David P. Flynn Comments on New York State Energy

To Kauffman, N.Y. grid reform has to make money for everyone

Gov. Andrew Cuomo had his man.

It was January 2013, and the New York governor was giving his State of the State address in Albany. Just months before, Superstorm Sandy had thrown a roundhouse punch to the power grid in New York and New Jersey, knocking out power to millions.

To him, Sandy was a harbinger of climate change. He wanted to respond, and not halfway. First, he said New York should build the country’s top clean-energy economy. Second, he said it should redesign the grid so it could take a punch.

“We want to create a Cabinet-level energy czar to marshal all the assets and do this in a comprehensive, holistic way. And we want to attract a national star to lead our efforts, and we did,” he said, calling out a man in the audience.

“It is my pleasure today to introduce you to Mr. Richard Kauffman, former senior adviser to the United States secretary of Energy, Steven Chu. He’s leaving Washington. He’s coming to New York. He’s going to lead our efforts. We couldn’t have a better man in the country.” Richard Kauffman, chairman of energy and finance for New York. Photo courtesy of the Department of Energy.

Three years hence, Cuomo’s plan has crystallized into one of the country’s most total efforts to reshape the grid: what he calls Reforming the Energy Vision, or REV.

Under Kauffman, regulation is changing to reward utilities for taking on new roles as middlemen, who make it possible for companies to sell customers new energy services like home retrofits or community solar. Utilities have launched pilot projects to see whether this new identity can work.

By the end of this month, utilities must file initial plans for how they’ll work with third-party vendors and encourage the development of distributed energy resources across their systems. The state’s $1 billion Green Bank wants to stimulate flows of private investment into clean-energy technologies, including solar and microgrids.

All Kauffman’s being asked to do is oversee the biggest transformation of the power system since it was born in Manhattan more than a century ago. Cuomo wants New York to have 50 percent renewable power and 40 percent less greenhouse gas emissions by 2030. At the same time, the state’s grid has to get more decentralized.

And the whole thing has to create value for all involved: ratepayers, utilities, clean-tech companies and the government.

Changing ‘a system of systems’

Kauffman, who spent nearly two decades in finance before joining government, said it can be done.

“I think it’s very clear that the reason we’re not building the grid of the future that we’ve seen pictures of a million times is because we have a policy and regulatory structure that has the incentives to rebuild the old system as opposed to build the new system,” said Kauffman, chairman of energy and finance for New York and chairman of the board of the New York State Energy Research and Development Authority.

“The stuff we’re doing involves a change in a system of systems,” Kauffman said in an interview with EnergyWire. “It’s not just one thing that has to change, everything has to change.”

To Kauffman, the reason is simple: Business as usual is unsustainable.

“Nobody’s completely happy with the current situation,” he said. In 2014, New Yorkers had the country’s fourth-highest average electricity prices, according to the U.S. Energy Information Administration. Power demand isn’t growing much, but the “peaks” in demand are getting more severe.

Utilities have a simple formula for handling that: Build power plants and wires, and get repaid for that by ratepayers. But that biases utility investment away from new, greener technologies and more efficient services, Kauffman said.

Under business as usual, utility customers will spend $30 billion just maintaining the grid over the next decade, according to the governor’s office.

“Given a choice between investing in a pole and investing in software, the utility will invest in the pole,” Kauffman said. It’s not the fault of the utility, it’s the regulatory structure, he said.

Still, dissatisfaction with the status quo runs deeper. A number of in-state power plants are making thin profits or just breaking even. Meanwhile, companies that sell “distributed energy resources” — such as rooftop solar, batteries and smart appliances — are making money, but they’re concerned the rules of the road favor the bigger energy incumbents and stifle their growth potential.

“We have a system which is not only energy inefficient, it’s also financially inefficient,” he said.

So Kauffman and his team are trying to change the system.

Bona fide moneymakers

Last month, for example, the New York Public Service Commission made reforms that would expand the options utilities have for earning revenue by making the grid lower-carbon or more efficient (EnergyWire, May 27).

The private sector is also responding to calls to reform the system of systems. In another proceeding before regulators, solar companies and utilities — two energy camps at odds in other states — struck a tentative net-metering deal to bring more distributed solar onto the grid while ensuring utilities collect enough revenue to maintain the grid. The agreement preserves full retail electricity price credits for individual rooftop solar owners until 2020, while phasing in increased payments to utilities from developers of large solar installations (EnergyWire, April 20).

The state’s investor-owned utilities are also advancing 10 demonstration projects meant to show how different business models can work for both electric utilities and third-party energy service companies. Over the next two years, the six large utilities will gather real-world data on how well Grid 2.0 is able to create revenue streams and seamlessly integrate distributed solar, digital technology and other ideas for saving energy and generating cleaner power.

Kauffman sees part of his job as clearing the way for clean energy to become a bona fide moneymaker.

“Energy efficiency, like demand response and like some of the other things I’ve talked about, have not been businesses for utilities,” he said at a conference in New York City last week. “Energy efficiency programs have been programs for utilities. They are funded by customer funds, by customer surcharges. They do not come from utility shareholders. They are not a business.

“We are never going to achieve our climate goals if we keep doing this the same way,” he said.

To drive these changes, Kauffman’s been given a broad set of tools. He oversees the state’s portfolio of energy agencies: NYSERDA, the state Department of Public Service, the New York Power Authority and the Long Island Power Authority. It’s an expansive policy apparatus, touching on power regulations, the government’s portfolio of clean-energy programs, state facilities and a pair of publicly owned utilities.

At two of these organizations, NYSERDA and the DPS, the top officials signed on the same year Kauffman did. Like him, both hail from the business world.

Kauffman is given to long pauses and considered responses. He describes himself as an outsider to government. After all, he spent the bulk of his career in finance, first in investment banking, then in clean-tech investing.

“One of the benefits that I brought to bear is that I’ve had a broad experience in business and finance across a range of industries, I’ve worked in federal government,” he said.

“It’s kind of sometimes easy when you come in from an outsider’s perspective to see,” he said. “I don’t want to sound egocentric, it’s sometimes easier to see things, right, when you’re coming from the outside.”

In a way, Kauffman brings fresh eyes to the energy business, too. He went to college during the 1970s energy crises, watching as Presidents Nixon and Carter struggled to keep a lid on global and domestic energy shortages and dramatic price fluctuations. By the early 1990s, Kauffman had made his way into high finance. Over 11 years at Morgan Stanley, he ascended to become vice chairman of one of its four major business segments. He then rose to the partner level at Goldman Sachs.

In 2006, he became CEO and president at Good Energies Inc., a private equity firm. It was one of the largest clean-tech investors at the time, each year managing $350 million to $400 million around the world, said Greg Kats, who was a managing director under Kauffman.

Kats said Kauffman came out of Goldman Sachs intent on doing something about climate change. “His passion had been to do something constructive in a societal sense,” Kats said.

At Good Energies, Kauffman oversaw an “enormous span of investment,” including renewables, energy efficiency and smart grid. The company invested in North America, Europe and Asia. Kats said some of the investments became major players in today’s clean-tech industry: Q-Cells Co. Ltd., Tendril Inc. and Trina Solar Ltd. as examples.

Failure in market signals

But even as Kauffman searched for investments, he thought the market could be doing more.

“There are lots of companies, in fact, that have fantastic energy efficiency technology,” he said at a Reuters climate conference in 2009, according to a transcript. Their problem? They don’t have enough customers. “We know that this is a failure not in the underlying economics, it is a failure in market signals and regulation,” he said.

“If we decided that it was really important to tackle our climate” and boost energy efficiency, he said, “then we have to change the incentives and the regulatory environment of electric utilities. There is no question in my mind.”

In September 2011, Energy Secretary Chu hired Kauffman as a special adviser. “I wanted someone who was in finance, because finance in terms of energy investments is a huge part of how you get deployment, how you accelerate deployment,” said Chu, now a professor of physics and molecular and cellular physiology at Stanford University.

Kauffman happened to start the same month the Silicon Valley solar company Solyndra declared bankruptcy, shifting attention to Washington, D.C., where Republicans in Congress sharply criticized the Obama administration’s clean energy investments. One of Kauffman’s key tasks was reviewing the portfolio of DOE’s Loan Programs Office, the division that backed Solyndra to the tune of $535 million in loan guarantees.

While at DOE, according to Chu, Kauffman also studied markets for certain clean energy technologies, and he investigated whether there would be enough support for extending tax advantages enjoyed by oil and gas pipeline companies organized as master limited partnerships to renewable energy companies.

The scientist and the financier talked a few times a week. Chu said they were “kindred spirits” in how they approached problems. Pragmatically, he asserted. “He has a lot of good common sense,” Chu said.

In 2013, Cuomo lured Kauffman to New York. To Chu, that means Kauffman gets to be the lead architect in the state’s goal of creating a grid that gets 50 percent of its power from emissions-free sources. The first challenge had been driving down the cost of wind, solar, efficiency and other forms of distributed power. The next challenge is an integrated system, Chu said.

“The individual parts have become low-cost, now it’s an integrated system. How you do provide the right financial incentives and the right investment atmosphere?” Chu said.

Acronym-fueled reform

Cuomo couches his energy plan in easy-to-understand terms: He wants to strengthen the grid, cut pollution and create clean-energy jobs.

But many of REV’s nuts and bolts lie in key terms that can challenge even the seasoned energy observer: harrowing concepts like DERs, DSPs, DSPPs, DSIPs, DSPPs, EAMs and LMP+D.

“Nobody knows what a DSP really is,” said energy executive Peter Fuller, referring to a “distribution service platform” — REV’s model of the future utility. “Nobody knows exactly how that’s going to work,” said Fuller, vice president for market and regulatory affairs at NRG Energy Inc., speaking at a conference this year.

“There was a fairly extensive period of time where it wasn’t really clear what REV was, once you got past the elevator speech of how it works,” said David Flynn, a partner at Phillips Lytle. “That is starting to fill out a little bit.”

So part of Kauffman’s task has been to explain how the grid of the future would work. Take the “platform” concept. In an interview with Vox in November, Kauffman made this analogy: “If you think about the iPad as a platform — Apple wants third parties to develop apps, because a share of the revenue from the apps goes to Apple.”

He went on, “So there’s a virtuous cycle that takes place, where the more Apple invests in the platform to make it valuable to the app developers, the more Apple gets paid back in revenue.”

Iberdrola USA, for example, is piloting an online “marketplace” through which it’ll sell clean-energy products and target them to customers. “As REV is implemented and more DER options become available, the lack of a seamless platform would become a major barrier to DER penetration,” the company wrote in its July proposal. “The Energy Marketplace proposal addresses this concern by establishing a platform that will enable customers and DER providers to directly interact.”

But other stakeholders may need to be convinced that the new ways work better than the old ones.

Last year, when Kauffman trekked to Albany to testify on REV, some Republican senators asked what happened to their preferred plan: the “energy highway” Cuomo proposed in 2012. The initiative would have built transmission to connect power stations upstate with demand centers downstate (EnergyWire, Jan. 5, 2012).

Kauffman stressed — to the lawmakers and to EnergyWire — that it’s not an either-or choice.

He said the goal is a “hybrid grid”: one that enjoys the benefits of a centralized power system, but which also counts on distributed resources to benefit the entire system.

“When we think about building this grid of the future, this hybrid grid,” he said, “[how] we’re going to build that is by utilities giving price signals to build out the distributed nodes in locations where those distributed nodes are going to be good for not just those customers but for all customers.”

How will we know when that grid exists? Kauffman frames it as an evolution; he declines to name deadlines or watershed events.

“We’re talking about a change in business model, attitude and culture” for industry, regulators and customers, he said. “I don’t know if there’s going to be a single moment of epiphany. I don’t know when that’s going to happen.

“But there are so many things that are going on around the utility industry, that we see evolution in how the utilities are approaching this opportunity,” he said. “Fundamentally, do they buy into the REV vision? I think they buy into the REV vision.”