Check out the episode:
You can find the shownotes through this link.
Are you interested in how distributed energy systems can work in practice?
Our debate today works with the report titled National Standard Practice Manual: For benefit-cost analysis of distributed energy resources from 2020, by Tim Woolf, Courtney Lane, Melissa Whited, Chris Neme, Mike Alter, Steve Fine, Karl Rábago, Steven R. Schiller, Kate Strickland and Brenda Chew, published on the National Association of State Energy Officials website.
This is a great preparation to our next interview with Karl R. Rábago in episode 460 talking about the opportunities within the distribute energy system model.
Since we are investigating the future of cities, I thought it would be interesting to see how local energy investments value against traditional utility alternatives. This report provides a comprehensive framework for conducting benefit-cost analyses of diverse distributed energy resources.
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Welcome to today’s What is The Future For Cities podcast and its Research episode; my name is Fanni, and today we will introduce a research by summarising it. The episode really is just a short summary of the original investigation, and, in case it is interesting enough, I would encourage everyone to check out the whole documentation. This conversation was produced and generated with Notebook LM as two hosts dissecting the whole research.
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Speaker 1: Imagine a massive winter storm sweeps across your state. Ice brings down the transmission lines, the central power plant trips offline, and your city is just suddenly plunged into darkness.
Speaker 2: Yeah, a total blackout scenario.
Speaker 1: But then something interesting happens. Your neighbour’s electric vehicle, which is just sitting in their garage, detects the outage, and its battery automatically kicks in, discharging power back onto the local grid. Multiply that by a few thousand homes, and suddenly the local hospital stays online, the neighbourhood doesn’t freeze. What is the actual financial value of that action? And more importantly, how does the utility compensate those homeowners?
Speaker 2: And that scenario is exactly why the traditional grid is becoming so just incredibly complicated to manage. We aren’t just sending power in one direction anymore. The physics have fundamentally changed, and now our accounting systems are scrambling to catch up. Today, we are looking at the National Standard Practice Manual.
Speaker 1: The NSPM?
Speaker 2: The NSPM. It’s the core framework that utilities and regulators use for benefit-cost analysis when evaluating what we call distributed energy resources or DERs. We are talking about rooftop solar panels, home battery storage, EVs, and even smart thermostats.
Speaker 1: And the central question we’re tackling today is how we actually calculate the true value of those resources. When a utility decides whether a grid investment is worth the money, should the cost-effectiveness of these DERs be determined strictly by their direct economic impacts on the utility system?
Speaker 2: The traditional ledger of money in and money out.
Speaker 1: Exactly. Or must that calculation encompass broader applicable policy goals, things like greenhouse gas reductions, energy security, and societal health? I will be arguing that we absolutely have to adopt the NSPM’s regulatory perspective. That means integrating a jurisdiction’s specific policy goals into the primary cost-effectiveness test. It is, frankly, the only mathematically rigorous way to capture the comprehensive value of a modernized grid.
Speaker 2: And I will be arguing that, uh, while incorporating those societal goals into grid planning sounds great in theory, building our primary utility tests around localized non-utility policy goals risks diluting economic rigor. If you’re listening to this and wondering, “Why should my monthly electric bill go up to pay for a utility program that subsidizes someone else’s rooftop solar panels?” That is exactly the danger we are talking about. It threatens to unfairly burden everyday ratepayers with broad societal costs just under the guise of grid investment.
Speaker 1: Let’s start with the physical reality of the grid today versus, say, fifty years ago. The traditional grid was like a one-way water pipe. Power flowed from a central generation plant through the transmission lines down to the distribution wires and out to your house. The accounting was simple. You measured the water leaving the reservoir and billed for it.
Speaker 2: Very straightforward.
Speaker 1: But today’s grid is more like a circulatory system. Energy flows in multiple directions. A homeowner can consume power in the morning, generate power from solar at noon, and discharge stored battery power back to the grid in the evening If our accounting only measures the water leaving the reservoir, it completely fails to measure the health and capability of the entire system.
Speaker 2: Look, the problem isn’t recognizing that the energy flows in two directions. We all agree on the physics. The problem is how we assign a dollar value to the side effects of that flow. The most critical aspect of utility infrastructure is maintaining safe, reliable, and reasonably priced electricity, period. Sure, but… And the manual outlines a process for creating what it calls a jurisdiction-specific test, or JST. Step one asks jurisdictions to articulate their applicable policy goals, and step three asks them to decide which non-utility system impacts to include. That’s where things go off the rails. Allowing jurisdictions to selectively inject broad societal metrics like public health or job creation into utility cost-effectiveness tests, it just politicizes the math.
Speaker 1: But those policy goals aren’t just political suggestions. They are often legal mandates. Utilities do not operate in a vacuum. If a state legislature passes a law mandating a fifty percent reduction in carbon emissions over the next decade, that isn’t some external externality. It is a core directive.
Speaker 2: I understand that, but-
Speaker 1: Wait, just to finish the thought. If the utility’s benefit-cost analysis ignores greenhouse gas emissions simply because they fall outside traditional utility accounting, the utility is going to misguide its capital investment. They will build the wrong grid because their math ignored the law.
Speaker 2: But philosophy doesn’t keep the lights on. When a utility actually sits down to calculate whether to build a new substation or pay a thousand homeowners to install smart thermostats, how does that math actually work in a jurisdiction-specific test? Because the moment you treat a utility test as a vehicle for broad societal engineering, you risk masking poor, unreliable grid investments behind hard-to-quantify societal benefits.
Speaker 1: Okay, let’s break down exactly how that math works using the manual’s case study of a non-wire solution, or NWS. Normally, if a neighbourhood is growing and people are using more air conditioning in the summer, the local grid hits capacity. The traditional solution is for the utility to spend, say, ten million dollars digging up streets, laying new copper wire, and building a larger substation.
Speaker 2: A tangible, highly reliable physical asset.
Speaker 1: True, but incredibly expensive. An NWS flips this equation. What if, instead of spending ten million dollars on copper wire, the utility spends two million dollars subsidizing home battery systems and smart thermostats in that exact neighbourhood? The utility programs the batteries to discharge exactly during those peak summer hours, taking the strain off the local wires. We just solved the capacity problem.
Speaker 2: Which is great, yeah.
Speaker 1: And saved eight million dollars. That is the physical deferral of infrastructure. But here is the critical part: it also generates massive greenhouse gas benefits.
Speaker 2: And why should the utility care about the greenhouse gas portion if the eight million dollars in savings already justifies the program?
Speaker 1: Because of how electricity is generated during peak demand. When everyone turns on their AC at 5:00 PM, utilities fire up what are called peaker plants. These plants sit idle most of the year and fire up rapidly using extremely dirty fossil fuels just to catch sudden spikes in demand.
Speaker 2: Their marginal emission rates are huge.
Speaker 1: Exactly. So the non-wire solution reduces demand exactly when emissions will be highest. If a state has a clean energy mandate and your test excludes the financial value of turning off that dirty peaker plant, you systematically undervalue the DER portfolio. You might look at a slightly more expensive NWS, say nine million dollars, and reject it in favor of the ten million dollar wire upgrade, completely missing the systemic value the batteries provide to the state’s emission goals.
Speaker 2: Okay, I hear that. The deferral of a ten million dollar substation is a real measurable utility benefit. I don’t dispute that. But look closely at the manual’s own NWS example. The greatest contributor to the overall cost-effectiveness of that portfolio is still the direct distribution benefits. It’s the physical wire deferral. The utility system impacts are tangible, but the regulatory perspective encourages planners to go further and add host customer non-energy impacts into that same test.
Speaker 1: Which are very real impacts for the people living in those homes.
Speaker 2: Are they? We’re talking about assigning a dollar value to a customer’s subjective increase in comfort or the perceived societal value of poverty alleviation. You are mixing hard engineering dollars, the cost of copper wire, with abstract societal valuations.
Speaker 1: I don’t think it’s-
Speaker 2: The moment you expand the ledger to include those things, you introduce massive subjective risk.
Speaker 1: I think you’re looking at this way too narrowly. Think about the traditional utility test, like a strict corporate balance sheet, and the regulatory perspective, like a macroeconomic GDP report. The utility system is part of the macroeconomic reality of the jurisdiction it serves. You can’t just draw a box around the utility’s bank account and pretend the surrounding economy doesn’t exist.
Speaker 2: I get the GDP analogy, but you’re skipping over the danger of asymmetry. Let’s look at the manual’s core principles. Principle three dictates that we must ensure symmetry, and principle six requires us to avoid double counting. If a jurisdiction claims the societal benefits of host customer tax incentives or low-income poverty alleviation in their benefit cost analysis, they’re equally obligated to perfectly account for the corresponding costs.
Speaker 1: And the manual explicitly requires them to do-
Speaker 2: But how do you actually quantify host transaction costs? Are you going to assign a dollar value to the time, the effort, and the anxiety a homeowner experiences trying to hire a contractor to connect a complex battery system to the grid? What about technological risk?
Speaker 1: The risk is managed by-
Speaker 2: If a centralized substation fails, the utility rolls out a truck and fixes it. If a decentralized network of residential smart software fails during a winter storm, what is the exact dollar value of that unreliability? These risks are notoriously difficult to quantify. When you allow planners to estimate vague benefits like societal comfort while struggling to accurately price the asymmetric risks of decentralized technology, you invite confirmation bias. The benefit-cost analysis just becomes a tool to justify whatever shiny new program the regulator already wanted to approve.
Speaker 1: I have to push back there. When traditional accountants refuse to put a dollar value on greenhouse gas emissions or grid resilience because it’s, quote unquote, “too hard to calculate,” they aren’t keeping the math pure They are explicitly entering a value of exactly zero dollars.
Speaker 2: It’s conservative accounting.
Speaker 1: But conservative accounting is inaccurate accounting in this case. We know for a fact the cost of a climate-driven blackout is not zero. We know the cost of respiratory illness from peaker plant emissions is not zero. The manual explicitly states that approximating hard to quantify impacts using the best available information is vastly preferable to arbitrarily assuming a value of zero. Refusing to estimate a value out of a desire for clean math is how we end up ignoring catastrophic risks.
Speaker 2: Approximating a value is fine for an academic exercise, but we are authorizing real utility expenditures that are recovered from working class ratepayers. Let’s talk about the actual people paying the bills. Principle eight of the manual explicitly states we must conduct BCAs separately from rate impact analyses.
Speaker 1: Exactly, because they are two different measurements.
Speaker 2: They are, but they are deeply connected in the real world. A benefit cost analysis tells you if a program provides more overall value than it costs. When we look at the levelized cost, which is the total cost to build and operate these systems over their lifespan, a system-wide DER portfolio might look fantastic. You might show an incredible dollar per ton of greenhouse gas reduced.
Speaker 1: Which means it’s highly cost-effective for society.
Speaker 2: For society as a whole, maybe, but that provides absolutely zero comfort to the ratepayer whose bill just went up. Let me explain how this happens. A utility might launch a program that pays wealthy early adopters a massive subsidy to install solar panels and home batteries. That program might reduce the utility’s overall system cost by one million dollars, so it passes the benefit-cost analysis. It looks great. But because those wealthy homeowners are now generating their own power, they stop buying electricity from the utility. The utility’s revenues drop by two million dollars. To cover the fixed costs of maintaining the poles and wires for everyone else, the utility has to raise electricity rates. You can have a highly cost-effective DER program that simultaneously causes severe ratepayer inequity, shifting the financial burden onto people who can’t afford a home battery.
Speaker 1: You’re touching on a fundamental challenge of rate design, definitely. But you are assuming that embracing the regulatory perspective inherently increases costs for everyday ratepayers. The reality of modern grid planning proves the opposite. The advanced planning frameworks detailed in the manual, like integrated distribution planning, or IDP, and integrated grid planning, use these comprehensive BCAs to actually optimize alternative resources.
Speaker 2: But optimization on that scale is entirely theoretical right now.
Speaker 1: It really isn’t theoretical. It’s happening. By valuing distributed energy resources accurately, utilities can prioritize the deployment of diverse portfolios that reduce system risk and achieve policy goals at the lowest possible cost. A broader test doesn’t ignore ratepayer costs. It prevents utilities from overbuilding. It ensures you aren’t spending ratepayer money on massive centralized infrastructure when a decentralized network of resources could solve the problem cheaper while also hitting the state’s emissions targets.
Speaker 2: You are assuming perfect optimization in a highly dynamic, wildly unpredictable environment. The manual outlines how traditional distribution planning works. It only accounts for the local distribution system. When you jump to integrated grid planning, you are trying to mathematically optimize the distribution system, customer-owned DERs, high-voltage transmission lines, and utility-scale generation all at the exact same time. The complexity absolutely explodes. The grid is complex. Yes, but if the inputs to your benefit-cost analysis are soft societal approximations, like the dollar value of public health, the outputs of your integrated grid plan will be fundamentally unstable. You are staking the physical reliability of the grid on the hope that a homeowner’s smart thermostat will reliably perform a demand response event when a winter storm hits.
Speaker 1: You’re defending traditional distribution planning, which the manual notes is limited to the distribution system alone, but we don’t live in that world anymore. In an era where a homeowner’s electric vehicle battery can discharge power to provide ancillary services to the wholesale energy market, isn’t traditional planning simply an obsolete lens? It’s like trying to navigate the internet using a map of the telegraph system. The physics of the grid have changed. Our mathematics must evolve to match the physics.
Speaker 2: The physics have changed, but the financial burden has not. The ratepayer is still the one funding this massive evolution. When you sort DERs by their net benefits, and those net benefits are heavily inflated by subjective societal impacts, you inevitably push utilities to fund highly complex decentralized systems over simpler, more reliable centralized ones. We must protect the integrity of the benefit-cost analysis. Strict mathematical boundaries are required to prevent a well-intentioned environmental policy from causing financial instability for the people who actually fund the grid.
Speaker 1: Look, if we look closely at what the National Standard Practice Manual provides, it is a transparent, rigorous five-step process precisely designed to prevent that instability. By moving past artificially narrow traditional tests and adopting a jurisdiction-specific test, we finally bring grid valuation into the twenty-first century. It stops us from building an obsolete grid based on incomplete math.
Speaker 2: And from my perspective, while distributed energy resources offer immense technological potential, treating utility economic tests as a vehicle for broad societal engineering is a dangerous game. Protecting the integrity of the benefit-cost analysis requires strict boundaries. We must prioritize objective utility system impacts to maintain safe, reliable, and affordable power.
Speaker 1: I think where we absolutely converge is on the reality that the grid is becoming vastly more complex, and that whatever test a jurisdiction uses, the math has to be entirely visible to the public.
Speaker 2: Completely agreed. Principle seven of the manual requires that all relevant assumptions and methodologies be clearly documented and available for stakeholder review. If a jurisdiction is going to include a subjective value for greenhouse gas reductions or poverty alleviation, they must show their work. Transparency is the only way to build trust in these highly complex models. If the public is paying for it, the public needs to see the ledger.
Speaker 1: It comes back to that one-way water pipe versus a circulatory system. We are rewriting the accounting rules for the most complex machine ever built by humans. The next time the power stays on during a winter storm because a network of batteries kicked in, or the next time you look at your utility bill, ask yourself, “What exactly is missing from the bottom line?”
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