San Diego Gas & Electric wants to try out a novel method to get customers to install behind-the-meter batteries and make them available for utility needs: a tariff that would reward customers who bring their own batteries to the grid.

SDG&E unveiled the proposal as part of its distribution resource plan (PDF), the document that it and California’s other two investor-owned utilities turned in to state regulators this month. Much like similar utility pilot projects around the country and the globe, it’s meant to to see if batteries can reliably defer the costs of upgrading local grid circuits and transformers, as well as help balance energy supply and demand at a system-wide scale.

But unlike almost every other pilot project out there, SDG&E won’t own the batteries it’s testing. Instead, it wants to incentivize them with “a new residential energy storage rate,” one that will reward customers who turn over their household energy storage units to the utility at key moments of the day.

That will allow SDG&E to test a “new business and revenue model for third-party ownership of distribution infrastructure,” one it says could support the growth of DERs that might otherwise lead to “fewer distribution-level infrastructure projects on which utilities like SDG&E would earn a traditional return.”

“For this pilot to be successful and scalable, it is necessary to incorporate and validate a new, performance-based utility incentive that partially replaces lost earnings and enables utilities to be active partners in identifying and incenting optimal location of DER solutions on the distribution grid,” SDG&E wrote.

Creating tariffs like these could open up the utility-DER value-sharing proposition to a much broader range of customers, compared to contracting with third-party DER providers. But that’s only if the tariff structure provides enough incentive for customers in key locations to sign up -- and also benefits utility customers that don’t happen to live in the spots that SDG&E needs to shore up with energy storage.

“This is a little ray of light through the darkness of the traditional utility business model,” James Fine, senior economist with the Environmental Defense Fund, said of SDG&E’s proposal. “It’s a new way to sustain and support the utility operations, to get away from the incentive to put more steel in the ground.”

But it’s also a proposal fraught with complications, he noted. “It involves getting the pricing right and fair under the new tariff structures, and it also involves empowering the customers” by giving them the information they need to share their stored energy while keeping enough for their own needs, such as emergency backup or saving money on peak power prices.

Then there’s the challenge of involving third-party energy storage providers in the mix. That’s going to be a critical next step for SDG&E and other utilities to hash out with regulators and the companies, such as SolarCity and Tesla, that want to capture the grid values from strategically located, aggregated and controlled DERs.

Tariffs as an emerging alternative for grid-integrated DERs

SDG&E’s proposal stands out amidst a set of utility regulatory regimes that haven’t yet come up with a comprehensive strategy for integrating customer-owned energy storage with utility needs. States like Hawaii, California and New York are starting to challenge these traditional regulatory models, however.

In California’s case, state law AB 327 mandated that SDG&E, Southern California Edison and Pacific Gas & Electric use their DRPs to move toward a planning regime that gives DERs standing alongside utility investments as key features of their grid operations and long-term investment needs.  

These DRPs, released on July 1, have a lot of new information about the values that DERs can provide the grid. What they haven’t done -- at least, not yet -- is put down in writing just how much money customers and third-party DER providers could earn for serving these grid needs.

One way to manage these financial issues is through contracts, like those that Southern California Edison signed last year with distributed solar, energy storage, demand response, energy efficiency and microgrid providers as part of its 2,200-megawatt Local Capacity Requirement (LCR) procurement.

There are some problems with these kinds of contracts, however. First, they’re usually linked to long-running utility procurement processes, which don’t move as fast as DERs are entering the market. Second, they only work for DERs that are controlled by a single party, one that’s able to reach out to lots of small-scale installations and manage them for utility needs.

Another option is for utilities to own the assets in question. But that’s a real problem for the companies already deploying DERs en masse across the state, and the California Public Utilities Commission (CPUC) has made it clear that it will be discouraging utility ownership of DERs, beyond the initial pilot projects it has demanded from each DRP.

SDG&E’s plan calls for a different approach, using a specialized tariff for customers who sign up for the pilot project. Specifically, “Customers taking advantage of the incentive will 1) accept a new dynamic rate that more acutely aligns charging and discharging with specific grid needs and 2) allow SDG&E to directly control the storage system’s charge and discharge functions during a limited number of high-load hours annually.”  

The financial incentives flowing from this dynamic rate would be tiered, with higher payments for customers who accept higher levels of utility control.

For the initial pilot, SDG&E will offer cash incentives for customers in the locations it has determined as ripe for battery backup. Those, along with the financial backing from the state’s Self-Generation Incentive Program, should “nearly, and in some cases, completely defer the customer’s out-of-pocket expense for the storage resources.” But cash incentives won’t be party of any tariff that may come about if the CPUC approves the pilot program for expansion, SDG&E spokesperson Hanan Eisenman wrote in an email.

The specifics of the energy storage rate are still being developed, but will “broadly speaking, encourage participating customers to charge and discharge at times that are most beneficial for the broader distribution system, and discourage charging and discharging when it is least beneficial,” Eisenman wrote. “We envision a rate that reflects forecasted system and circuit conditions on a day-ahead basis, and through hourly price signals will incent both charging and discharging activity.”

SDG&E has proposed a separate pilot project that will deploy utility-owned batteries under its direct control, and will compare that project’s performance against the tariff-based systems in terms of cost and effectiveness. “Additionally, the pilot will help answer questions regarding the necessary or appropriate level of direct utility control required to realize a deferral benefit provided by behind-the-meter resources,” the utility wrote.

This tariff concept isn’t without precedent. In fact, SDG&E last year proposed an electric-vehicle charging tariff pilot to incentivize owners of EV chargers at workplaces or multi-family housing units to alter their charging patterns, or hand over control of their charger to the utility, to help defer grid costs.

Letting the third parties play, while keeping utilities in the game

One of the biggest questions for SDG&E is how its proposal will be received by the slew of solar and storage companies busy selling batteries to PV-equipped homeowners. Right now, most of these systems are being installed to provide some emergency backup power in the event of a blackout. But almost all the companies in the business also see a future grid-services role for their solar-storage systems -- and many of them are laying the groundwork for bidding their aggregated capacity into markets or programs that offer some financial reward.

For now, however, SDG&E won’t be looking for third-party aggregators to participate in its pilot, Eisenman wrote. As for how third parties could play a role in whatever future tariff structures might emerge from the pilot, “It’s too early to tell,” he wrote. “If the Commission approves the pilot, and after it is implemented, SDG&E will be better positioned to make informed decisions about expansion, scale and potential opportunities for other DER providers.”

It’s hard to say how DER companies will react to SDG&E’s proposal, but it’s likely that they’ll resist any attempt to exclude them from whatever real-world tariff structures emerge from the process.

“Storage tariffs, or solar-plus-storage tariffs, are pretty new territory,” said Lon Huber, director of government and utility practice for Strategen Consulting, a firm that serves as key manager and advisor to the California Energy Storage Association industry group. “If we can identify certain locational values, and that location also provides system-wide benefits with certain assets, we should try to unlock that for ratepayers.” At the same time, “I would like to see some room for third-party aggregators as well.”

But third-party DER providers will likely have a role to play in finding customers and selling them batteries, Fine noted. Utilities “could develop a new approach where they’re getting fees for the service they’re providing for the customer, and the customer is getting fees for the services they provide, and the third party is obtaining payment for services,” he said.

There’s also a natural role for utilities to determine just which areas of the grid could benefit most from DER deployments, versus which areas might be negatively affected by it, he said. Or, “let’s say a customer gets a proposal from a battery provider, and they don’t quite trust it -- they could ask for an audit from SDG&E.”

Finally, any utility-run DER tariff will have to make sure it shares the benefits not only with the customers who sign up for it, but for its ratepayers at large, he noted. To make that happen, SDG&E’s proposal calls for “ratepayers and shareholders [to] equally share all savings, if any, between the cost of the identified conventional solution and the DER solution.”

In other words, however much money SDG&E can save by securing battery capacity through its tariffs, instead of making traditional grid investments, will be split between revenues to SDG&E and rate reductions for its customers. This kind of performance-based incentive is one of the policy prescriptions for utilities trying to avoid the “death spiral” that could come as more and more customers generate and store more of their own energy, leaving utilities with fewer customers to make up the lost revenue.