FeDERalist paper #1: Equity and DERs
The role DERs play in building more equitable power systems
Hi there Task Force! Following the publication of the DER Task Force Bill of Rights, we wanted to share a very important discussion that emerged from those four fundamental rights outlined in our whitepaper. Below is the first FeDERalist paper associated with the Bill of Rights: the role DERs play in building a more equitable grid.
We hope this piece gives you something to think about, and if you want to contribute to the discussion topics through a feature such as this, drop me a line in Slack!
DER Bill of Rights — Discussion 1: An Equitable Future for the Grid
We do not currently have equitable energy infrastructure in this country. Too often, lower-income and communities of color bear the disproportionate burden of pollution from energy generation and transmission and have greater exposure to the effects of climate change. Lower-income and disadvantaged households spend more of their income on energy bills than the national average and live in less energy efficient homes, experience greater rates of power outages, and have fewer opportunities to participate in the DER movement. Furthermore, The Energy Information Administration estimates that 14 percent of households on Native American reservations have no access to electricity, which is 10 times higher than the national average.
Compounding this inequality, lower-income households tend to be renters who are typically locked out of energy capital markets — banks and lenders who finance DERs do not underwrite single family rental homes or apartments. As a result access to DERs, ubiquitous for single family homes and large commercial operations, is non-existent to renters. The capital markets do not distinguish among renters with investment grade income, low-and-moderate income, or credit-disabled status, instead bucketing all renters into the “credit-disabled” underwriting segment.
Addressing these concerns requires a consistent, scalable, foundational framework, and the DER Task Force believes that the principles outlined in the DER Bill of Rights, if adopted by regulators and policymakers, will enable a far more equitable grid. Below, we present several ways the DER Bill of Rights can be leveraged to create more equitable outcomes, as the Task Force believes DERs will be critical for protecting all customers against institutionalized power structures and enabling a more equitable future. The Task Force also recognizes that the below recommendations are only a starting point, and that further work will be necessary to advance policies and programs in support of equity goals.
Principles of DER Equity
Low-and-moderate income (LMI) and environmental justice (EJ) communities should have access to the same resilience and cost-saving benefits enjoyed by early adopters of DERs. While it is the belief of the DERTF that implementation of the four fundamental rights of DERs will lead to equitable outcomes, the DERTF acknowledges existing structural inequalities are hard to overcome. Thus, where there are gaps in DER deployment, policies should exist that close this gap.
Further, state DER programs must center the inclusion of marginalized groups, especially those that currently face high barriers to access DER technologies. Participation mechanisms must be available for all potential grid services and broaden the scope of DER ownership beyond those that can afford the upfront costs, own their property, or have the credit-worthiness to receive third-party financing, in part by setting aside adequate funding for LMI and EJ communities and designing more inclusive incentive programs.
The most effective approach to ensuring equity is to use public funding mechanisms separate from scalable, accurate, market-based compensation frameworks. While utility-focused DER deployment programs should have requirements for LMI and EJ spending, these policies must exist outside of utility-created rates and tariffs. Attempting to solve social issues via bureaucratically defined tariffs and rates obscures the true techno-economics of the physical grid, creating perverse incentives and distorting proper market signals. Ironically, this distortion is what can lead to inequitable outcomes. While the discussion that follows argues how the rights proposed will decrease inequity, public funding and other programs can further accelerate that process and close any gaps the market creates.
Equitable Allocation of Costs (Right to Compensation)
A common critique of DERs has been that only wealthier customers can afford, or benefit from, third-party ownership models, and that DERs shift the social costs of the grid from wealthy DER owners onto those that cannot afford them. Neither is a characteristic fundamental to the nature of DERs, but rather the frameworks by which they have historically been advanced.
The Right to Fair Compensation does not mean the Right to Over-Compensation. For example, net metering in its traditional form runs the risk of over-compensating customers (particularly solar generation), at the expense of non-generating end-users. If unchecked, this can certainly lead to inequitable outcomes, with those who can least afford it paying more to maintain a system they have no choice but to rely on. Bureaucratically imposing taxes or other penalties on DER owners, however, can further raise costs and barriers to entry, locking out those already excluded by the system.
Citing equity concerns due to this cost-shifting under the existing NEM 2.0 regime, California's NEM 3.0 proposal looks to tax solar customers as opposed to addressing the underlying reason for cost shifting (i.e. blunt payment schemes to solar customers that are not reflective of the physical reality of the grid). Contrary to its stated goals, the proposed decision, when implemented, will lead to further inequity. Taxes levied against DER customers will raise the barrier to entry, not lower them, ensuring that only the wealthiest will be able to afford solar and storage systems as back-up power in the face of increasing outages.
Instead, the DER Task Force strongly endorses “Avoided Cost”, VDER, or other similar methodologies to determine the stacked-value that DERs provide to the grid. If the underlying techno-economics of the grid are properly incorporated, this group of valuation methods address the problems of cost-shifting by encouraging the net reduction of costs to the grid and thus reduces the overall cost of grid maintenance for all users. It also ensures fair compensation to DER owners and keeps the playing field level.
Equitable Financing & Ownership (Right to Ownership)
A market-based framework for compensating DERs is necessary but not sufficient to unlock more equitable ownership of DERs. Over time, these more robust market signals will lead to new financing mechanisms that the existing paradigm of blunt or over-compensation does not allow for. However, that alone will not suffice — steps must also be taken to reduce red tape to lower the costs of installing DERs, which will in turn lower barriers to entry and reduce the need for third-party financing. Any remaining gaps in DER ownership can and should be closed by public funding. The following are illustrative examples of the types of solutions that the DERTF Bill of Rights, if abided by, can unleash:
In a net metering regime where solar can only offset the customer bill, the customer bill (and corresponding faith that the customer will continue to pay the bill, or credit-worthiness) is all that can be used to finance DERs. However, by properly compensating DERs for their value to the grid, the credit-worthiness of an individual customer is no longer the primary concern and opens up the market to renters and less-credit worthy populations. If regulators shift compensation to a value-stacked, avoided cost approach with robust market signals, DERs can be compensated by an actual market, and the customer becomes relevant only to the extent that the DERs are located on their property. This reduces the reliance of credit-based underwriting as a form of third-party financing in a DER-heavy future, reducing the chances lower income individuals are denied the chance to purchase a DER based on their credit-worthiness. It also reduces the reliance on state-sponsored funding, which can be dependent on state budgets and availability. Further, the value-stacked, avoided cost approach would open the energy capital markets and DER financing access to all renters, regardless of high or low FICO scores and/or credit-disabled consumer profiles.
For example, “vacancy-based underwriting” is emerging in areas where proper compensation is given for T&D benefits and clear energy and capacity price signals. In vacancy-based underwriting, financiers receive higher payments when customers live in buildings where the DERs are sited (receiving retail rates that offset the customer bill), but still receive payment if the building were to be vacated (receiving wholesale rates as more power is now injected into the grid). This is because the DERs are still able to provide benefit to the surrounding grid, and be paid through well-defined market signals, even if there are no off-takers in the actual building. This provides an underwriting model to the financier that values DERs based not just on the behind-the-meter consumers, but also the value to the broader grid based on its “front-of-the-meter” benefits to all ratepayers within the utility jurisdiction. When financiers look at “vacancy-based” underwriting – i.e. the chances an entire building or region of the grid will vacate and stop paying bills – their downside is limited by the very low probability of widespread vacancy. That differs from NEM, which has an extreme downside of zero payments. Vacancy-based underwriting is just one example of the innovation that market-based frameworks can unleash.
Equally as important as new financing and market frameworks is a reduction in the soft costs associated with installing DERs. Currently, difficult permitting processes and other bureaucratic red tape artificially inflate the costs of installing DERs. For example, in Australia, rooftop solar is $1219/kw and utility scale is $1061/kw, whereas in the US it’s $3520/kw ($4,236/kw in CA) and $1101/kw, respectively. This is purely due to administrative and other soft costs, all of which make access more difficult for LMI communities. In the future, with streamlined processes, DERs may become so comparatively cheap that it is analogous to a landlord installing laundry at their building as a marketable amenity (no power outages!). In areas like Australia, this future has arrived, making the need for non-credit or renter based financing schemes obsolete. Thus, efforts to reduce bureaucratic red tape will lower soft costs for installing DERs, driving down the system’s installed costs and making DERs more accessible to LMI communities.
Beyond the above examples, state-based funding will continue to play an important role in ensuring equitable DER access. Regulators should consider expanding the definition of what qualifies as low to middle income spaces, which have traditionally been multi-family housing units. Expanding the definition to include funding for local businesses that serve as community gathering spaces in outages or in hot summer months (e.g. grocery stores, community centers) recognizes that the system requires more than a one-size-fits-all approach, and that DERs can function as tools for strengthening communities, empowering residents, and remedying the injustices caused by the historically centralized system. These funding mechanisms should exist in concert with the DERTF Bill of Rights: unlike tariff structures that violate the Right to Compensation and can raise barriers to entry, public funding mechanisms working in parallel with scalable market-based approaches will drive rapid adoption of DERs across all income levels.
The Ultimate Check on Inequality (Right to Choice)
As the grid ages and infrastructure investment does not keep pace, we are witnessing increased outages and increased costs of delivering power all over the country. In markets like California, the costs of power continue to sky-rocket even while reliability decreases. This is why the Right to Choice exists. While individuals may struggle to access DERs because they are renters or not credit-worthy, communities ought to be allowed to band together to build shared infrastructure, much in the way farming communities did with the original co-ops. In a sense, it is easier to bank a community, even if it is composed of LMI individuals, than it is to bank individuals alone. Community microgrids are the ultimate check on the issue of grid inequity: when the grid fails communities, communities can build their own microgrids. This right must exist regardless of whatever powers are currently given to municipalities or utilities. Ultimately, the Right to Choice unlocks a DER-centric co-op model for historically underserved communities. In the past, communities may have been forced to take whatever service offered to them, at whatever cost. In the future, DERs make it easier for communities to choose their own fate.
Such financing mechanisms and those yet to be imagined, enabled by the Rights to Compensation, Choice, and Ownership, will lead to more equitable third-party ownership models.
Promote third-party or coop-like ownership, like community solar, as important alternative/non-credit financing mechanisms to enable equitable ownership for communities which have historically been segregated from traditional banking systems.
Reduce bureaucratic red tape to lower soft costs and barriers to entry for lower-income communities
Set minimum percentages (e.g. 40%) of incentive program financing to go to marginalized and low-income communities
Expand the definition of Low & Moderate Income (LMI) to include funding for local businesses that serve as community gathering spaces in outages or in hot summer months (e.g. grocery stores, community centers).
Enable wider DER ownership by deploying alternative financing paths. Energy capital markets must recognize that not all LMI consumers, whether renters or homeowners, are credit disabled, and that for renters in particular, access to DER financing will increasingly be deployed outside of mainline PPA and lease underwriting boxes, primarily via mechanisms like “vacancy-based underwriting” that provide access independent of credit
Thank you for reading the DER Task Force’s discussion on equity. If you enjoyed it, please share with a friend!