May 21, 2014

Reforming the Energy Vision: Moore’s Law and the New York Department of Public Service

By Todd Olinsky-Paul

We have been tracking various state and federal initiatives that address resilient power and related issues, such as the integration of renewables and other distributed generation resources, the need to move to a more decentralized power system, and the need to create functioning markets for societal benefits such as resiliency and clean energy.  For the most part, these initiatives, while positive, have been fragmentary: an RFP here, a new regulatory standard there, “smart grid” programs that somehow seem to end up with the installation of a few new meters.  But recently New York State announced that it will be taking a giant step toward a more holistic approach to the problem.

The announcement came in the form of the New York Department of Public Service’s “Reforming the Energy Vision” (REV) program.  Essentially, Governor Cuomo has tasked the DPS with revisioning the entire electrical system.  The effort begins with a 91-page report and proposal that is impressive in its breadth.  Its purpose is to explore how a distributed grid architecture can be implemented on a wide scale.

The REV document begins by correctly identifying the current grid structure as a dinosaur that has failed to evolve with the rest of the world.  Restructuring, which was expected to lead to more competition and lower cost, has benefited large utility customers to some degree, but not most smaller commercial and retail customers.  Over the past winter, the report notes, “Many residential customers with average usage levels saw their winter electric bills increased by over 80 percent.”

To some degree, this is related to climate change and an increased reliance on natural gas, which can cause price volatility.  But high costs, the report points out, are also inherent in the inefficiency of the bulk power model, which requires that generation and transmission infrastructure be sized to meet peak loads.  In New York State, retail peak demand is approximately 75% percent higher than the average load, resulting in a total rate of system utilization of less than 60%.  The report notes that this is considered a normal rate in the utility industry, and points to a number of factors that hamper the efficiency of electricity markets, among them the lack of electricity storage capacity, constrained transmission, and demand insensitivity to price.  Electricity markets have “tolerated” these conditions, according to the report, “but at a cost.”

The report also calls out a number of stresses and opportunities for change in the traditional electricity system, including:

  • New York struggles with an aging electricity infrastructure, which will require an estimated $30 billion infusion of capital over the next decade;
  • Peak demand is growing, while the sales base for utilities remains flat;
  • Predictions of increasingly severe weather will exacerbate existing problems and complicate planning, and this, coupled with the heightened resiliency needs of the digital economy and rapidly dropping costs for distributed generation technologies, may impel some customers toward self-generation;
  • Heavy dependence on natural gas for electricity generation has increased price volatility;
  • As rechargeable electric vehicles move into the mainstream, they may pose capacity challenges for some distribution circuits.

The solution proposed by New York’s DPS is to change the architecture of the electricity grid from a top-down, centralized “hub and spokes” model to a more distributed model.  The DPS report anticipates that this change will result in greater efficiency and less volatility, and that customers will benefit from lower costs, greater reliability and reduced emissions.  Customers will also gain the opportunity to “optimize their individual priorities with respect to resilience, power quality, cost, and sustainability.”

Central to this new model are the distribution utilities, which the DPS sees as playing the role of Distributed System Platform Providers (DSPPs).  These DSPPs are supposed to mediate between the customer and the bulk power system, coordinating customer activities to improve efficiency and reduce the need for infrastructure investments.  The DSPPs are also supposed to coordinate Distributed Energy Resources (DER) markets, in which both generators and retailers will participate, which will allow the monetization of services that are not compensated in existing markets (see table).

It is difficult to overstate the importance of the DSPPs in the DPS vision.  For example, “The DSPP will create markets, tariffs, and operational systems to enable behind the meter resource providers to monetize products and services that will provide value to the utility system and thus to all customers. Resources provided could include energy efficiency, predictive demand management, demand response, distributed generation, building management systems, microgrids, and more.”

The DPS correctly characterizes this vision as a “dramatic transformation” of the existing system, that will require a revision of the existing regulatory paradigm.  Expectations of utility performance will change, as will the assumptions that underlie ratemaking.  Customers will be transformed from passive consumers of electricity to active participants in electricity and related commodity markets.

Energy storage is also expected to play a significant role in the new electricity system.  But, rather than setting a capacity goal for storage as was recently done in California, DSPPs are supposed to “identify economic applications of storage” in conjunction with market participants.

To reach its vision of an electricity system of the future, the DPS recommends “incremental steps… requiring input from parties and market participants as the Commission’s proceeding moves through its policy-making and implementation phases.”  But the DPS also notes that “Moore’s Law will tend to outpace regulatory change.”  Loosely interpreted, Moore’s Law states that technology advances at an exponential rate – much faster, in other words, than the recommended “incremental steps” of policymaking.

This may already be happening.  For example, a recent Morgan Stanley report highlighted predictions that in many states, installing customer-sided PV with battery backup could soon be cheaper than purchasing utility power.  The specter of such technological advances mooting incremental regulatory changes, such as those recommended in the NY DPS report, is already giving utility investors sleepless nights.

The Cuomo Administration and the New York Department of Public Service should be commended for their willingness to name and confront the issue, as should some progressive utilities that are embracing distributed generation rather than pretending it doesn’t exist.  However, much depends on next steps, both in New York and across the nation.  And those with the most to lose in the energy economy should be leading this charge, because – as Moore’s Law reminds us – innovation doesn’t wait for policy.

For more information on the NY REV proposal, visit the NY PSC’s website.

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