Performance-Based Incentives Boost DER Market Response

David Appleyard

ISOs are increasingly integrating distributed energy resources into the wholesale energy market through performance-based incentives.

As distributed energy resources contribute steadily more to the energy mix, transmission and distribution system operators are developing performance-based incentives to encourage greater market engagement.

This action is seen as necessary in order to maintain grid stability in terms of voltage and frequency as more variable output resources, such as wind and solar, energize the grid. As large and often fossil-fueled central power stations are replaced by the equivalent renewable capacity, overall system inertia is falling, making the challenge of maintaining frequency and voltage that much more difficult and therefore costly. The simple fact is that the energy networks were never designed to accommodate distributed energy architecture.

Distributed energy resources (DERs) encompass a host of elements, including renewables and other sources of generation, energy storage, and even behavioral mechanisms like demand-side management. The common theme among all these various elements is their distributed nature. This presents both challenges and opportunities for independent system operators responsible for transmission and distribution systems.

ISOs Moving with the Times

Faced with a rapidly changing world, system operators are looking to the market to deliver a response and are initiating performance-based incentives trials to enable DERs to participate in the market.

For example, in February of this year, the New York Independent System Operator (NYISO) released its Distributed Energy Resource Roadmap, designed to offer routes for consumers and emerging technologies to support enhanced grid utilization.

"The DER Roadmap is a step toward building the grid of the future as we transition from the century-old, centralized power system to a diverse, distributed, bi-directional grid," explained NYISO's president and CEO, Brad Jones, in an NYISO press release.

A series of pilot projects will test the various integrated components and, using the Roadmap, the NYISO's goal is to develop a series of market enhancements to more fully integrate DERs by opening the wholesale markets to participation. In particular, the NYISO is introducing measures to integrate these types of energy resources into the NYISO's wholesale energy markets, including the ancillary services market, to provide a route for DERs to engage with and take advantage of real-time prices based on location and time. The trials are also aimed at improving measurement and verification, given that accurate load forecasts are essential to balancing supply and demand in real time. Ultimately, the NYISO plans to develop an incentive framework that will allow DERs to operate on a comparable platform with other generation resources and reflect their flexibility and performance in terms of system requirements.

California Leads the Nation

New York follows other states in pushing for greater market participation from DERs. For instance, California, which has at least 8 GW of solar power capacity to date, is among the leading proponents of DER engagement.

In June of last year, the California ISO (CAISO) gained approval for tariff changes for DER aggregation—a first for the United States. Under the proposals, individual energy resources typically seen as too small to participate in the wholesale market are to be grouped together to meet the minimum 500 kW threshold.

"This is a step toward the re-design of the power grid," observed CAISO President and CEO Steve Berberich. "We are seeing a shift from a one-way centralized system to a two-way decentralized system. This will open new market opportunities for distributed energy resource products and services, which will be instrumental to grid reliability in an emerging era of renewable power," he added in a CAISO press release.

This initiative is focused on enhancing the ability of ISO-connected and distribution-connected resources to participate in the market, including rooftop solar, energy storage, plug-in electric vehicles, and demand response. Phase one of the program focused on non-generation DERs such as demand-side response and storage. Measures introduced under the scheme in the autumn of 2016 included the ability to submit the state of charge as a daily bid parameter in the day-ahead market, for example. The second phase of the program was approved in late July and aims to explore additional enhancements for market participation of storage and distributed energy resources.

Different Approaches, Single Goal

New York and California clearly have very different levels of DER penetration to date, and this has informed their approaches to engagement. Statewide, California has more than half a million residential solar systems in place, whereas New York has around one-tenth of this figure. Nonetheless, there are some significant similarities. In particular, both seek to support DERs in their access to wholesale energy markets and, by extension, the ancillary services markets that support grid stability. Indeed, DERs may ultimately reduce the necessity for capital expenditure on grid enhancements by being smarter and responding more quickly to ISO requirements. For example, the digital nature of battery storage systems enables a millisecond response time, compared to seconds for conventional thermal capacity.

Effective integration of DERs is expected to improve system efficiency and resiliency and bolster energy security and diversity. DERs also have the potential to support consumers with lower prices, cleaner energy, and even potential revenue streams. The distributed energy revolution is here. The market has to keep pace.


Blockchain has huge potential all through the energy industry value chain. But can it really democratize green energy investing to get more projects past the development stage? Several new startups certainly think so.

Power plant performance technology can integrate fleetwide data to help asset managers make successful decisions they may not have made based on their own experience.

Demand-side response technology can help utilities better manage load dispatch at times of peak demand, gain greater insight into customer behavior, and capture new revenue streams.