In March, Acadia Center released an analysis demonstrating that outdated financial incentives are driving expenditures on expensive and unnecessary utility infrastructure and inhibiting clean energy in the Northeast. The report, Incentives for Change: Why Utilities Continue to Build and How Regulators Can Motivate Them to Modernize, shows that under current rules, utilities can earn more money on infrastructure expenditures like natural gas pipelines and electric transmission lines than on cleaner, local energy resources like energy efficiency, rooftop solar, and highly efficient electric heat pumps. The key takeaway from the analysis is that without changes to the way they are regulated and rewarded, utilities will continue to advocate for infrastructure over local energy resources because their fiduciary duty to shareholders requires it.
Meanwhile, experience throughout the Northeast shows that clean, local energy resources can replace expensive grid infrastructure proposed by utlilities. These local alternatives include energy efficiency and demand response technologies that reduce demand for electricity at specific times, as well as roof-top solar, battery storage, and efficient combined heat and power.
Energy efficiency investments alone have avoided over $400 million in major transmission upgrades in Vermont and New Hampshire.1 Similarly, the Tiverton/Little Compton pilot project in Rhode Island,2 the Brooklyn/Queens Demand Management Project in New York,3 and the Boothbay Smart Grid Reliability Project in Maine4 are real world examples of local clean energy resources deferring or avoiding upgrades to the distribution grid. Earlier this year, expert witnesses for the New Jersey Division of Rate Counsel argued that a $75 million, 10-mile transmission line is no longer needed due to increasing adoption of distributed generation.5 There are additional examples from California also, where the state’s grid operator (California Independent System Operator, or CAISO) announced in December 2016 that it is putting the Gates-Gregg 230 kV transmission line project on hold, and may cancel the project entirely, due to forecasted increases in the development of solar energy.6
These clean energy projects are possible when consumers are given the ability to shape a cleaner, lower cost energy system through their investment decisions and behaviors. To motivate utilities to give consumers these options, utility regulators need to adopt alternative economic structures that balance the need to bring clean energy resources on-line with the need to keep utilities financially healthy.
Acadia Center’s UtilityVision outlines an alternative economic structure to resolve this conflict. UtilityVision recommends that states adopt performance incentives to motivate utilities to advance priorities such as system efficiency, grid enhancements, distributed generation, energy efficiency, and other energy system goals. Regulators can then increase the portion of revenue recovered through those performance incentives while reducing the portion of revenue that is linked to infrastructure projects, helping to shift utility priorities further towards achieving the performance outcomes.
A handful of states are beginning to adopt reforms to focus the utility’s financial incentives on advancing public policy goals for clean energy development. On January 25, 2017, the New York Public Service Commission issued an Order approving a shareholder incentive to reward Con Edison for deploying distributed energy resources (DER) to defer or avoid traditional transmission and distribution projects and deliver net benefits to ratepayers. The PSC approved a shared-savings model that uses a benefit-cost framework to determine the difference between the net present value of DER and the traditional infrastructure solution. The PSC found that this reward structure effectively signals the utility to find the most cost-effective grid solutions for ratepayers and advances additional energy and environmental goals.7
The California Public Utilities Commission is taking similar steps to resolve the conflict between bringing more DER online and ensuring they do not harm utilities’ profits. In December 2016, Commissioner Florio issued an Order creating a model to financially incentivize utilities to adopt DER. The Order will incentivize the deployment of cost-effective DER that displaces or defers utility spending on infrastructure by offering the utility a reward equal to 4% of the payment made to the DER customer or vendor.8
Whether the New York and California model is the best of many ways to revamp the utility business model to incorporate DER is an open question. One limitation of this model is that it is based on a comparison between DER and the traditional infrastructure projects that would otherwise be built in their place. This model makes it relatively straightforward to compensate the utility based on the cost savings and greater net benefits from the DER solution, but it is not easy to apply to more general deployment of DER. For instance, in Rhode Island,9 stakeholders led by the Office of Energy Resources are considering how to reward the utility for proactively and strategically using DER to improve grid conditions and prevent problems before the grid gets to the point of needing infrastructure upgrades. In this case, the NY/CA model can’t be used because there isn’t a traditional infrastructure project to compare to the proposed DER.
States must continue to seek reforms to utility regulations so that clean energy can flourish and both consumers and utilities are treated fairly. Replacing poles, wires, transformers, and substation upgrades with rooftop solar, battery storage, demand response, and energy efficiency can reduce costs and make the grid cleaner—but utilities make a guaranteed rate of return on their million (and billion) dollar grid investments, and any lower cost DER alternatives threaten to undercut those revenues. Until a new system of incentives is created, it will be an uphill battle to achieve states’ goals for a lower cost, cleaner energy grid.
3 New York Public Service Commission Case 14-E-0302, “Petition of Consolidated Edison Company of New York, Inc. for Approval of Brooklyn Queens Demand Management Program.” June 15, 2014.
4 Maine Public Utilities Commission Docket No. 2011-238, “Final Report for the Boothbay Sub-Region Smart Grid Reliability Project.” January 19, 2016.
5 “Rate Counsel Sees No Need For High Voltage Transmission Line,” NJ Spotlight (Jan 19, 2017) available at: http://www.njspotlight.com/stories/17/01/08/rate-counsel-sees-no-need-for-high-voltage-transmission-line/
6 ”Solar Growth Puts Fresno High-Voltage Line on Hold,” Fresno Bee (Dec 20, 2016). Available at: http://www.fresnobee.com/news/local/article122063189.html
Attention now turns to the Northeast, where nine states, including New York, Connecticut and Massachusetts, are part of what is known as the Regional Greenhouse Gas Initiative, which, like California’s effort, is a market-based cap-and-trade program that goes beyond state boundaries. So far, R.G.G.I., as it is known for short, has helped reduce emissions from power plants in the region by 40 percent between 2008 and 2016, according to the Acadia Center, a research and public interest group. States are now negotiating the future of the program beyond 2020.
Read the full editorial from The New York Times here.
Nine states, including New York, participate in the Regional Greenhouse Gas Initiative, a mandatory, market-based program to reduce carbon emissions. According to a new analysis by the Acadia Center, since 2005 the RGGI states have reduced carbon emissions by 40 percent while their economies have grown by 25 percent, outpacing the rest of the country.
Acadia analyst Jordan Stutt said these states bring real economic clout to the effort to combat climate change.
“Together, they represent the sixth-largest economy in the entire world,” he said. “This is no longer about symbolic statements; it’s about real action to reduce harmful emissions.”
Following the president’s announcement, the RGGI states reasserted their commitment to upholding the Paris agreement.
The report found that participation in RGGI has done more than reduce carbon emissions. Stutt said reductions of such other pollutants as sulfur dioxide and nitrogen oxides have led to fewer asthma and heart attacks, premature deaths, and missed school and work days – all of which saves money.
“When we quantify all of those avoided impacts,” he said, “we see that RGGI has delivered $5.7 billion in avoided health costs for the region.”
Stutt added that electricity prices have also declined in RGGI states while going up in other states.
Six of the RGGI states have joined with seven other states and territories to form the U.S. Climate Alliance. While the alliance doesn’t have a coordinated plan to reduce emissions, Stutt noted that some of the states already have policies in effect while others have legislation in progress.
“There are a number of different vehicles being discussed to address this issue,” he said, “and it’s encouraging to see that all these states are going to be working together to achieve that goal.”
Combined, the U.S. Climate Alliance states, which include California, represent the third-largest economy in the world, behind the United States and China.
But as Fast Company has written before, the emissions reductions laid out under the Clean Power Plan are already underway, and the directive from Virginia, says Jordan Stutt, a policy analyst at the clean-energy research nonprofit Acadia Center, “is the first domino in what will be a series of states moving to adopt clean energy policies.”
In issuing the directive to Virginia’s DEQ, McAuliffe instructed that his state’s proposal to limit energy-sector emissions should fall in line with those already in place across the country, and is looking specifically to California and a coalition of nine East Coast states united under the Regional Greenhouse Gas Initiative (RGGI), both of which have successfully implemented cap-and-trade policies to curb carbon dioxide emissions. Stutt says that while cap-and-trade policy implementation has been slow to spread beyond California and the RGGI (pronounced “Reggie”) states, and now Virginia, “the conversation is getting louder.” Following Obama’s introduction of the Clean Power Plan two years ago, “the whole country began preparing to comply with the standards, and most states were looking at how a RGGI model–a cap-and-trade model–might work in their state,” Stutt says.
“States are looking to these programs; they don’t want to be missing out on all the benefits the RGGI states and California have been seeing for revenue to be reinvested in clean energy initiatives and infrastructure needs,” Stutt says.
While cap-and-trade has proven effective in the RGGI states and California, and it’s likely to be the model that Virginia pursues (Stutt met with legislators in the state as far back as two years ago, as they were gauging the possibility of Virginia becoming part of RGGI), NextGen Climate founder and philanthropist Tom Steyer–who has considered running for governor of California–tells Fast Company that “there is no one magic bullet” that will dictate how states drive clean energy policies going forward. “The unending increase in the efficiency and effectiveness of technology is driving down the cost of renewable energy sources like wind and solar dramatically,” Steyer says. Unlike coal, whose price continues to rise as its supply constricts, renewable generation can proliferate with no harm to society, and states on both sides of the political divide are responding to the favorable market conditions.
While currently, those states most aggressively pursuing cap-and-trade and other carbon-reduction policies are blue states, both Kiely and Stutt emphasize that support for clean energy policies extends across political divides. RGGI was proposed by a Republican, former New York governor George E. Pataki, and John Kasich, the Republican governor of Ohio, vetoed an attempt by the state legislature in December to make the state’s renewable energy standards voluntary, saying to roll back the renewable energy policy would hurt Ohio’s economy (the legislature is continuing to fight the veto). And some of the strongest supporters of wind energy come from states like Iowa and Texas, where the availability of natural resources has driven the cost of renewables down. In Iowa, the cost is so dramatically lower that to do anything other than integrate wind into the energy landscape would put the state at an economic disadvantage–and powerful Iowa Republican Senator Chuck Grassley is strongly in support of increasing the amount of wind power the state produces.
Clean energy rivals New England and California are racing toward a new prize: leadership on energy storage. Both coasts have been leaders on energy efficiency, renewables deployment, and electric vehicles (EVs), and storage is the logical next step to improve system efficiency and back up intermittent wind and solar as they are increasingly adopted.
The benefits of storage are clear and increasingly well-recognized. Storage deployed at scale will serve the same purpose as warehouses and refrigerators in our food system by rationalizing an energy grid that is massively overbuilt to match supply and demand every second of every day. This logic is backed up by analysis from the Massachusetts’ Department of Energy Resources (DOER) showing that the top 10% of peak demand hours drive 40% of energy costs, and storing energy to meet these peaks would provide $3 billion in energy system benefits each year. According to a recent study from UC Berkeley, storage can also produce significant public health benefits by avoiding reliance on dirty ‘peaking’ power plants that are often located in marginalized urban areas.
Massachusetts Leadership In the race for energy storage in the Northeast, Massachusetts is taking an early lead. Under energy diversity legislation passed this summer, DOER can act to meet the storage target it recommended—600MW by 2025—which proportionately would be far larger than California’s mandate. The legislation also cleared an important practical hurdle by authorizing utilities to own storage, and, so long as third-party owners are protected to ensure competition, political support for energy storage should remain strong.
An overall mandate would build on efforts already underway in the Commonwealth. DOER is offering $10 million for demonstration projects through the Energy Storage Initiative. The Massachusetts Clean Energy Center has invested $9 million in storage-related initiatives and is serving as a match-maker for storage developers and potential customers. Under the new solar incentive mechanism being developed, bonus incentives for storage are being considered in the range of two to seven ¢/kWh, based on storage duration (kWh) and power (kW) relative to solar capacity. Within energy efficiency plans that invest $700 million per year, utilities are piloting demand management programs integrating thermal and battery storage, and attention to demand resources is likely to increase as peak demand flatlines, overall consumption declines, and the focus on improving system efficiency at all levels grows.
New Tool in the Energy Toolbox Across the Northeast energy storage is gaining favor as an alternative to more expensive and often difficult-to-site transmission and distribution (T&D) system upgrades. In Boothbay Harbor, Maine, cheap energy available at night is stored in ice that is then used to cool buildings on hot summer afternoons. In conjunction with targeted efficiency, solar, and demand response, storage is being deployed instead of an $18 million transmission upgrade. At a larger scale, in New York ConEd is investing $200 million in storage, targeted energy efficiency, distributed generation and demand-response in lieu of a $1.2 billion substation upgrade. The potential for eye-popping T&D savings (in addition to other energy system benefits) contributed to a proposed rule from the Federal Energy Regulatory Commission that would require all Regional Transmission Operators to remove barriers impeding storage from providing energy, capacity, and ancillary services. This clear directive will help drive the grid operator ISO-NE to take necessary steps to enable storage, including compensating storage for rapid response capabilities, opening markets to smaller storage facilities, and allowing storage to provide multiple services simultaneously. Large scale energy storage could additionally help replace retiring nuclear and coal capacity in Southeast Massachusetts/Rhode Island (potentially pairing directly with offshore wind in a coal-to-clean energy conversion at the soon-closing Brayton Point plant) and address expected load growth in the greater Boston area.
Complementing top-down reform, several states are pursuing grid modernization processes in order to capitalize on declining costs and technology advances for energy storage and other distributed energy resources. New York’s Reforming the Energy Vision has received the most attention, but REV does not stand alone. Massachusetts utilities filed Grid Modernization plans including energy storage projects and pilots in August of 2015, and while the plans need improvement to ensure unified progress toward truly modern grids, the process has begun. Meanwhile, Rhode Island is pursuing a truly bottom-up approach by using distributed resources to meet energy system needs, and grid modernization proceedings were recently initiated in New Hampshire.
Resiliency and Preparedness Because of its resiliency and preparedness, storage is increasingly recognized for its security advantages. The vulnerability of the grid to cyber-attacks was made clear in Ukraine, and physical attacks on critical grid infrastructure have recently increased. Weather-related outages will also increase with climate change-fueled extreme weather. As we grow ever more dependent on electrical devices, the importance of grid security expands accordingly.
Storage alone can provide backup power, and pairing storage distributed generation offers steady supply when the grid is down. In recognition of these benefits, Massachusetts put $40 million into the Community Energy Resiliency Program to support solar plus storage projects at schools that double as emergency shelters, hospitals, and other critical facilities. Following storms that caused major power outages, Connecticut established a microgrid grant and loan program that is currently deploying $30 million in funding.
And the Winner Is… California receives the most attention for energy storage, and with real progress toward a bold procurement mandate the attention is deserved. However, unique conditions in the Northeast—aggressive renewable energy targets, relatively high energy prices, and difficulty siting traditional infrastructure—make the region ripe for storage.
At this stage the race for energy storage leadership is just getting started, and the ultimate winners will be customers and the climate, as storage deployment ramps up, costs decline, and our entire energy system becomes more efficient and cleaner.
This blog post also appeared as a guest post on UtilityDive.com. See it here.