an investor-owned distribution utility operating in a deregulated market. The utility serves a combination of urban and rural customers who may select their energy provider. The utility may not own any generation assets and serves as the provider of last resort. The wholesale market is managed by an RTO/ISO ■ The current state does not include aggressive state-level policies supporting renewable energy. In particular, there is no renewable portfolio standard nor state tax credit. Third-party ownership of distributed generation is not permitted in the current state ■ The only policy mechanism supporting DER is net metering. Regulations require electric utilities and energy providers to offer net metering. There is no cap to the number of net-metered assets permitted on the system. Customers earn monthly bill credits at retail rates for net excess generation. At the end of an annualized period, the utility or energy provider compensates customers for excess generation at the avoided cost of wholesale power ■ The policy environment in the current state has resulted in a small, but growing base of distributed solar PV systems. Growth can be attributed to declining technology costs making distributed solar PV attractive to customers willing to accept long payback periods and customer tastes and preferences for green, distributed energy ■ A summary of the current state is provided in the following table: Current State 5 Market Feature Description Service Territory Mix of urban and rural Utility Type Investor-owned utility DER Penetration Small, but growing Utility Structure Distribution only Wholesale Market Organized market (RTO/ISO) Retail Market Fully deregulated State Renewable Policy None Net-Metering Policy Monthly retail credit; annual compensation at avoided cost of wholesale power Third-Party Ownership of DER Not permitted
  • 8. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Guiding Principles ■ Guiding principles can be used ensure the future state is sustainable and meets long-term objectives ■ In this 51st State Roadmap, the future state must align with the following guiding principles: • Expand customer choice and access to DER in a manner that promotes competitive and strategic deployment based on value, benefits, and costs while ensuring cost-effective and reliable grid operations • Maintain a simple, easy-to-understand basic service with simple rates. Offer alongside it additional services with differentiated pricing—as occurs with almost any other good or service. For additional services, minimize complexity in market design and transactions • Promote least-cost operation of the electric system. When customer choice does not result in least cost, price accordingly using an equitable, cost-causer-pays basis • Ensure the electric utility retains an obligation to serve all customers and remains the energy provider of last resort • Ensure the electric utility retains the opportunity to earn a return on prudent investments and is neither constrained nor advantaged in offering new services • Ensure third-party DER service providers are granted non-discriminatory access to the distribution grid. Conversely, allow the electric utility to leverage comparative advantages (e.g., low cost of capital) when offering new services • Ensure safe and reliable operations of the electric grid while encouraging testing and deployment of new technologies that improve operational performance Future State 7
  • 9. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Future State Characteristics Key Features ■ Customers connecting DER to the distribution grid receive a payment or incur a charge through a rate rider on their utility bill as authorized by DER rate schedules. The payment or charge is commensurate with the positive or negative value the DER asset provides the electric system ■ The value of a particular DER asset is influenced by the time and location at which the asset is installed. DER rate schedules may include caps (e.g., maximum MW of distributed solar on the system or a circuit) and are updated at regular intervals (e.g., annual update). Rate rider values may change significantly between updates, thereby reflecting current grid composition and value of DER. While the rate rider may change for new customers, existing customers are grandfathered on their original rate ■ DER rate schedules may include a wide range of services, including energy efficiency, solar PV, EV charging stations, microgrids, and demand response assets. Depending on the DER, rate schedules may allow unmetered resources similar to utility outdoor lighting programs. DER rate schedules may also include flexibility to accommodate the interests of large commercial or industrial customers ■ Customers may obtain a portfolio of DER assets from the electric utility or third-party service providers. The electric utility may install, own, and earn a return on investment on DER assets in their service territory. Regulations establish size limitations (or other criteria) to ensure a utility does not own utility-scale generation. Third-party service providers may also install and own DER assets ■ The introduction of DER rate schedules is coupled with the phasing out of full retail rate net metering. In addition, a system charge (or similar mechanism) is implemented to ensure the electric utility is being adequately compensated for the reliability, backup ancillaries, and other values of the grid that are essential to the economy. This includes maintaining and operating the distribution system ■ Retail and wholesale markets interact by allowing DER assets to be aggregated and providing services to the RTO/ISO operating the wholesale market. Despite the interaction, a clear line of demarcation remains between these markets in terms of administration and jurisdictions ■ In summary, the future state allows the electric utility to earn revenue in three ways: • A system charge provides the revenue and return necessary to adequately maintain and operate the distribution grid • The DER rate schedule may provide revenue, but only in instances where DER assets result in a net increase in grid operating costs. In this case, the customer compensates the utility for the incremental cost associated with operating the DER asset • The utility may also own and operate DER assets or provide unregulated services to electric customers (e.g., insurance products) or DER services providers (e.g., rooftop solar lead generation) Future State 8
  • 11. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Roadmap Overview ■ Stages represent the major steps required to transition from the current state to the future state. The 51st State Roadmap includes five distinct stages: • Stage 1: Develop standards, protocols, and codes of conduct • Stage 2: Define retail and wholesale interaction • Stage 3: Reform rates and regulations • Stage 4: Modify utility operations and business model • Stage 5: Iterate and improve framework ■ Checkpoints represent a concrete set of criteria that should be met before advancing to the next stage. There a two critical checkpoints in the 51st State Roadmap: • Checkpoint #1: Before proceeding to Stage 3, stakeholders must confirm (1) standards, protocols, and codes of conduct are comprehensive and ensure safe and reliable grid operations and (2) retail and wholesale market interaction will promote high DER penetration and efficient system operations • Checkpoint #2: Before proceeding to Stage 4, stakeholders must enact rate and regulatory reforms ■ Finally, signposts are items outside of the control of those driving the change and signal when the transformation should be sped up, slowed down, or when a new path needs to be adopted. The following signpost should be monitored during implementation of the 51st State Roadmap: • Emergence of new technologies or major advances in existing technology • Acceleration of DER penetration • Change in public policy ■ The following pages provide a summary of the 51St State Roadmap as well as specific details on stages, checkpoints, and signposts 51st State Roadmap 10
  • 12. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Develop and maintain robust cybersecurity standards Develop and maintain grid interconnection and integration standards and protocols Require DER providers to comply with standards, protocols, and codes of conduct Establish rules for utility ownership and returns on investment in DER Permit stakeholders to aggregate and leverage DER assets in wholesale market Design system charges to cover fixed operating costs to accommodate DER Replace net metering with DER rate riders Develop infrastructure and processes to allow robust data analytics Refine utility operations to reflect growth of DER assets Identify utility-owned DER opportunities and business models Market test utility- owned DER business models Select successful utility-owned DER business models Develop processes and methodologies that integrate DER into long-term ISO/RTO planning Develop processes and methodologies that integrate DER into long-term distribution planning Modify market and regulatory rules based on early lessons learned Develop methodologies to price the value of each type of DER asset on the distribution grid Identify DER assets to be aggregated and provide services to RTO/ISO Develop mechanisms and markets for aggregated DER assets in the wholesale electricity market Identify DER assets to be supported by retail customer rate riders Roadmap Overview (Cont’d) 11 51st State Roadmap Develop Standards, Protocols, and Codes of Conduct Define Retail and Wholesale Interaction Reform Rates and Regulations Modify Utility Operations and Business Model Iterate and Improve Framework Checkpoint #1  Confirm standards, protocols, and codes of conduct are comprehensive and ensure safe and reliable grid operations  Confirm retail and wholesale market interaction will promote high DER penetration and efficient system operations Checkpoint #2  Enact rate and regulatory reforms Signposts  Emergence of new technologies or major advances in existing technology  Acceleration of DER penetration  Change in public policy Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Swimlanes RM Retail Market Design WM Wholesale Market Design UB Utility Business Model AD Asset Deployment IT Information Technology RR Rates and Regulation Update utility code of conduct to ensure fair competition if utility owns DER assets KEYACTIONS R R Develop third-party code of conduct for customer data
  • 13. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Stage 1: Develop Standards, Protocols, and Codes of Conduct Swimlane Key Actions Retail Market Design ■ None Wholesale Market Design ■ None Utility Business Model ■ None Asset Deployment ■ Develop and maintain grid interconnection and integration standards and protocols Information Technology ■ Develop and maintain robust cybersecurity standards ■ Develop third-party code of conduct for customer data Rates and Regulation ■ Update utility code of conduct to ensure fair competition if utility owns DER assets 51st State Roadmap 12 Develop Standards, Protocols, and Codes of Conduct Description Objective ■ Develop and maintain grid integration and cybersecurity standards and protocols ■ Develop and update codes of conduct for customer data and utility DER ownership Outcome ■ Development of grid integration and cybersecurity standards and protocols ensure the safe, reliable, and secure operation of electric grid ■ Development of codes of conduct ensures third-party service providers protect customer data and the electric utility provides non-discriminatory access to the grid Challenges ■ Interfacing with national organizations who have responsibility for grid integration and cybersecurity standards ■ Finalizing and integrating standards into state regulations so they are enforceable Standards, protocols, and codes of conduct are essential to provide clear and transparent guidance to third-party service providers and the electric utility on a range of system control issues. Key topics include data communication protocols, grid operations, and grid visibility (e.g., knowing the location and operating status of DER assets)
  • 14. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Stage 1: Develop Standards, Protocols, and Codes of Conduct (Cont’d) Developing and maintaining grid interconnection and integration standards and protocols is essential to ensuing safe operations of the electric grid ■ Utility interconnection standards and protocols must be updated to ensure the safe interconnection, operation, and utility interaction with DER assets. In addition to utility interconnection standards, the Institute of Electric and Electronics Engineers (IEEE) recently launched a working group to complete a full revision of the IEEE 1547 standard, which is a national standard addressing the interconnection of distributed resources. IEEE is also developing the IEEE 2030 standard to address smart grid interoperability. These national standards are critical because they provide clear guidance on how DER assets should be integrated and operated on the electric system Developing and maintaining robust cybersecurity standards is essential to protect the grid as internet connectivity and the number of access points increases at a rapid pace ■ In November 2013, the Federal Energy Regulatory Commission (FERC) approved Version 5 of Critical Infrastructure Standards (CIP) developed by the North American Electric Reliability Corporation (NERC). These standards require all bulk electric system cyber assets be subject to at least some reliability standards. In addition to CIP standards, the National Institute of Standards and Technology (NIST) developed Guidelines for Smart Cybersecurity, which provides a comprehensive framework organizations can use to develop effective cybersecurity strategies. NIST has also developed the Framework for Improving Critical Infrastructure Cybersecurity in response to Executive Order 13636 – Improving Critical Infrastructure Cybersecurity. Stakeholders must evaluate if current standards are adequate or if additional advances are required before proceeding with rate and regulatory reforms (i.e., Stage 3). Standards must also be continuously updated to protect against new cybersecurity threats Developing third-party code of conduct for customer data will ensure third-party service standards meet the same privacy requirements as electric utilities ■ Third-party service providers connecting or owning DER assets should be held to the same data privacy standards as the electric utility. Therefore, the regulator—with input from the utility and third-party service providers—should develop a third-party code of conduct for customer data. The code of conduct should outline how third-party providers may gain access to customer data, how they may use customer data, and how the customer data will be protected The electric utility will be permitted to own DER assets in the future state. The utility code of conduct should be updated to ensure fair competition if utility decides to own DER assets ■ If the electric utility decides to own and operate DER assets, the company should not have an unfair advantage when competing against third-party service providers. The regulator will need to update the utility code of conduct to account for the new market opportunities available to the electric utility 51st State Roadmap 13
  • 15. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Stage 2: Define Retail and Wholesale Interaction 51st State Roadmap 14 Define Retail and Wholesale Interaction Swimlanes Key Actions Retail Market Design ■ Identify DER assets to be supported by retail customer rate riders ■ Develop methodologies to price the value of each type of DER asset on the distribution grid Wholesale Market Design ■ Identify DER assets to be aggregated and provide services to RTO/ISO ■ Develop mechanisms and markets for aggregated DER assets in the wholesale electricity market Utility Business Model ■ None Asset Deployment ■ Develop infrastructure and processes to allow robust data analyticsInformation Technology Rates and Regulation ■ None Description Objective ■ Ensure interaction between wholesale markets and DER resources located on the distribution grid maximizes the value of DER assets Outcome ■ Identification of DER assets to be deployed with rate riders ■ Understanding of how DER assets will be valued on distribution grid ■ Understanding of how assets will be aggregated in the wholesale market ■ Identification of IT infrastructure and processes required Challenges ■ Aligning multiple jurisdictions will be the most significant challenge, especially if the wholesale market is managed by an RTO covering multiple states ■ Developing clear and transparent methodologies that assign DER value The interaction between retail and wholesale markets is critical in order to achieve a high DER penetration and efficient system operations. The regulator, electric utility, and RTO/ISO play key leadership roles in defining DER assets eligible for rate riders, developing methodologies that assign value to DER assets, linking aggregated DER assets to the wholesale electricity market, and building IT infrastructure and processes required for robust data analytics
  • 16. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Stage 2: Define Retail and Wholesale Interaction (Cont’d) The regulator—with input from the utility, customers, and third-party vendors—must identify DER assets to be supported by retail customer rate riders ■ Building a functioning marketplace requires an understanding of the available products and services. In this case, stakeholders must identify the portfolio of DER assets that will be available to customers. The regulator should open a proceeding that includes a Request for Information to identify the merits of different DER technologies. The proceeding should also include public comment and hearings to identify customer interests. Key considerations should include DER availability, current penetrations, technology readiness levels, capital costs, and system life. The regulator selects initial DER assets to be supported by retail customer rate riders Under the guidance of the regulator, the electric utility—with input from stakeholders—develops methodologies to price the value of each type of DER asset to be supported by retail customer rate riders ■ The value assigned to each DER asset should reflect the net benefit or cost the technology provides to the distribution grid, with specific consideration given to the time (e.g., 2016 v. 2026) and location of an individual installation. The methodologies should avoid excessive complexity and overhead. They should assume that the value of the rate rider is fixed for existing customers (i.e., existing customers are grandfathered on their original rate), but may change for new customers with annual updates due to local constraints (e.g., maximum solar capacity on individual circuit). Ultimately, the net benefit or cost is reflected in the DER rate rider available to each retail customer. The regulator approves each DER methodology The regulator and RTO/ISO lead a stakeholder group to identify DER assets to be aggregated and provide services into the wholesale electricity market ■ The interaction between retail and wholesale markets is critical to achieve a high DER penetration and efficient system operations. The regulator and RTO/ISO should sign a memorandum of understanding to lead a stakeholder group to identify a subset of DER assets that can be aggregated and provide services to the wholesale electricity market (e.g., ancillary services or demand response). The stakeholder group should represent the electric utility, electric generators, third-party vendors, and electric customers The RTO/ISO develops mechanisms and markets for aggregated DER assets in the wholesale electricity market ■ Proper market signals will encourage the participation of aggregated DER assets in the wholesale market. Market protocols, pricing mechanisms, and market processes must be developed by the RTO/ISO to ensure fair competition, competitive prices, and transparency. In addition, market mechanisms must prevent double counting of energy services in both retail and wholesale markets The RTO/ISO and electric utility must develop IT infrastructure and processes to allow for robust, real-time data analytics ■ The growth of DER assets will require the RTO/ISO and electric utility to analyze large volumes of operations data from disparate sources. In particular, developing IT processes and infrastructure will allow real-time exchange of data between grid operators, inform operational decisions impacting grid reliability, and provide accurate price signals to market participants 51st State Roadmap 15
  • 17. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Checkpoint #1 Rationale Considerations ■ Standards, protocols, and codes of conduct provide the ground rules for connecting and operating equipment on the electric grid ■ Reforms to rates and regulations should reference and require clear standards, protocols, and codes of conduct for both the electric utility and third-party service providers ■ Consequently, reforms to rates and regulations (i.e., Stage 3) may not begin in earnest until these items are clearly defined ■ A key challenge is the time required to develop standards, protocols, and codes of conduct (e.g., multi-year effort). Slow progress could delay reforms to rates and regulations (i.e., Stage 3) and modifications to utility operations and business model (i.e., Stage 4) ■ Changes to rates and regulations can occur before finalizing clear standards, protocols, and codes of conduct; however, this approach runs the risk of requiring significant updates at a later date 51st State Roadmap 16 Confirm standards, protocols, and codes of conduct are comprehensive and ensure safe and reliable grid operations Rationale Considerations ■ As noted earlier, the interaction between retail and wholesale markets is critical in order to achieve high DER penetrations and efficient system operations ■ Selecting DER assets eligible for rate riders and understanding their aggregation into the wholesale market is a prerequisite to reforming rates and regulations (i.e., Stage 3) ■ Stakeholder alignment on the DER portfolio and wholesale market interaction will reduce the potential for contentious debates when reforming rates and regulations (i.e., Stage 3) ■ Stakeholders should simultaneously develop standards, protocols, and codes of conduct (i.e., Stage 1) and define retail and wholesale market interactions (i.e., Stage 2) Confirm retail and wholesale market interaction will promote high DER penetration and efficient system operations R R
  • 18. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Stage 3: Reform Rates and Regulations 51st State Roadmap 17 Reform Rates and Regulations Swimlanes Key Actions Retail Market Design ■ None Wholesale Market Design ■ None Utility Business Model ■ None Asset Deployment ■ None Information Technology ■ None Rates and Regulation ■ Require DER providers to comply with standards, protocols, and codes of conduct ■ Establish rules for utility ownership and returns on investment in DER ■ Permit stakeholders to aggregate and leverage DER assets in wholesale market ■ Design system charges to cover fixed operating costs to accommodate DER ■ Phase out net metering and establish DER rate riders Description Objective ■ Transform rate and regulatory environment to guide DER deployment in a manner that best supports grid operations Outcome ■ Implementation of a flexible rate and regulatory construct that supports strategic deployment of DER assets and efficient system operations ■ Implementation of a clear definition of responsibilities and market opportunities for the electric utility and third-party service providers Challenges ■ Building stakeholder support for a framework that replaces net metering and institutes system charge for all customers ■ Transitioning to a rate rider model where geographic location impacts the compensation offered to or costs borne by customers (and may change over time) ■ Ensuring low-income customers are not disproportionally or adversely impacted ■ Addressing “seams” issues between jurisdictions Reforms use market signals to encourage targeted and incremental deployment of selected DER asset, thereby mitigating stranded costs. Different rate rider payments within a customer class is a break from traditional ratemaking
  • 19. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Stage 3: Reform Rates and Regulations (Cont’d) Regulations must be updated to require DER providers to comply with established standards, protocols, and codes of conduct ■ Standards, protocols, and codes of conduct are not mandatory unless required by state regulation. Consequently, a key step is updating regulations to integrate and require standards, protocols, and codes of conduct. Third-party service providers must also meet operating protocol requirements. This action ensures a level playing field between third-party service providers and the electric utility. The requirement also ensures third-party service providers meet the same standards required of the electric utility and, conversely, the electric utility does not gain an unfair advantage over third-party service providers Regulations must establish rules for electric utility ownership and return on investments with DER assets ■ To ensure robust competition, the electric utility is allowed to own and rate base DER assets. The electric utility may also develop strategic partnerships that leverage their comparative advantage over third-party service providers. For example, one comparative advantage is existing customer relationships that could be leveraged to lower acquisition costs Regulations must ensure stakeholders can aggregate and leverage DER assets in the wholesale market ■ Any barriers preventing customer-owned, third-party-owned, or utility-owned DER assets from being aggregated and providing services to the wholesale electricity market should be removed Rates will need to be updated to include a system charge designed to cover the fixed costs required to operate an electric grid with a higher penetration of DER assets ■ Transitioning to a system charge is critical because it provides certainty that the electric utility will be compensated for meeting the obligation to provide all customers with reliable electricity service. Customers will be encouraged to pursue energy efficiency and other DER options through new DER rate riders. The system charge can differ between customer classes, and special provisions or discounts may exist to protect low-income customers. The system charge should allow for review and update without a full rate case The final regulatory reform is replacing net-metering policies with the new DER rate riders ■ Customers installing DER that provide net system benefits receive fixed, long-term compensation through the DER rate rider. Similarly, customers installing DER that provide net system cost pay fixed, long-term charge through the DER rate rider. The rate rider value is proportional to the net value provided to the system. While the value of rate rider is fixed for existing customers (i.e., existing customers are grandfathered on their original rate), it may change over time for new customers at the same location (e.g., value of new rooftop solar may decline as circuit penetration increases). All DER assets must also meet operational parameters that improve system performance (e.g., utility visibility of DER asset). Overall, the DER rate ride is similar to the value of solar credit offered by Austin Energy; however, the value of the rider depends on location and can result in a customer charge. The electric utility may only offer the DER rate rider; the company may not require customer adoption. Existing renewable energy systems are grandfathered under old net- metering policies until the system is no longer operational 51st State Roadmap 18
  • 20. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Checkpoint #2 Rationale Considerations ■ Rate and regulatory reforms must be finalized before the utility operations and business model can be modified with certainty ■ Critical rate and regulatory reforms include adding a system charge, establishing rules for utility ownership of DER assets, and replacing net metering with DER rate riders ■ Enacting a full suite of rate and regulatory reforms could take a substantial amount of time (e.g., multi-year effort) ■ Further, changes in DER technology, DER penetrations, or public policy could require significant modifications to reforms ■ As a result, modifications to utility operations and business model should not begin in earnest until rate and regulatory reforms are fully enacted 51st State Roadmap 19 Enact rate and regulatory reforms R
  • 21. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Stage 4: Modify Utility Operations and Business Model 51st State Roadmap 20 Modify Utility Operations and Business Model Swimlanes Key Actions Retail Market Design ■ None Wholesale Market Design ■ None Utility Business Model ■ Refine utility operations to reflect growth of DER assets ■ Identify utility-owned DER opportunities and business models Asset Deployment ■ Market test utility-owned DER business models ■ Scale successful utility-owned DER business models Information Technology ■ None Rates and Regulation ■ None Description Objective ■ Adapt utility operations and business model to account for regulatory reforms and a future with high DER penetrations Outcome ■ Implementation of improvements in operations, processes, and customer outreach allow the electric utility to become an enabler of high DER penetrations while ensuring safe and reliable grid operations ■ Implementation of new utility business opportunities that include ownership of DER assets Challenges ■ Implementing change management in utility operations in order to accommodate high DER penetrations Modifications to the utility operations and business model do not require any regulatory action; reforms in previous stage authorize changes to rates and new business models. In this stage, the electric utility will need to address real-time operations, review organizational structure and processes, and conduct customer outreach. The development of utility DER business models should include customer engagement and pilot projects.
  • 22. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Stage 4: Modify Utility Operations and Business Model (Cont’d) Once rate and regulatory reforms are enacted, the electric utility operating model will need to refine utility operations to reflect the addition of DER assets to the electric grid, especially third-party DER assets. Ensuring third-party DER assets meet standards, protocols, and codes of conduct requirements will be essential to move to high DER penetrations ■ Critical components in this step include updating real-time operations, reviewing organizational structure and processes, and conducting customer outreach. Real-time operation updates may require expanding grid visualization and further distribution automation tools to provide more granular insight into grid operations. In addition, the utility must develop open and transparent forecasting and planning in order to allow stakeholders to make informed investment decisions. A review of organizational structure and processes will ensure the company is prepared to efficiently manage high DER penetrations. Finally, the utility will need to conduct comprehensive outreach to educate customers about the transition to system charges, addition of DER rate riders, and phasing-out of net metering With a broad portfolio of DER rate riders available to customers, the electric utility must identify utility-owned DER opportunities and business models ■ Important criteria for the utility to consider include customer interests, competition from third-party vendors, comparative advantage offered by the electric utility (e.g., low capital expenses), potential strategic partnerships, and ability to remain the primary energy point of contact for customers. Customer engagement—through focus groups or surveys—can provide valuable insights when evaluating potential new utility business models The electric utility should conduct market tests of utility-owned DER business models ■ Market tests or pilot projects provide the electric utility first-hand experience marketing, installing, and operating a variety of DER assets. This knowledge can be used to adjust business models, scale promising endeavors, or discontinue poor-performing efforts The electric utility should scale successful utility-owned DER business models that best fit with their strategic and business plans ■ While rate reforms provide sufficient revenue for core operations (i.e., delivery of electricity), the electric utility can grow revenue by offering DER assets. Market tests or pilot project outcomes should inform the utility on which business models to scale to a broader segment of customers. The utility should also ensure these new business models align with the company’s broader strategic and business plans, including changes in the utility cost structure 51st State Roadmap 21
  • 23. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Stage 5: Iterate and Improve Framework 51st State Roadmap 22 Iterate and Improve Framework Swimlanes Key Actions Retail Market Design ■ Develop processes and methodologies that integrate DER into long-term distribution planning Wholesale Market Design ■ Develop processes and methodologies that integrate DER into long-term ISO/RTO planning Utility Business Model ■ TBD Asset Deployment ■ TBD Information Technology ■ TBD Rates and Regulation ■ Modify market and regulatory rules based on early lessons learned Description Objectives ■ Modify market and regulatory constructs to account for early lessons learned ■ Update long-term distribution planning and RTO/ISO planning to account for high DER penetrations Outcome ■ Implementation of improvements that contribute to long-term sustainability of DER markets and revised regulatory constructs ■ Implementation of long-term planning accurately forecasts and adequately accounts for DER growth Challenges ■ Developing new long-term planning methodologies may be time consuming and require multiple iterations ■ Coordinating between the electric utility and RTO/ISO to ensure use of similar market and DER assumptions The final stage ensures long-term success by evaluating early lessons learned and incorporating DER assets into long-term planning. A cycle of continuous improvements will allow the addition of new DER assets and manage changes in broader market or policy conditions
  • 24. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Stage 5: Iterate and Improve Framework (Cont’d) Regulators and the ISO/RTO review early market performance in order to modify market and regulatory rules based on early lessons learned ■ Improvements to the market and regulatory construct will be needed once stakeholders begin deploying and managing DER assets. Lessons learned should be compiled one or two years following rate and regulatory reforms. Market and regulatory modifications should be enacted if they expand growth of DER assets and improve system operations. This process may also include expanding the portfolio of technologies supported by DER rate riders. The state regulator should be the primary lead in this effort; the RTO/ISO providing updates to the wholesale electricity market Long-term success and efficient grid operations will require the electric utility and RTO/ISO to develop processes and methodologies that integrate DER into long-term planning ■ The final step updates long-term planning activities and tools in order to forecast and account for high DER penetrations. More specifically, the RTO/ISO and electric utility should develop methodologies to account for DER assets in long-term distribution and ISO/RTO planning. These methodologies should consider the current DER outlook and the impact of alternative scenarios. This step will also require processes that facilitate coordination between the utility and RTO/ISO to ensure alignment in assumptions, methodologies, infrastructure upgrades, and probable outcomes. Processes must also be developed to ensure long-term planning results become an input into the annual update of DER rate riders 51st State Roadmap 23
  • 25. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Signposts The following signposts should be monitored during the implementation of the roadmap. Changes in any of these signposts could require significant adaptations to the 51St State Roadmap. 51st State Roadmap 24 Signpost Description Implications Emergence of New Technologies or Major Advances in Existing Technology ■ Innovation can produce new technologies (e.g., integrated home energy management products) or new applications for existing technology (e.g., EVs offering demand response) ■ Major advances in existing technology (e.g., increasing PV efficiency) can improve performance and reduce costs of DER ■ The emergence of new technology could result in new solutions available for grid operators. However, retail and wholesale market designs would need to be modified to accommodate these technologies ■ Major advances in existing technology could make DER assets more attractive to consumers and ultimately accelerate adoption and increase long- term penetration Acceleration of DER Penetration ■ The roadmap assumes modest growth of DER assets, thereby allowing ample time for rate and regulatory reforms and modifications to utility operations and business models ■ An acceleration of DER penetration would indicate market forces are driving increased customer interest in DER ■ In particular, consumer tastes and preferences may change over time or there may be significant shifts in the market ecosystem ■ In this instance, stakeholders would need to expedite rate and regulatory reforms and modifications to utility operations and business model ■ This approach would be needed to ensure DER assets are strategically deployed in a manner that provides the greatest benefit to grid operations ■ Otherwise, a larger number of DER assets providing little value to overall system could become grandfathered under the old regulatory regime Change in Public Policy ■ Changes in state or federal public policy could accelerate or stall DER deployment ■ For example, DER deployment would be supported by increasing Clean Power Plan targets, extending renewable energy tax credits, and/or enacting a state renewable portfolio standard ■ Public policy changes may impact the composition and penetration of the long-term DER portfolio ■ Distribution and RTO/ISO long-term planning methodologies and outcomes should be updated to account for any changes resulting from shifts in public policy
  • 26. Copyright © 2016 by ScottMadden, Inc. All rights reserved. Alternative Current State Alternative Current State: Vertically Integrated Investor-Owned Utility Operating in Cost-of-Service Regulated Market ■ The alternative current state considers a vertically integrated investor-owned utility operating in a cost-of-service regulated market. The utility owns generation assets, owns and operates transmission, and delivers electricity to retail customers. The alternative current state does not include an RTO/ISO ■ The alternative current state retains other core aspects from the original current state. The service territory consists of a mix of urban and rural customers with a small, but growing penetration of DER assets. The alternative current state does not maintain a renewable energy portfolio standard and does not allow third-party ownership of distributed generation. Customers owning distributed generation may sell excess electricity to the electric utility through net metering. These customers receive a monthly bill credit at retail rate for excess generation and an annual payment for net excess generation at the avoided cost of wholesale power Modifications to the 51st State Roadmap ■ The alternative current state requires modifications to Stage 2: Define Retail and Wholesale Interaction and Stage 5: Iterate and Improve Framework. These stages are impacted because the utility—as opposed to an RTO/ISO—is responsible for planning and maintaining both the retail and wholesale markets. Consequently, the alternative current state results in changes in two swimlanes: retail market design and wholesale market design ■ The objective of Stage 2 remains the same: ensure interaction between wholesale markets and DER resources located on the distribution grid maximizes the value of DER assets. However, in this instance, the primary stakeholder managing day-to-day operations is the electric utility. The utility—in coordination with regulators, customers, and stakeholders—is now responsible for ensuring interaction between retail and wholesale markets. The lack of an RTO/ISO should reduce complexity compared to the original roadmap ■ The objective of Stage 5 remains the same: update long-term planning to account for high DER penetrations. However, instead of an electric utility and RTO/ISO being responsible—and coordinating—on these tasks, the exercise will be conducted solely by the electric utility. Again, this should reduce complexity compared to the original roadmap ■ There are no changes to the other stages or swimlanes. In addition, the checkpoints and signposts remain relevant and unchanged 51st State Roadmap 25