TODAY’S STUDY: How New York Is Changing Its Power Sector
Driving Environmental Outcomes Through Utility Reform; Lessons from New York REV
Elizabeth B. Stein and Ferit Ucar, January 2018 (Environmental Defense Fund)
The economics that have driven America’s electric utilities have changed. For a century, utilities’ ability to make profit has depended on their investment in infrastructure, and their revenue has been tied to charging customers based on how much energy they use.
Yesteryear’s approach conflicts with today’s public interests—energy efficiency, less local air pollution, and decarbonizing our economy. It also conflicts with the technological advancements of the last several decades, which now allow energy to flow more freely through copper wires, much as data flows through the airwaves. Customers can now generate, store and even sell their own electricity. They are beginning to “see” their usage and make real-time decisions to change it.
None of this technological change reduces our need for affordable and reliable energy. Rather, in a warming world, that need has only increased. Major storms like Superstorm Sandy and Hurricanes Irene, Harvey, and Irma are painful reminders of how dependent our lives and economy are on electricity.
Around the United States, cities, counties, states and industry are investing billions of -dollars into grid modernization efforts to improve resiliency and future-proof the grid from a mounting wave of disruptive technologies. Together, America’s grid upgrade projects will be the largest infrastructure investment in history.
These efforts have the potential to generate incredible environmental and public health benefits, from reductions in local air pollution to massive reductions in greenhouse gas (“GHG”) emissions. None of these benefits are, however, guaranteed by a modern grid. They must be part of the plan, right along with resiliency and affordability.
The state of New York launched Reforming the Energy Vision (“REV”) to spark a transition of the state’s electric system to “achieve optimal system efficiencies, secure universal, affordable service, and enable the development of a resilient, climate-friendly energy system.”1
This whitepaper examines the approach taken by the New York Public Service Commission (“NYPSC”) and sheds light on the elements that must be included for electric utility modernization efforts to yield maximum environmental benefits.
1. Building a smart platform. A clean grid requires a fundamental improvement in the “intelligence” of the infrastructure, including a smart platform that allows customers to become an active part of the energy network and enables utilities and market participants to efficiently deploy a portfolio of generation. This requires the electricity system to evolve beyond poles and wires into a “distributed system platform”—a transactional platform that will function atop the distribution system.
2. Aligning utility earnings with environmental outcomes. REV is built around an electricity system that is heading toward decarbonization. A low- or no-carbon future is not debated; it is treated as essential. This, of course, creates a significant challenge to utilities that have not only relied on resources that burn fossil fuels, but have generated money mostly by selling more energy. Decarbonizing the energy system will require that environmental outcomes be valued and, therefore, desired by energy providers. If utilities have no incentive to foster the emergence of a cleaner grid, they will not do so. Utility earnings opportunities should arise from GHG emissions reductions, or at least from specific levers that utilities can use to influence GHG emissions reductions.
3. Engaging customers: transforming electricity buyers into market participants. Technology and new types of generation energy will surely play major roles in the modern grid. But actively engaged customers will be significant new players. In a future where grid flexibility is valued, customers who can generate energy or significantly alter demand will become as essential as power plants. For this reason, customers will require access to timely, detailed information about consumption, market signals that reward them for certain consumption decisions, and privacy and data ownership policies that allow them to securely share their energy data with any solution providers they choose. Moreover, to ensure a just transition, it will be essential to include low-income and vulnerable consumers in an effort to transform traditionally passive residential customers into full market participants.
The transformation of the U.S. electric industry now underway offers a unique and remarkable environmental opportunity. The imperative to achieve favorable environmental outcomes must remain in focus if that opportunity is to be fully realized…
Decarbonizing electric supply
Decarbonizing the economy entails decarbonizing generation, converting non-electric energy uses to electricity, and generally operating a leaner, smarter energy system. There are clear pathways for REV-type reforms to push all participants in the distributed energy marketplace in the direction of the cleanest DER and beneficial electrification, and to push the transmission and distribution utilities in the direction of greater efficiency and flexibility. However, in New York, it is expected that the future electric supply portfolio will continue to include large-scale generation, as contemplated in the CES Order.
A decarbonized electric generation fleet can take a number of different forms. Non-emitting resources can include a range of renewable energy generation, which may include solar, wind, and hydroelectric, as well as biogas and other technologies. All types of renewable energy generation have the advantage of not being dependent on exhaustible fuel sources, although some have disadvantages as well. Solar and wind-based generation are intermittent—meaning their output depends on weather conditions, such that these resources cannot necessarily be “dispatched” when electricity users demand power. Hydroelectric generation is eminently controllable, to such an extent that it can function as an energy storage mechanism, but impoundments cause significant environmental degradation, including material levels of methane emissions.117 Additionally, persistent drought conditions, which may be exacerbated by evolving weather patterns influenced by climate change, may limit the availability of some hydroelectric resources. Non-renewable technologies may also have a role to play in a decarbonized grid—and these technologies present trade-offs as well. Nuclear generation produces electricity without emitting GHG or other air pollution; however, it presents other serious environmental challenges, such as waste disposal. Nuclear generation is also incapable of being dispatched in response to demand because today’s nuclear plants are designed to operate at a particular level of output at all times. Even fossil fuel combustion may be able to operate with little or no emissions impact through carbon capture and sequestration, but to date, this technology has proven extremely costly. 118
In light of the environmental drawbacks associated with hydroelectric and nonrenewable alternatives, the non-competitive cost of carbon capture and storage, and the continually declining cost of solar PV and wind energy, it is likely that intermittent renewable resources will provide a significant or even dominant share of the future low- or non-emitting generation fleet. Based on the programs currently in place,119 that seems to be the direction that New York favors.
The most efficient approaches to achieving New York’s goals would involve internalizing the externalities associated with carbon dioxide emissions on an economy-wide (not just electric sector) basis.120 This would drive migration to cleaner generation and also decarbonization across sectors. For example, to the extent that electric vehicles cause less GHG pollution than gasoline vehicles, electric vehicles would enjoy a relative fuel cost advantage, which would naturally create incentives for a wide variety of market actors to accelerate their adoption of electric vehicles.
Whatever pathway is chosen to drive the large-scale generation in the direction of decarbonization, the mix of regulatory and market tools deployed, together with technological, market, and societal developments that cannot yet be anticipated with precision, will shape outcomes in ways that may or may not be predictable. The connection between REV and any of these outcomes is not yet clear. The distribution utilities that are economically regulated by the NYPSC—the entities whose regulatory framework is being reshaped by REV—generally do not own or operate generation, nor do they select the large-scale generation that will serve their distribution customers.
What more could REV do?
REV’s vision of electric distribution utilities as transactional platforms aligns well with the environmental imperative to use the electric system as a platform for decarbonizing the entire economy. However, although REV has gone some significant distance toward aligning utility earnings and business practices with emerging market realities and policy imperatives, more could be done to encourage the electric utilities to embrace their role as a decarbonization platform. Recent efforts to bring certain REV principles to the gas distribution business— notably the introduction of the concept of “non-pipelines solutions”121—may eventually dovetail well with this transformation, but more will be needed to ensure that the gas business changes, which should include significant contraction in the coming decades, are well coordinated with the changes that are needed in the electric sector. Giving distribution utilities a direct stake in a low-GHG-emissions future would be a transformative step, but for now that has not yet become a reality, nor has it been clearly directed by the NYPSC.
Under REV as currently promulgated, distribution utilities do not yet have an economic interest in minimizing carbon dioxide and other GHG output for the electric system, let alone the economy as a whole. In light of the opportunity that electric utilities have to shape the market in which their customers operate, this gap is problematic; if it is not bridged, New York will be considerably less likely to meet its environmental goals, and certainly less likely to do so in a manner that harnesses the full creative power of the marketplace.
To that end, the NYPSC and other state regulators considering REV-type reforms should consider opportunities to tie utility earnings opportunities to GHG emissions reductions writ large—or at a minimum, to more specific levers for emissions reductions. At this time, the only earnings opportunity called for in REV orders that represents a clear step in the direction of rewarding utilities for improved environmental outcomes at the scale of the entire marketplace is the EAM for improved energy intensity. While this is a laudable step, it also reflects an outdated understanding of the role of the electric system in driving environmental outcomes. It assumes that less electricity use should be the environmental goal, when in fact lower emissions overall are the goal. Less use of electricity can help reach this result—but so can a stable amount of electricity use, if the electricity comes from relatively lower-emitting sources (for example, due to strategically-timed consumption). Even increased electricity use does not necessarily preclude emissions reductions, if that increased use means that comparatively low-emitting electric energy is being substituted for higher-emitting fossil fuel combustion (i.e., environmentally beneficial electrification).
Indeed, thanks to environmentally beneficial electrification, the long-term future may be one of higher electricity consumption, and greater customer reliance on the electric grid may be critically important to the utilities’ financial health in the future.122 Instead of giving the utilities a small economic interest in a metric that could have perverse results, it might be preferable to give them a substantial economic interest in metrics that accurately capture what society needs them to accomplish. The Con Edison EAM collaborative has provided a welcome opportunity to begin envisioning how such metrics might operate. A GHG-reduction EAM could consist of a utility earnings opportunities that relates to a wide range of activities that their customers engage in in order to give the utilities a reason to want to be maximally supportive of such customer activities. For example, utilities could have earnings opportunities associated with their customers’ increased reliance on renewable generation, with the emissions efficiency of their customers’ electricity use, or with their customers’ deployment of environmentally beneficial electrification.123 It may not be readily apparent what the electric utilities can do to realize these earnings opportunities, but that is the purpose of the EAMs: to encourage utilities to innovate outside the approved programs that their regulator has already directed them to execute and for which they have been provided with funding.
Further, in light of the critical role of the electric system as a platform for economy-wide decarbonization, the NYPSC and other regulators would do well to think as holistically as possible about these earnings opportunities. For example, where possible, electric utilities should be directed to consider their customers’ full GHG footprint—at least as related to natural gas and electricity, but even, to the extent jurisdictionally possible, emissions associated with customers’ transportation habits. While electric utilities lack direct control over these nonelectric emissions sources, their systems may hold the key to reducing the emissions associated with them, and their business practices and rates may play a central role in shaping how customers change their electric consumption habits. Earnings opportunities that reward utilities for optimizing this potential of their system would give them reason and opportunity to think broadly about how customers and other market participants might accelerate their movement away from fossil fuels, and what they can do to facilitate that transformation.