Introduction1
This is an important compendium. During the recent heyday of books and speeches on the creation of the “Smart Grid”, experts frequently repeated the observation that the integrated power system represented one of the great engineering feats of the 20th century. For the 21st century, I believe that regulatory innovation will be cited by experts as the transformational accelerator that gave birth to the electric prosumer, the widespread integration of distributed energy, transactive power, and their chief enabler, the Distributed System Platform (DSP) provider.
In New York’s plan to Reform the Energy Vision (REV), the transformation of our electric distribution companies from risk adverse, regulated monopolies into innovative, market-enabling, and increasingly efficient and smart platform operators, DSPs, is a central bet for accelerating the achievement of the power system and network innovations that are discussed throughout this book. Like many transformative actions, the launch of REV was stimulated by a significant event. For New York, it was the devastation the State witnessed by four major storms over a short period, culminating with Superstorm Sandy. Under the leadership of Governor Andrew M. Cuomo, the State determined that combating climate change was no longer optional and, therefore, the manner in which power was produced, delivered, and consumed had to change.
New York has extremely ambitious climate goals. Under Governor Cuomo, New York has mandated that it will reduce emissions by 40% by 2030 and ensure that 50% of the electricity consumed in the Empire State is produced by renewable resources by the same time. To achieve these mandates along with equally important reliability, efficiency, and network security goals, the Department of Public Service and the Public Service Commission, the utility economic regulators in the State, were charged with discovering and then instituting the necessary retail market and regulatory reforms.
Readers of this book likely already know that technological innovations provide us with the ability to achieve essential deep decarbonization, while continuing to improve upon the reliability, resiliency, adaptability, and efficiency of the power networks. The real challenge is to convert these opportunities into a reality in a power system that has heretofore been dominated by markets designed around status quo preferences for large central station dispatchable generation, monopolistic utilities who earned almost exclusively from investing in expensive and long lived assets, a presumption that consumers are passive and consumption is largely inelastic, and retail regulatory practices based upon 20th century sensibilities. As the state agency that oversees regulated utilities in New York, the intent is to challenge these presumptions; a challenge common to all regulators across the globe as reflected by the Foreword, the Preface, and the Epilogue in this volume by utility regulators from other parts of the world.
As the retail utility regulator in a State that led on competitive restructuring of the wholesale power system and was an early adopter of retail competition, the necessary focus was on the role and function of the regulated distribution utility. New York previously adopted many of the regulatory mechanisms used to ensure that regulated distribution utilities do not actively oppose programs to increase energy efficiency or the adoption of customer-based distributed energy resources. New York’s regulatory construct already included forward test years, revenue-decoupling mechanisms, and modest incentives for the privately owned utilities. What was missing, however, was the fact that while utilities were not economically harmed by activities at the edge of the network, they had no business reason, other than regulatory compliance, to actively pursue strategies that would support third-party investments on the customer side of the meter or at the edge of the grid. The regulatory changes put in place under REV are designed to provide that incentive.
The crux of the utility changes contemplated in REV can be summarized into the following five areas, many of which are touched upon by the authors of the following chapters.
1. The creation of the DSP: The successful integration of intermittent renewable resources both on the bulk power system and at the edge of the distribution system depend upon the strength of the network business. Transmission and distribution system operators must transform into forward leaning platform businesses that invest in the knowledge, tools, and math that will allow them to function in a world of the millisecond dispatch and a dynamic two-way system, In the modernized networks, reliability and efficiency must be simultaneously managed on the bulk system and at the grid’s edge. For the distribution utility, this means that system operators must have the knowledge, confidence, and tools to increasingly rely on third party–owned distributed energy resources to maintain reliable, resilient, and environmentally and economically efficient operations. For the first time, distribution network operators will need to plan for, understand, and then rely on third party–owned resources at the grid’s edge, as well as consumer behavior as core elements of a secure and reliable network.
2. Promoting and encouraging innovation: Learning to innovate for organizations that pride themselves on low-risk taking and regulatory compliance is a change that requires deliberate and sustained focus. To innovate around a business model or service delivery requires an opportunity to make small bets that can yield large benefits with minimal regulatory interference. The best entrepreneurs learn to place small bets with rapid deployment followed by quick adaptations based on lessons learned. Integrating that thinking into the mindset of slow-moving and process-oriented utilities and regulators required us to adopt a model that allows—indeed requires—utilities to develop business model demonstration projects that serve this critical role. The result has been the creation and continued creation of multiple demonstrations that are allowing for rapid change in the understanding of how the utility can promote innovative solutions and to create employee-based excitement and enthusiasm for the opportunities that are essential to any transformational activity. While regulators cannot mandate innovation, they should do their best not to obstruct or constrain it. This is particularly important given the fast pace of innovation and disruption taking place at the so-called “grid’s edge”—the interface between the distribution network and the consumer, prosumer, or prosumagers—the focus of this volume.
3. Regulated earnings model: Peter Bradford, a former Chair of the New York Public Service Commission made the wise observation that all regulation is in fact incentive regulation, it is just what regulators are trying to incent that changes.2 The broad regulatory change REV is intended to encourage utilities to deliberately move away from regulated capital investing to a business model where significant and sustained earnings can be achieved through information and services that support optimizing the value of distributed energy resources and load management as assets that make the integrated networks more valuable to end-use consumers. Regulators are living in a world where demand for innovation at the edge of the network will continue to grow. The business compliment to this innovation is that regulators have to move away from thinking solely about the volumetric rate for regulated electric services. Rather, regulators need to look at the world from the consumer’s perspective of looking at the total bill and value of received services. For consumers the economic and environmental benefit that can be created from a modern grid is to be active participants in an increasingly dynamic and transactive power system dominated by zero-cost energy resources that are made reliable and efficient by a smart, dynamic distribution network.
The utilities could see that change as a threat to their traditional monopoly franchise business, the so-called “death spiral,” or a source of an opportunity to innovate and grow in a manner that benefits the end user. In New York, regulators have supplied utilities the latter path. Under REV, they are able to earn from activities as varied as those that reduce peak, increase energy efficiency, reduce transaction expense for DER suppliers, and reduce their own capital spend. Under various formulas, these earnings can more than make up for the earnings they would have achieved under the previous business model. However, unlike New York’s current form of regulation, the utility activities in this formula are designed to decrease reliance on spend that finds its way into regulated revenue requirements and thereby result in a system that is smarter, more efficient, and produces an overall bill reduction to consumers. At the same time, New York is fully cognizant of the fact that its utilities remain functioning monopolies that must continually raise considerable capital. Thus, in making these changes, New York will continue to ensure that its regulation balances the needs of shareholders and customers for financially sound companies that are able to attract investment at a relatively low expense.
4. System information and transactive markets: Critical to any well-functioning market is the ubiquitous availability of information that innovators and suppliers can use to develop and distribute value-added products and accurate price signals. REV promotes and requires the development of retail markets that will reduce the costs of third parties to participate in retail markets. To that end, New York requires its utilities to develop and file distribution system plans on a regulator basis, develop cost-effective plans for advanced metering infrastructure, pursue advancements in hosting capacity, and develop markets that provide needed load and system data and monetize the value of dynamic load response and energy efficiency.
The development of accurate prices for dynamic load is a substantial undertaking. Throughout the United States regulators are struggling with the transformation from the convention of net energy metering (NEM) for solar resources, a form of feed-in tariffs, to a price regime that accurately and fully values the ability to manage resources at the grid’s edge or the interface with the customer’s premise. New York is transforming from its blunt tariff-based system that used conventions, such as demand response payments, NEM, and energy efficiency targets, and measurements, to a transactive system that is nondisruptive, unbundled, and identifies the complete value of these resources. These actions set the foundation for creating competitive statewide distributed energy markets that have the durability and depth needed for third-party investments.
5. Fair and cost-effective universal access: The last element of REV that is often overlooked, but critically important, is the maintenance of universal access at a fair and reasonable price. New York has adopted an energy-affordability index that is designed to ensure that no New Yorker is required to spend more than 6% of their income on energy. It is also cognizant of the fact that its economically vulnerable customers are at risk of disenfranchisement from access to energy efficiency and distributed energy without government intervention. Consequently, throughout REV there are numerous initiatives that are designed to ensure that New York avoids the creation of an “energy divide.”
This book is notable because it addresses issues that are central to the future governance and functionality of the distribution network, while encouraging technological innovation and disruption to take place at the grid’s edge. As a society, regulators have to look to decarbonize our energy systems as a critical component of protecting the natural environment. Economic regulators are on the front lines of achieving this goal in manner that maintains the equally important policy objectives of reliable, cost effective, resilient and secure power. This can only occur if regulators embrace network innovation.
Audrey Zibelman
CEO, Australian Energy Market Operator (AEMO) and, Former chair, New York Public Service Commission
..................Content has been hidden....................
You can't read the all page of ebook, please click here login for view all page.