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New York Lays Foundation for Electricity Regulation Reform

new york energy future renewables

This post was co-authored by Ashwini Bharatkumar and Max Luke

Last Thursday, New York’s Public Service Commission (PSC) issued a landmark order that signaled that the State’s push to revolutionize its electric power sector is gaining steam. The order is part of an ambitious initiative known as “Reforming the Energy Vision” (REV), a regulatory proceeding that began in April 2014. The REV initiative is the Empire State’s response to a confluence of factors – including increasing competitiveness of renewable energy technologies, aging grid infrastructure, extreme weather events, and system reliability and resiliency needs – that are putting pressure on New York’s electricity system to change. The new order, “Order Adopting Regulatory Policy Framework and Implementation Plan”, is the first major order to emerge from the proceeding that lays out a path forward for implementation of the REV.

Here we provide a brief overview of some of the key elements of the new order and why they matter, and we discuss some of the challenges the Commission has identified as it moves forward with the REV proceeding and implementation.

The new order clearly articulates the overarching objectives of the REV initiative. The rationale of the REV is to tap into the distribution system, or customer side of the electricity system. The distribution system, the New York Commissioners write, represents an enormous and largely untapped resource to improve the value of the overall power system. The goal of the REV project “is to establish markets such that customers and third parties can be active participants and to achieve dynamic load management on a system-wide scale.” It is envisioned that under such a framework, distributed energy resources (DER) will compete on a level playing field with and enhance the integration of cleaner, more efficient centralized resources, and DER will become integral tools in the planning, management, and operation of the power system.

At the heart of this vision is a partnership between 1) end-users and non-utility technology providers and aggregators acting as providers of electricity services, and 2) distribution utilities acting as “Distributed System Platform (DSP) providers.” As DSP providers, distribution utilities are tasked with managing a statewide platform to provide uniform market access to customers and providers of DER. The current role of New York State’s electricity distribution companies in ensuring reliable and affordable electricity and in planning and operating the State’s distribution networks makes them the prime candidates to manage the DSP. The Commission asserts that integrating the role of DSP provider with the existing roles of the distribution utility will align utilities’ incentives, obligations, and capabilities to enable rather than resist the integration of DER. The Commission’s Platform Technology Working Group describes the DSP as such:

The DSP is an intelligent network platform that will provide safe, reliable and efficient electric services by integrating diverse resources to meet customers’ and society’s evolving needs. The DSP fosters broad market activity that monetizes system and social values, by enabling active customer and third party engagement that is aligned with the wholesale market and bulk power system.

The order describes the three core functions of the DSP: 1) to plan the electric distribution system; 2) to operate the physical distribution network; and 3) to operate the markets that encourage the adoption of DERs. We summarize the key elements of each of these functions below.

First, the DSP will function as an integrated system planner, overseeing the incorporation of DER in distribution system planning. Under this framework, distribution companies acting as DSPs will continue to be responsible for system planning and construction; however, the system planning information will need to be made transparent to customers and technology providers in order to support the development, utilization, and market participation of DER in meeting current and future system needs. This information will be disclosed in a multi-year Distributed System Implementation Plan submitted to the New York PSC. The Distributed System Implementation Plan outlines DSP plans and objectives in order to help market participants identify opportunities and build business cases to meet system needs.

Second, the DSP will play a key role in integrating DER in distribution system operations. Again, distribution utilities, acting as DSPs, retain primary responsibility for overseeing distribution operations. However, with increased visibility, monitoring, and control of distributed generation, loads, and network assets, and expected growth in reliance on DER, the DSP takes on a more active system management role by balancing generation and controllable load through dispatch of market-based DER, and ensuring the provision of ancillary services within the distribution network. The distribution utility or DSP functions much like an independent system operator (ISO), the independent organization that operates the electricity generation and transmission system.

Third, and finally, the DSP will operate markets that enable the integration of DER into the State’s electricity distribution system. A critical role of the DSP will be to establish uniform definitions and methods of valuation of products and services, uniform rules and conditions for market participation, and uniform technical protocols. In addition to operating “retail” markets for distribution services within a distribution service area, the DSP is tasked with coordinating retail and wholesale operations and markets. The Commission’s vision proposes multiple alternatives for what such a coordination role may look like, including DER providers participating directly in wholesale markets; the DSP aggregating services by DER providers and participating in wholesale markets; or the distribution utility participating in wholesale markets much as it does now, with wholesale markets effectively blind to the particular distributed resources deployed within the distribution service area. 

The Commission notes that while commodity prices – prices for energy, capacity, and ancillary services for example – will continue to be established in markets managed by New York’s independent system operator (NYISO), the DSP will “design and offer tariffs” that allow it to leverage DER and load management to reduce distribution investment and operating costs and to enhance system efficiency. The Commission holds that designing and communicating these price signals to guide DER operation is an inseparable component of the operation of the distribution network.

In setting forth its vision for the DSP’s role in market operation, the Commission recognizes the staged nature of market design and implementation.

Staff recommended a phased approach to implementation, distinguishing among “near term no-regrets” actions, transitional steps, and the planning and design of mature REV markets.

Rather than proposing immediate development of new markets for new services, the Commission envisions the procurement of “near-term products” such as peak load modifications, non-bulk ancillary services, and load management to enable investment deferral and more secure system operations with near-term pricing and market mechanisms such as RFPs and load-shaping rates and tariffs. Eventually, a wider array of services and products may be procured in more sophisticated auction-based markets. Service providers will be free to develop new offerings based on their assessment of customer needs and products, such as fixed commodity pricing, demand response and efficiency programs, and others. The market will also support alternative supply models such as community aggregation, microgrids, and community based solar and storage. As the capabilities of the DSP evolve, so will the procurement of DERs.

However, this is only the beginning, and open questions and challenges remain ahead. The Commission emphasizes that critical to the success of its ambitious vision is the reform of ratemaking practices. Electricity distribution companies are currently regulated under a cost-of-service model, with incentives to increase their own capital investments and to cut operating expenditures, but not to enable third parties to generate value for customers. The Commission’s vision recognizes the need for utility revenues to depend more on creating value for customers and achieving broader policy objectives. The Commission intends to address these issues in subsequent orders and rate proceedings, striving to create a remuneration process and rate structure that better-aligns the incentives for distribution utilities with the vision of their role as platform providers.

The Commission articulates a compelling vision of an environment in which the distribution utility, serving as a DSP provider, functions as a partner to and enabler of third-party DER integration in a “transactive relationship.” However, the Commission also identified considerable concern amongst stakeholders over the appropriate role of the distribution utility in dispatching DER, in providing both distribution and DSP functions, and in serving as the coordinator between retail and wholesale markets.

While we have concluded that the utilities should expand their obligations to incorporate the functionality of a DSP, we are also alert to the legitimate concerns that utilities as traditional delivery companies will need to undergo fundamental changes, and DER markets may not prosper unless the Commission establishes clear expectations and monitors performance.

Additionally, the Commission staff recognizes the importance of enabling transparent communication of system condition and price information to all service providers and customers in the DSP in order to ensure market participation and prevent the exercise of market power. In the long term, the Commission envisions the creation of a customer data exchange to enable access to customer data at varying levels of granularity, as well as the creation of a system data exchange to grant DER providers with access to relevant system data. Ongoing efforts in Market Design and Platform Technology will further consider whether or not particular DSP functions are best separated from distribution utility operations and will aim to engage stakeholders in continued development of the vision. The order also outlines plans for developments in other important areas of implementation, ranging from altering incentives for utility energy efficiency programs and enabling integration of large-scale renewables, to ensuring access and affordability for low- and moderate-income customers.

The New York REV is an impressive step towards a comprehensive redesign of the electricity sector. We look forward to watching the implementation of this vision unfold. It is very well possible that New York’s landmark proceeding – along with ongoing proceedings in other jurisdictions – could initiate a wave of regulatory changes by utility commissions across the United States.

Ashwini Bharatkumar and Max Luke are both students at the Massachusetts Institute of Technology and researchers on MIT’s Utility of the Future Study.

Photo Credit: New York State Energy Planning/shutterstock

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