Technology and Innovation

Distributed Generation

Distributed generation (DG) – small-scale power generation near the point of consumption, such as a home with a rooftop solar array – has the potential to revolutionize the electric utility industry. We are actively preparing for the investments in the grid that lie ahead to support development and deployment of these technologies onto the grid.

Net Energy Metering

AEP recognizes the natural maturity of the distributed generation (DG) market but also has an obligation to advocate for fair and equitable rate recovery to support the ongoing reliability of the electric grid.

Public policies and rate structures put in place to encourage early development of DG have led to unintended consequences that must be addressed. The Energy Policy Act of 2005 required state utility commissions to consider enacting special rates to encourage growth of renewable DG. As a result, states adopted a series of mechanisms, including net energy metering (NEM) tariffs, to accommodate that directive.

Net energy metering arrangements typically use a single meter to “net” the amount of energy produced by a DG consumer against the amount of energy used by that customer. NEM tariffs typically credit DG consumers at the full retail rate. This rate not only includes the costs associated with the energy itself, but also the fixed costs associated with serving customers, such as the distribution and transmission infrastructure and generation stand-by capacity. Thus, when DG customers are credited at the full retail rate under NEM tariffs, they avoid paying their fair share of these fixed costs for services that they use from the grid.

As a result, those costs are shifted to all other customers, which is obviously not fair or equitable. This cost shifting can disproportionately affect vulnerable customers, such as low-income households or those with fixed incomes. In addition, as more customers shift to existing NEM tariffs, utilities are placed at financial risk of not being able to recover their fixed costs in a timely manner, which is necessary to maintain grid reliability.

When the number of DG installations was relatively low, the impact of these subsidies was limited. However, with significant declines in the cost of solar power, as well as a variety of substantial government subsidies, the growth of DG is beginning to have a material effect on electric utilities and non-NEM customers throughout our industry.

Although the overall number of NEM customers on the AEP system is relatively modest today, the pace of growth is quickening. We are discussing the long-term impacts of NEM policies and regulations to our company and our non-NEM customers with our legislators and regulators. AEP is actively engaged with our industry trade group, the Edison Electric Institute, and our stakeholders to reach a fair and equitable solution that leads to a more sustainable arrangement for all customers.

A central issue in the debate over DG and NEM policies is the value of the grid. Both non-DG customers and DG NEM consumers use the grid. DG NEM consumers need the grid to provide energy at times when their DG system is not generating electricity, such as when customers with rooftop solar panels use energy at night. Even if these DG consumers are generating more power than they need, they rely upon the grid to absorb and distribute that energy, even if the utility doesn’t need it. Therefore, a fair and equitable arrangement needs to provide credit to DG NEM customers for the real avoided cost of the energy that they offset while they should also pay their fair share of the costs for the grid services they use.

While there are many ways to address this issue, we must have a mechanism to support our investments in the grid when accommodating the multitude of different resources being connected to it.

Building the Utility of the Future

At AEP, we are building the electric utility of the future. Although we can't predict what will happen, we know that our industry is changing at a fast pace, we must be adaptable and we must be willing to embrace and lead change.

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