Electric utility regulation could be enhanced by providing utilities with incentives for the efficient deployment and operation of distributed resources (DR)—or power producing and power use reduction technologies that are dispersed throughout a utility’s distribution system. The benefits of DR can include reduced transmission congestion, avoided fuel and purchased power costs, and, in some cases, deferred transmission and distribution investment. Efficient DR can benefit customers, but geographically- and time-averaged tariffed rate structures are roadblocks that must first be surmounted. Utility cost recovery of DR-related costs (including lost revenues), as well as other incentives to stimulate utility involvement, could provide ways of overcoming these obstacles.

NERA recently completed a project for the Edison Electric Institute, in which a team of experts focused on developing workable models for financial incentives that would encourage utilities to play an appropriate role in DR deployment and operation. This paper examines the role of electric utilities in developing distributed energy resources and propose several mechanisms for promoting utility involvement, such as gain sharing mechanisms, incentive rate of return, and fixed performance-based incentives. The authors conclude that distributed resources can play an important role in efficiently satisfying energy needs, but care needs to be taken in assessing their costs and benefits.