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Jmm2020
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Imagine an electricity market that gives small businesses and consumers the same ability to compete and make money that utilities have always had.
The market has no explicit technology mandates that require utilities or individuals to “pick winners and losers.” It simply sets some basic rules that prioritize consumer-side distributed energy technologies, efficient and economic use of energy, business model innovation and environmental performance.
The market is guided by a simple philosophy: regulators pledge to set parameters and then get out of the way to let entrepreneurs selling energy services flourish alongside traditional utility companies.
Sounds like the dream of conservatives and libertarians everywhere, right?
No, this is not the electricity system planned for Glenn Beck’s utopian libertarian community. Rather, it’s the one being constructed in New York, one of the top-five most liberal states in America.
“We think the markets and the innovators will do better at developing solutions than either regulators or utilities will do on their own,” said Audrey Zibelman, chair of the New York Public Service Commission, in a recent panel discussion on the state’s efforts to redefine the electricity system.
Over the last six months, Zibelman and other New York officials have begun the complex process of remaking the way utilities on the distribution grid operate. The goal itself is straightforward: turn utilities into “platform providers” that broker more customer-sited clean energy systems on a two-way system. By next year, New York hopes to be on the way to having a completely different distribution grid.
“Utilities are now the platform. This is about the innovation on top of the platform that’s going to make consumer needs more important,” said Zibelman.
Under the proposal, called Reforming the Energy Vision (REV), regulated utilities would still maintain operational control of the grid, but would get compensated for investments based on certain performance metrics, rather than just building new large power plants. They would have an explicit directive to procure more resources from individual customers and third-party companies providing solar, storage, combined heat and power, microgrids and energy efficiency services.
Solar? Storage? Efficiency? Are regulators are just cloaking their expensive green agenda in free-market language?
No. The state is creating a freer market with more options that is designed to keep electricity rates stable.
Rather than simply valuing the build-out of more centralized power plants, as regulators have traditionally done (ones that may not be needed as demand flattens), New York has decided to value environmental performance and network efficiency, and then let competition flourish under that broad framework.
“I don’t want to create mediocre wires companies. I want to create excellent, innovative companies that have third parties wanting to come to New York and build businesses around DER [distributed energy resources] because they see it’s a marketplace where they can be successful,” said Zibelman.
The REV process is fundamentally different than the clean energy standards that have been passed in 37 states, including New York. REV does not set a specific technology mandate — only a set of market rules and guiding rate structures. Utilities and third-party providers would have a lot of freedom in how they procure and sell resources, as long as projects are cost-competitive and meet a certain threshold for emissions.
In fact, officials in the state have proposed phasing out explicit state-level mandates and want to use the REV model to guide $5 billion in “fuel-neutral” clean energy investment.
More competition, more consumer choice, and no mandates: could there be any way to promote clean energy that would be more appealing to conservatives?
There’s one catch, however. The REV process is predicated on the fact that climate change is being driven by the burning of fossil fuels, and that new infrastructure investments need to take that into account.
Although surveys have shown that a majority of Republicans understand that humans are changing the climate, it has become virtually impossible for GOP politicians to talk about the issue out of fear that a small group on the extreme right wing will vote them out of office in primaries.
“What Republicans are afraid of is that if we give more credence to climate change, that it’s going to be [interpreted as] the call…for more rules, more regulations,” admitted New York Republican Congressman Michael Grimm in an interview earlier this year.
But that’s what is so attractive about REV. It’s designed to prevent over-regulation. It creates a simple market structure with the goal of decarbonization (along with reliability and customer choice), and allows for businesses to compete to provide the best services in an effort to achieve that goal.
Even the New York utility Con Edison, one of the biggest investor-owned utilities in the country, is enthusiastic about the process.
“It gives us a pathway to understand where we are going to go as a business in the future,” said Sergej Mahnovski, director of Con Ed’s “utility of the future” team. “It’s inevitable that some of these distributed technologies are going to get more cost-effective and that they’re going to get integrated into the system somehow. What Audrey [Zibelman] has allowed for is a process and a regulatory structure to understand that path to get from where we are today to that future.”
Even for conservatives who may have an ideological aversion to the science of climate change, New York’s proposed structure offers plenty they could rally around: competition, business innovation, and a focus on consumer choice.
“What I want is New Yorkers feeling that they are getting a lot of value for their energy dollar. And that value is being driven by a lot more choice of product and services than they ever had before,” said Zibelman.
Conservatives in America are in desperate need of some intellectual leadership on environmental issues. As New York is proving, there are big, bold ways to deal with issues like climate change without sacrificing conservative values or relying on traditional mandate-based policies.
In a thought-provoking essay from earlier this year, Michael Liebreich, founder of Bloomberg New Energy Finance, summed up conservatives’ current problem on the issue.
“The big mistake of the right has been to leave unchallenged the assumption that leftist tools are the only ones available to manage the transition to clean energy, instead of coming up with good conservative solutions — ones which have improved services, lower costs, competition, wealth creation, pricing in of externalities, personal responsibility and freedom at their heart,” he wrote.
That is the perfect description of what’s currently underway in New York.
Ironically, one of the most left-leaning states in the nation is developing a system that people on the right — even the most hardcore libertarians — should be salivating over.
New York has a unique set of factors in its favor: a deregulated market, slowing demand, aging and vulnerable infrastructure, as well as united leadership from the governor and regulators. The REV model won’t necessarily work everywhere as proposed. But it does provide a model for what’s possible beyond traditional mandates, which so many on the right loathe.
So what’s it going to be?
Will leaders on the political right continue their zombie-like approach to clean energy and climate change, dismissing solutions as an encroachment on freedom?
Or will they see it as many thought leaders already do: a platform for creating revolutionary changes in energy choice and competition, while also happening to benefit the environment?
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For the past few years, we’ve been covering the saga of FERC Order 745, the 2011 federal ruling that raised revenues for demand response providers across the country, only to be overturned by a federal court this summer, putting the promise of future markets in doubt.
Last week, the U.S. Court of Appeals in Washington, D.C. rejected a request from the Federal Energy Regulatory Commission and the states of Pennsylvania, Maryland, and California to rehear the case. That means that FERC and the states, as well as demand response industry players, will have to face off in the Supreme Court against the power generator companies that brought the complaint, if they’re to pursue a legal victory.
Meanwhile, power generator FirstEnergy Corp. has asked the court to consider expanding its review of FERC Order 745, which dealt only with the small amount of demand response operating in so-called “economic” grid markets, to cover the much larger capacity markets as well.
These are all challenges for the demand response industry. But according to David Brewster, president of U.S. DR market leader EnerNOC, they pale in comparison to the proven benefits of managing demand to meet grid needs — and the state-by-state regulatory changes that are pushing it to the masses.
“At the end of the day, the success of DR has been the success of about twelve years of cooperation between state and federal governments, and it has led to billions of dollars of savings per annum, in reducing consumers bills,” he said in a Thursday interview. A report on Mid-Atlantic grid operator PJM showed that energy efficiency and demand response saved $11.8 billion in electric bills last year, a figure that’s projected to grow to $16 billion this year.
“I am confident that no matter how this shakes out, the value of DR will be maintained,” he said. “A legal technicality won’t put the genie back in the bottle.” He likened the power generators’ legal actions to “hotel lobbies trying to kill business models like Airbnb,” or taxi companies trying to get regulators to restrict ride-sharing startups like Uber.
It’s a bit more complicated than that, of course. FERC Order 745 called for grid operators to pay demand response the full market price, known as the locational marginal price (LMP), it pays generators for the electricity they produce, in both real-time and day-ahead markets. Generators and industry groups like the Electric Power Supply Association, which brought the challenge to FERC Order 745, have argued that LMP is too much to pay people for turning down power use, compared to the costs of delivering the same amount of real energy from a power plant. The District Court found in a 2-1 decision (PDF) that FERC had overstepped its authority over the states by setting pricing policy.
So far, different grid operators have taken different approaches to implementing the order, with PJM the furthest ahead. PJM did see demand response payments rise considerably as a result, but only for the large commercial and industrial customers savvy enough to play in the economic DR markets. Now that the order has been vacated, just how they’ll unwind or alter the programs they’ve set up is an open question.
EnerNOC only got about 2 percent of its roughly $1 billion in revenues over the past three years from the economic markets that will be affected by the court’s decision on Order 745, Brewster said. Still, the company is hoping FERC will take the case to the Supreme Court, since “we believe that demand response is integral to the competitiveness of wholesale markets. I don’t see how you have a competitive market when you have a playground for generators.”
The bigger effects will be in the future, as these economic demand response markets grow in significance. In its latest report, U.S. Demand Response Markets Outlook 2014, GTM Research projects that losing Order 745 will reduce U.S. demand response industry revenues by about $4.4 billion over the next decade, from a relatively tiny portion of overall revenues today to nearly one-quarter of projected revenues by 2023.
As for the threat to the much larger capacity markets, EnerNOC is keeping an eye on FirstEnergy’s legal challenge, Brewster said. Still, “you have one generator lobbying in one complaint to PJM about capacity markets — I’d describe this as the last flick of the tail of the dinosaur.”
“I think generators need to be careful about what they wish for,” he added. As each state or region grapples with how to fill the hole that vacating FERC Order 745 has left in their planning, states like New York and California are reworking their entire approach to distributed energy resources, including demand response, in ways that could end up opening up more opportunities.
