Lessons from America – New York State’s Reforming the Energy Vision
Catherine Mitchell, IGov Team, 2nd July, 2014
Those of us in Europe who would like progressive energy policies in our own countries tend to look to Germany and Denmark as the examples we should follow. However, New York State is trying to transform its energy system and judging from its Department of Public Service Staff Report, we in Europe should start to take note. New York State and its Public Service Commission (PSC) sets out its Reforming the Energy Vision (REV), which includes a detailed run-though of what needs to be done in order to deliver a transformation to a sustainable energy system.
As the REV says, its vision is to question the two assumptions of the traditional utility paradigm: (1) that there is little or no role for customers to play in addressing system needs; and (2) that the centralised generation and bulk transmission model is invariably cost effective due to economies of scale. ‘Distributed resources should be re-evaluated to determine how demand management can be used not as a last resort but rather as a cost-effective primary tool to manage distribution system flows, shape system load and enable customers to choose cleaner, more reliable power options’.
What is substantially different about this regulatory report (aside from the fact that one would expect its authors to be NGOs rather than regulators given its content) is that it moves beyond high level description to a detailed unpicking of what it means, and what is needed, to transform an energy system. Not only does it argue that the traditional utility model should be challenged but it also argues that the role of a utility; the role of a regulator; the role of an innovator (or innovation); and the role of a customer should be re-thought. It is for the first time, as far as I am aware, that ideas for regulatory reform of this depth and detail have been ‘mainstreamed’, and the NYPSC deserves to be congratulated for that. It is, for example, in a completely different league from Ofgem’s Project Discovery, the only vaguely similar analysis that Ofgem tried to undertake.
The purpose of the REV process is to examine how distributed grid architecture and technology, that is now technically feasible, can be achieved / delivered on a wider scale. They conclude that the regulatory paradigm will need to be revised and that the PSC’s expectation of utility performance will change to a more outcome-based regulation – rather than traditional ex post regulation – and presumably means more focus on changes in practice. This is to be welcomed and, as the REV spells out, the emphasis should be placed on developing the regulatory and system platforms that support innovation while providing the appropriate level of protection for customers.
Along with output based regulation the other key plank is turning the US equivalent of DNOs into Distribution System Platform Providers (DSPP), the nearest concept in the UK being market facilitators which actively manage the distribution networks. The Embedded Generation Working Group began to highlight the potential of DNOs as market facilitators in 2000 but this concept has not moved beyond the smart meter roll-out in practice. The REV reads like the NYPSC is attempting to drag the utilities into using 21st Century technology. Customers are to become active partners and REV dissects why the current regulatory framework does not provide ‘proper and sufficient’ price signals to motivate them.
This is all very impressive and inspiring stuff (apart from one remarkably uncritical review of Ofgem’s RIIO which caused mental warning bells to ring). However, NYPSC has not suddenly had a brainwave. They have begun over the last decade to take steps towards a distributed grid architecture and evolution of the regulatory paradigm. For example they have: demand response programs at the distribution level, as well as cooperation with the New York Independent System Operator’s bulk level demand response programs; Performance-based rate incentive; revenue decoupling mechanisms that make utilities indifferent to changes in sales volume that may result from customers adopting energy efficiency and distributed generation; interconnection standards for customer-sited generation connected to the distribution system; standby rates (i.e., rates paid to utilities, by customers that own generation equipment, for the value of having the utility system available as a backup); Time of Use rates (voluntary for smaller customers) to encourage off-peak usage; Gas delivery rates for customers with distributed generation; Energy efficiency programs and bonds to pay for them; customer-sited clean energy programs under the Renewable Portfolio Standard; advanced energy technology research and development programs; a Green Bank to facilitate financing of advanced energy projects; and implementation of statutory net metering requirements.
Of course, the REV has just been announced. There is a long way to go before it is implemented. However, Audrey Zibelman (Chair of the NYPSC) has a progressive background and has said she wanted the name Reforming the Vision rather than something like Utility 2.0 because she wants the changes to go well beyond the latter. Similarly, Richard Kauffman, Energy Czar to NY State and ex Senior Advisor to Steven Chu at the Department of Energy, has been making unequivocal statements on the need for change.
So what is the politics behind this? Will it remain a radical document or will it be implemented? Zibelman and Kauffman have powerful allies and are credible. They have until the end of 2018 (assuming the present administration remains intact) to address the policy issues, move through a compliance phase, and accomplish substantial implementation. And they have a large staff to undertake the work. Getting that governance right is essential if a real step change in the energy system to sustainability, efficiency and security is to be delivered. Questions about the role of the regulator, utility, customer and business in future energy systems is the first step to implementing that appropriate governance. A lot of people are watching New York State (with its 19 million people) to see how it works out, and we in Britain should be keeping track too.
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