How much should utilities – with their guaranteed rates of return – be allowed to compete in the emerging market for microgrids, energy storage and other distributed energy resources?
The question is a big one, especially in restructured states, where utilities years ago were barred from owning power plants so that a competitive market could emerge.
Independent companies argue that the same rules that apply to power supply should apply to distributed energy, so that utilities do not use their market power to dominate. And the independents appear to have won, at least in an early round in New York.
In an order this week, the Public Service Commission remained firm that the utility can only own the resources under very specific circumstances.
The History
Consolidated Edison, the utility serving much of New York City, in January asked state regulators to loosen up on restrictions to utility ownership of distributed energy resources.
At the center of the issue is a plan by Con Edison to invest $200 million in “non-traditional” resources. The project will avert the need to build a $1 billion substation and related infrastructure in Brooklyn/Queens, where an electrical overload appears to be developing.
The utility plans to install and own battery storage to alleviate part of the problem. The commission approved the storage ownership since it would be on the utility’s property and integrated into its system.
However, the regulatory commission also made clear that this was a limited circumstance, and that typically it will only allow utilities to own distributed energy resources as a backstop when the market fails to step up.
Con Ed appealed the decision in January, arguing that it should be allowed to compete with independent vendors, especially since customers sometimes prefer to deal with a utility, a company that they are familiar with.
Several groups, however, urged the commission to deny the utility request, among them the Independent Power Producers of New York, an organization that represents power plant owners, so has been in such turf wars with the utility for years.
In a filing to the commission, IPPNY said:
“Energy services should be provided cost-effectively by private developers on a competitive basis rather than by transmission and distribution (“T&D”) utilities through rate-of-return regulation. This ensures that private investors, not captive ratepayers, bear investment risks, and that uneconomic projects, which may harm the private developers that must rely on competitive markets for their survival, are not developed. It also ensures that T&D utilities are not able to exercise vertical market power to the detriment of competitive markets and consumers.”
However others, such as the Environmental Defense Fund, countered that the market remains nascent for microgrids, storage and other forms of local energy. Therefore, in this limited circumstance – to avert building the expensive substation — utility involvement makes sense.
The public service commission didn’t see it that way. In this week’s order, it held firm that it wants to see a robust market form for distributed energy resources and utility involvement will get in the way.
The Decision
“The markets will perform optimally where there is both perception and reality of a level playing field, and that is best accomplished by restricting utilities’ participation,” the commission wrote.
The commission has set limited conditions when a utility can own distributed energy. They are when:
1) The utility issues a solicitation, but the market doesn’t respond adequately or the independent projects are too expensive
2) A project consists of energy storage integrated into the utility distribution system architecture
3) A project will enable low or moderate income residential customers to benefit from the resource where markets are not likely to satisfy the need; or
4) A project is being sponsored for demonstration purposes.
Of course, other restructured states may rule differently. But New York is likely to have a lot of influence on regulatory decisions elsewhere. In many ways, it is the first out of the gate in forming a new grid, with its Reforming the Energy Vision policy. So the ruling was clearly a win for competitive distributed energy companies.
The decision is available on the New York PSC website.
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