New York Prods Utilities to Shift From Monopoly Sales Model

May 12, 2014 10:02 am ET

(Updates with solar incentive in 14th paragraph.)

May 12 (Bloomberg) -- New York State is pushing its utility industry to shift away from a century-old business model into a system that can accommodate more power from solar and wind.

With the fourth-highest electricity prices in the U.S. and a grid increasingly susceptible to storm-related failures, the current system isn’t working, said Richard Kauffman, the former chairman of Levi Strauss & Co. who is now the state’s first energy czar.

Regulators and power-industry executives are meeting today in Albany to discuss his proposal for a new model, “Utility 2.0.” The program recasts the industry as something akin to traffic cops, coordinating the flow of electricity instead of functioning as a monopoly distributor of power coming from a few large plants. The move would spur generation from thousands of smaller systems owned by individuals and other companies -- notably rooftop solar panels.

“The way we structured utilities 100 years ago, with cost recovery plus a return on their capital, doesn’t work today,” Kauffman said in an interview in New York.

This is no small shift. The power grid was built for a world when producing and providing electricity was complicated and expensive, something best left to the utilities. That world is no more, Kauffman said.

Managing Capacity

Today, anyone with space for a few solar panels can make their own power, and millions are. Utilities have access to technology to keep track of all the potential capacity on the grid, as well as demand, on a minute-to-minute basis. They can even throttle back consumption from some customers when needed, to ensure the power reaches others who may need it more. There’s enough electricity; it just needs to be monitored and delivered more efficiently, Kauffman said.

“Business as usual will cost the state significantly more than adapting to new technologies.” he said.

The initiative began with Governor Andrew Cuomo, who appointed Kauffman chairman of energy and finance for the state in January 2013. What Cuomo is planning for New York’s power companies is the culmination of years of deregulatory efforts across the U.S. to promote competition and innovation in the industry.

New York is the only state actively taking steps to dismantle the utility rate structure and replace it with a system designed to reward efforts to reduce demand and use the grid more efficiently, Kauffman said.

Energy Model

“Done right, this could prove to be a model for the rest of the U.S.,” said Jackson Morris, energy and climate analyst at the Natural Resources Defense Council. “There are a ton of details to hammer out but the core principals are very encouraging.”

This vision of a new power grid is detailed in a April 25 Public Service Commission order entitled Reforming the Energy Vision. It calls for a “fundamental change in the manner in which utilities provide service.”

What’s missing from the proposal is details on how to achieve this vision, though the agency expects to have the framework of a plan by year-end. That’s the subject of today’s meeting in Albany.

It’s already clear that the goal is to better incorporate renewable energy, especially small power plants such as rooftop solar panels and microgrids that power some college campuses. These so-called distributed-generation systems produce power for utilities’ customers, and utilities currently have little control over when it’s available to the grid.

To spur investment, Cuomo has also lined up $1 billion in incentives for solar rooftops over the next decade and set up a green bank to make renewable energy projects cheaper. A meeting tomorrow in Albany with the state’s energy leaders will also discuss ways companies can use technologies such as microgrids to produce their own power and heat more efficiently.

Distributed Resources

“The 21st century grid is going to have a lot more distributed resources,” Audrey Zibelman, chairman of the New York Public Service Commission, said in an interview. “The scope is comprehensive: solar, energy efficiency, storage. Let’s make it the core to the redesign, not ancillary.”

Letting utilities tap into these generating assets during periods of peak demand would give them access to new capacity, without requiring big, new power plants. Avoiding unneeded capital projects is where the cost savings come from.

“You don’t want transmission and distribution projects that are only needed three or four hours a year,” she said. “We need fundamental reform.”

Utilities say the initiative will help them modernize.

“What the Public Service Commission has done is very good for us,” Stuart Nachmias, vice president of energy policy and regulatory affairs at Consolidated Edison Inc.’s utility. “It allows us to take a holistic view of where we are headed anyway and consider whether we are moving there in the best way.”

--With assistance from Naureen S. Malik and Jonathan N. Crawford in New York.