June 18, 2014

CESA States Push For Grid Modernization

By Todd Olinsky-Paul

We in the Northeast have seen firsthand the enormity of the changes wrought by Hurricane Sandy – not only the storm damage itself, but subsequent and longer-lasting changes in state policy addressing resilient power and the electric grids.

Now two grid modernization initiatives, announced in New York and Massachusetts, show just how deep these changes go.

Last week, the Massachusetts Department of Public Utilities issued an order requiring electric distribution utilities to file a 10-year grid modernization plan.  The DPU is also working on a second order requiring variable time-of-day pricing in place of the current flat rate paid by most customers in Massachusetts.  With these orders, Massachusetts becomes the first state in the nation to require electric distribution companies to significantly modernize their grids.

The grid modernization requirement addresses four objectives: (1) reducing the effects of grid outages; (2) optimizing demand, which includes reducing system and customer costs; (3) integrating distributed resources; and (4) improving workforce and asset management.  There is also a required five-year short-term investment plan (“STIP”), that focuses on advanced metering; however, other capital investments are also allowable under the STIP, so long as they are related to grid modernization and justified with a business case analysis.

The MA DPU is citing a number of expected benefits that should flow from its modernization initiative, including that customers will be better able to manage electricity costs, that electricity supplies will be more reliable in the face of increasingly extreme weather events, that electricity markets will become more competitive, and that climate change and clean energy mandates will be addressed by increasing integration of renewable generation, demand response, electricity storage, electric vehicles, and energy efficiency.

The MA DPU’s forthcoming order requiring the adoption of time-of-use rates is arguably even more important for resilient power technologies such as electricity storage.  This order is designed to allow electricity customers to save money by buying electricity at low-demand times, when rates are low; in turn, this lowers the peak demand profile for the entire grid, meaning less generation capacity will be required to be standing by to meet peak requirements (currently, more than one-third of the state’s generation capacity provides electricity for only ten percent of hours during the year).  The change from flat to time-variable rates should create a market for electricity arbitrage, and create favorable conditions for energy storage and distributed generation.

New York has taken an even more direct approach, with legislation being proposed by New York Attorney General Eric Schneiderman that would require that state’s electric and gas utilities to file a “Climate Change Impact Statement” with the state Public Service Commission, assessing their preparedness for storms and detailing planned improvements to prevent future power outages.  New York has already required Con Edison to invest $1 billion to prepare its electricity infrastructure to withstand severe storms and rising sea levels; this new legislation broadens the climate change preparation requirement to include the state’s other utilities.  Schneiderman has been quoted as saying, “New Yorkers learned the hard way after Sandy and Irene that many of our utility providers are unprepared for a future of more extreme weather…. By requiring gas and electric utilities to assess their vulnerability to climate change and then outline their plans to protect their energy systems, we can ensure that utility providers are investing ratepayer dollars wisely.”

In addition, New York Governor Cuomo has tasked the New York Department of Public Service with re-envisioning the state’s entire electricity system in its “Reforming the Energy Vision” (REV) program.  The purpose of this effort is to explore how a distributed grid architecture can be implemented on a wide scale.  As with Massachusetts, the New York DPU sees the state’s distribution utilities are central players in this effort.

We hope that these Northeastern initiatives toward grid modernization and climate change preparation indicate a broader movement at the state level.  Although some utilities are embracing technological and market advances such as solar + storage on their own, and actively seeking ways to mitigate the effects of climate change, many others are ignoring or actively resisting these trends.  Already, we have seen Morgan Stanley warning utility investors that electric customers may soon have the option to abandon the electric grid entirely – a conclusion reinforced by Rocky Mountain Institute’s excellent report, The Economics of Grid Defection.  Now, we see Barclays downgrading the entire electric sector of the U.S. high-grade corporate bond market, for the simple reason that most utilities appear to be ignoring the threat to their business model that is represented by solar + storage.  To quote Barclays:

We believe that a confluence of declining cost trends in distributed solar photovoltaic (PV) power generation and residential-scale power storage is likely to disrupt the status quo… the cost of solar + storage for residential consumers of electricity is already competitive with the price of utility grid power in Hawaii. Of the other major markets, California could follow in 2017, New York and Arizona in 2018, and many other states soon after…. We believe that solar + storage could reconfigure the organization and regulation of the electric power business over the coming decade.

These changes are coming at the right time.  Just at the moment when climate change-related severe weather events threaten increasing damage from power outages, the confluence of two powerful trends in the electricity sector – the increasing need for resilient power, which solar + storage can in many cases provide, and the decreasing cost of solar + storage relative to grid-purchased electricity – seems to be setting the stage for a revolution in the way electricity is generated, sold, delivered and used in this country.

Utilities are well positioned to lead this revolution, and to better protect people from damaging extreme weather events.  If they do not lead it, they may be left behind by it.