New York Energy Reforms Would Bar Utilities from Owning Local Power

By Rona Cohen

As part of Governor Andrew Cuomo’s effort to modernize the way electricity is produced and dispensed throughout New York state, regulators have released a new order that calls for greater integration of solar, wind and other distributed energy resources into the grid, while mostly barring utilities from owning those forms of power. The order directs utilities instead to serve as distributors of power from a reformed electricity system intended to achieve a mix of ambitious climate, technology and market-related policy goals.

The order from the New York Public Service Commission describes the basic policy framework for implementing the commission’s “Reforming the Energy Vision”, or REV, a report initially released in April 2014. One of the foundational elements of REV is to make clean energy and energy efficiency integral rather than ancillary to basic system planning and operations, and to provide consumers with the opportunity to play a more active role in their power use. It envisions a dramatic transformation of the current electricity system, which for much of the last century has been powered by large-scale fossil-fuel plants located far from demand, or load, centers.

“A 21st century economy needs a 21st century power grid, and these reforms will ensure New Yorkers get the best possible service from their utilities while improving the statewide economy,” said Governor Cuomo, in a statement on February 26.

(For an overview of REV, see New York State’s Bold New Plan to Restructure its Electricity System)

Under the current regulatory model, distributed generation — power sources that are located on site or close to demand centers — competes with the standard, centralized method of supplying and delivering power. Utilities have little or no incentive to enable new markets or encourage providers of products that create value for their customers, like energy efficiency, rooftop solar panels and demand response programs, which enable customers to trim their energy usage at peak demand times, and often receive financial incentives for doing so. “Rather, utilities’ earnings are tied primarily to their ability to increase their own capital investments, and secondarily to their ability to cut operating costs, even at the expense of customer value,” says the order.

The decision to largely restrict utilities from owning distributed energy resources is therefore central to regulators’ bid to create a truly competitive marketplace. Under REV, the utilities would provide the “wires” for the system and serve as the essential “intelligent platform” that enables a marketplace based on distributed energy resources, or DER, to thrive. Those resources include a broad range of options, such as end-use energy efficiency, demand response, onsite storage and localized generation, including solar and wind. The utilities would be known as distributed system platform providers (DSP), whose job would be to integrate such diverse resources into the grid, and connect third-party suppliers of demand management and other innovative services to the public in a competitive marketplace.

An underlying goal of REV is to use competitive markets and risk-based capital instead of ratepayer funding as the source of asset development, in an effort to lower costs and customers’ bills. “We are persuaded that unrestricted utility participation in DER markets presents a risk of undermining markets more than a potential for accelerating market growth,” the order says. “Markets will thrive best where there is both the perception and the reality of a level playing field, and that is best accomplished by restricting the ability of utilities to participate.”

Noting that the “customer side of the grid represents an enormous and largely untapped resource to improve the value of the system,” the REV proposal seeks to enable customers and third-party suppliers to become “active participants” in managing demand, helping to create greater efficiencies.  As a result of this “market animation,” distributed energy resources will become integral tools in the planning, management and operation of the electric system, the order says. It adds that utilities in their new role as DSPs would coordinate with the New York Independent System Operator, which administers and monitor’s the state’s wholesale power markets, to design and offer tariffs that would enable DSPs to monetize the system values of distributed energy resources, thus “placing DER on a competitive par with centralized options.”

The REV proposal is intended to respond to a mix of looming environmental, financial and technological challenges to the current electricity system.

Regulators have pointed to the need for greater fuel diversity, particularly in light of a dramatic increase in the use of natural gas for heating and electricity in the state. Between 2004 and 2012, the state’s reliance on natural gas increased by 96 percent. Natural gas emits fewer pollutants than oil or coal, and abundant supplies from the nearby Marcellus Shale have encouraged generators to switch to the cleaner-burning fuel source. While lower prices for natural gas have yielded cost benefits for consumers, pipeline bottlenecks and supply constraints in neighboring markets have left them vulnerable to price spikes, the order says.

Diversifying the state’s fuel mix will also help New York meet its greenhouse-gas-reduction goals, which call for a 30 percent cut in emissions by 2030 and 80 percent by 2050. Attaining those goals will require the incorporation of large quantities of weather-variable generation, like wind and solar, which would need to be paired with large-scale storage or very flexible backup generators that can be dispatched on short notice to compensate for drops in output when it is not windy or sunny,  the report says.

Solar power’s share of the energy mix has been rising in recent years, thanks to state incentives and a sharp decline in price: between 1998 and 2013, the installed price of solar power slid by an average 6 percent to 8 percent per year, according to a report from the Lawrence Berkeley National Laboratory.  Meanwhile, from 2003 to 2012, installations of photovoltaics under an incentive program from the New York State Energy Research and Development Authority grew from 0.37 megawatts (MW) to 62 MW. The commission’s order cautions that a modernized electricity system is essential to accommodate anticipated future growth. For example, a very high penetration of solar into the state’s energy mix has the potential to disturb the operation of distribution circuits unless intelligent controls are used, it says.

“By requiring utilities to modernize their business models and meet evolving customer demands, New York is committed to forging a new path to develop a dynamic, customer-oriented power grid able to drive clean energy markets to scale,” said Richard Kauffman, New York state’s energy czar who is leading the REV strategy on behalf of Governor Cuomo, in the February 26 statement.

The changes laid forth in the order are also intended to contribute to cyber security, make the electricity system more resilient to impacts of severe weather, and improve the efficiency of the planning process, particularly in light of the challenges associated with forecasting demand amid increasingly severe weather trends. In addition, the demand-side flexibility enabled by a modernized grid and distribution system is anticipated to facilitate the widespread incorporation of electric vehicles into the grid, which policymakers consider essential for New York to meet its carbon-reduction goals. EVs not only can reduce carbon emissions from the transportation sector, but also offer the potential to provide storage for the grid and an array of other grid services.

The order notes that investments needed to modernize the grid will be substantial, but that in the near term, they could be comparable to the projected investment that would be required under a business-as-usual scenario. Planning reports filed by utilities before the publication of REV and its associated orders have cited the need for $30 billion in investment over the next decade to maintain the current infrastructure, most of which was built prior to the development of the Internet and the proliferation of interest in DER.

Substantial cost reductions could be achieved through investments in demand response, which could flatten costly peak loads by forestalling the need to bring additional power plants online and also lower electricity rates, the order says. For example, the order says that reducing energy use during the 100 hours of greatest peak demand in the system would yield between $1.2 billion and $1.7 billion per year in long-term avoided generation capacity and energy savings.  Distributed generation, would reduce the need for transmission and avoid associated line losses, which total approximately $200-400 million per year.

The order forms part of the first of two “tracks” around which the REV initiative is structured. The second track, undertaken in parallel with the first stage but on a later timeline, will examine changes in current regulatory, tariff, and market designs and incentive structures to better align utility interests with achieving the commission’s policy objectives.

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