The urgency of climate change and emissions commitments, along with growing and shifting loads, changing customer needs, and emerging technologies, is causing a generational shift in the US electric grid. To adapt to the new paradigm, the federal government, state and local governments, utilities, and grid operators are changing their approach to electric system planning. E3 is advancing our approach to calculating “avoided costs” for distributed energy resources (DERs), a keystone of our analysis for more than two decades, to address the evolving nature of the grid, its loads, and its resources. By applying a forward-thinking approach to DER valuation, E3 is increasingly integrating a wider array of bulk grid considerations, incorporating values that reflect potential market volatility, and weaving avoided cost calculations into long-term planning. This approach has both expanded the impact of E3’s avoided cost calculation in jurisdictions where we’ve worked for decades and has allowed us to introduce our approach to avoided costs to new areas and new analyses.
Many utility costs are sunk or not avoidable, in that they reflect investments that have already been made or must be made in the future irrespective of load reductions. However, a share of forward-looking electric system costs could be avoided by reducing load in certain hours or shifting load out of those hours. Avoided costs were once focused primarily on evaluating energy efficiency programs that provided durable load reductions. Today, avoided costs are being used to assess a larger set of DERs, including conservation and demand response programs, customer generation resources like rooftop solar, and building and vehicle electrification technologies that increase load. Avoided costs are also increasingly being used to support the design of customer rates and tariffs.
For more than 20 years, E3 has supported the California Public Utility Commission (CPUC) in developing the Avoided Cost Calculator, a public avoided costs model that is used across a wide range of CPUC proceedings and workstreams. Recently, E3 has worked to better connect the Avoided Cost Calculator with the state’s Integrated Resource Plan (IRP), which develops a long-term strategy for achieving the state’s electric-sector reliability and decarbonization goals. For example, going forward, the avoided costs associated with greenhouse gas emissions and generation capacity costs are directly linked to the upfront and operational costs of resources that provide emissions value and capacity value in the IRP. In the past couple of years, the Avoided Cost Calculator has also taken on a new role as the basis for some compensation under California’s “Net Billing Tariff” for customer solar (“NEM 3.0”). With these advancements and improvements, E3’s California Avoided Cost Calculator remains the standard-bearer for rigorous avoided cost analysis.
Over the last few years, E3 has expanded its analysis of avoided costs to new parts of the country. New or expanded projects in Washington, Oregon, Illinois, New York, Massachusetts, the District of Columbia, and for the City of Glendale, California, have shown new applications for and interest in avoided costs. Expanding our analysis to new regions has helped establish the importance of a rigorous methodology for assessing the value of DERs. Further, these projects have shed light on how different variables – costs of energy and infrastructure, transmission constraints, and stakeholder priorities – may inform DER evaluation. Lastly, by expanding avoided cost analysis throughout the country, E3 has honed an approach that can capture avoided costs at different levels of complexity, including using comprehensive public data, to meet the needs and budgets of many types of clients.
E3’s latest work on avoided costs delves deeper and wider into the topic and it examines costs and benefits of DERs in new jurisdictions. Across this new analysis, E3 has reached several conclusions on best practices for avoided cost calculations.
- First, avoided costs, even relatively simple calculations, can be useful for reflecting the share of utility costs that are avoidable and thus informing the system value of DERs.
- Second, E3 has developed new best practices for calculating avoided costs and tying them to long-term planning. The standard practice of a net cost of new entry calculation for a new peaker resource is no longer sufficient. As many jurisdictions are working to develop integrated planning approaches, avoided costs can be a crucial link between long-term resource planning and DER evaluation and program development.
- Third, many regions increasingly rely on high-capital, low-marginal-cost resources like wind, solar, and storage. As a result, accurately quantifying the predictable and reliable load reductions of DERs during critical hours that vary by day and by season has become essential. This ensures that DER contributions to grid reliability and capital cost reduction are properly valued and integrated into system planning.
- Lastly, E3 remains excited to continue examining the interesting open questions surrounding avoided costs and DER evaluation:
- Should avoided costs be used to evaluate load growth measures such as electrification? What changes might be needed to properly evaluate electrification measures?
- How should non-energy benefits of DERs, which do not accrue as financial savings to ratepayers, be integrated into avoided costs and DER evaluation?
As E3 continues to expand its avoided cost calculations to new horizons and new jurisdictions, these and other questions will continue to motivate further study.
