Financing at the Grid Edge

AuthorC. Baird Brown
Page 148 Legal Pathways to Deep Decarbonization in the United States
I. Introduction
e Deep Decarbonization Pathways Project (DDPP)
reports for the United States call for an annua l decar-
bonization investment requirement ranging from “under
$100 billion today to over $1 trillion in a span of about
20 ye ar s.”1 is includes more than $200 billion annual ly
for each of commercial and residential building eciency2
and more than $600 billion annually for low-carbon elec-
tric power-generating resources.3 e DDPP reports do
not attempt to address nancing as a quantitative matter,
but include a policy prescription to “anticipate investment
needs and build a suitable investment environment”4 and
note that this “requires stable policy and a predictable
investment environment.”5 is chapter explores those
1. J H. W  ., P  D D  
U S, U.S. 2050 R, V 2: P I 
D D   U S 12 (Deep Decarbonization
Pathways Project & Energy and Environmental Economics, Inc., 2015), avail-
able at
pdf [hereinafter DDPP P R].
2. Id. at 41.
3. Id. at 42.
4. Id. at 12.
5. Id.
policy imperatives as they a ect decarbonization invest-
ment at local levels.
Local actors— customers, campus managers, and com-
munities—are increasingly investing in and attracting
investment to clean energy, energy eciency, and energy
storage. New technologies support this movement, leading
to an increasing democratization of electricity generation
and energy management. e result is a new sec tor that
is highly motivated by both energy savings and environ-
mental goals. e participants in this sector are invest-
ing in highly ecient integration of thermal and electric
energy generation and management at the “grid edge.” In
this chapter, references to the “grid edge” or “grid-edge
resources” refer to facilities and resources owned or oper-
ated by or on behalf of customers or communities, either
behind the meter or through various forms of aggregation
of individual customer demand such as communit y choice
aggregation (CCA) or community solar. e meter is ty pi-
cally where utility ownership ends a nd customer ownership
begins, and so it is the legal ed ge of the grid.6 Par ticipa nts
6. Recommendations made in the chapter may apply equally to other distributed
energy resources, but the focus is on investment decisions made by customers
or communities or by their vendors and suppliers.
Chapter 6
Financing at the Grid Edge
by C. Baird Brown
is chapter discusses legal impediments and solutions for customer, community, and third-party nancing of
behind-the-meter and community-scale clean generation, storage, and energy eciency. Current levels of invest-
ment by utilities and independent power producers fall well below levels needed to meet deep decarbonization
goals. Investments at the “grid edge” driven by customers and communities not only contribute to clean energy
goals, but also reduce energy prices and improve the resilience of the power supply. ese linked incentives can
help attract the new investment we need. To unleash investment at the grid edge, legal reforms are needed to per-
mit ownership of local energy resources and sales of energy and other services by customers, communities, and
their local suppliers; to encourage utilities and regional transmission organizations to foster transparent markets
for services from grid-edge resources and make direct purchases of such services; to provide better information
on the usage of customers and the needs of the grid; and to adapt and reuse existing nance markets and create
new institutions that support grid-edge nance. ese reforms will permit customers and communities to struc-
ture creditworthy projects that qualify for nancing.
Page 149
in this sector need support from the grid, but they are a lso
providing services that support the grid.
Attracting new investors to deca rbonization matters.
e investment requirements contemplated by the DDPP
reports are large compared to current levels and represent
a substantial proportion of aggregate annual investment
in the current U.S. economy as a whole. Annual average
gross private domestic investment in the United States
stood at $3.126 billion in the last quarter of 2016.7 More-
over, that aggregate investment does not represent a vast
pool of capital ready to ow in any direction where prots
are available. Lending and equity investment take place
within established product boundaries in specialized insti-
tutions and institutional depart ments. While credit analy-
sis8 across these investing silos shares some fundamentals,
there are dierences in cultu re and approach that provide
diering opportunities for expa nsion of decarbonization
investments, both by traditional investors such as util ities
and by new grid-edge investors. We need to expand the
pool of investors.
e electricity sector is among the most regulated in
the nation. While building energ y-eciency measures are
less regulated (see Chapters 10 (New Buildings) and 11
(Existing Buildings)), the ability of buildings a nd their
included storage and generation to respond to the require-
ments of the electric grid brings them increasingly i nto the
regulated sphere. Four kinds of legal requirements directly
aect the ability to invest in new energy technology:
Substantive regulation. State laws limit who can own
generating resources and distribution wires.
Laws aecting energy markets. State and federal laws
aect sales of energy a nd of “ancillary services”
needed to serve customers and operate the grid.
Laws aecting specic forms of energy nance. States
regulate the abilities of utilities and governmental
entities to borrow, and federal tax law governs aspects
of the issuance of most governmental bonds.
7. U.S. Bureau of Economic Analysis, Gross Private Domestic Investment
(GPDI), Retrieved From FRED, Federal Reserve Bank of St. Louis, https:// (last visited May 25, 2018).
8. roughout this chapter “credit” and “credit analysis” are broadly used to refer
to the ability of a project (or pool of projects) to repay principal invested with
an expected return, whether the investment is in the form of debt or equity
or a hybrid, and includes returns from all sources including tax benets and
third-party payments. It does not refer to “investment analysis” in the sense
of suitability for a particular investor.
State procurement laws. State laws govern procure-
ment of energy equipment and services by state and
local governments and agencies.
In addition, state and local governments are forming “utili-
ties” or “banks” to facilitate sust ainable energy nance.
is chapter, in Part II, makes the case for action at
the grid edge. It then reviews the barriers and benets to
decarbonization investment at the grid edge arising from
these four types of lega l frameworks and sugge sts paths
forward. ose paths fa ll broadly into four categories:
Enable ownership, operation, and sales of services
by customers, communities, and local groups of cus-
tomers (aggregations) and by private industry that
supports them (Part III)
Encourage utilities and regional transmission orga-
nizations to serve as tra nsactional platforms that
allow grid-edge resources to receive full value for the
services they provide (Part I V)
Collect and disseminate in formation about the grid
and the performance of decarbonization projects
that supports grid-edge project planning a nd credit
analysis ( Part V)
Adapt and reuse existing nance markets to support
deep decarbonization investment, and create new
institutions that support identication, structuring,
and nance of creditworthy grid-edge decarboniza-
tion projects (Part VI)
Part VII concludes with a further discussion of energy jus-
tice and a proposal for an energy bill of rights for custom-
ers and communities investing in deca rbonization at the
grid edge.
II. The Case for Action at the Edge
A quarter-century ago, a family moving into a house
would sign up with monopoly suppliers of electricity,
water (if they did not have a well), and phone service. ey
might also sign up with a monopoly natural ga s supplier
or choose between oil or propane delivery services. ey
bought gasoline from a local l ling station supplied by one
of a handful of major oil companies. (Previous revolutions
in home heating and refrigeration had largely ended the
coal and ice deliveries of 50 years ea rlier.) Switching the
homeowner’s name on accounts of the utility companies
Page 150 Legal Pathways to Deep Decarbonization in the United States
and arranging for tr ansitional meter readings are well-oiled
rituals of real estate closings and mortgage nancing s.
A. The Energy Revolution at the Grid Edge
New technologies are giving energy cu stomers, large and
small, individually a nd collectively, the power to manage
their energy consumption and generate their own electric-
ity. Other chapters in this book deal with these technolo-
gies individually. ese technologies include:
End-use energ y reduction:
Buildin g envelope improvements
Heating, ventilating, and air-conditioning systems
Industrial equipment (such as variable speed motors)
Advanced building and process controls
New tech nologies to generate and s tore energy local ly:
Renewable energy
ermal storage
In addition, there is renewed interest in community
energy solut ions:
District heating and cooling
Community solar
Multi-customer microgrids
End-use customers can now combine these technologies
to manage their aggregate energy needs. e revolution
arises not from a single technology, but from integration of
multiple tech nologies that support active manage ment and
production of energy at the grid edge. e balance of this
chapter treats the instal lation of any one or a combination
of several of these technologies that will be nanced col-
lectively as an “energy project.”
e revolution began as large customers— college cam-
puses and industrial a nd research facilities— began to
deploy cogeneration to meet their thermal energy require-
ments while also generating power. ese instal lations
can achieve greater tha n 80% eciency in fuel use9 as
9. U.S. Environmental Protection Agency Combined Heat and Power Partner-
ship, CHP B,ts (last visited June
26, 2018); U.S. E P A C H
 P P, E M  CHP S: T
S  E E E,
compared to around 35% current grid average10 and less
than 60% for modern combined-cycle gas turbine power
plants.11 By locating at the customer’s site, they also avoid
losses on the transmission and dist ribution system that
may rise to an additional 10%. Over time, these instal-
lations have been coupled with building and process e-
ciency improvement that reduce electric and thermal load,
storage devices (both thermal and electric) that allow load
to be shifted to dierent times of day, and active building
energy management (which allows buildings themselves
to act as thermal storage). Modern microgrids12 combine
all of these types of strategies to dramatica lly change the
shape of their energy loads. Where appropriate regulatory
frameworks exist, t hey can arbitrage against real-time
energy prices and are able to sell services to the grid.
As an example, the Princeton University campus is
served by a microgrid that includes 15 megawatts (MW)
of gas cogeneration, 4.5 MW of solar generation, 40
megawatt hours (MWh) equiva lent of thermal storage,
advanced building controls, and an advanc ed interfac e
with the grid. Figure 1 shows wholesale market energ y
consumption and price for the Public Service Electric and
Gas (PSEG, the electric utility ser ving Princeton) service
territory and the Princeton campus energy purcha ses from
the grid, all plotted aga inst the time of day. e data is for
July 19, 2017, one of the days when the entire regional grid
operated by PJM Interconnection, LLC (PJM) was near
system peak capacity.
e chart shows that Princeton purchased a substantial
amount of electric energy in the early morning to cha rge
its thermal storage— chilled water in an insulated tank.
It then purchased almost no electric power at the time
of peak usage and pea k pricing on the PJM system. is
result at peak was achie ved by 15 MW of cogeneration and
3.75 MW of solar. Campus potential peak load of around
27 MW was reduced to around 19 MW through use of
steam chillers supplied by heat from the cogeneration plant
and discharge of chilled water from the thermal storage
tank. Princeton avoided purchasing high-priced power
(the prices reached $255.00 per MWh), and reduced its
obligation to pay transmission charges, wh ich are allocated
according to customer usage at system peak. Princeton
paid a weighted average of $34.06 per MWh for power
that day compared to a system average price of $50.17 per
MWh. On more ordinary days, Princeton may dedicate a
portion of its generating capacity to providing frequency
10. U.S. Energy Information Administration, Table 8.2. Average Tested Heat
Rates by Prime Mover and Energy Source, 2007-2016,
electricity/annual/html/epa_08_02.html (last visited May 25, 2018).
11. Gas Turbines Breaking the 60% Eciency Barrier, D E,
Jan. 5, 2010,
12. A microgrid is a collection of controllable loads with substantial included
generation that can separate electrically from the grid but can provide services
to the grid when generating in parallel.

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