Financing at the Grid Edge
| Date | 01 September 2018 |
| Author |
9-2018 NEWS & ANALYSIS 48 ELR 10785
ARTICLES
Financing at the
Grid Edge
by C. Baird Brown
C. Baird Brown is Principal at eco(n)law LLC.
Summary
is Article, excerpted from Michael B. Gerrard
& John C. Dernbach, eds., Legal Pathways to Deep
Decarbonization in the United States (forthcomi ng in
2018 from ELI Press), discusses legal impediments and
solutions for customer, community, and third-party
nancing of behind-the-meter and community-scale
clean energy generation, storage, and energy eciency.
Current levels of investment by utilities and indepen-
dent 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. Legal reforms are needed to permit ownership
of local energy resources and sales of energy and other
services by customers, communities, and their local
suppliers; to encourage utilities and regional transmis-
sion organizations to foster transparent markets for
services from grid-edge resources; 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.
I. Introduction
e Deep Decarbonization Pathways Project (DDPP)
reports for the United States call for an annua l decarbon-
ization investment requirement ranging from “under $100
billion today to over $1 trillion in a span of about 20 years.”1
is includes more than $200 billion annua lly for each of
commercia l and resident ial build ing ecienc y,2 and more
than $600 billion annually for low-carbon electric power-
generating resources.3 e DDPP reports do not attempt
to address nancing as a qua ntitative 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 Article explores those policy imper a-
tives as they ae ct decarbonization investment at local levels.
Local actors— customers, campus managers, and com-
munities—are increasingly investing in and attracting
investment to clean energy, energy eciency, 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 environmen-
tal goals. e par ticipants in this sector are investing in
highly ecient integration of thermal and electric energy
generation and management at the “grid edge.”
In this Art icle, 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 agg regation
of individual customer demand such as community 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 Participants
in this sector need support from the grid, but they are also
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
1. J H. W ., E E E,
I. ., US 2050 R, V 2: P I D
D U S 12 (2015).
2. Id. at 41.
3. Id. at 42.
4. Id. at 12.
5. Id.
6. Recommendations made in the Article 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.
Author's note: e author is extremely grateful for the research
assistance of Emily Maus.
Copyright © 2018 Environmental Law Institute®, Washington, DC. Reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.
48 ELR 10786 ENVIRONMENTAL LAW REPORTER 9-2018
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 prots
are available. Lending and equity investment take place
within established product boundaries in specialized insti-
tutions and institutional departments. While credit analy-
sis8 across these investing silos shares some fundamentals,
there are dierences in culture and approach that provide
diering opportunities for expa nsion of decarbonization
investments, both by traditional investors such as utilities
and by new grid-edge investors. We need to expand the
pool of inves tors.
e electricity sector is among the most regulated i n the
nation. While build ing energy-eciency measures a re less
regulated, the ability of buildings and their included stor-
age and generation to respond to the requirements of the
electric grid brings them increasing ly into the regulated
sphere. Four kinds of legal requirements directly aect the
ability to invest in new energy technology :
• Substantive regulation. State laws limit who can own
generating resources and distribution wires.
• Laws aecting energy markets. State and federal laws
aect sales of energy a nd of “ancillary services”
needed to serve customers and operate the grid.
• Laws aecting specic 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.
• 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.
Part II of this Article makes the case for action at the
grid edge. It then reviews the barr iers and benets to decar-
bonization investment at the grid edge arising from these
four types of legal f rameworks, and suggests paths for ward.
ose paths fall broadly into four categories:
• Enable ownership, operation, and sales of services by
customers, communities, and local groups of custom-
ers (aggregations) and by private industry that sup-
ports them (Part III);
• Encourage utilities and regiona l transmission organi-
zations to serve as transactional platforms that allow
grid-edge resources to receive full value for the ser-
vices they provide (Part IV );
7. U.S. Bureau of Economic Analysis, Gross Private Domestic Investment
(GPDI), Retrieved From FRED, Federal Reserve Bank of St. Louis, https://
fred.stlouisfed.org/series/GPDI (last visited May 25, 2018).
8. roughout this Article, “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 benets and third-party payments. It does not refer to “investment
analysis” in the sense of suitability for a particular investor.
• Collect and disseminate in formation about the grid
and the performance of decarb onization projects that
supports grid-edge project planning and credit an aly-
sis (Part V );
• Adapt and reuse existing nance markets to support
deep decarbonization investment, and create new
institutions that support identication, structuring,
and nance of creditworthy grid-edge decarboniza-
tion projects (Part VI).
Part VII concludes with a fu rther discussion of energy jus-
tice and a proposal for an energy bill of rig hts 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 fam ily 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 service s. ey bought gas-
oline from a local lling station supplied by one of a hand-
ful of major oil companies. (Previous revolutions in home
heating and refrigeration had larg ely ended the coal and ice
deliveries of 50 years earlier.) Switching the homeowner’s
name on accounts of the utility companies a nd arranging
for transitional meter readings are well-oiled rituals of real
estate closings and mortgage nancings.
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. ese technologies include:
• End-use energ y reduction:
ﾖBuildin g envelope improvements
ﾖHeating, ventilating, and air-conditioning systems
ﾖIndustrial equipment (such as variable speed
motors)
ﾖAdvanced building and process controls
• New technolo gies to generate a nd store energy lo cally:
ﾖCogeneration
ﾖRenewable energy
ﾖBatteries
ﾖermal storage
In addition, there is renewed interest in community
energy solut ions:
• District heating and cooling
• Community solar
Copyright © 2018 Environmental Law Institute®, Washington, DC. Reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.
9-2018 NEWS & ANALYSIS 48 ELR 10787
• Multi-customer microgrids
• CCA
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 ac tive management a nd
production of energy at the grid edge. e balance of this
Article treats the installation of
any one or a combination of sev-
eral of these technologies that
will be nanced collectively as
an “energy project.”
e revolution began as large
customers —colleg e campuse s
and indust rial and research
facilities—began to deploy
cogeneration to meet their ther-
mal energy requirements while
also generating power. ese
installations ca n achieve greater
than 80% eciency in fuel use9
as compared to around 35% cur-
rent grid average10 a nd less tha n
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 dis tribution
system that may rise to an addi-
tio nal 10%.
Over time, these insta llations
have been c oupled with build ing
and process eciency improve-
ment that reduce electric and
thermal load, storage devices
(both thermal and elect ric) that
allow load to be shifted to dif-
ferent times of day, and active
building energy ma nagement
(which allows buildings them-
selves to act as thermal storage). Modern microgrids12 com-
bine all of these type s of strategies to dramatica lly change
the shape of their energy loads. Where appropriate regula-
9. U.S. Environmental Protection Agency Combined Heat and Power
Partnership, CHP Benets, https://www.epa.gov/chp/chp-benets (last
visited June 26, 2018); U.S. E P A
C H P P, E M
CHP S: T S E E E,
https://www.arb.ca.gov/cc/ccei/presentations/chpeciencymetrics_epa.pdf.
10. U.S. Energy Information Administration, Table 8.2. Average Tested Heat
Rates by Prime Mover and Energy Source, 2007-2016, https://www.eia.gov/
electricity/annual/html/epa_08_02.html (last visited May 25, 2018).
11. Gas Turbines Breaking the 60% Eciency Barrier, D
E, Jan. 5, 2010, http://www.decentralized-energy.com/articles/print/
volume-11/issue-3/features/gas-turbines-breaking.html.
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.
tory frameworks exist, they can arbitrage against real-time
energy prices and are able to sell serv ices 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 mega-
watt hours (MWh) equivalent of thermal storage, advanced
building controls, and an advanced interface with the grid.
Figure 1 show s wholesale market energ y consumption and
price for the Public Service Electric and Gas (PSEG, the
electric utility serving Princeton) service territory and the
Princeton campus energy purchases from the grid, all plot-
ted against the ti me 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 pea k 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 electr ic power at the time of peak
usage and peak pricing on the PJM system. is result at
peak was achieved 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 stea m
chiller s supplied by heat from the cogeneration plant a nd
discharge of chilled water from the thermal storage tank .
Figure 1: Princeton Campus Power Demand, PSEG Grid Demand,
and Energy Price, July 19, 2017*
* Note that syst em load and campus import s use the same lef t margin scale, but system loa d
is in MW and campu s imports are in kilowatt s (kW). LMP denotes th e “Locational Marginal
Price,” which is the w holesale price specific to eac h utility service territ ory, in this case PSEG.
Source: Edw ard T. Borer, Energy Pl ant Manager, Princeton Universit y.
Copyright © 2018 Environmental Law Institute®, Washington, DC. Reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.
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