By Kevin C. Blake – Guest Columnist , originally published in Buffalo Business First / Buffalo Law Journal on Dec 20, 2017, 6:00am EST .
Column: New York’s Energy Revolution
At the junction of Lake Erie and the Niagara River, Buffalo has been at the forefront of the electric utility industry since the late 19th century. As this city and others began to electrify, electricity markets took on two important characteristics: high barriers to entry and economies of scale. Large, centralized power plants and the myriad of transmission and distribution lines required significant upfront capital investment, and the cost of delivering power became cheaper with each new customer added to the distribution grid. As a result, New York State, among others, entered into what is known as the “regulatory compact” whereby the New York Public Service Commission (PSC) granted utility companies a protected monopoly franchise for the sale of electricity or gas to customers within a defined service territory. In exchange for this monopoly, the PSC regulates utility rates in such a way that balances consumer financial protection and the financial viability of utility companies. In order to promote electrification, the PSC granted utility companies a guaranteed rate of return on prudently incurred infrastructure investments. As a result, for the last century, utilities have been incentivized to rapidly build power plants, transmission lines, substations and distribution equipment with no incentive to minimize costs or create an efficient energy system.
As a result of this structural regulatory design, utility companies are fundamentally at odds with the 21st century clean-tech industry, which is increasingly comprised of rooftop solar, electric vehicles, battery storage and smart home energy management technologies. These technologies empower consumers to take control of their energy usage, unlock business model opportunities for innovative energy companies and promote a clean and efficient energy system that mitigates climate change and reduces our exposure to harmful pollutants.
With the advent of the internet and communications technology, the natural monopoly that formed the basis for the regulatory compact continues to shrivel as third parties are increasingly willing and able to provide services that once were only within the purview of the utility.
In 2014, New York embarked on a mission to build a clean and efficient energy system. At the center of that effort is a program known as Reforming the Energy Vision (REV), which tasks the PSC with bringing the utility industry into the 21st century by realigning incentives such that utilities can benefit from accelerating an increasingly efficient, clean, reliable and consumer-oriented electric grid. In part, to fairly compensate and incentivize utilities to (somewhat paradoxically) sell less of their products and services and promote third-party competition.
One key REV objective is to promote distributed energy resources (DERs), as opposed to centralized power stations, as the primary tool in the planning and operation of the modern power grid. DERs encompass a broad category of resources, including energy efficiency, demand response, distributed storage and distributed generation. Under the traditional utility model, those resources could reduce the need for infrastructure upgrades and thus reduce utility revenue.
Therefore, the key for REV is to align the interests of utilities with DER providers, customers and the environmental goals of reduced carbon emissions.
In order to achieve that type of reform, REV creates a unique and important role for utility companies – Distributed System Platform Providers. As a DSP, each utility will manage and coordinate DERs within its service territory and be compensated with Earnings Adjustment Mechanisms (EAMs) based on, among other things, the efficient promotion and deployment of DER, carbon reduction, market development, conversion of fossil-fuel end uses, customer engagement and customer satisfaction.
Under the DSP umbrella, third parties would operate in a distribution-level market to provide competitive products and services to customers such as rooftop solar, energy storage, smart home energy management and distributed generation. The prices for those products would be set by real-time, market-based factors based on the location of those resources and the attributes they provide.
To facilitate those markets, the utilities are required to provide publicly available grid data and forecasting methodologies – collectively referred to as the Distribution System Implementation Plan (DSIP) – to enable third parties to assist in providing products and services to cost-effectively meet system needs.
The DSIP provides, among other things, indicator maps to show where DER investment is most economically beneficial. With clear market signals and properly aligned incentives, REV aims to animate DER markets and empower third-party providers and consumers.
For the last four years, the PSC has been actively engaged in laying the theoretical groundwork for how a reformed utility system would operate. It has examined the outdated regulatory paradigms and emerging market opportunities and grappled with complex questions of what the role of the utility should be and how to animate new business models.
With that foundation, New York is positioned to enter the implementation phase of REV in 2018. Perhaps most important, the PSC will likely issue a revised “value stack” methodology used for compensating the unique values of DERs to the grid, which will provide enhanced market signals to third parties and incentivize development and deployment of resources in optimal locations.
Kevin Blake is an attorney at Phillips Lytle LLP who focuses his practice on energy law, including advising clients on business development and regulation of electricity, natural gas and telecommunications before state and federal authorities: firstname.lastname@example.org.