For Utilities, the Time to Start Building DER Management Capabilities is Now

• DER growth expected to accelerate with major carbon commitment (such as recent COP26 targets) and will put significant operational, customer and cost pressure on utilities
• Utilities should take the lead in building DER capabilities, focusing on end-user outcomes (both internal and external), interoperable technology (such as federated DER communications) and new model to capture high-fidelity grid-edge data
• DER will fundamentally disrupt how utilities operate today and will require a bionic approach leveraging both technology and human enablers to deliver business outcomes

DER GROWTH AND IMPACT ON UTILITIES

Every 21st century distribution utility is facing the same challenges—from customer demands for digital and personalized services, to increased reliability, cyber risks, and climate change, to greater regulatory pressure to meet stricter environmental and efficiency standards. Adding to this, utilities now also need to enable faster uptake of Distributed Energy Resources (DER) to accelerate the energy transition and achieve COP26 objectives.

The DER market—which includes sources of generation and load on the distribution grid, such as solar PV, batteries, and EVs—is growing rapidly. One example: global distributed solar PV capacity is projected to grow ~250% by 2030 (~200 GW to ~750 GW) (see figure below).

In geographies with relatively high DER penetration (>20-40%), utilities are already facing operational impact today and must quickly find ways to build capabilities to manage them. Even where DER penetration is still low (<5-10%), leading utilities are starting now to lay the groundwork for end-to-end DER management. Thinking ahead is important as DER management is highly complex, lengthy, and costly. It involves numerous capabilities—from planning, registration, integration and aggregation to operations, marketing, and billing. The entire process requires profound changes to how utilities work, from operating distribution networks to emergency response. In all cases, execution demands smart investments in assets for grid-edge visibility and a highly qualified workforce—people capable of learning new skills and adapting as the industry evolves. This kind of work cannot be launched instantly as needed. It requires thorough and profound preparation.

Risks of delaying DER management investments

Enabling DER growth is now more important than ever. With the latest COP26 commitment to net zero by mid-century, clean technology (incl. distributed renewables, electrification of transportation, etc.) will be a key lever to achieve these ambitious goals.

Utilities that fail to fully integrate and manage DERs risk three adverse outcomes:

1.    Inability to meet customer expectations. Customers want to support the energy transition. They want to own DERs and in doing so they usually expect rapid, digitized, and personalized services to manage their new assets. Utilities that cannot meet these expectations risk poor customer satisfaction numbers. Meeting customer expectations is already an issue. In the past year alone, utility customers in six US states filed connection-time complaints—Hawaii, Maine, New Jersey, Rhode Island, Massachusetts, and Minnesota.

2.    Failure to maintain grid reliability. DERs make it more difficult to maintain grid reliability. For example, high rooftop solar electricity generation can cause power quality issues. In fact, just this year, excess rooftop solar supply prompted a large distribution network operator to turn off thousands of rooftop solar installations. While customers saw little foregone revenue, more frequent shutoffs will likely turn DER owners into unhappy customers. And, importantly, failure to manage resiliency concerns may risk regulatory backlash.

3.    Risk of a high-cost impact. DER growth has important financial implications. Simply scaling up current utility processes—such as connection application reviews (a hefty manual process)—will lead to higher operating costs in the form of increased labor costs to manually manage a growing DER base. Similarly, leveraging traditional “poles & wires” solutions to connect new DERs in suboptimal locations will quickly lead to skyrocketing capital costs. Utilities that address DER challenges too late not only face significant opex and capex overruns but also risk disruptions from new entrants in the grid.

Benefits of proactive investment

By planning ahead, utilities can do more than avert losses—they can realize substantial financial gains. Benchmarks suggest that DER management can save roughly 20% of capacity upgrade costs (more on this in Next Gen Network Planning). Furthermore, depending on regulations, utilities may be able to capture additional revenue from performance incentive mechanisms (PIMs), such as New York’s earning adjustment mechanism (EAM).

Utilities should take the lead

Given the pace of change and complex DER management, utilities will want to lead the way, working with regulatory and vendor partners to deliver comprehensive and forward-looking DER management capabilities. It is not wise to wait or to rely on external stakeholders to define their strategies, for two reasons:

• First, while regulatory bodies are starting to layout frameworks to manage rapid growth of DERs, they are still learning and testing best approaches. As a result, frameworks will continue to change and adapt. In some jurisdictions, they are already mapping a vision for DER integration (e.g., the US’s FERC Order 2222), developing new utility business models (e.g., Hawaii with RPS-A), and testing new flexible platforms (e.g., Europe’s FlexiGrid demonstration programs). However, guidance remains limited in scope and key technical challenges (e.g., interoperability) have not been resolved. Furthermore, legacy barriers to new DER connections, such as prohibitions on rate-basing non-wire solutions, still exist in some jurisdictions and utilities will have to address them.
• Second, utilities will have to reimagine their relationships with vendors. DER management is not solely about technology acquisition, so utilities should not expect turnkey solutions. Instead, they will want to reimagine their broader operating models—determining which capabilities and human enablers are necessary—and partner with vendors to deliver bespoke solutions.

LESSONS FROM INDUSTRY LEADERS

The diversity of emerging regulatory regimes, market models, and technical solutions means many utility approaches will work. Our recent analysis of the DER management programs of utilities facing more than 20% penetration and/or ~15% annual growth in penetration confirmed this. While no utility has implemented full-scale, end-to-end DER management, there are 5 lessons to learn from utilities that have embarked on their DER management journeys:

1.    Focus on outcomes

Focus on end-user outcomes. DER leaders rigorously vet new technologies to ensure they improve outcomes for external (e.g., residential) customers and internal end-users (e.g., distribution planning engineers and control room operators). For example, in response to concerns that new solutions would result in added control room burden, one US utility added an automation desk to reduce complexity for control room operators and ensure reliable network operation.

2.    Capture high-fidelity grid-edge data

Pursue data and new capabilities. Industry leaders chase high-fidelity grid-edge data and develop new capabilities (e.g., governance, storage) to manage it. Grid-edge data from so-called “smart” assets such as smart meters and smart inverters is a key enabler for advanced DER management-use cases, e.g., forecasting and power quality modelling. These in turn enable better outcomes, such as improved control room decision-making and real-time DER/VPP control.

3.    Drive interoperability

Drive standardization and interoperability. One successful tactic in the software context was to be an early mover in platform development, creating solutions that were adopted by other stakeholders. Another strategy, pursued by three utilities we studied, is to employ federated DER communications and control architectures to mitigate interoperability challenges. Different grid-edge systems are used to communicate with heterogenous sets of DERs. In a federated infrastructure, both central & grid-level DER management systems exist, with communications from DERs flowing to the former through the latter.

4.    Employ Agile ways of working

Take an iterative, agile approach that is product-focused. Rising DER penetration, evolving end-user needs, and new technologies frequently result in unanticipated issues that demand flexibility from utilities. Agile ways of working contain several principles that will help utilities face this uncertain future, including build-test-learn cycles, a focus on product rather than projects, user-centric design, rapid “real-world” feedback from users, etc.,

5.    Engage regulators

Be proactive. The top utilities engage regulators to define their strategic role with DERs. For example, one American utility worked with state regulators to rate-base behind-the-meter battery storage installations, while another took a similar approach with behind-the-meter PV.

IMPLEMENTING A BIONIC APPROACH TO DER MANAGEMENT

These five lessons learned illustrate why utilities must become bionic. Bionic networks leverage their strategic goals to define priority business outcomes, and then cultivate a combination of technological and human enablers to achieve these outcomes—to learn more about the Bionic Network, see Introducing the Utility of the Future.  

Define your purpose and strategy

To avoid marginalization, utilities will want to quickly determine their desired role in DER management and then actively work with all stakeholders—from shareholders to regulators and customers—to realize it.

Prioritize outcomes

While specific relevant outcomes depend on regulatory and market context, the list is generally consistent: 1. Drive Energy transition by enabling DER growth; 2. Ensure grid stability and reliability (e.g., preventing blackouts and minimizing power quality issues); 3. Maximize customer satisfaction (e.g., delivering streamlined experiences for connection and energy management); 4. Reduce customers’ costs (e.g., offering cheaper connection and lower electricity costs); 5. Drive positive societal benefits, such as environmental, and enable their workforce (e.g., allowing control room operators to focus on core job requirements).

Build the necessary enablers

New technological tools—such as those that enable LV network transparency and DER visibility and control—are essential to better DER management. However, utilities must also ensure their technology architecture is ready to accommodate these tools. Utilities will want to create a modular, interoperable software stack and develop the necessary hardware enablers. Modularity is achieved by employing federated architectures (mentioned above), which permit alteration of grid-edge systems without affecting the central control platform. To drive interoperability, utilities can encourage standardization through platform creation and/or regulatory partnerships. Finally, encouraging smart asset deployment offers grid-edge visibility and lays a strong foundation for DER management.

Beyond technology, success will heavily depend on changing how utilities operate and developing human enablers. Utilities must reform their operating model, anchoring the changes in the required business outcomes and taking a product mindset to delivering DER capabilities. For example, leading utilities are employing Digital ways of working using cross-functional teams to co-design relevant processes (e.g., connections, network planning, maintenance, system control, fault and emergency response, customer care). See Getting More from the Digital Transformation Journey for a more detailed discussion of best practices.

About the authors:

Justin Dean, Managing Director and Partner, Washington DC

Philip Hirschhorn, Managing Director and Senior Partner, Sydney

Carolyn Ford, Managing Director and Partner, Dallas

Matthew Sundberg, Partner, New York

Oxana Dankova, Managing Director and Partner, Sydney

Konark Singh, Managing Director and Senior Partner, Dallas

Zsofia Beck, Managing Director and Partner, Budapest

Sofia Berrada, Principal, New York

Dan Eichelsdoerfer, Project Leader, Philadelphia