New York’s electric distribution utilities are facing a major market transformation. While this may shake things up for the energy industry, this move is good news for the customer since utility regulation will now be meeting the needs of a more distributed, consumer-focused energy system.
New York’s Governor Andrew Cuomo asked his public state commission and chairman of energy and finance, Richard Kauffman, to make the necessary changes to the current utility regulation since it wasn’t keeping up with customers’ energy needs.
According to Audrey Zibelman, chair of the New York Public Service Commission, the current ratemaking structure falls short of the pace of technology development that defines many parts of the region’s economy.
She adds that by restructuring the way utilities and energy companies sell electricity, New York can maximize the utilization of resources, and reduce the need for new infrastructure through expanded demand management, energy efficiency, renewable energy, distributed generation, and energy storage programs.
In its report, Reforming the Energy Vision, New York’s Public Service Commission calls for a major transformation and expects the state’s distribution utilities to meet the following policy objectives:
Increasing customer knowledge and providing tools that support effective management of their total energy bill
Market animation and leverage of ratepayer contributions
Fuel and resource diversity
System reliability and resiliency
System is not ready
The Public Service Commission acknowledges that the current rate-making procedure doesn’t work and that the distribution system is not equipped for the changes which are coming to the energy market. New York is already a deregulated market in which distribution is separated from generation and there is retail choice for electricity.
According to the report, one key outcome of the transformation is to address the Commission’s stated objective to make energy efficiency and other distributed resources a primary tool in the planning and operation of an interconnected modernized power grid.
The Public Service Commission agrees that the system is dysfunctional for the following reasons:
The bulk power system is too large to meet the demand of the few hours of peak demand every year
The transmission and distribution system has annual losses of nearly 9%
The commodity markets are inefficient
There is not enough storage for electricity
A new identity for utilities
To resolve these and other pressing issues, the Commission wants utilities to become Distributed System Platform Providers. It will be up to them to upgrade the distribution network and then “create markets, tariffs and operational systems to enable behind-the-meter resource providers to monetize products and services.” Basically, utilities will become buyers and aggregators for distributed resources.
Distributed System Platform Providers are expected to eliminate peak. Instead of setting a storage mandate (as is the case in California), they will identify economic applications of storage and will most likely opt for time-based rates.
“It’s time for the regulatory system to catch up with advances in clean energy, and New York is one of the first states to act. New York’s re-evaluation of the utility business model will spur a future in which solar and wind power and energy efficiency can deliver grid resilience and reduce pollution,” Cheryl Roberto, associate VP of clean energy for Environmental Defense Fund, said in a statement. “This is a move of national significance and should reverberate across the country.”
As “new managers distributed energy resources”, utilities will need to find new ways of making money. The second part of the reformation will be an overhaul of the traditional rate of return using an annual rate case cycle, with a new focus on long-term (up to eight years) performance-based rates emphasizing results for customers and system efficiency.
A new rate system
The new rates will not only affect distribution system efficiency, but also efficiencies within the utility. The report suggests that utilities adopt a network of in-house incentives so that employees can expect to be incentivized for the achievement of enterprise goals.
The new rates will probably be based more on time, flexibility and controllability. Instead of flat rates, there will need to be “a greater unbundling” of products and services. The report points out that the new results-based approach should not affect the obligation to deliver reliable and affordable power.
One model that New York state is looking at is the United Kingdom, where the regulatory body changed its ratemaking policies to encourage innovation and manage more decentralized energy assets.
The Commission expects to have “policy determination on issues relating to regulatory design and ratemaking in the first quarter of 2015.” The first status report is to be released this summer.
Moving the process forward
The gap between policy determination and implementation is unclear. The Commission states that “a reasonable and realistic sequence will be essential,” and, among other factors, will rely on the standardization of communications equipment to control distributed energy resources.
If the major power utilities, such as NYPA, Con Ed and PSEG Long Island (formerly LIPA), are on board with the transformation, it could be one of the fastest-moving regulatory proceedings any state commission has ever seen for a transformation of this size.
However, even if stakeholders conform, it will still be a challenge to get the process moving forward since the innovation is taking place at the grid edge.
The stakes are huge, however, and the outcome could have impacts well beyond New York’s borders.
“New York is now at the forefront of states looking to find answers to a rapidly evolving energy industry,” Rory Christian, director of New York Clean Energy at EDF, said in a statement. “To be clear, this proceeding is not a destination, but a significant step toward a future where people have the option to play a greater role in how they use energy.”