Reforming the Energy Vision in New York State September 2018

Background: Vertically Integrated Utilities or Not?

In the other half, including New York, utilities do NOT own generation Background: Vertically Integrated Utilities or Not? In about half of U.S. states, electric utilities are “vertically integrated,” meaning they own generation, transmission and distribution In the other half, including New York, utilities do NOT own generation

Clean Energy Standard: 50% by 2030 A mandate that by 2030, 50 percent of electricity must come from renewable sources

Meeting the 50 Percent Mandate We cannot achieve the 50 percent renewable mandate by continuing to “bolt on” Distributed Energy Resources (DER) and renewable energy to a grid architecture that wasn’t designed for those types of resources

The 20th Century Grid

Supply is determined on a given day by a fixed estimate of demand The 20th Century Grid Electrons flow in one direction from large power plants often over hundreds of kilometers to cities Supply is determined on a given day by a fixed estimate of demand

Good for DER host customers… The 20th Century Grid Good for DER host customers… but good for all?

Creating the Grid of Tomorrow

Features of the 21st Century Grid: Creating the Grid of Tomorrow Features of the 21st Century Grid: A mix between large power plants and DER Electrons flow in more than one direction Supply and demand are dynamic Intermittency of renewable resources are paired with storage and adjustable load

Why aren’t we building the 21st century grid? The Challenge Why aren’t we building the 21st century grid?

Because we have policies and regulations that The Challenge Because we have policies and regulations that keep us rebuilding the old grid

The current grid is energy inefficient (it was not designed that way) The Challenge The good news: The current grid is energy inefficient (it was not designed that way) The current grid is financially inefficient

The Challenge

Low capacity utilization: The Challenge Low capacity utilization: The grid is built for the hottest hours or days of the year, but customers pay all year long

Low capacity utilization: The Challenge Low capacity utilization: Because the current grid is so financially inefficient, in New York State we can largely build the new grid within the “cost envelope” of the existing bill

Three Elements of Reforming the Energy Vision: Creating the Grid of Tomorrow Three Elements of Reforming the Energy Vision: Establish locational value for Distributed Energy Resources Change regulated utility incentives and business practices Stimulate grid edge activity with government resources

Three Elements of Reforming the Energy Vision: Creating the Grid of Tomorrow Three Elements of Reforming the Energy Vision: Establish locational value for Distributed Energy Resources Change regulated utility incentives and business practices Stimulate grid edge activity with government resources

1. Locational Value: Grid “Opportunity Zones”

Three Elements of Reforming the Energy Vision: Creating the Grid of Tomorrow Three Elements of Reforming the Energy Vision: Establish locational value for Distributed Energy Resources Change regulated utility incentives and business practices Stimulate grid edge activity with government resources

Traditional Utility Business Model: 2. Changing Regulated Utility Financial Incentives Traditional Utility Business Model: Through rates, utilities recover costs of providing service plus a regulated return on capital deployed (known as rate based regulation) The more capital deployed, the greater the profit The more capital deployed, higher rates unless there are more customers to share costs

What’s wrong with the model: It’s expensive: excess capital deployed 2. Changing Regulated Utility Financial Incentives What’s wrong with the model: It’s expensive: excess capital deployed It’s a deterrent to adoption of new technology It discourages use of distributed energy resources (DER)

Utility Revenue Sources Creating an Incentive for Utility Innovation Utility Revenue Sources Fuel Other Taxes Income Taxes Depreciation and Amortization Other Expenses Wages and Benefits Capital Costs UTILITY PROFIT: 6-7%

2. Brooklyn-Queens Demand Management (BQDM) Program Targeted Brooklyn-Queens Networks

Traditional solution: $1.2 billion substation 2. Changing Regulated Utility Financial Incentives Traditional solution: $1.2 billion substation

Instead of Request for Proposals… 2. Changing Regulated Utility Business Practices Instead of Request for Proposals…

… request for Solutions 2. Changing Regulated Utility Business Practices … request for Solutions $200 million for: Solar Storage Efficiency CHP Demand response Instead of $1.2 billion substation

2. Changing Regulated Utility Business Practices Utility Procurement 2.0 Every utility knows when it is going to commit capital Utility proposes its solution to market participants, together with underlying data on grid and load conditions Market actors submit their own ideas Utility and regulator evaluate alternatives If alternative solutions are cheaper, utility can earn a share of savings

2. Changing Regulated Utility Business Practices Non-Wires Solutions (NWS) approach: If every state adopted a non-wires approach, the carbon benefit could reach 3.5 billion metric tons between now and 2030 – avoiding as much carbon as the entire U.S. wind fleet.

Utility Revenue Sources 2. Changing Regulated Utility Financial Incentives Utility Revenue Sources Fuel Other Taxes Income Taxes Depreciation and Amortization Other Expenses Wages and Benefits Capital Costs UTILITY PROFIT: 6-7%

We can go beyond deferred capital: 2. Changing Regulated Utility Financial Incentives We can go beyond deferred capital: Utilities now have incentive to reduce power supply costs We will now see if “negawatts” are a possible business for utilities

Three Elements of Reforming the Energy Vision: Creating the Grid of Tomorrow Three Elements of Reforming the Energy Vision: Establish locational value for Distributed Energy Resources Change regulated utility incentives and business practices Stimulate grid edge activity with government resources

Stimulating grid edge activity with government resources…

Previous support programs: 3. Stimulating Grid Edge Activity Previous support programs: $1 billion per year – 85% in the form of one-time grants…

Problem: Lack of Scale Previous support programs: 3. Stimulating Grid Edge Activity Previous support programs: $1 billion per year – 85% in the form of one-time grants… Problem: Lack of Scale

New York State’s new $5.2 billion Clean Energy Fund: 3. Stimulating Grid Edge Activity – Clean Energy Fund New York State’s new $5.2 billion Clean Energy Fund: Emphasis on reducing soft costs like financing or customer acquisition

3. Stimulating Grid Edge Activity – Clean Energy Fund Lowering customer acquisition costs: Aggregate demand Standardize processes Provide data Lowering financing costs: NY Green Bank Difficulty in financing stems from bank capital rules and limited access to bond markets for renewable energy projects Conclusion: there is a financing gap for projects that are economic but cannot obtain financing NY Green Bank offers debt to fill in financing gaps in collaboration with private sector financiers Examples of financing products include aggregation facilities, unfunded lines of credit, credit enhancements, subordinated debt, or longer tenor debt.

3. Stimulating Grid Edge Activity – Clean Energy Fund Competitive Markets: Building the IT Network on top of the physical grid

More Value from the Electrons Pathway to clean energy deployment through responding to customer needs: comfort, health and convenience.

More Value from the Electrons Pathway to clean energy deployment through responding to customer needs: comfort, health and convenience.

More Value from the Electrons Pathway to clean energy deployment through responding to customer needs: comfort, health and convenience.