How will utilities profit in the future? New York's REV initiative is trying to figure it out
New York is remaking its utility industry, but one key piece – where the money comes from – remains elusive
Market signals are funny things. When you're trying to, for instance, create immense value for consumers by overhauling a massive utility system, it's important to recognize that you don't always want to get bogged down on the details.
“We want to be more rigorous and accurate, not necessarily precise,” said Richard Sedano, the principal and U.S. programs director at the Regulatory Assistance Project. “What's important is sending an impactful signal.”
RAP, along with the Rocky Mountain Institute and the New York State Energy Research, helped PSC staff craft a landmark white paper that conceptualized new business models and rate designs for New York's revamped industry. Initial comments on the paper are due Oct. 5.
While precision and accuracy are both important, Sedano believes that the state's Reforming the Energy Vision is ultimately about utilizing the market forces already at play, rather than an overly-technical approach that would leave regulators bogged down in the details and standing in the way of innovation.
“Customers will be able to respond to a rough price signal, same with rate design” Sedano said. “What's important is the inducement, that the opportunity to save money is clear. We're very fond of calculating rates to a very fine-grain level, and it is important to pay attention to fairness, but again there is a cost and I think it's the wise regulator that figures out how much effort is worthwhile.”
So where does that leave the state's utilities? Earlier this month New York approved seven demonstration projects designed to show not just what is technologically feasible, but how utility partnerships with the private sector can yield profits for both companies while also generating savings for customers. It's a balance, and the white paper on business models was meant to spur discussion over the role distributed resources would play in New York's utility future.
Three little letters: MBE
New York is focused on the creation of distributed system platforms (DSP), essentially allowing the utility to act as a platform provider for third parties which serve customer demand for energy and services. REV envisions utilities increasing revenue through market-based earnings (MBE), and regulators expect "the relative balance between base rates, performance incentives, and MBEs will change."
As the role of the PSC evolves with the utilities and industry, regulators will move from setting incentive levels and rates to supervising markets. In some ways, Sedano said, the REV process is designed to help regulators get out of the way of progress.
“If you have perfect information and a decision-maker who could look at things purely from a value perspective, what would happen? There's a lot of things in the traditional regulatory system that defeat that,” Sedano said. “And every one of them that I can think of is is addressed in some ways in the REV process.”
The white paper envisions that the shift from traditional regulatory incentives and utility profitmaking to MBE opportunities “will complete the transition to a business and regulatory model where utility profits are directly aligned with market activities that increase value to customers."
"System costs can be reduced and, to some extent borne, by participants who benefit directly from the market, resulting in fewer costs that must be socialized among all ratepayers,” the paper reads.
The idea is to “promote equity among customers and the incentive for utilities to encourage and facilitate innovation in the market,” according to the paper.
The relationship between the utility and the customer will be key to the success of new business models. “The utility is the face of the power sector,” said Sedano. And the REV overhaul tasks utilities “with many responsibilities to communicate important things to customers.”
“Unfortunately,” he said, “Customers are not always accepting or trusting of what the utilities have to say.”
But that is a hurdle utilities will have to deal with.
“The utility has to take this relationship; it's not a blank slate,” Sedano said. “They're being asked by the New York commission to communicate a lot of things to customers. Through rates, they way they acquire distributed resources, the way they are sensitive to social justice issues. There are a lot of different things utilities have to do and it is no doubt a complicated challenge they have.”
Earlier this month the New York Department of Public Service tapped seven “demonstration projects” to move forward, aimed at showing how businesses and utilities can access capital and create value, while also adding renewable resources and empowering customers.
Among the projects selected, three call for developing “marketplaces” that will connect a range of consumers with efficiency and demand management solutions.
National Grid has a project designed to help help low to moderate income customers access clean energy while reducing arrears. Working through a neighborhood solar project in an economically distressed area, the project will also use reduced uncollectible debts to help recoup the initial cost of the project.
Iberdrola, working with Smarter Grid Solutions, is working on a “flexible interconnect solution” that will streamline the connection of large distributed generation projects. While a traditional interconnection is expensive and slow, potentially making some projects uneconomic, Iberdrola and SGS would provide an “infrastructure as a service” alternative, managing the resources for customers.
Con Edison, in partnership with SunPower and Sunverge, is developing a “clean virtual power plant” to offer residential customers a resiliency service that will bundle solar energy and storage. The project is designed to test consumer demand for a premium service aimed at keeping the lights on.
And Iberdrola and a too-be-named partner will develop a new service helping communities achieve energy goals by aggregating local demand for clean technologies and helping facilitate bulk purchases from third-party providers. A second phase of the project could expand the offering to include financing services to reduce costs and barriers for communities.
'Use the force'
New York is at the forefront of states moving their utility industries into a new era – perhaps only California is pushing faster to redesign how the grid functions. But ultimately, it's only a recognition of where market forces are heading, says Sedano. And with California essentially out in front, in terms of regulatory evolution, it's likely New York's utility industry heads the same way.
“What I see New York really trying to do is recognize those trends in a jujitsu kind of way,” Sedano said. “Use the force of those trends in a positive way instead of resisting. What you see in the totality of what the commission has come out with … is acknowledging the forces and trying to allow those forces to do good things.”
California has the “most evolved investigation” into how distributed energy resources will be integrate, Sedano said. Over the summer the investor-owned utilities filed plans with state regulators examining how best to site, integrate and value energy resources on the distribution grid. Those are issues being dealt with around the country, and so the West Coast proceeding may be somewhat prescient for New York.
California lawmakers directed the utilities to file distribution resource plans that would focus on finding optimal locations for DERs, defined as: distributed renewable generation resources, energy efficiency, energy storage, electric vehicles, and demand response technologies. The state's utilities filed their plans with California regulators in July.
“Perhaps the details haven't gotten the same level of attention,” Sedano said, but “there's an expectation that New York and California are on the same path. … I think that's where New York is heading in order to properly value all distributed energy resources.
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