We have written about the backdrop of NY-REV in previous issues of the EDGE Finance Advisory. This update discusses the opportunities and obstacles emerging as the proceeding is unfolding.
The Reforming the Energy Vision (REV) docket opened by the New York Public Service Commission (PSC) is an attempt to prepare for a more resilient and energy-efficient future. REV’s major thrust is to create a decentralized and resource-diverse power supply system that is less susceptible to disruption caused by a single event. The goal is a more dynamic and reliable system.
REV seeks to encourage adoption of Distributed Energy Resources (DERs), which are defined to include both energy efficiency measures and distributed generation resources. To further this goal, the program includes incentives for installation of fuelefficient power units, development of renewable resources such as solar and wind, and development of microgrids and community solar approaches. With the influx of DG energy, the PSC envisions a marketplace where generation owners can participate by providing their generation to the grid, and where customers will be able to compare and choose providers of energy.
On the other side of the equation, incumbent utilities will continue in their role as distributors of energy, but will also step into the role of marketplace operators. The utilities have agreed to act together in a new capacity, as a Distributed System Platform (DSP), that will serve as a neutral gatekeeper between the providers and buyers of energy. The DSP’s function will be to coordinate grid-wide DER activities as a market administrator, almost as a “mini” distribution-level independent system operator (ISO). The proposed reforms redefine the role of public utilities and redistribute some of their functions, while recognizing that “macrogrid” entities still serve a public interest purpose in a decentralized power world.
In addition to setting forth the DSP/ DER framework, the PSC Order initiated proceedings on a number of other REV-related items that would need to be addressed to ensure the success of the new approach. The other items include net metering, community net metering, community choice aggregation, low-income affordability, new functions for the Green Bank (a state-sponsored financial entity working to increase private investment in clean energy), the development of a Clean Energy Fund, interconnection, and microgrids, among others. The PSC is currently in the midst of stakeholder engagement to flesh out the on-the-ground realities of how a DER-centric market model will operate. Below we describe the directions being taken at this point in the process.
Distributed System Platforms (DSPs)
The DSP role is envisioned to be filled by the incumbent utilities. The DSP will be positioned between the DERs and retail customers (which will sometimes be the same entities) on the one hand, and, on the other, the New York Independent System Operator (NYISO), which is the bulk wholesale market used by utilities and other wholesalers to buy and sell power, transmission, and ancillary services.
The DSP will serve as a marketing platform and trading clearinghouse for buyers and sellers of DER output. The DSP will also support use of DERs by providing information, communications, interconnection, and dispatch services. The utility, as the physical grid operator in its “mini ISO” role, will have the real-time ability to dispatch the entire system, including DERs. Key to REV is the idea that utilities’ financial incentives will be realigned to ensure efficient and effective distribution of the power generated by DERs. Therefore, rates will be developed that reward utilities for successfully providing enhanced services that meet the policy goals of REV. To ensure independence in the system, utilities that serve in the DSP role will be prohibited from owning DER resources except under limited circumstances.
Distributed Energy Resources (DERs)
On the other side of the generation/ distribution coin under REV are the DER providers. Under REV, DERs include not only combined heating and power (CHP) systems, cogeneration, renewables such as solar, wind, and biomass, but also energy efficiency, conservation, and demand response systems. In the interest of resiliency, the REV program encourages all energy users, and particularly large commercial users such as hospitals, universities, hotels, offices, and residential buildings, to install DERs. In some cases, therefore, end-use consumers will also own DERs.
The online interface operated by the DSP will empower customers to choose the source of their electricity, and will likely give the utility information to balance grid load and potentially plan for DER infrastructure improvements based upon the available resources. Pricing of DER outputs and utility charges under the DSP model will require an adjusted measure of rate setting, with different inputs for cost recovery. The process of determining pricing mechanisms is currently underway as part of Track Two of REV.
Uniform interconnection procedures will be necessary to allow DERs to interact with the larger grid, a key underpinning of REV. Utility interconnection capabilities will be instituted in two phases: phase one will be oriented toward streamlining approval processes for smaller distributed generation projects such as residential solar, and phase two will be oriented toward a comprehensive ability to integrate interconnection processes into system planning and operation. Interconnection has been identified as a key issue with respect to DERs, but also provides some potential pitfalls as discussed below.
The New York Green Bank (NYGB), a division of the New York State Energy Research and Development Authority (NYSERDA), is a state-sponsored financial entity which works directly with private institutions to help stimulate investment into the clean energy sector. The NYGB has been active in recent months. Publicly announced portfolio projects include:
- $5.5 million to municipalities participating in New York’s property-assessed clean energy (PACE) program
- $4.0 million in revolving construction loans to support New York-based United Wind’s installation of over 160 distributed wind energy projects
- $25.0 million to support a new warehouse credit facility for Level Solar, a residential solar installer
- $20.0 million to Renew Financial to allow it to expand its consumer lending program in New York
NYGB is positioned as a major component of NY—REV. While NY—REV is currently in the planning stages, the NYGB’s influence has already been felt – as of year-end 2015, market participants have proposed over $1.0 billion in investments to the NYGB, which corresponds to approximately $4.0 billion in clean energy projects once private capital is accounted for.
Hurdles to Overcome
While REV potentially creates opportunities for market participants and customers, it faces significant challenges. Several identifiable hurdles will need to be overcome if the initiative is to achieve ultimate success, including:
- Ensuring collaboration between stakeholders. The PSC has implemented an efficient and inclusive stakeholder feedback process. However, two potential problem areas have been noted by initiative participants and observers. First is a lack of consumer feedback. Second, while the working group process has been relatively smooth to date, it will not be surprising to see more divergent views emerge as details solidify and implementation becomes more imminent. A recent example was the lack of ability to find consensus over the price of generation, a critical component of REV. Therefore, the energy and focus required to keep all key stakeholders in the fold may increase over time.
- Structuring the rule to minimize regulatory complexities. Many expect REV to serve as a template for other states going forward. It can similarly be viewed as a test case or test battleground for those who stand to lose out under alternative power futures. FERC separately has exempted qualifying cogenerators, small power producers, and certain wholesale power generators from FERC rate regulation. And in a similar vein, the PSC has determined on a preliminary basis that DER providers will not be subject to rate regulation by the state. Yet the PSC is still reviewing what oversight might be required under REV in light of the types of products and services that DERs can sell or purchase. It has stated that some supervision “could become necessary” in order to ensure both consumer protection and fair competition. Even if FERC issues are avoidable, it is clear that avoidance will take careful structuring. Additionally, aspects of REV, including net metering and microgrid generation/ storage, need similar attention to address—or, optimally, avoid— regulatory issues.
- Technical issues need to be resolved. One of the central tenets of REV is that technology can be utilized to more fully integrate enduse customers into the energy procurement process, leading to greater customer choice. However, the technology needed to facilitate those types of interactions is costly, complicated, and clearly needs to operate flawlessly. New York’s energy grid, by and large, lacks the ability to handle the “twoway traffic” that the REV initiative contemplates. Everything from meters to distribution networks themselves will need upgrades to be able not only to deliver, but also to take delivery of, the energy that is being produced. The grid will also need to interface with instantaneous buy/sell decisions by DERs and consumers, who in some cases will be one and the same entity.
- The role of utilities—and repercussions of changing roles. While the transition to a utility-as-“mini ISO” framework has merit, challenges in the form of possible workforce retraining or redeployment, addressing legislatively mandated rates of return, potential losses of shareholder value, and transfers of property all need to be addressed. It is not clear that the PSC, to date, has sufficiently addressed these issues.
- Timing. Even if the ultimate vision of widespread, clean distributed generation is highly desirable to many New Yorkers, there could be practical implications inherent in the time it takes to transition from the current status quo to the new vision. Proponents may need to pragmatically accept that lead times on these changes could be measured in years rather than months or quarters.
- Price increases — particularly shocks — will be detrimental to the final success of REV. While one of the premises of REV is that money will be saved by consumers—in large part due to increased customer choice, increased proximity to generation sources, and increased ability to own generation assets—it is also true that the changes contemplated by the plan will cost money. This is a risk for politicians who need to ensure that constituents are aware of both the risks (despite the difficulty of those conversations) and the benefits of REV, and that price increases and shocks are minimized.
- Security, particularly the rising threat of cybersecurity, presents unique problems. The PSC must contend with the very real issue of cybersecurity risks associated with giving generation responsibilities to independent entities. Distributed generation resources are arguably physically safer from attack than large, centralized plants and generally increase the resiliency of the grid. However, new market entrants need to be connected to the macrogrid via the Internet, which will allow for many new entry points for cyber-attackers to enter the main grid framework. Against this backdrop is the reality that the reliance on technology to manage the grid in a distributed generation environment will increase exponentially at just the point in history that the number of entities with the technological capability to threaten the grid seems never to have been higher. While these problems are clear, their resolutions remain murky. As a policy matter, it makes sense to push some of these costs onto utilities. While REV does this, it is also true that not every vulnerability will be to utility-owned or controlled assets in the system. Presumably insurance products and technology solutions will be created to address this concern, making it a potentially promising area for entrepreneurs.
- Uncertainty impacts investment. Traditional investors, including those who invest in long-term projectfinanced assets, value certainty above all else. In the context of REV, the largest current unquantifiable risk is the lack of clarity regarding which policies will ultimately be implemented. That is why many investors are currently sitting on the sidelines until final determinations on everything from the value of generation to the cost of security and regulatory compliance are made.
New York’s REV initiative is ambitious and will serve as a guide for regulators in other jurisdictions moving toward various versions of the “grid of the future.” The PSC estimates that the energy savings, reduced line losses, and other cost reductions under REV could save New Yorkers between $1.4 billion and $2.1 billion a year.
However, the road to attaining the true DER/DSP dichotomy that is one of REV’s goals remains fraught with perils. Exceptions to rules threaten to swallow some of the more innovative aspects of the plan. Realization of the savings quoted by the PSC is contingent on proper execution and the removal of uncertainty from the plan.
Even to the extent that these problems are addressed, it is not inconceivable that resolution will take longer, even much longer, than some market participants have discussed. However, with any transitional period comes disruption, and it is clear that policymakers in New York are considering the difficulties that will arise during this period of change. The fact that the task is difficult does not make it less worthwhile—indeed the opposite may be true. Those deploying disruptive technologies, and those with the appetite to develop projects speculatively, could be big winners in such an environment.
The REV process, even if implemented efficiently, will be a bumpy ride. But it could provide entrepreneurs and customers with great benefits and could well serve as the testing ground for any number of ideas that will shape the future of energy generation and distribution in America.