Trends in Grid Modernization and Energy Market Structure
Q&A with Richard Kauffman
Chairman of Energy & Finance for New York
Office of Governor Andrew M. Cuomo
Clint Wilder, Senior Editor, Clean Edge
Bryce Yonker, Executive Director, Smart Grid Northwest
Clint and Bryce talk to New York’s Chairman of Energy and Finance about NY REV, FERC 745, and pacing infrastructure investments.
Q: What are some models that utilities and regulators are looking at to finance new energy resources in New York? In particular, how are models taking shape that aren’t having ratepayers pick up the bill, and how are value benefits envisioned to be distributed?
A: Regulated utilities in New York state need to be allowed to be capital-efficient. It is important that the full level of capital be available in the competitive marketplace.
Financing in the competitive markets around energy efficiency, demand response, distributed generation and other new resources have been based on contractual obligations on the customer side. And programs in these areas have been driven by, and in many instances limited by, the regulatory environment that requires them.
There has been limited securitization in solar and even more so in other areas like energy efficiency. It’s time that the market grows to a point of critical mass to bring financial assets and investments to the marketplace in full force. To get there, we’ll need standardization and access to data.
When you look at the average customer’s utility bill, a utility’s profit opportunity is really only about 2.5% of their total revenue. It is time that we find a path for there to be shared value streams, both for utilities and their customers, with the other 98.5%.
Aggregation of value from a utility in any given area – efficiency, demand management, distributed assets, etc. – are areas ripe for finding added value streams and sharing those among various stakeholders
Beyond decoupling here in New York, we want to have utilities evolve away from rate-based compensation and toward additional areas such as improved capacity on infrastructure, reduced peak demand, procuring energy efficiency, deploying demand response programs, siting distributed energy resources, and more.
Q: In what ways can the efforts and lessons of REV be applied in other states and markets beyond New York?
A: Many places face the same set of issues we face. Natural gas has helped lower generation costs, but T & D costs have continued to go up. Customer and community preferences are changing, they want to have more choice. And we need to be addressing climate change and resiliency. All these things extend beyond New York – changing the investment flows and realizing this is not the Westinghouse/Tesla grid of yesterday.
Q: Can you talk a bit about the requirements for various levels of grid modernization that the New York REV process is driving?
A: To implement REV effectively, we need to do a number of things to operate energy markets more effectively. These include significantly increasing the system capacity utilization, integrating distributed energy resources (to benefit all customers), and determining the real costs and benefits of programs like demand response. The system needs to be one that dynamically balances demand and supply.
We certainly need finer capabilities to determine, offer, and validate price signals in the marketplace.
We need to ask ourselves important questions around infrastructure investments, like when do we need them, where should they be located, and do we have the right amount. We don’t want to create an environment where utilities feel the requirement to make all investments for all future values. This would lead to an over-build and an overly expensive energy system.
Again, we need to create economic incentives that relate to utility investments in the marketplace and don’t incentivize them to spend significant capital expenditures so they can make regulated rates of return over the decades that those assets depreciate.
Q: What role does REV want to play regarding utilities and “disrupters?”
A: Utilities have traditionally viewed third parties as the enemy, and vice versa. REV and its dedicated consultants can help out with a “translation function” – neither side really knows how to talk to the other side.
We’re talking about changing a whole system. No one is completely happy in the current situation. Utilities aren’t getting load growth, but distributed solutions are growing, and that poses a long-term threat. We need to create as much capital efficiency as possible. And drive more capital into competitive markets, such as DG and demand response. This will result in lower O & M costs, fewer line losses, fewer capacity constraints, fewer peak power purchases. There are many new business opportunities, and new revenue streams.
Q: What impact will the recent Supreme Court ruling upholding FERC Order 745 have on the progress of REV?
A: The FERC 745 ruling affirms the important role of DR in the marketplace. It also brings some additional clarity to the arrangements between the federal government and states and sheds light as to how that relationship continually needs to be aligned.
The feds have traditionally managed wholesale markets while states managed distribution; that made sense in a one-way flow of centrally generated energy. This model seems to be making less and less sense going forward as flows of energy are rapidly becoming bi-directional and more distributed. FERC’s role in the marketplace needs to evolve as the utility model does.
DR in the current market structure is good for customers — it can generally help them save money – for example, to lower the cost of delivery of energy at peak demand times. It is, however, a role that utilities have generally served solely from a need for compliance with regulatory requirements. We need to find a way to provide real business incentives for utilities to offer these types of solutions.
We are now at the tip of the iceberg for DR and EE, for what could be economically beneficial for the energy marketplace and for what could come from the immense cost savings from those types of offerings.
Q: Looping back on the topic of smart grid and grid modernization investments, can you talk a bit about what kinds of technologies are best suited to help REV reach the outcomes it has set out to achieve?
A: I am not in the best place to talk about specific technologies, but for a second let’s talk about AMI. Utilities would love to deploy advanced metering and rate base that capital investment.
But let’s take a step back and think for a minute. Do we really need to have AMI ubiquitously? Or should we have it especially where it is needed and where there is a clear payback?
Could we imagine an economic arrangement where utilities recover the investments from the services they provide, not the kWh they sell? The objective is to use the entire cost envelope of utility operations and billing to help fund the best developments for the market.
We don’t need lots of high tech to see grid-constrained locations. We don’t need lots of high tech to know when infrastructure needs replacement. We can get started in rough ways immediately to save customers money by targeting new and smart infrastructure investments.
When people ask what REV looks like in action, Con Edison’s Brooklyn-Queens Demand Management project, or BQDM, is a good early example. Projecting load growth in Brooklyn and parts of Queens, ConEd’s business-as-usual approach would have been to build an entirely new electrical substation, at a cost of $1 billion to ratepayers. Instead, they went to the market. The market came back with a range of solutions to meet growth: battery storage, distributed generation, and demand response. The total cost of the distributed solutions will likely be less than one quarter of the substation that otherwise would’ve been built, representing a savings of up to $800 million to all ConEdison customers.
It’s a good example to show an approach for a $1 billion infrastructure project. We would like to see the process that was taken here replicated for all meaningful amounts of utility capital deployed. What is meaningful doesn’t at this point have a specific delineation – it’s certainly not for $10,000 investments and it doesn’t always have to only be for $1 billion projects either. It would be good to see efforts somewhere in the middle.
Q: Do you think that ultimately the REV efforts bring the market to toward a transactive energy kind of a structure?
A: We don’t want a highly configured infrastructure system with the hopes for a market to come. We want to pace infrastructure investments to what the market will generate and really needs.
In this scenario there is a role for governments as well as a role for private sector actors. A key part of the solution is how to develop system capacity with open architecture and buy-in from all parties – utilities, service providers, customers, financial players, and others.
Q: Last question- I’m really trying to wrap my head around the equitable deployment of distributed resources in the regulated utility framework. Can you help me understand how REV is working to achieve this?
A: We can look to many instances where the deployment of distributed solutions can benefit all customers in the form of shared savings. Instead of shifting an undue cost burden to customers who cannot participate in distributed solutions, all customers can benefit from a more efficient system. The general concept seems simple enough and we are trying to put it into practice.