The New York Department of Public Service Staff released a complex report of recommendations to the New York Public Service Commission on how to properly value distributed energy resources (“DERs”) as the state transitions away from net energy metering (“NEM”). Reforms to NEM—which credits distributed generation at the retail rate of electricity—have been a controversial topic in numerous states as utilities warn of revenue losses and customer cross-subsidies caused by outdated rate designs that do not properly calculate the costs and benefits of NEM to the grid.

As many states continue to quibble over the details and fairness of NEM, New York’s Reforming the Energy Vision (“REV”) proceeding recognizes the broader forces reshaping the power sector and attempts to modernize the ill-equipped, industrial-age regulatory model. One of the key pieces to that modernization puzzle is creating a comprehensive framework for valuing DER, including energy efficiency, demand response, distributed storage and distributed generation, all of which will become integral tools in the operation of the modern electric grid. This Staff report marks a major milestone in the creation of that value framework.

The report proposes to replace NEM with its “Phase One” tariff by the end of 2016, which will ultimately be replaced by a “Phase Two” methodology in 2018. The report notes that while NEM has provided a simple and easy-to-understand compensation mechanism, it is an “imprecise and incomplete signal of the full value and costs of DER.” More precise price signals will be required in order for the NY REV model to replace the outdated regulatory model and create a system where customers and third parties make choices about how to use power and invest in DERs. The report proposes to gradually transition New York away from NEM, grandfathering current NEM customers into that compensation policy for the next 20 years and allowing new behind-the-meter customers to continue using the NEM framework until 2020, at which point the credits would gradually decline until they ultimately merge with the value of DER formula adopted by the Commission.

To replace the NEM formula, the Staff report outlines a value stack consisting of four primary benefits that DERs can provide and assigns a value formula to calculate each benefit. Those benefits fall into four categories: (1) energy (electricity generation); (2) capacity (availability of the system to provide electricity during peak demand); (3) distribution system value (deferment of infrastructure upgrades); and (4) environmental and public health.

Importantly, the report adopts monetary crediting as opposed to volumetric crediting. While volumetric crediting accounts for only the volume of electricity generated, monetary crediting provides a more complete value because it accounts for additional metrics, such as the location and time at which the electricity is generated.

While the energy value is fairly straightforward, there could be debate around the capacity value and environmental value. Calculating a capacity value for intermittent resources is inherently difficult for certain DER resources due to uncontrollable events such as clouds and wind patterns. Part of that formula could be tied to the variability of intermittent resources, but that would present issues for securing project finance. Solar advocates will certainly want to be a part of that discussion to ensure the Commission reaches the proper balance.

The report recommends crediting DER for its environmental value that is at least as high as the Social Cost of Carbon as defined by the EPA, or higher as reflected in Tier 1 REC prices established by the New York State Energy Research and Development Authority (“NYSERDA”). NYSERDA expects to publish the quantity and price of Tier 1 RECs for 2017 compliance in November 2016.

One major component of the value stack that the report did not address is the value of DERs to the local distribution grid. In the absence of detailed distribution-level data, the report recommends a Market Transition Credit (“MTC”) which recognizes that such a value exists, but its exact numerical value is unknown. Determining the value of DER to the distribution system will be a key task of the Commission as it works on a Phase Two methodology, which is expected by 2018.

In its final iteration, the value stack for DER may prove to be more of an art than a science. As U.S. Supreme Court Justice Stephen Breyer once wrote in Regulation and its Reform, “To spend hours of hearing time considering ‘rate of return’ models is of doubtful value; and suggestions of a proper rate – carried out to several decimal places – give an air of precision that must be false.”

If successful, New York’s innovative approach to valuing the costs and benefits of DERs to the grid could spark discussions in other states around how to modify NEM policies. Meanwhile, stakeholders in New York will begin to dissect this report and draft comments to ensure their products and services are valued appropriately in the Commission’s expected order in December.