Transformational Regulation – comparing the NY REV & RIIO
(Revenue = Incentives + Innovation + Outputs)
Catherine Mitchell, IGov Team, 11th August 2016
IGov has published a number of blogs etc about the New York Reforming the Energy Vision (NY REV), and in particular NY’s new, regulatory value proposition, distribution service providers. When discussing the NY REV in GB with various stakeholders in different forums (for example, the DSO versus DSP workshop), the comments received can be divided into four general streams:
1. a general feeling of not understanding what the NY REV is – so not really understanding its relevance to GB but being open to new knowledge as a useful thing; wanting to understand more, even if sceptical that it might be relevant;
2. a view that NY State and US regulation is too different from that in place in GB, and therefore of limited relevance;
3. a view with respect to regulation, that GB is doing OK and that RIIO is working pretty well so GB does not need to think about other options (ie we don’t need the NY REV and/or we don’t need the disruption of implementing something new); and
4. a conceptual interest in the problems that NY REV is trying to solve, and the solutions they are putting forward – even if the NY REV solutions may need altering (or improving in some ways) if they are to be transferable to GB.
IGov views reflect the fourth stream.
With respect to the second stream (that NY State and US Regulation is too different from that in place in GB and therefore of limited relevance), we accept that there are differences between US States and the basis of their regulation, as there are in all countries. However, we do think that whilst some (or many) ideas and practices in one country may not be relevant in another, many ideas and practices will be relevant provided we accept that the transfer of them will always have to take account of country differences – whether technologically, culturally, socially and so on.
The third stream (the view that with respect to regulation, the GB is doing OK and that RIIO is working pretty well relative to the ideas of NY REV) is more complex, and this blog is about this issue.
The hypothesis of the IGov project has been that the governance process in place in GB has acted as a barrier to the development of a secure, sustainable and affordable energy system. Our research work has focused on this issue, and we now feel comfortable saying that there is considerable evidence available to support that hypothesis. Our next step is to put forward an alternative governance framework, which we argue is fit for purpose, here and for a more updated version here. We also argue that the cost and effort involved in moving to that new framework is worth it – because to not do so will inevitably mean that we, as GB, underperform in our energy system transformation. In this sense, we think the third stream is much too sanguine about how GB is doing.
We also think the NY REV is a fundamentally different regulatory and market framework for energy which is a far better fit for dealing with the current challenges of the energy system. To ignore it, or to think it is too disruptive, is very short-sighted. It has four key aspects:
- The NY REV is a Vision, which has been built on a number of policy and governance building blocks put in place over the last 10 years and which has then, explicitly, taken these building blocks and strengthened and further integrated them since the NY REV kicked off in April 2014 (and see here and here for updates). It is a Vision which questions 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. The intention of the Vision was to find a ‘new’ energy system paradigm (and its actors) which suits the current challenges that energy systems face (and NY in particular), and which can capture its opportunities. Within NY this new paradigm is increasingly a decentralised energy system, with a new ‘heart’ at the distribution level, which is operated in a new way with more values for more services. The intention of that Vision is to establish an enabling environment (policies, institutions, regulations and markets) for that ‘new’ energy system paradigm which stimulates innovation within the energy system, which benefits the economy of NY and which meets NY’s energy policy goals;
- The NY REV is engendering an in-depth, transparent discussion about the needs of a 21st century energy system where customers are placed at its centre and viewed as unique, rather than a pre-ordained block (or profile). It takes a broad view of the overall costs and benefits of different energy systems to NY customers. It is trying to establish not only what is good for the NY economy but also what customers want and the ways which will connect them to their energy use in the ways they want. This has shifted the debate from the interests of companies to one of public interest and resilience. The NY REV is arguing that an energy policy built around public interest is likely to be more successful in meetings its goals than the old ‘private’ interest model.
- The NY REV regulatory reforms have provided a new value proposition, centering on the Distribution Service Provider for decentralised energy resources (DER). This allows DER to bypass the wholesale market and the transmission operator, thereby creating a new value proposition for decentralised energy and revealing a new economics of energy provision. This is opening up all sorts of new market possibilities which the DSP, in theory, should facilitate. It also reveals the value of DER, and the NY REV’s new regulatory system allows those values to be rewarded, and it also incentivises utilities in new ways to encourage and complement this. It is this new economic model which is allowing the NY REV to challenge the ‘myth’ of traditional energy economics that the centralised generation and bulk transmission model is invariably cost effective due to economies of scale.
- The NY REV reflects a new balance between regulation and markets. NY REV has taken a strong ‘enabling environment’ approach combined with placing responsibility of change on customers and companies via markets and incentives. NY has multiple administered programs to help develop renewables for example, improve energy efficiency and so on. At the same time, it is incentivizing the distribution company to complement those administered programs and to set up markets and to encourage new entrants and 3rd party providers to become involved in the energy system and fulfil customer choice. The NY REV should be viewed as a process which is a combination of both regulated programs and markets. Those markets are socially constructed to deliver certain outcomes, but once designed and implemented they will be allowed to run, and the hope is that they will deliver innovation better than in a wholly regulated environment.
Thus, the NY REV has far greater coherence than GB energy policy – whether in terms of policies, institutions, the regulatory environment and meeting its targets – individually or together. The value of this is important to understand for GB.
RIIO, in comparison, is related to networks and therefore one dimension of the GB governance process. It is designed to encourage network companies to: put stakeholders at the heart of their decision-making process; invest efficiently to ensure continued safe and reliable services; innovate to reduce network costs for current and future consumer; play a full role in delivering a low carbon economy and wider environmental objectives – all of which sounds good. It is an improvement on RPI-X, and is in its early days so we need to keep an open mind on how it performs (and a mid term review is due). But it is still a Business-as-Usual approach which is not well stitched into the wider regulatory, policy or institutional landscape; nor has that wider governance framework (whether policy, regulation, markets, rules or incentives) made an effort to restucture itself to better fit the challenges it faces (as argued above). One reason for this is because GB does not have an explicit Vision, as NY does, and so the move to a sustainable, secure and affordable energy system is often one step forward, then 2 steps back.
Unlike the NY REV, RIIO is not part of a process which is questioning traditional utility models – despite huge change going on around the world; it is not questioning how to deliver energy policy goals in a way which is best for society (both customers and the economy); it is not part of a transformative new value proposition, which enables new markets, reveals new values and new system economics; it is not a rebalancing of markets and regulation; and it does not link policy programs with regulation.
As such, we would argue that RIIO is a very pale comparison to the regulatory aspects of the NY REV and a very different and narrow reality compared to the multi-dimensional, and holistic, NY REV. Thus, were one to compare the GB energy governance framework to NY’s (ie the NY REV), we would argue that NY has taken steps to try to reach a fit-for-purpose governance structure – time will tell if it is successful. This is far in advance of GB. RIIO is discussed in detail in this working paper.
No doubt, the NY REV will not get everything right and, also, no doubt much of it would not suit GB’s energy situation. However, we do applaud it for trying to bring the dimensions of an enabling environment together into a forward looking strategic framework to deal with the energy problems it faces, and it would argue, in a more cost-effective and environmentally preferable way. Britain needs to be much more intellectually robust and rigorous about the way it analyses its ‘whole’ energy system.
 Demand response programs at the distribution level; cooperation with the New York Independent System Operator’s bulk level demand response programs; some performance-based rate incentives; revenue decoupling mechanisms; 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.