On Tuesday, New York electricity regulators released a white paper on ratemaking and utility business models to be considered as part of the state’s Reforming the Energy Vision (REV) initiative, which seeks to transform distribution utilities into energy platform providers, encourage distributed generation, and eliminate electricity peaks.
The 100-page document features specific recommendations for making REV a reality. It was also full of acronyms for energy geeks to digest.
The key will be moving utilities from the current way of doing business -- guaranteed returns on rate-based assets -- toward market-based earnings (MBE). Those earnings will be initially based on new performance incentives, referred to as "earnings impact mechanisms" (EIMs).
“As the distinction between consumer and producer begins to dissolve through increased reliance on [distributed energy resources], it becomes even more important for customers to receive value signals that allow them to make optimal investment choices,” the wrote public service commission staff in the white paper.
Creating a dynamic, market-driven platform for distributed energy resources sounds attractive. However, implementing such a platform is an incredibly complicated process -- and so far, there have been few details on exactly how New York will orchestrate the leap. There are concerns on all sides that the process could move too quickly or not quickly enough.
We now have more details on what kind of policies the Public Service Commission (PSC) might adopt.
Utilities are fond of rate-basing assets, as it's the way they've been doing business for decades. Recognizing the complexity and cost of the transition, regulators will allow distribution utilities to rate-base the platforms for managing distributed energy assets.
For third-party solar energy providers, net metering could also be expanded. Ultimately, however, the goal is to more dynamically value distributed electricity.
Net metering will eventually evolve into a rate that brings together the location-based marginal price of energy and the full value of the distributed energy resources (DERs), which the PSC has dubbed "the value of D." Although it has been given a name, the value itself is still open for debate.
The first performance incentives
The paper proposes an initial list of EIMs that could be altered or removed as the market matures. Additionally, regulators have proposed scorecards that will allow utilities to be measured on metrics that don’t have a direct earnings impact.
The initial list of EIMs includes peak reduction, energy efficiency, customer engagement and information access, affordability and interconnection. These mechanisms will be more carrot than stick, with the exception of data access and interconnection, which could have “potential negative adjustments” for utilities that don’t meet goals.
Some of these mechanisms, such as energy-efficiency programs targeting a percentage of peak reduction, should be relatively straightforward. Others, such as information access and timely interconnections, could prove to be more challenging for utilities.
"The degree to which these outcomes begin impacting utility earnings will ultimately dictate the maturity of grid-edge technology markets in New York,” said Steve Propper, director of grid edge at GTM Research.
Specifically, the Public Service Commission calls for utilities to build portals via which customers can engage with distributed energy providers.
“The development of the metrics around the 'customer engagement and information access' outcome could have a significant impact on creating the open platform distribution system REV is intending to create,” added Propper.
Eventually, market forces should allow utilities to make money from platform service revenues. The REV demo projects announced last month are meant to be the first step in defining what these revenue opportunities might look like.
Clawing away at the clawback
Another near-term opportunity identified by regulators is a change to utility net plant reconciliation mechanisms, commonly referred to as "clawbacks."
Clawbacks allow utilities to remove the earnings benefits of capital spending that falls short of projections. They are intended to prevent utilities from cutting capital expenditures that are needed in the long term to boost near-term earnings. If utilities don’t spend their entire capital budget, the carrying charges on the unspent amount goes back to customers.
That money, however, could be used more effectively, the PSC suggests: “At a minimum, utilities should not have a disincentive to use operating resources or third-party assets in lieu of utility capital investment, where the former are more efficient and effective.”
The PSC suggests that utilities should hold on to those carrying costs if distributed energy resources supplant the capital investment. The goal would be to make the utility "indifferent to whether the utility or a third party funded the DER.”
“The question is how and who is going to determine which third party gets those in-kind investment dollars, and how will they be measured to ensure they truly lead to lower rates in the subsequent rate-case proceeding,” said Propper.
More granularity, less complexity?
One of the most difficult challenges will be bringing sufficient granularity to rates for different customer classes, while also making the rates easier to understand. The PSC acknowledges that that may be impossible and that third parties could play a key role in conveying key points about various rates to customers in the future.
The PSC recommends that utilities advance time-of-use (TOU) rates and explain how they will give customers more information about how best to take advantage of these types of billing schemes.
Eventually, TOU rates should come with shadow billing, which would allow customers to see how much they’re saving over a flat rate. These rates will likely be opt-in for most utilities in the near term. Sophisticated TOU plans would likely require smart meters, which most New York utilities have not yet provided to residential customers.
Residential customers investing in smart-home technology, such as connected thermostats and controllable lighting, should also be offered a smart-home rate in the near future. In addition, low-income customers are likely to soon be offered plans that allow them to accrue some of the benefits associated with distributed energy resources.
On the commercial and industrial side, regulators are calling for a change to standby rates for customers with self-generation, including a new reliability credit that would be based on the difference between a C&I customer’s contracted and actual demand.
Although this white paper is just a proposal, the Public Service Commission suggests these recommendations are increasingly moving toward the action stage.
“The critical task is to incentivize the near-term activities that will promote the development of full-scale markets,” the commission staffers wrote. “The pace of change, however, will not be dictated by regulation alone. All markets, and particularly technology markets, evolve at speeds that are often unpredictable and frequently faster than anticipated.”