Interconnection Cost-Causer-Pays Model: Is It Fair or Antiquated in the Era of Grid Modernization

The transition to green energy is often seen through two different lenses: a burden or an opportunity. Grid modernization refers to a comprehensive transformation of the traditional power grid to upgrade aging infrastructure to enhance reliability, resilience, efficiency, and sustainability of electricity generation, transmission, distribution, and consumption. A key element of grid modernization is designing the grid to allow greater deployment of distributed energy resources (DERs). The push for sustainability throughout the U.S. has resulted in many states setting renewable portfolio standards or goals. Green energy will require substantial investments from private individuals, entities, states, and the federal government. These energy targets or standards are aspirational when analyzing the investment required for the grid compared to the investments made.

One of the biggest challenges to deploying renewable energy is the cost associated with interconnection. Integrating DERs onto the grid has fundamentally changed how the grid operates. Before DERs, power flowed in one direction; now, with the incorporation of DERs, power flows bidirectionally with generation sources in many areas of the grid. System upgrades and redesigns are often deemed necessary for the interconnection.

In an S&P Global article, Bloomberg New Energy Finance assessed that annual power grid investment will need to grow to $100 billion by 2043 in the U.S., and 63% of the investments will be at the distribution level. Traditionally, many utility companies only upgrade their system for capacity needs, reliability enhancements, or aging infrastructure. DER interconnection adds some complexity, as upgrades are needed to facilitate grid interconnection. This leads to lengthy and costly interconnection processes. Many utility companies follow the cost-causer-pays model, wherein the generator that triggers the distribution upgrade must pay for all interconnection costs and distribution system upgrade costs. The cost-causer model also protects ratepayers by ensuring that DER costs are not socialized and recoverable among them since they are not the direct beneficiaries; albeit, there are instances of secondary benefits, such as increasing reliability due to DER distribution system upgrades or deferring capacity investments.

Due to costly distribution upgrades, projects are constantly being abandoned. Renewable developers and residential owners in the current environment not only face permitting challenges but also expensive distribution system upgrade costs. Accordingly, many states are reviewing the applicability of the cost-causer model. The cost-causer-pays model creates a system of inequity and free ridership where future projects benefit from the new upgrades without incurring additional costs. Thus, the triggering project bears all of the financial burdens. Some states have created solutions to address the inequity caused by the application of this model for large and small DER projects.

Maryland

Over the years, the Maryland Public Service Commission (PSC) has discussed the Maryland Cost Allocation Model (MCAM). The PSC’s working group has developed primary and secondary MCAM to create a more equitable allocation model. MCAM will eliminate the causer-pay model and implement a model in which interconnection customers pay their proportional share for hosting capacity upgrades for larger DER developers. Utility companies within Maryland would be allowed to recover the costs for upgrades through rates. A proposed fee for distribution upgrades per kilowatt will be charged for smaller DER installations. The Maryland PSC is in the process of considering this change policy in its recent rule-making process.

Maine

In November 2023, Maine became the newest state to revise its interconnection policies to allow for cost allocation even with opposition from interest groups, including the Office of the Public Advocate (OPA). Maine’s cost allocation rule allows for projects under 25 kW interconnection costs relating to installing new single-phase transformer costs to be socialized and recovered from all ratepayers. The commissioners of the Maine Public Utility Commission believed that the transformer installation will benefit more than DER customers and should be treated the same as transformers that benefit load growth. Additionally, a flat fee of $150 is to be paid by projects under 25 kW for other distribution upgrades not exceeding $5,000. The customer will pay the balance of distribution upgrades that exceed $5,000. For projects from 25 kW to 250 kW, the interconnection will pay a per-kW fee to cover all non-single-phase service transfer distribution upgrades not exceeding $10,000. The fees will be pooled together for distribution upgrades. Even with the opposition of OPA, arguing that it was unfair to make ratepayers bear the cost of distributed generation upgrades, the commissioners took a holistic approach to ensure that ratepayers were not unduly burdened but also focused on meeting the state’s renewable targets.

Minnesota

On Dec. 19, 2022, the Minnesota Public Utility Commission issued an order for small DER projects. Under this order, projects up to 40 kW with upgrade costs of $15,000 or under will be covered by the utility company with a fee of $200. Upgrades to small DER interconnection are constantly seen as a hindrance; as such, upgrade costs are mostly viewed as an unbudgeted expense. Policies of this nature eliminate the cost-causer-pays model (except for low-income customers) with a fee of $200. However, implementing this policy did not include cost recovery from ratepayers; instead, the fee will be pooled for cost-sharing of upgrades. This policy shows the innovative methods available for more equitable policies that do not include socialization among ratepayers. There has been a similar proposal in the District of Columbia, where a flat fee of $280 was proposed for distribution system upgrades, with 20% being of the distribution system upgrade and interconnection facility costs recovered from all customers proposed by Potomac Electric Power Co. (Pepco). It is worth noting that the District’s Public Service Commission in 2021 approved a partial subsidy for distribution upgrades of up to $25,000 or 50% for community solar projects. The cost-sharing is capped at $500,000 annually and is administered by Pepco. The purpose of the rulemaking was to increase the growth of community solar within the District. Regulators have shown an openness to cost allocation because it is seen as a means to increase DER growth and remove cost barriers.

Massachusetts

Before November 2021, Massachusetts struggled to deploy DERs onto its grid due to historically high interconnection costs. There were 679 MW of solar projects being studied in clusters stalled for over a year in interconnection queues. Cost allocation policies were discussed over concerns that projects would become cost-prohibitive and withdrawn without any cost-sharing mechanism. The Department of Public Utilities (DPU) created a provision plan to recognize a unique and immediate concern since the traditional approach to DER upgrade costs would result in barriers to interconnection. The capital investment projects (CIPs) structure was devised, wherein costs related to substation transformer replacements, transmission upgrades, reconductor distribution feeders, and distribution protection measures can be carried out by utility companies, and ratepayers will be charged a non-bypassable dollar per kilowatt per hour charge to cover the cost of the CIP. The interconnecting customer will be charged a CIP fee assessed by their pro rata share of the CIP approved by the DPU. The provisional order in Massachusetts was historic within the U.S. because it was the first to create a cost-sharing policy in this manner and end the causer-pays model.

New York

In 2021, New York implemented its Cost Sharing 2.0 Plan, which aims to have cost-sharing for DER projects to increase hosting capacity. This policy also removed the cost-causer-pays methodology, wherein qualified projects would pay their pro rata share for specific distribution hosting capacity upgrades rather than the entire upgrade cost. The policy is based on utility-initiated upgrades and market-initiated upgrades. Utility-initiated upgrades are planned capital investments at the substation by the utility; if there is DER interest at the location, the asset and developers share in the cost for the upsize of the asset of upgrades of a minimum of $250,000. Meanwhile, market-initiated upgrades are system modifications that increase capacity caused by a triggering project and have a minimum cost-sharing trigger amount of $250,000, such as substation upgrades, substation transfer upgrades, and underground secondary network upgrades. Within this policy, developers would receive a refund if more than the pro rata share is paid when the project is fully covered.

Additionally, there is a cost recovery of 2% of uncovered costs of their utility/sub-transmission electric capital investment per fiscal year. This cap shows the balance that must be struck between the energy transition and the burden placed on ratepayers when analyzing cost allocation policies. After the 2% percent is exhausted, triggering projects would have to provide total funding before the construction of upgrades. Lastly, the commissioners ensured that free ridership ended by the New York State Standard Interconnection Requirements for substation upgrades and substation transformer installations/upgrades.

Cost Allocation Alternatives

High interconnection costs have led to the development of innovative workarounds for DER deployment, such as flexible interconnection and smart inverters. Flexible interconnection emerged to combat expensive distribution upgrades and long interconnection timelines. This principle identifies grid operating constraints using a power flow analysis in the interconnection study process. The power flow analysis examines the impact on the system to create and optimize interconnection parameters for flexible interconnection.

Flexible interconnection is not widely utilized in the U.S. because many electric distribution companies believe more development of DER management systems are needed to monitor these interconnection strategies. States such as California, New York, and Maryland are developing policies to drive the adoption of flexible interconnection. Unlike flexible interconnection, smart inverters have been well-received in many states. Objective smart inverter deployments can allow the grid to accommodate additional power by adjusting DER performance to mitigate violations that would have otherwise triggered upgrades.

The change in policies in various states to create a more equitable landscape for distribution upgrades for DERs shows that the current causer-pays model is impractical for greater deployment of DERs. The growth of DERs requires the review of policies to counter the challenges, such as the cost of distribution of upgrades. Cost-sharing or cost-allocation models will be fundamental to increasing the affordability of renewable projects. States that have implemented cost allocation for DER upgrades have abolished the causer-pays model to create a more equitable system while ensuring that ratepayers are not unfairly burdened. However, exploring alternatives, such as smart inverters and flexible interconnection, are important to reduce project costs where the causer-pay model prevails.

—Janique Williams is a licensed attorney, working as a Senior Regulatory Analyst with Pepco.