By now many people are aware of the phrase floating around the utility world: “death spiral.” For those who aren’t familiar, it describes how distributed energy and storage has been decreasing many utility’s bottom line. More and more customers are taking advantage of the cost reductions due to the technological advances in areas like rooftop solar and batteries to reduce their dependency on their local utility. Meanwhile, the utility revenues decline, forcing them to raise their rates in order to pay for the infrastructure to keep the grid alive, as well as ensure that everyone has access to power, whether it’s used or not. The higher rates have driven more customers to turn to distributed energy, and so the “death spiral” continues.
Distributed Energy Resources (DERs) such as solar and battery storage are clearly here to stay. With a high focus on reduction of carbon emissions and the need to “do more with less” within financial budgets, the number of corporations adopting DERs into their strategies are continually increasing in numbers. While there are many benefits, it not only challenges the traditional utility business model, it’s making it unsustainable. Even though some utilities are embracing DERs, others are maintaining the business as usual model and could find themselves struggling in the “death spiral”.
Regulators in New York, California and other developed regions with high energy prices around the world are beginning to disrupt this traditional business model. In New York, for example, after the devastating effect of Hurricane Sandy in 2013 left widespread and dangerous system outages, customers were no longer simply complaining about some of the highest rates in the country, they were also worried about the reliability of the grid. In response to this, and to help utilities avoid descending into the “death spiral”, Governor Andrew Cuomo initiated Reforming the Energy Vision (REV) with the goal to make New York’s electric system cleaner, more resilient and more affordable, and to define the role of utilities in the process. It’s a worthy and ambitious goal, and it’s getting a lot of attention.
REV is driven by New York Public Service Commission (PSC), which also oversees the regulated utilities in the state such as Con Ed, NYSEG, RG&E, and National Grid. In April 2014, the PSC released the initial findings of Track 1 which created the outline of the program as a whole. The six objectives for this initiative focus on increased customer knowledge and tools to support them, system efficiency, reliability and resiliency, fuel and resource diversity and a reduction of carbon emissions.
In fact, the New York Energy Plan targets a 40 percent reduction in greenhouse gasses with 50 percent of electricity coming from renewable sources by 2030. The PSC recognizes that ratemaking models need to be reformed to ensure the utilities’ interests are aligned with achieving these targets. Business as usual creates a mismatch in priorities and is no longer an option for New York.
Track 2 is focusing on just that. A PSC staff white paper released on July 28th titled, “White Paper on Ratemaking and Utility Business Models,” outlines several recommendations to reform ratemaking practices to make sure utilities are in alignment with the vision of REV. The PSC is aware that utilities need to provide reasonable prices to its customers while still maintaining strong investor confidence. Their findings are intended to identify a win-win solution so that utilities can embrace and even find benefit from DERs, while at the same time holding to Track 1’s six objectives. Through extensive outreach and public comment, the findings contained in the white paper focus on three areas of reform:
- Utility business model reforms that in part create opportunities to increase revenue from the Distributed System Platform (DSP) as the DER market matures;
- Incremental ratemaking reforms to the utility revenue model that include a C&I focus on demand-based rates, generating a credit earned from demonstrating consistent reduced reliance on the grid; and
- Rate design reforms to reflect the needs of the evolving energy marketplace.
This track is a process and has a long way to go. But as the April straw proposal states, “REV is an opportunity to improve greatly on the status quo with quantifiable system benefits, but REV is also a response to a convergence of trends presenting severe challenges that makes business as usual unsustainable.” If programs such as REV can find a win-win for customers, utilities, and not to mention reduce carbon emissions, they will help set a roadmap across the nation, making the “death spiral” a thing of the past.
The information in this page is offered only for general informational and educational purposes. It is not offered as and does not constitute legal advice.