Last week, New York took a first step toward its vision of turning utilities into operators of distributed, customer-centric power grid assets. Now it’s up to Consolidated Edison to prove it can harness the power of these new assets on time, and at the right price.

On Thursday, the New York Public Service Commission approved Con Ed’s Brooklyn-Queens Demand Management Program, first submitted in July. The plan calls for replacing about $1 billion to upgrade its Brownsville No. 1 and 2 substations -- something the utility says it would need to do by 2018 to avoid potential overloads -- with a cheaper set of distributed alternatives.

Specifically, Con Ed will spend about $200 million to incentivize customers in the area to enroll in demand response and energy efficiency programs, to get them to shave a total of 41 megawatts of energy use at the moments when the substations are under the most stress. Another 11 megawatts of utility-side battery storage will provide additional stability for the substations, which have to contend with an unusually long 12-hour peak period.

Con Ed expects to spend about $150 million for the customer-side resources, or about $3.7 million per megawatt, as well as another $50 million on its utility-side battery projects, or about $4.5 million per megawatt.

As Con Ed notes in its filing, “these per-MW unit costs are generally higher than previous network-oriented programs due to the complicated nature of the network conditions and the demographics of the area,” with lots of residential and small commercial customers and fewer big power-users available for big chunks of load.  

That makes Con Ed’s project more challenging than other similar projects, like Southern California Edison’s distributed energy procurements in the Orange County region, which we covered last month.

Still, the plan should come out ahead of the substation-upgrade alternative, according to Con Ed’s benefit-cost analysis submitted in September. That is, of course, if Con Ed is allowed to rate-base, or increase customer rates over the years to come, to cover a significant portion of these non-traditional investments.  

That’s a tricky subject, because anything Con Ed invests in -- and is allowed to charge its customers to pay for -- outside of its traditional utility infrastructure could be seen as infringing on another group’s ability to compete in the energy marketplace. It could also be seen as overcharging customers for something another party could provide more cheaply.

That’s why Con Ed will face strict limits on owning any piece of the Brooklyn-Queens Demand Management (BQDM) project’s megawatts of resource, outside of its 11 megawatts of energy storage systems. On the customer-facing side, Con Ed put out a request for information (RFI) for projects that could meet its needs and received about 78 responses, including “proposals for energy efficiency, energy management/audit software, energy storage, customer engagement, demand response, and proposals incorporating multiple categories,” Thursday’s filing noted. Contracts for RFI winners could come as early as this month.

Con Ed’s BQDM project could be a critical early test of New York’s Reforming the Energy Vision (REV). This long-range effort is meant to radically restructure the state’s utility and energy regulations to allow utilities and customers to share more of the costs and benefits of distributed resources like these. Eventually, it calls for creating “distribution system platform providers,” or DSPPs -- a network in which Con Ed and other utilities in the state can manage energy services from a variety of third parties and aggregators.

GTM Research, in its recent report, U.S. Demand Response Markets Outlook 2014, noted that Con Ed’s proposal is “uniquely challenging” in the geographic and time constraints it will face to get its distributed assets in order: “Given the magnitude of this Brooklyn/Queens initiative, this effort will act as a valuable test project for Con Ed to acquire the experience and data required to determine how it will redefine demand response to fit the needs of the new DSPP model and customers alike.”

As last week’s order from the PSC noted, the BQDM  “provides an important opportunity to consider and observe the means by which the Commission’s objectives for the REV proceeding may be achieved in the marketplace,” even if that means that “this Commission must itself innovate in order to support innovation by utilities and third parties.”