Bridging the Retail-Wholesale Divide In Electricity Markets: The Economics of Distributed Energy Resources

Increasing penetration of distributed energy resources (DERs) impacts electric grid operations and utility revenue requirements. Existing retail rate tariffs for commercial customers do not align with utilities’ wholesale market purchases of energy, ancillary services, and capacity guarantees, nor do they efficiently convey resource scarcity to customers to alter their consumption and DER deployment decisions. This report seeks to understand the effects that real time pricing has on electricity costs and incentives for DER deployment for small commercial building owners. Our analysis uses historical load data from multiple commercial building types throughout New Jersey to (i) evaluate the relationship between locational marginal prices (LMPs) and consumptive patterns, and (ii) explore the potential benefit of new electrical rate structures with increased granularity in the temporal and geographic dimensions. This assessment of potential savings for customers and utilities can be used to inform future rate design. Our key findings are as follows: (1) retail rates based on LMPs can benefit both distribution utilities and their customers; (2) any new rate introduced must be optional, as varying load attributes at specific sites result in very different experiences under these rates (i.e., almost half of subject sites are worse off); (3) utilities can reduce risk by implementing a retail rate with a real-time price signal.