An Interview with NY’s Energy Czar on Advancing Microgrids and Re-creating Utilities
This is the first in a series of interviews with notables who will speak at Microgrid Knowledge’s May 19 conference, “New York and Beyond: Advancing Microgrids Nationally with Lessons Learned in New York.”
Here New York state energy czar Richard Kauffman, who will serve as the morning keynote speaker, offers insight into how New York is re-creating the 100-year-old electricity industry.
‘REV’ is a short acronym packed with radical meaning for the power industry. It stands for ‘Reforming the Energy Vision,’ a re-creation of New York’s electricity market that is being carefully watched nationwide as a model for the grid of the future.
Policy reform is not unusual in the electricity industry. But it tends toward adjustments that don’t deeply disrupt the utility. This isn’t surprising. Utilities operate under complex regulations and safeguards that don’t lend themselves to easy change.
But New York decided to brave a big transformation two years ago when it realized that the power industry faced a host of oncoming challenges – from climate change to flattening of electricity sales to an influx of new tech. So Governor Andrew Cuomo in 2014 launched REV, a questioning and remaking of the very market structure under which electricity is delivered to retail customers.
“We recognized that business as usual is bad public policy,” explains Richard Kauffman, who is leading the effort as the chairman of energy and finance for New York State.
New York saw REV as an opportunity to make the most of clean energy’s economic and environmental potential. Without some big changes, the power industry was headed for trouble in the form of rising utility bills and growing customer dissatisfaction. Policymakers feared the emergence of a socially unjust clean energy economy, one made up of haves-and-have-nots.
“That’s the reason why we have gotten involved in REV, to try to see if we can get ahead of some of these trends so that we have some control over our destiny — so that our future isn’t just handed to us,” Kauffman says.
Détente for Utilities and Distributed Energy
Now, with some REV initiatives underway and others still being worked out, a clearer picture is forming of a REV-like industry.
Like many of today’s energy reforms, REV envisions a more efficient, cleaner grid that gives consumers more technology choices and control. But REV does so differently than most.
“It requires a change in culture and business model for the whole system,” Kauffman says.
REV moves the electric industry away from a monopoly, top-down and incentive driven system to one that is governed by the market and emphasizes distributed energy.
One of the most interesting changes is a new job created for utilities. They will run a distributed system platform, a kind of market exchange, where microgrids, solar, energy efficiency and other distributed energy resources will compete to serve the grid.
“The polices being undertaken are pro-consumer, pro-innovation, markets-based. And they have as an effect, a system which over time will become more affordable and resilient and more valuable to customers. And it will also be cleaner,” Kauffman says.
But what exactly does that mean for advancing microgrids?
REV intends to integrate more distributed energy into the grid. So the policy clearly opens new opportunities for microgrids. But it does more than that, as Kauffman describes it.
REV could undo the long-standing rivalry – some might say animosity – between utilities and their perceived competitors – independently developed microgrids, solar, energy storage, combined heat and power and the like.
But getting to this détente, one born out of market forces and not government fiat, isn’t going to be easy, Kauffman says.
For one thing, the players will have to shift thinking about who they are, what they buy and sell, and how they derive value.
“It’s a different way of thinking for distributed energy companies, and it’s certainly a different way of thinking about it from a utility standpoint,” he says.
Utilities as Businesses
As it stands now utilities integrate distributed energy resources as a matter of regulatory compliance. In some parts of the country, utilities resist. They see distributed energy robbing them of sales.
But under REV, utilities integrate distributed energy as a matter of business; it’s part of their job managing the distributed system platform.This allows utilities to think about capital in a new way.
“The history of business in the last 35 years has been about capital efficiency. If you are going to survive, you have to figure out how you are going to become much more capital efficient,” Kauffman says.
But pre-REV, the regulated utility had little incentive to pursue capital efficiency.
“We’re starting from a system which is quite capital- and quite energy-inefficient, a system where there have not been market incentives to focus on the total cost of delivering energy to customers,” he says.
In fact, only about 1.35 percent of a typical utility bill represents profits from capital deployed. That leaves more than 98.5 percent to work with. States have typically tried to spur more green and distributed energy with funds collected from fees added to the utility bill. Under REV, the money instead can come from better use of the 98.5 percent.
This change “requires migration of utilities away from thinking about their compensation being based upon deploying capital and instead thinking about compensation arrangements that are geared toward creating more capital efficiency,” he says.
Under REV, utilities won’t own distributed energy (except under rare circumstances.) They will instead achieve their capital efficiencies – and earn profit — in the management of the distributed system platform. The utilities might, for example, achieve capital efficiencies by encouraging more distributed energy, demand response or energy efficiency in areas where the grid is congested.
Exactly how utilities will be paid under REV is now being worked out in rate cases, demonstration projects and upcoming orders due from the state Public Service Commission.
Credit: Jim Henderson
Advancing Microgrids and the Public Good
Meanwhile, the competitive side of the power industry needs to expand its role too, according to Kauffman.
While utilities need to think more like businesses, distributed energy companies may need to think more like utilities.
“We’ve said that part of the change utilities need to do is to start thinking about distributed energy companies not as the enemy or as competitors.…Well that’s true the other way around. Many companies in the distributed energy world, they tend to view utilities as the enemy,” Kauffman says.
Further, distributed energy companies are apt to focus solely on how their project will help their customers. “They aren’t really thinking about all customers,” he says. “We would want distributed energy companies to think about their role as market participants for the benefit of all people in New York, not just for their customers.”
Training Wheels for Distributed Energy
The distributed energy industry has relied on government grants for a long time. That has to change too, says Kaufmann.
That notion may seem surprising in light of Cuomo’s recent announcement of a $5 billion Clean Energy Fund. But like many New York energy programs now, the fund comes with a REV slant. Incentives are a means to create a market that will no longer need incentives.
Under REV, clean energy programs migrate away from one-time grants and focus money where it can “unlock market barriers,” says Kauffman. For example, incentives are used to drive down soft costs — the price paid for customer acquisition, financing, installation and other parts of a project aside from the actual energy plant.
“Even a state the size of New York isn’t going to really have a meaningful impact on the cost of CHP or solar or windmills. We’re not big enough. But we can have big influence on soft costs,” he says.
In another example, New York uses incentives to help an industry reach scale. Under the solar incentive program known as NY-Sun, incentives decline within a pre-determined schedule when the industry reaches certain milestones.
For microgrids, the most significant incentive program is the NY Prize, a $40 million competition to develop community microgrids. The NY Prize operates under a REV philosophy, offering seed money to communities in the hope of building industry scale and driving down costs.
Already, it seems to be working. In the first phase, New York intended to grant feasibility study money to about 25 communities. But the state received so many strong applications, it instead chose 83 projects. As a result, the program has attracted a bevy of microgrid developers and vendors, including some of the world’s largest infrastructure companies.
Without the galvanizing force of the NY Prize, these companies and communities probably wouldn’t have come together, or at least not as easily or quickly. “For us to spend a relatively small amount of money and identify dozens of projects – that’s good value for the money,” Kauffman says.
Only a handful of community microgrids will win the biggest pot of money offered by NY Prize – up to $5 million toward build-out and construction. But the state expects the program to attract private investors that will build others.
“Our hope and expectation is that out of this 83, there are going to be some number that are financeable on their own – the private sector can take over,” he says.
Work and More Work
It will take New York years to fully embed REV thinking into policy, rules and operations. Today the state faces the difficult task of moving from philosophy to practice, to “translating those concepts into the how,” says Kauffman.
This means continuing the ongoing process of gathering all of the parties to the table to do the hard work and math.
“Government can set policy, and we’re trying to do that,” he says. “But ultimately it will come down to private sector actors that are going to work with each other.”
Learn more about how REV is advancing microgrids and changing the electricity market. Join Microgrid Knowledge May 19 in Manhattan at “New York and Beyond: Advancing Microgrids Nationally with Lessons Learned in New York.”
