INDUSTRY LEADERS ROUNDTABLE DISCUSSION Sullivan & Worcester Conference Center, New York City With some of the highest electricity prices in the United States, and still reeling from massive disruptions to the State’s electric service caused by Hurricane Sandy, New York has undertaken a major reform of its electric utility industry. Five senior business leaders came together in October in New York to share their thoughts on how the New York initiative, called ‘Reforming the Energy Vision,’ or REV, will impact project development and financing in New York. The five are Robert Curry, former New York Public Service Commissioner and manager of SteepRock Advisors, LLC; Sarah Zemanick, Director of Sustainability for Cornell University, one of the State’s largest energy consumers; Jacob Worenklein, Chief Executive Officer of US Grid Company, a microgrid development company; Mike Pantelogianis, co-head of Power and Infrastructure for Investec Securities, and Merrill Kramer, an energy project finance lawyer at Sullivan & Worcester LLP and formerly manager of a private equity energy fund. The moderator is Elias Hinckley, Chair of Sullivan & Worcester’s Energy Finance Practice. How do you create a marketplace where the utility accepts a market design that provides it with no growth? Bob Curry 12 EDGE Finance Advisory / May 2016 Commission. The PSC is now considering the elements of Track 2, which is out for comment. In the meantime, there are demonstration projects being developed that are being funded through another state agency called NYSERDA [New York State Energy Research & Development Agency]. The Green Bank, also under the auspices of Mr. Kauffman, is providing financial support at this stage of the market. The challenge to the PSC is to create a marketplace structure with appropriate incentives so that the criteria used for picking demonstration projects are financially viable, are scalable concepts, are replicable for different locations, and can be promoted while leaving the utility financially intact. Financially intact means that the utility is able to service its debt, pay its dividend, and stay in business. The ultimate challenge is to create a marketplace where the utility accepts a market-based design that provides it with no growth. Con Ed’s growth is miniscule, 0.8 percent year over year. With that environment, how do you encourage a win-win for both the consumer and the developer and, of course, the utility. MR. HINCKLEY: Michael Pantelogianis and Merrill Kramer, from a lender and investor perspective, what do you need to see before you invest time looking at a potential investment. MR. PANTELOGIANIS: From a banking perspective for investing in the power space, we need regulatory certainty. We need a supportive framework that fuels capital spending, whose regulatory tenet provides for elements of revenue certainty, and a way to earn the revenue that will ultimately yield the ability for an investor to service its debt and earn a reasonable equity return. Our investors also need to have an understanding of the capital costs inherent in developing some of this thought. Having a framework in place that provides transparency and a way for people to expend their capital is very important. You additionally need the constituents around the framework to be supportive. California is a good model in that it moved its big three utilities to go out and seek the power resources that were needed. Thousands of power purchase agreements have been signed that have fostered the growth of renewable energy over the last 10—15 years. So it’s got to be all in. Everybody around the program has to be supportive. Otherwise it becomes difficult to achieve these objectives. MR. KRAMER: Private equity generally looks at the same things Mike mentioned that lenders look for. Equity investors are seeking to financially leverage their investments. They require visibility to the regulatory path for earning their target returns. This includes the ability to timely secure contracts, interconnections, transmission access and permitting. That being said, private equity is willing to take more merchant and other risks than banks. Equity additionally looks for a strong management team that can control costs and provide investors comfort in their risk analysis. Mike mentioned the California program. One important difference between the California and New York programs is that in California the legislature provided a clear mandate that included standard offer contracts; by providing investors with a clear contract path, California created critical mass, ease of entry into the market, rapid development and a path for capital entry into the market. In New York we are in a transitional period where none of that clarity exists. If, when and how the REV framework ultimately is established will determine the success of the New York experience. The Market for Microgrids MR. HINCKLEY: Jay Worenklein from US GridCo, microgrids are a significant part of the REV discussions. Can you give us a perspective on what a microgrid is? MR. WORENKLEIN: Sure. In a nutshell, a microgrid is a component of the larger grid which has the ability to have its own generation, distribution, system controls, software that people dispatch in a proper method, and interconnections to allow it to separate from the grid. It is essentially a microcosm of the entire grid. 13 MR. HINCKLEY: Jay, you have active microgrid projects in development in the State that are pre—REV non—demonstration projects, so they presumably work on their own economics. With the uncertainty overhanging the REV Program, does that create friction for companies actively planning to participate in the market? MR. WORENKLEIN: We are in a unique and, I think, wonderful environment right now. We have forces in New York thinking about how to step back from what is and was into what should a power system really look like, and to create something that is highly workable. That in itself creates opportunity. Microgrids are a tale of two missions. Mission number one is to allow users, customers and communities to fashion a system that meets their own unique needs. If an industrial company, say, has a major site, as we have in Connecticut, with the ability to add massive data centers and other operations well protected from a security point of view, and wants to use that opportunity to develop the town, building a microgrid presents an economic development opportunity to bring in business and jobs. The local government is enthusiastic and the local utility will cooperate with it. This is in Connecticut, which doesn’t have the REV process. So some projects have an independent economic development focus. Then take Far Rockaway. All the talk in New York State following Hurricane Sandy was about how we had to do something about Far Rockaway, a community that was devastated by the storm. Or a major housing project in Coney Island which has 2,500 families, not a small housing development, that had its substations flooded and destroyed by Hurricane Sandy along with a hospital — we saw pictures of nurses carrying babies in incubators down 20 flights of stairs, and old people who were in the middle of surgery — an aquarium where many of the fish died, and a police station. These episodes show the dire need for reliability. It’s an opportunity to give communities within the electric grid the ability as part of redevelopment to create and fulfill their own objectives. In the first case of the data center, people will need extraordinary reliability. They will pay premium pricing for a site that will give them everything they need, such as longterm access to backbone communications, transmission lines, and energy storage. In the second case you have different drivers – you are developing a microgrid solely for the purpose of helping the utility develop a more resilient, more reliable operation. Part of what’s driving Mr. Kauffman and other people involved in REV is to provide these services much more efficiently. I had the pleasure of working on large central station generation and distribution and transmission for most of my career. What we’re doing in New York is to We saw pictures of nurses carrying babies in incubators down 20 flights of stairs, and old people who were in the middle of surgery – an aquarium where many of the fish died, and a police station. These episodes show the dire need for reliability. [Microgrids are] an opportunity to give communities within the electric grid the ability as part of redevelopment to create and fulfill their own objectives. Jay Worenklein 14 EDGE Finance Advisory / May 2016 basically displace the need for these billion dollar massive investments to be built at ratepayer expense to support the population growth in New York — by encouraging demand side management, energy efficiency, smarter systems, and reducing demand. When these elements are in place these systems could be a lot cheaper. They will be a lot cheaper. REV is the opportunity to take all these different objectives and, with one policy formulation, say that there are better ways to do this, subject to the following constraints: We want to protect the utility. I’d like to add to Bob’s comments. If you talk candidly to the members of the New York Public Service Commission and to the Governor’s office, one thing that they know is that utilities are the social safety net of our cities, our state, and our country. People who live in New York City, even in the very finest buildings in New York City, let alone the poorest, are not going independent of the grid; okay? We are not going to have people basically taking care of their own needs in their own little apartments. The country will always be dependent on a strong utility grid, and therefore a strong utility, that can serve them for a very, very long time. Governments know that they really need strong, viable utilities with visible earnings growth, with the ability to raise equity as well as debt on a predictable basis for themselves. One of the rules proposed under REV is that utilities may not be partners or equity owners of microgrids. I’m concerned that you’re not giving utilities enough incentive based on their self-interest as well as the public interest by allowing them to take some equity in the situation. The government leaders driving the process in New York have responded, “Don’t worry. We know we’ve got to take care of utilities. They have plenty of incentives. They need to create a resilient utility system, they’ll need billions of dollars of investment, and we will take care of that.” I am focused at US Grid Company on fixing the entire grid. The nation’s grid is underinvested and needs hundreds of billions of dollars of investment over the next 20 years or so. Utilities necessarily need to be partners in this undertaking. Reconciling Environmental and Economic Goals MR. HINCKLEY: Sarah Zemanick from Cornell University, you have a broad mandate, which is not just reliability, but also a set of climate goals. As a value proposition, how do you put a value on specific things like reliability and resilience? Is that difficult to do in the marketplace? How does that conversation go when you say, “Well, we’ve got climate value and resilience value,” and on the investor side, they’re like, “Well, we need revenue”? MS. ZEMANICK: That conversation is interesting, to say the least. Our campus has a public goal to become carbonneutral and more. We also wish to do it in a way that has global impact. So we’re trying to find global solutions using our own campus as a living laboratory. We have a 37-megawatt optionally islanding microgrid system already on campus, we are developing solar through a net metered arrangement, and are working with a local wind farm using a wholesale contract for differences. As you state, we have triple bottom line criteria coming from administration, but they’re insistent that we not pay any premium for our green power and not put any economic value on the environmental attributes. So we need to accomplish our goals based on grid parity. It’s very challenging. MR. WORENKLEIN: Are you looking for a job right now, by any chance? (Laughter.) MS. ZEMANICK: I might be when I’m done. MR. WORENKLEIN: Because what you just described is impossible. Full stop. (Laughter.) The nation’s grid is underinvested and needs hundreds of billions of dollars of investment over the next 20 years or so. Utilities necessarily need to be partners in this undertaking. Jay Worenklein We’re trying to find global solutions using our own campus as a living laboratory. Sarah Zemanick 15 MS. ZEMANICK: Well, we have one project online. But we’re also required to be true to our academic mission and make sure that we have research and teaching opportunities in all the projects that we’ve done. To that end, we’ve worked with Distributed Sun as our solar developer, and they’ve been able to leverage the NYSERDA subsidies as well as bring in private investors who can monetize the federal tax incentive; our long-term Power Purchase Agreement brings in the rest of the funding. Our ability to make all this happen financially depends a lot on the net metering processes combined with the relatively lucrative program subsidies from NYSERDA. More recently, we’ve run into issues with interconnection on the grid side of the house, with debate with the utility over what upgrades are necessary to safely interconnect these projects. The utility proposal would add 25 - 30 percent additional capital expense on top of the projects to make that happen. So these types of projects can be increasingly difficult as NYSERDA grant money disappears. Without remote net metering, the value of the electricity coming out of the solar farm depends on where you send it. We have varying rate structures in our NYSEG territory which is an additional challenge; and, of course, the looming loss of the federal tax credit. We have been able to pull our program off based on a set of favorable circumstances and a creative and helpful developer, but it’s getting more difficult to achieve these kinds of goals. MR. HINCKLEY: The other big piece of the program is energy efficiency and energy management technology, which, to me, seems to be best motivated by time-of-use pricing and real-time price signals. Bob Curry, is that something that we can expect to see down the road? MR. CURRY: For some reason, within the last decade the New York State Legislature passed a bill saying that you could not have residential mandatory time-of-use pricing. I discovered that when I was the commissioner and started to make a fuss. I asked: “Why don’t we have someone in the legislature introducing a bill to take this away?” Well, the origins of this were so murky that no one wanted to take it on. There’s a great level of sensitivity at the PSC and the Governor’s office that that has to go away as part of the REV, or independent of REV. Time-of-use pricing on a very broad scale is important. It’s used now in the industrial and commercial markets. How it’s going to change I can’t say, but they assure me it’s going to happen. MR. HINCKLEY: Merrill is there still is a way to go out and get those assets built, but not quite as efficiently, without time-of-use pricing? I’m interested to get your perspective on what that marketplace looks like for energy efficiency, energy management tools and demand response within the confines of New York. 16 EDGE Finance Advisory / May 2016 MR. KRAMER: Sure. As Bob mentioned, some customers receive time-of-use price signals, but its confined to the larger commercial and industrial customers. They’re not true time-of-use price signals, but simpler signals that encourage peak shaving to avoid incurring peak demand charges. There are also vehicles available in the New York Power Pool that place value on demand response, but those vehicles generally are not accessible to most customers. As a result, the principal economic driver behind energy efficiency projects and the like in today’s New York market is retail displacement. What that means is that an energy user will build a project “behind the fence” or “behind the meter.” They’ll look at their retail utility rates and their energy consumption and then build a project sized to displace their retail purchases rather than sell the power into the wholesale markets. The arrangement is particularly attractive with the downstate utilities, where retail rates can be anywhere from 18 cents to 24 cents a kilowatt hour. Under those circumstances there’s room for a customer to achieve significant savings. In the case of CHP or cogeneration, where the facility also generates steam for hot water, heating and cooling, the increased efficiencies and energy savings make these projects a win-win for the customer and for the developer. The arrangement also satisfies one of the key requirements of the lending and investment community, which is to get a long-term contract with a creditworthy offtaker. Providing power in this fashion also provides utility system benefits. It reduces strain on the grid, freeing up substation and transmission line capacity, perhaps avoiding the need for capital spend by the utility to meet system growth. That being said, that customer project may not be located where it is most valuable from an overall grid standpoint. A project’s maximum system value will be where the project can relieve transmission congestion, avoid the need for new generation on the other side of a bottleneck, avoid line losses, and avoid or defer construction of new substations, transmission, distribution, and other expensive system upgrades. And the reason the project is not built at that location is that the customer and project developer are not receiving adequate information and price signals about what the true cost of power is at one site versus another. What REV is trying to accomplish is to have these price signals in the market to cause efficient investment decisions to be made to locate projects where they maximize their value to the system, not simply to a particular customer. These price signals are created by designing a marketbased platform for buying and selling energy, and having time-of-use or smart meters in place. Until that happens, energy will be understood by us for the most part as a monolithic kind of commodity. Since it is not unbundled, it is not yet understood by its component parts and how each provides different value to customers and the system, things such as system stability, voltage support, frequency response, operating reserves and the like. These are things that the FERC refers to as ancillary services. There is a market for these products on the wholesale level where they are unbundled and separately valued and priced by the market. REV is trying to establish a market-based platform where these prices and values will exist and be provided in real time to customers and the marketplace so that they can respond to those signals. In essence REV seeks to create a market in which there is efficient price setting, response and competition. In the short term, since none of those things are in place, the New York Public Service Commission is attempting to promote market entry by providing artificial, regulatory-set price signals, while also creating sufficient financial incentives for utilities, who will run the new market trading platform. Utilities might have a natural incentive to discourage other participants from entering the market where it would reduce utility earnings, which are tied to the utility’s capital investments. Until that market happens, the projects that we will mostly see either are ones that receive NYSERDA funding, or the ones that can sell to one or more customers on a net metering basis. It’s difficult for a Wall Street-oriented organization to work on transactions that are less than $20 million… that’s where the regional local banks play an important role. Michael Pantelogianis 17 The larger projects, like the microgrid projects Jay was discussing, will be part of an evolving process. I don’t think Mike would finance these projects today because you can’t really price what the transmission or distribution parts of those projects are worth. The price signals simply are not out there. MR. CURRY: When the straw proposal for Track 2 is fully vetted and Con Ed files its rate case at the beginning of next year, a lot of the certainty you all are looking for from an investment standpoint is going to get somehow formulated in the rates, because that’s ultimately where the certainty will be expressed by the regulator: “If you do X, you will get Y in return.” Until that gets out of the conceptual stage and into the really hard rate-making context, it’s difficult to have the certainty to encourage broad investment, except if you have specifically identified customers who are creditworthy and can sign PPAs, etc. Uncertainty is not something that our investor base appreciates and wants exposure to. What goes into getting money flowing is what have been the buzzwords of today’s panel: certainty and transparency. MR. HINCKLEY: The other embedded piece of that question is the focus on distributed resources or behind-the-fence projects, and the smaller scale of those projects. What is the scale at which you have interest? If I show up at your door and say, “I’ve got $80,000 for projects; will you underwrite them?” You’re going to say “Why did you call me?” What is institutional capital generally looking for in terms of scale? MR. PANTELOGIANIS: A lot of that is driven by the demand for capital. Today there is a lot of capital out there to feed good opportunities at very attractive yields for equity; but, by virtue of the competition for this capital, we tend to trend up in terms of deal size because of the nature of our business and the way we’re compensated. It’s really difficult for a Wall Street-oriented organization to work on transactions that are -- let’s call it less than $20 million. I think that’s where the regional local banks have to come in and play an important role in providing capital, but otherwise they need the same requirements that we need on Wall Street. We have clients who just haven’t reached that level that are working with the Green Bank, that’s got a charter to fuel renewable energy assets and growth in New York State. But there are also other, smaller banks that come to mind. A good active player in the Northeast is Bridge Bank. They and other regional banks are there for -- call it 2, 5, 10, $15 million transactions. Then we come in when the number becomes 20, 25 and higher. It’s a great opportunity for regional banks to jump in. But by virtue of the structure in place on Wall Street, our projects just need to be larger. MR. HINCKLEY: Jay, on the other side of this, where are you going to get your capital from? Are the capital markets limiting the projects you’ll look at? MR. WORENKLEIN: Financing will ultimately not be the barrier here. Our projects are of significant size. If there is a compelling community need, credit can be found to solve the problem. For example, there are players that feel it is so important to strengthen Far Rockaway, to help strengthen Coney Island, that they are thinking about a special governmental utility or other programs where people actually wish to make investments. If there’s a compelling case from the community and public point of view, there will be ways to find either utility, governmental, or other involvement that will make credit sense. In the project finance area, Mike will recall in the period that he was at Chase and at WestLB and that I was at Lehman and Soc Gen, where projects went from a billion 18 EDGE Finance Advisory / May 2016 dollars -- massive natural resource projects, massive utility projects -- to cogeneration projects, where we were looking at $10 million. We had people saying to us, how are we going to finance $10 million projects? We put together a $200 million facility which is basically to say, when you have projects of the $10 million scale and you don’t really want to do the brain damage of a fullscale project financing, we said, “If your projects have the following characteristics associated with them” -- a turnkey EPC contract from a major contractor, a creditworthy offtake contract, etc., we’ll put together a full facility.” We syndicated it broadly and had the ability to fund smaller projects. With really small projects, this is where your point, Mike, about the Green Bank, is very important, but not just the Green Bank. There are people out there who have viable businesses securitizing small contracts, small energy efficiency contracts which meet a certain credit profile, or the Green Bank eager to provide credit support behind those projects to enable them to be assembled together. So there are ways in which to ultimately get energy efficiency projects, demand side management projects, and the like to be financed on a basis with credit support, or where the project is viewed as so important to New York and its goals, that we’re going to find a way where the government is going to provide some credit support behind the project. We haven’t talked about corporate credit. Let’s say I am setting up a demand side management business. I am interested in doing something that I think is so powerful in terms of savings to be achieved by housing projects or other kinds of tenants. I set up a company, I go out and raise equity for a company that will, in fact, be in the business of doing these small projects. I will come to you, equity investor, and I will say to you, “There is a business here that is a multibillion dollar business, and the business is highly efficient and it makes so much sense. Why don’t you put some anchor equity into it, we’ll get some governmental money attached to it, and we will create a company where we will, by issuing corporate debt and corporate equity, finance a very largescale initiative which makes fundamental economic sense. So don’t think about projects alone; think about corporate entities that have a market opportunity now that could be so substantial that investors actually want to be able to go into the business. MR. HINCKLEY: Bob, going back to your point about setting the rate path for REV, the PSC timeline for this is fairly aggressive. Are we being unrealistic in our timeframe for when these rate cases will be completed? Does this uncertainty overhang persist for longer than we think? MR. CURRY: In the absence of the kind of demonstrated need that Jay was just talking about, it’s going to take a while to get through this process. Without stating anything but the obvious, The Quadrennial Energy Review published by the Department of Energy said, you’re going to be paying more for your electricity. That’s not something that is often said publicly. There are a lot of different interests involved in this process that need to be reconciled. There is no true incentive yet developed for the investor in utilities, let alone the Long Island Power Authority, which deals with 3-plus million people on the island. With all the effort that’s going into demonstration projects to see if things can be scaled up, that other piece hasn’t crystallized yet. The key at the end of the day is whether there will be sufficient incentive and certainty. Will the rating agencies say grace over this? Will the equity analysts say grace over this set of changes? And they’re not going to know whether they’re going to say grace until they see a rate case. REV’s success will turn on big scale utility involvement. I don’t think that will happen in the rate case for the Spanish-owned New York utility -- New York State Electric & Gas. We have international problems with them. MR. HINCKLEY: Sarah, you have a demonstration project in Track 2. What is your driver at this early stage in proceeding Master funding models drive financing costs down, including by diversifying investor risk, and by being able to tap into the public markets. Merrill Kramer 19 with the project? How much of your motivation is driven by wanting to help design the State program and how much was an opportunity to get a project done inside the existing framework without having to wait for some of this uncertainty to resolve? MS. ZEMANICK: Despite the ‘mission impossible’ description I gave earlier, we have to convince our administration to take a long view on these projects. What is the price of power going to be in 30 years? I don’t know. Currently it is around 3 ½ cents/kwh. We are in a region where there’s a glut of Shale Gas. We figured out the technology and the business model. We got folks who figured out the financing. Where we ran into a wall is with the utility interconnection. When you get either to a certain size project or if you’re the first mover in an area with a project and there are some utility upgrades that are required, or you’re the second or third person in but you trip a capacity threshold, the utility screens and limits hit you with all of the costs of that next upgrade. The screens are not adequate to evaluate the distributed generation resources. We were unable to convince Iberdrola [NYSEG] to think creatively, to work with us to look at some modernization of the screens, or to bring in some ancillary equipment to mitigate the issues that were identified. These issues are going to be encountered by lots of folks trying to do DER. MR. HINCKLEY: We’ve heard two wildly different figures for the price of power. Bob, can you provide a little bit of context? Why the vast difference in pricing Upstate versus Downstate? MR. CURRY: Upstate doesn’t have the same capacity constraints as downstate. There is an Upstate/Downstate divide on transmission. NYPA, the New York Power Authority, which is in charge of selling the Niagara River’s cheap bounty into the rest of the state, has capacity charges that it lays onto people like the Port Authority and the New York City Housing Authority, each of which get almost all their power from NYPA. It can really aggregate as you come further Downstate. And Long Island’s worse, for whatever that’s worth. There are all these things in aggregate. MR. HINCKLEY: Merrill, as we look at this marketplace, the uncertainty, and the scale challenges we’ve discussed, are there participants outside of the Green Bank who are active investors in this marketplace? In addition to the regional banks, who should developers, consumers, or contracts or be thinking about as a place where they have a reasonable expectation of finding capital for their projects? MR. KRAMER: Sure. There’s no shortage of capital out there. A lot of capital is sitting on the sidelines looking for the opportunity to deploy where projects meet the requirements I mentioned — an experienced management team, being able to control costs, a long-term PPA. From the regulatory side, Sarah mentioned an important issue – interconnection that could potentially delay a project and increase costs. The biggest issue in attracting private equity then is scale. Scale directly affects investor returns. The soft costs of doing a 1 or 2-megawatt project such as legal costs, permitting costs, accounting, financing and overhead costs are generally the same for a 20-megawatt or a 200-megawatt project. Without scale, these costs demonstrably eat into investor returns. Jay mentioned a real opportunity here for funding sources to walk in with a model that rolls up projects. Models out there include Yieldcos, master limited partnerships, mezzanine funds and the like. These models require projects to satisfy some sort of standardized 20 EDGE Finance Advisory / May 2016 requirements. The model will be driven by the financial community, not the regulators. These master funding models drive financing costs down, including by diversifying investor risk, and by being able to tap into the public markets. The cash is there. And also the corporate credit. What you also have that is particularly attractive with REV for portfolio financing are a lot of diversified c o m m e r c i a l energy users with multiple loads whose reliability is essential — like hospital chains, public u n i v e r s i t i e s , hotels, office buildings and the like. Where c o r p o r a t e leaders or asset managers have the vision, they have an opportunity to do a roll-up that solves the scale issues, the corporate credit and the collateral security issues, and provide additional value to the grid contemplated under REV. MR. HINCKLEY: Thank you. I want to make sure we get a chance for the audience to ask questions. AUDIENCE MEMBER: I have a question for Mr. Worenklein. On the microgrid side, what size generating facility will we need in Downstate in order to compete with the grid in terms of price? MR. WORENKLEIN: I don’t see a size constraint; I see an objective constraint. What is your real need? If your need is of a certain type, then a 2-megawatt project works perfectly. There are places in New York City, which -- I didn’t believe until I saw it -- which are completely off the grid. They’re primary producers and have redundancy they create for their customers with their own power, for example, the massive housing project, Mitchell-Lama in Co-Op City. The resilience issue, the reliability issue, is such that people will pay extra for power. You can be economic in meeting your own objectives with a small project or with a large project, but it’s quite possible to find a lot of projects there that will be self-sufficient as a microgrid because of the needs that the community has and seeks to achieve. AUDIENCE MEMBER: Why don’t more people know about REV? It seems like it’s the same people always talking to each other in the same room. MR. CURRY: I’ll give you a quick answer. It is all inside baseball all the time. Regrettably, it’s tough to sell this, because people are inured to the pitch, “Oh, don’t worry, this is going to save you money,” because even if it does save you money, if those of you in the ConEd service territory have ever looked at your bill -- and I have, carefully, and I complained about it, and was told by ConEd that it was written by the Legal Department of the Public Service Commission -- there is no clarity here at all. It’s all obfuscation, well-intentioned; caring, loving, wellintentioned efforts. (Laughter.) MR. CURRY: But this is inside baseball. It’s very difficult to get a groundswell of interest here. But we’re trying to make it sufficiently attractive to those inside baseball that we effect the savings, we effect the changes in the marketplace that are inevitable, and that we lead them, we’re not driven by them; and that, at the end of the day, we have truly transformed the energy vision. That’s the intent. MR. KRAMER: I’d like to add to that. From a marketing standpoint, you always try to keep the message simple. But what we’re talking about here is something very complicated. We’re not just talking about getting your electric rates down and saving you money. We’re talking about unbundling electricity and creating a bunch of different competitive products in the market. For any of you who trade energy products in the New York Power Pool or PJM, it’s like looking at a Chinese menu in Chinese. Unbundling power to create competitive products is a complicated message for the public. People don’t understand ancillary services; they don’t understand VAR support. The trick is how to move to a situation where we’re providing increased value and efficiency in the market, but keeping the story simple. 21 I’m reminded of Denzel Washington’s line in the movie “Philadelphia” where he’s a lawyer defending Tom Hanks and is cross-examining Jason Robards about why the firm fired the Hanks character. Denzel Washington keeps asking Robards, “Explain it to me like I’m a fifth-grader,” “explain it to me like I’m an eight-year-old.” If you can follow that advice, then you can get the message out. But if to do so you have to explain ancillary services and all that, eyes are going to glaze over and you won’t get there. MR. HINCKLEY: You touch on an important point, which is we don’t educate anybody about energy at all. It’s a black box for most of society. The idea that we can educate about something this complicated is really difficult without people having that fundamental understanding. MS. ZEMANICK: I might offer, Tompkins County in Ithaca as an example -- granted, a bit of a unique community we joke it’s 10 square miles surrounded by reality but more people there know what REV is and are involved, and we have community groups. Part of my job is engagement in education -- that just it’s not accessible to most people, either the language, the ancillary services. You need to tie it back to something that people care about. At least in Ithaca, Tompkins County, people will get it when you talk to them in terms of climate change or their own energy costs. Our solar program, Solarize Tompkins, has been incredibly successful. People are interested in residential solar, in community solar. We’re now doing the same kind of education model, trying to get people interested in geothermal and other renewables. Just bring it down to a level where it is accessible and people have a ramp to get involved. You just need to bring it down to a level where they can see a personal connection. AUDIENCE QUESTION: It was mentioned that there may be time-of-day pricing for residential in the future. Any likelihood of going as far as demand charges for residential? That might stimulate the storage business and possibly provide an alternative for, for example, net metering, maybe in conjunction with something like a value of solar tariff? How far can the instinct to protect the residential market from the actual markets be fought, I guess is my question. MR. CURRY: In the straw proposal, staff is putting something out there with the concept that a demand charge may be viable in New York State. You can pick up the comments online when they come in if you can find them. There’s a lot of discussion. A minimum bill also is the source of a lot of discussion. And utilities want to get rid of net metering as fast as they possibly can; that’s a source of a lot of discussion. This particular framework that’s been put out there for comment really gets to the teeth of a lot of the things that will justify or not justify the financing at the end of the day. AUDIENCE QUESTION: I had a question about financing those really small energy efficiency projects. What role can the ESCOs play? Are they passé at this point? You know, they benefit from multiple revenue streams in those projects, so perhaps that’s part of the answer. MR. KRAMER: The value of the ESCOs will depend on the size of the energy efficiency project. In many cases energy efficiency projects result in a reduction of load at the sites, so there is really no retail sale that’s being made. If you get into economies of scale, where you, say, install energy efficiency projects to serve more than one load, like community projects, then ESCOs can play a valuable role. Let’s say you’re putting in a central heating system to save money, and it makes more economic sense to size it to serve two buildings rather than one. ESCOs can play a role because they’re better at interfacing with the utility. Anyone who’s close to a customer, can interface with a utility, and can do billing, and already is licensed on the retail side in the State has a head start on other people. 22 EDGE Finance Advisory / May 2016 But ultimately in my view it’s going to depend on if they can guarantee the savings to the customer. MS. SANDS: That’s why they need the ESCO, because they’ve got the big balance sheet. AUDIENCE QUESTION: I want to thank the panel; it’s been very insightful. In preparation for REV, there’s a lot of uncertainty about what’s going to happen; we see the model evolving towards on-site generation and microgrids. From the financing side, do you see certainty in preparing the buildings for these microgrids and on-site generation, so doing the energy efficiency measures within the building to reduce the size of the demand? And from the developer’s standpoint, the same question: Do you find yourselves building your infrastructures with the future in mind and making changes to your buildings to make sure that you’re sizing your renewables and your on-site generation properly? MR. HINCKLEY: Well, I would say as a threshold issue, you’ve touched on an important point. There’s a much broader real estate community out there that’s not really engaged in this process in the same way but obviously plays an important role thinking about things like deployment of efficiency. MR. KRAMER: Let me take a quick stab. From a commercial standpoint, one of the big issues in future adoption will be the existence of triple net lease arrangements; another is where steam is supplied on a building-wide basis. Those things have to change. For a new building, you probably want to set up the utility metering system in a way that the building owner or asset manager can share in the value of the savings and is incentivized to make these large investments. In many tenant situations energy is simply a pass through item. MS. ZEMANICK: We are actually in a debate in Tompkins County. Ironically, natural gas is constrained from an economic development standpoint, so there’s a big debate in the county right now about do we get a new gas line through NYSEG or do we convince these folks that they can build their buildings energy efficient with heat pumps or some other source. MR. CURRY: You could also take the California perspective, which is they changed the building code 20 years ago to demand efficiency, as well as earthquake preparedness and other things. No one in New York has been willing to step forward and try to legislate that here for some reason. MR. HINCKLEY: That brings us to the end. Thank you again all for coming. And everybody who joined by phone, thank you very much for taking the time to join us. For more information contact Merrill Kramer at email@example.com or 202-775-1224.