POWER April 2016 - 28

The Road to Distributed
Generation: How to Avoid
the Bumps
Nicholas A. Giannasca
D
istributed generation (DG) is receiving much attention
as a resource that can facilitate the development of a
smarter, more resilient, and more sustainable electric
grid. Several jurisdictions, including New York, are considering
a revision of the traditional utility rate paradigm, with utilities
playing the role of coordinator between distributed resources,
including DG, and consumers. For DG to play such a pivotal role
in the smarter distribution system, however, stakeholders will
need to address and overcome several regulatory, contractual,
and financing challenges.
Getting the Connection
A primary impediment to DG development is regulatory uncertainty.
In many jurisdictions, a potential DG host (such as an owner
or operator of a commercial or industrial facility contemplating a
DG installation), faces the prospect of regulation as a utility, and
the associated or perceived administrative burden of subjecting
its business operations to agency scrutiny and review. Coupled
with the complexity of installing a DG facility (electric interconnection,
environmental assessment, etc.), the prospect of agency
regulation could be daunting. It is imperative for stakeholders
to lobby for clear and definite rules that exempt the owners or
operators of DG facilities from regulation as utilities, with the
exception of matters pertaining to safety, environmental protection,
and reliability.
Electric interconnection rules are another potential impediment
to DG development. Some utilities maintain cumbersome
and inefficient rules for review of proposed DG interconnections,
and for the actual, physical interconnection to the grid.
These rules in some instances allocate unduly high costs for
system modifications to the DG facility owner. Additionally, interconnection
study periods are often protracted. Lenders, developers,
and hosts may, and often do, abandon plans for DG
deployment if the timeframe for testing and study threatens a
project's economic viability.
Making It Pay
With regard to economic viability, the owner of the DG facility
and the host (assuming the host opts not to own the DG
facility) need to consider the revenue impact related to the
DG facility producing excess generation. In some jurisdictions,
the host as the titled owner of the electricity produced by the
DG facility may be able to inject the excess electricity into the
grid in return for a payment or credit (known as net metering).
The host in such an arrangement typically receives a bill credit
for each kilowatt-hour injected. The credit may be equal to the
recipient utility's retail rate, or it may be a " wholesale " rate
28
determined by reference to a real-time price established in the
market administered by a regional transmission organization or
independent system operator.
Net metering arrangements are facing enhanced scrutiny in
many states, with some calling for the downward revision of the
credit mechanism while others advocate for the abolition of such
arrangements altogether. The potential for a net-metering outlet
to become unavailable (through regulatory or legislative action),
places the host in a position of finding an avenue for disposing
of the excess generation for economic value. The absence of
that additional revenue, which may be used to offset mandatory
payments to the developer (take-or-pay charges), could impose
serious economic stress on the host.
Financing the Project
Financing considerations factor prominently in DG development.
Certain hosts elect to self-finance the installation of a DG facility,
and such a capital outlay and combination of debt has
important impacts for the host's balance sheet. An alternative to
self-financing is the third-party financing model using a power
purchase agreement (PPA) or energy service agreement (ESA).
Under this model, the host agrees to purchase all of the thermal
and/or electric output of the DG facility from the third-party
owner over a long term. Additionally, such a structure could be
accounted for as an operating lease (and not a capital lease) on
the host's books.
The financing community continues to develop this third-party
PPA/ESA product, but certain challenges exist in PPA/ESA forms
currently being offered. For example, certain models are overly
lengthy and complex, and reflect performance, breach, and liability
provisions skewed in favor of the developer. Additionally,
these contracts confer significant and material rights on lenders,
thereby forcing the host to balance its economic and performance
interest against those of the developer and the lender.
Regulatory agencies and legislators are considering significant
rate and market design policies and structures that will facilitate
the development of DG, and DG is slated to play a pivotal role
in the evolution of the smart and sustainable electric grid. But
for these efforts to succeed in stimulating the development of
DG, appropriately balanced policies, procedures, and contracts
will need to be established in order to surmount certain impediments,
including regulatory uncertainty, protracted electric interconnection
procedures, the unavailability of net metering, and
the dearth of financeable PPA/ESA models. ■
-Nicholas A. Giannasca (nicholasgiannasca@dwt.com) is a
partner in Davis Wright Tremaine LLP's energy practice in the
firm's New York office.
www.powermag.com
POWER | April 2016
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POWER April 2016

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