Energy Finance Report

New York Unveils Details of its Clean Energy Program

Posted by Merrill Kramer on 8/9/16 11:46 AM

Co-author Morgan M. Gerard

New_York_Clean_Energy_Standard_Solar-1.jpgThe New York Department of Public Service (DPS or Commission) on August 1, 2016 issued its long-awaited Clean Energy Standard order (“Order”). The Order sets forth the means by which the Empire State intends to achieve its ambitious goal of supplying 50% of the State’s electricity needs with clean energy by 2030 (50x30). By attaining this target the State will reduce its overall carbon emissions by 40%.

The Clean Energy Standard (CES) Order is a companion to a State initiative already underway called Reforming the Energy Vision, or REV. REV creates a transformative competitive framework for increasing the use of locally-sited or “distributed” energy, energy efficiency, energy storage, and customer load controls, collectively referred to as Distributed Energy Resources or DER. REV is seeking to establish a locational market-based platform through which DER resources are priced and may be bought, sold and traded. REV also includes an initiative to promote development of large-scale renewable projects to be integrated into the State’s electricity grid.

The CES order primarily focuses on three large-scale resources to supply the bulk of electrical supply needed for the State to achieve its ambitious 50x30 goal:

  • Large scale solar, wind and other renewables which the DPS expects to contribute approximately 29,000,000 MWh toward the goal;
  • Off-shore wind resources, which the DPS praises as a significant resource of potential value;
  • Existing uneconomic nuclear facilities that, while not renewables, constitute low carbon resources. Without ensuring that these plants continue to operate, DPS concludes that their output would be replaced by fossil fuel power plants whose emissions would undermine the State’s carbon emissions reduction goals. The program thus announces subsidies that it will provide to several nuclear facilities.

The plan to subsidize nuclear power plant operations is sure to be the most controversial aspect of the CES program.

To maximize the reach and uniform application of the clean energy program, the DPS establishes a renewables mandate not merely for utilities subject to its rate jurisdiction such as investor-owned utilities, but also retail energy service providers (ESCO’s). In addition, the CES Order applies to the Long Island Power Authority (LIPA), the New York Power Authority (NYPA), municipalities, and companies that purchase power from the New York Independent System Operator (NYISO).

The DPS solicits public comment on certain aspects of the Order and directs NYSERDA to implement other portions of the Order. Notably, the Commission solicits comments to seek to ensure that its clean energy standards are designed to “expand energy development by retaining and creating investor confidence” by “providing clarity and certainty to investors in implementing the Program.” The highlights of the CES program are as follows:

The New Renewable Energy Standard

The CES program is centered on a Renewable Energy Standard (RES). The RES is effectively a compliance obligation placed upon Load Serving Entities (LSEs) such as investor-owned utilities and retail energy service providers (ESCOs) to procure a target percentage of their generation mix from renewable resources. The procurement can be accomplished in three ways: (1) building new renewable facilities, (2) entering into power purchase agreements with third party renewable developers and (3) purchasing Renewable Energy Certificates (RECs), including from NYSERDA. The Order allows LSEs to choose to meet its renewable obligations by making an “Alterative Compliance Payment” or ACP. The ACP effectively acts as a ceiling on the price entities will pay for RECs.

NYSERDA will continue its program of providing cash incentives to third party renewable developers through solicitations and Statewide procurement in exchange for receiving the project’s RECs (which NYSERDA will in turn sell to LSEs and others to meet their respective RES obligations). A New York Generation Attribute Tracking System (NYGATS) operated by NYSERDA will provide a liquid trading platform for RECs in New York. Renewable resources may register their project’s environmental attributes to qualify them for RECs eligible for sale to LSEs and others.

The DPS divides eligible technologies for REC generation into three tiers: (1) Tier 1, which includes solar, fuel cell, wind, ocean/tidal, biogas, biomass and liquid biofuel; (2) Tier 2, a maintenance program to provide incentives to certain capital intensive existing technologies such as small-hydro; and (3) Tier 3—a special credit generated by nuclear energy called Zero Emission Credits, or ZECs. ZECs are specially priced certificates designed to preserve the ailing nuclear industry in New York. LSEs will be required to purchase a certain percentage of ZECs. 

In addition to RES requirements, the DPS envisions the development of a thriving “voluntary” green market, and encourages market participants to go above and beyond the mandatory thresholds to create and participate in a green energy products market that achieves additional greenhouse gas reductions.

Annual Renewable Targets and the Voluntary REC Market

The 2030 target of 50% renewable resources is allocated to individual LSEs and others based on an allocation formula tied in part to the LSE customer’s percentage contribution to the total System Benefits Charge (a DPS mandated charge to customers that is levied by distribution utilities and used to fund renewable energy incentives among other programs). The actual target of MWh in any period may be adjusted based on a number of factors. Among other things, LSE targets may be impacted by other market activity that includes retail, end-user participation in opt-in or other voluntary programs, energy efficiency, behind the meter third party renewable investments, conservation and other variations in demand and supply. Creation of a voluntary REC market that generates “additionality” is hoped to have an impact that will result in renewables consumption above and beyond the CES goal.

New Breath for Offshore Wind

The CES Order focuses on large-scale resources that can help the State meet its goals. Offshore wind is viewed as a potentially abundant energy resource in New York. The CES Order therefore sets a path for “steel in water” development.  Depending upon the distance from the shoreline, offshore wind projects will either be in state or federal waters.  The jurisdictional complexity inherent in offshore wind project development therefore requires coordination of clear state and federal programs and policies. 

With support from the State, the Deepwater Wind Project, a 90 MW project off the coast of Montauk, Long Island, has been going through the regulatory review and approval process. A coalition including NYPA, LIPA and Con Edison has also submitted a proposal for an additional project off the coast of the Rockaway Peninsula of Long Island.  Both project areas are far-enough off the coast to qualify as the “Outer Continental Shelf” (OCS), which is under the jurisdiction of the federal government and the Bureau of Ocean Energy Management (BOEM). 

NYPA, LIPA and Con Edison’s unsolicited project was denied by BOEM, and BOEM will now seek proposals in a competitive bidding process. The bidding process for the identified wind area is just under way. A Proposed Sale Notice (PSN) issued by BOEM, which is open to public comment, provides detailed information concerning the area available for leasing and proposed leasing terms. The PSN comment period also serves as the timeframe during which any company wishing to participate in the final lease auction may submit a qualification package.  Currently, there are seven companies that are already qualified to participate in the potential auction for the New York Wind Area.

State action will be necessary to implement the Deepwater and other offshore wind projects to run new transmission and distribution lines to the site, as well as provide for a stable offtaker to provide the required assurances for a financeable energy project. The CES Order includes a “program to maximize the value potential of new offshore wind resources,” and DPS directs NYSERDA to “identify the appropriate mechanisms the Commission and the State may wish to consider to achieve this objective.”

Warming up to Nuclear Power

Nuclear generation has a long history in New York. Several State plants are nearing the end of their useful life and are planned for retirement. Many nuclear plants, such as Entergy’s Fitzpatrick nuclear plant in upstate New York, have high operation and maintenance costs and are no longer economic. These plants generate a tremendous amount of energy - around 16% of the State’s overall energy. However, due to high operation and maintenance (O&M) expenses and low natural gas prices, coupled with their inability to quickly ramp up and down to respond to demand, these plants are not competitive in the NYISO market.

DPS has expressed concern that shuttering these plants could lead to their replacement by fossil fuel resources. This in turn would threaten the emissions reductions achieved through low-carbon programs. Therefore, the CES Order provides nuclear plants with a separate tier that includes a premium payment to avoid this result.

Nuclear electric generation will have its own designated emissions allowances called zero emissions credits, or ZECs. LSEs will be required to purchase a certain percentage of ZECs, and the required level will be set by NYSERDA.  To procure and allocate ZECs, NYSERDA will enter long-term contracts with nuclear facilities that are considered “at-risk.”  Plants within the Tier 3 category include Entergy's Fitzpatrick, Exelon’s Nine-Mile Point and Ginna nuclear facilities, but not Entergy’s Indian Point nuclear plant. The 43-year old Indian Point nuclear reactor has faced a series of safety and operational problems, and Governor Cuomo has called for the plant to be permanently shut down.

Shortly following issuance of the CES Order, Exelon agreed to purchase Entergy’s Fitzpatrick nuclear plant for approximately $110 million. Following the purchase Exelon will own all three nuclear plants in the State eligible for ZECs.

The effect of the ZECs is to create a price floor for nuclear energy. Providing these base load plants with a price subsidy is a legally uncertain area as it raises Constitutional questions under the Supremacy Clause regarding the authority of a State agency to set rates in an area that may be preempted under federal law, in this case, FERC jurisdictional authority. Only recently, in 2016, the U.S. Supreme Court in Hughes v. Talen Energy Marketing struck down a plan in Maryland to incentivize the installation of a new in-state power plant by providing it with a price floor that would allow the plant to competitively bid its power into the PJM power pool. The Supreme Court found that the rate incentive interfered with the FERC’s exclusive jurisdiction to set prices for the wholesale sale of power into PJM.

DPS anticipates these potential challenges. The DPS distinguishes its actions by arguing, among other things, that: (1) the Supreme Court has not directly barred bilateral power purchase agreements outside of the ISO competitive process; (2) the ZEC payment is not for electric power but, rather, for the environmental attributes or REC’s from the plants, an area that the FERC has stated is outside the purview of its rate authority; (3) the ZECs quantify the environmental benefits to New York caused by lowering carbon emissions and thus have an independent rational basis; and (4) the State has clear authority over the health, welfare and environmental protection of the State and its citizens. While the ZECs may have an impact on wholesale rates, the Supreme Court has recognized that such incidental impact on wholesale rates is a permissible exercise of state authority.

Conclusion

The CES Order lays out additional details on how the State plans to achieve its clean energy goals, and in what areas it intends to rely upon the private market to help it meet those targets. The order emphasizes the need for its rules to not only attract outside capital, but to insure that the program is sufficiently competitive with clean energy programs in neighboring states to attract these projects to New York.

The Commission has solicited comments on various aspects of the clean energy program with an eye toward having LSEs implement the program and commence their obligations by the beginning of 2017. The Order lays out an ambitious program that pushes the boundaries for new renewable generation, including paving the way for offshore wind, while announcing a major policy turn in deciding to preserve and maintain portions of the State’s nuclear fleet in operation. The DPS has sought to carefully balance its desire for utility financial stability with its commitment to attracting competitive renewable energy development to the State, on-shore and off-shore.  Only the future will tell if the State has struck the right balance.

Topics: NY REV, Renewable Energy, Reforming the Energy Vision, New York Solar, clean energy standard

New York Seeks Value for Distributed Energy and Reevaluates Net Metering

Posted by Joshua L. Sturtevant on 1/7/16 12:02 PM

Co-author Morgan M. Gerard

NY_REV_Notice.jpgOn December 23rd, 2015, The New York State Public Service Commission (NYPSC) issued a Notice under which it is soliciting comments concerning the value that Distributed Energy Resources (DERs) contribute to the distribution grid system. It is also soliciting feedback on a successor methodology to its current Net Energy Metering (NEM) policy that will help drive development in the interim. Both of these issues are being tackled by the NYPSC as part of New York’s broader Reforming the Energy Vision (REV) initiative.

New York needs critical energy infrastructure to the tune of billions of dollars at the same time that utility revenues are falling. Additionally, more distributed generation (DG) is coming online, including DG resources that net meter to the grid, and therefore potentially shift the pro rata costs of grid maintenance onto non-DG owners.  In response, the NYPSC opened the REV docket in an attempt to reconcile these trends as well as prepare for a more resilient and energy efficient future. 

It is hoped that the policies and rules promulgated under REV will facilitate the adoption of greater on-site and near-site energy resources and efficiency approaches, known under REV as Distributed Energy Resources (DERs). Under this new framework, DER owners will be able to sell their generation to utilities as well as directly to commercial and retail customers. Due to the complexities inherent in such a model, the Commission has worked with incumbent utilities who will help achieve ambitious DER goals by operating as Distributed System Platforms (DSPs), which will coordinate grid-wide DER activities as a market administrator, not unlike a distribution level independent system operator. 

However, a complication has arisen under this new paradigm: What is the value of these DERs to the system? Assessing the value of DERs is a key component in constructing an efficient market as transactions will consist of interactions among customers and service providers, and also between utilities and DER providers. It is also true that in the absence of clarity regarding the value of DERs it will be difficult to attract private capital to projects under development. Because of these complications, and the need to both resolve uncertainty and ensure that the burdens of systemic grid maintenance and upgrades are not being bypassed by DER and grid-exiting customers, a mechanism is required to establish accurate pricing. 

It was made clear in the NYPSC Staff’s Track Two White Paper that the system value of DERs will be divided into two components: 1) the energy value and 2) all other values associated with distribution-level resources. The energy value in New York is established by power markets and is called the location-based marginal pricing (LMP), a methodology where the price of energy at each location in the New York State Transmission System is equivalent to the cost to supply incremental load at that location. The full value of a particular DER can be expressed as the LMP plus the distribution delivery value (the value of D); together known as “LMP+D.” In the NEM Interim Ceilings Order, the Commission further elaborated that “[the] ‘value of D’ can include load reduction, frequency regulation, reactive power, line loss avoidance, resilience and locational values as well as values not directly related to delivery service such as installed capacity and emission avoidance.”  The Notice indicates that the NYPSC is seeking to establish a new methodology and process for determining the full value of DERs prior to December 31, 2016.

Determining the value of DERs to the grid system implicates possible changes to the future of net energy metering (NEM), which in the Empire State is a statute-based incentive that allows small generators of electricity to sell their excess generation into the grid subject to an overall cap. If a new value is being placed on all DERs, and DER outputs can be purchased by the utility and non-utility actors in real-time, the question of how the current NEM regime can co-exist within the REV marketplace is begged.  Despite this gray space, Staff saw no reason to adjust NEM for the mass-market per the Track Two White Paper, and stated that a bill-crediting mechanism used in NEM should continue to be considered as part of a successor to NEM. It also stated that changes to NEM should be focused on larger projects with substantial net export of electricity. 

The Commission decided in the subsequent Net Metering Ceilings Order that “until these valuation efforts [the value of D] are completed, and incorporated in tariffs that recognize the full benefit of DER, net metering must continue, to avoid the disruption of DG development efforts that would contravene the State’s energy policies.” Despite an overall lack of change, the cap on NEM under the Ceilings Order is now allowed to float to avoid “repeated disputes over the proper level of the ceiling . . . and shall be allowed to float in the interim until the calculation and application of ‘the value of D’ and other issues affecting valuation of DER is decided.”  In addition, and in recognition of the various paths NEM policy could take going forward, the current solicitation also seeks comment on how the Commission should consider the transition “from NEM,” and indicates that they favor a scenario where “a single comprehensive process should be embarked upon to adequately address the range and complexity of the questions raised [in this matter].”

The “value of D” may be the necessary component to determine how DERs, specifically on-site generation and microgrids, contribute to the efficiency and resiliency of the grid. Although New York is starting the process of targeting the valuation metric, and many DER providers and NEM advocates may disagree with the method, for the purpose of project financing the “value of D” may lend the clarity needed to ensure the stability of the REV-driven marketplace.  To take part in the discussion over NEM and the value of DER to the distribution system, potentially interested parties are able to respond and comment to the Notice until April 18, 2016.

Topics: NY REV, Microgrid, Distributed Energy, Distributed Energy Resources, Net Energy Metering, Reforming the Energy Vision, NEM, DG, DER, value of D, Distribution, New York Public Service Commission, Distributed Generation, LMP+D

2015 Year in Review - Renewable Energy in the U.S.

Posted by Joshua L. Sturtevant on 12/23/15 3:33 PM

2015-_Green.jpgCo-author Morgan M. Gerard

Despite the low price of oil throughout the year, 2015 may have been an inflection point for renewable energy as a competitive generation source in the U.S. Deutsche Bank has noted that renewable sources, like solar, have reached, or will soon reach, grid parity with fossil fuel sources in many states. As non-fossil energy has become more economically viable, the industry has responded by standardizing and streamlining project processes, and by accessing financing vehicles like yieldcos and public bonds. Despite growth, the past year has also been a tumultuous one full of unexpected developments and policy shifts including the COP 21 agreement and the Clean Power Plan (CPP), and the formation of intriguing grassroots coalitions, like the green tea party. All of these developments were, of course, set against the specter of a potential step-down of the Investment Tax Credit (ITC), and its surprising last-minute revival. The following is a breakdown of some of the major developments impacting renewables in 2015.

COP 21

On the world stage, nearly 200 leaders, including representatives from key nations such as the United States, China, Russia and India, adopted an agreement that seeks to reduce global emissions. Expectations were tempered going into the much-anticipated conference with France calling for a binding treaty, and the U.S. balking at an arrangement that would almost certainly be struck down by a Republican-led Congress. In the end, the agreement established a long-term goal of maintaining a temperature rise “well below 2 degrees Celsius.” To achieve this objective, each country must submit emissions targets by 2020 with an ongoing reporting requirement. This victory for climate change advocates may serve as a leading indicator for a growing market for renewables.

The Clean Power Plan

The Clean Power Plan serves as the unofficial, yet primary domestic implementation framework for the COP 21 agreement. The CPP was promulgated by the Environmental Protection Agency (EPA) under its Clean Air Act (CAA) authority to regulate ambient emissions from stationary sources. The final Plan sets a target of a 32 percent decline in carbon dioxide emissions from 2005 levels by 2030, and contemplates a much larger role for renewables in the nation’s energy mix. Under the CPP each state will submit a compliance plan to achieve the emissions targets by retiring coal fired facilities, increasing natural gas as a fuel source and incorporating more renewables.

However, as the year draws to a close, the final disposition of the plan is far from certain. Hours after the regulation was published in the Federal Register, twenty-seven states filed more than 15 separate cases against the EPA, which have been consolidated before the U.S. Court of Appeals for the District of Columbia Circuit. In support of the CPP, 18 states, including New York and California, have sought to defend the EPA.

Before the merits of the case are even addressed, 2016 will see a three-judge panel address a “stay” of the rule, which halts the CPP’s implementation until the litigation is finalized. The parties seeking the stay, including West Virginia, feel that by meeting their prescribed standard they will be irreparably harmed. Renewable energy advocates argue that the granting of the stay could greatly damage the efficacy of the rule and its ability to be implemented in accordance with CPP (and unofficially COP 21) targets.

Solar_Panels_and_Wind_Farm.jpgThe Production and Investment Tax Credits

While the U.S. government has sought to assist the nascent renewables industry through tax credits in recent years, through most of 2015 the long-term status of the Production Tax Credit (PTC) and Investment Tax Credit (ITC) appeared grim. The PTC has been the great driver of the wind industry as it provides 2.3 cents per kilowatt-hour generated by a wind facility. Its expiration in 2014 led to a noticeable drop off in new wind projects. The ITC, which has been the driver of solar and also serves as a potential alternative credit for wind, provides a credit for 30% of the development cost of a renewable project, and is applied as a reduction to the income taxes for that person or company claiming the credit. The ITC was originally slated to be cut from 30% to 10% for non-residential and third-party-owned residential systems, and to zero for host-owned residential systems by the end of 2016.

Congress had been considering a PTC extension, which passed the Senate earlier this year. However, many thought an ITC extension was “off the table,” despite the fact that the reduction in credit value would render solar as unviable in many areas of the country. Thus, the industry was swept by uncertainty throughout the year. After solar businesses spent the past year reconsidering their business models to ease the pain of the step-down and speeding along projects to clear the credit requirements, Congress, to the surprise of industry, authorized the extension of both the PTC and ITC. The ITC will now be in place for an additional five years, including three years at the current value, followed by three years of more graduated step-downs. The impact of the ITC extension is set to be significant, and will likely inject new life into abandoned projects, protect existing jobs, support additional job creation and ensure that the renewables sector remains poised for an upward growth trajectory.

Yieldcos

In addition to using tax equity, larger solar companies have been able to raise public funds through the “yieldco” approach. Yieldcos are dividend growth-oriented companies, typically created by a parent company that bundles renewable and/or conventional long-term contracted operating assets in order to generate predictable cash flows. With about one dozen YieldCos now trading on North American exchanges, the vehicle has seen explosive growth in the last year.

The cost of capital required for energy projects has been reduced via the YieldCo model due to access to cheap corporate debt and as their use of standardized project structures and documents have lowered transaction “soft” costs. YieldCos have created efficient homes for the assets that large companies formerly kept on their balance sheets and have additionally allowed nascent entities to raise relatively cheap capital for acquisitions. They have also facilitated diversification of the renewable energy investor base as typical dividend-focused individual investors have been able to "go green" as an alternative to low yield bonds in a way that has been difficult in a tax credit-driven environment. Arguably, this has lowered return expectations, and therefore the cost of capital, further.

However, despite significant growth in 2015, the future of the YieldCo model is less than certain as the fourth quarter of 2015 saw great variability in YieldCo share prices. The reasons are myriad with theories addressing MLP values, rising interest rates, negative public statements from management teams, a slowing Chinese economy, lower oil prices, capital constraints and YieldCo disassociation from parents entities all being floated as potential reasons for recent losses in shareholder value. While it is important to decouple share price from the ability of a YieldCo to remain in business, lower share prices paired with rising interest rates could hinder the ability of many entities to continue to grow portfolios and dividends at current rates.

Distributed Energy Resources—Grid of the Future Proceedings

ThinkstockPhotos-178976522_1.jpgIn the wake of super-storm Sandy and the ensuing power outage to downtown Manhattan, the New York Public Service Commission (NYPSC) is proactively exploring revamping incumbent utilities to better incorporate Distributed Energy Resources (DERs) to ease the transition toward a more dynamic and robust energy generation and distribution system. DERs present a challenge to the tradition grid system, which only envisions energy flowing in one direction, typically from one large source located far from the end user. The proliferation of DER has caused a grid issue in that energy now flows bi-directionally—from the utility customer’s generating system into the utility.

NYPSC’s Reforming the Energy Vision (REV) docket envisions many user-sited DERs that will sell capacity into the system or to other energy consumers. Utilities will act in a new capacity, Distributed System Platforms (DSPs), as “gatekeepers” to a multi-sided platform market with the utility functioning as the platform provider. The utility will facilitate the transaction between the DER owner/operator and the consumer.

Similarly, California is also experimenting with incorporating and leveraging DER formally within their grid framework. The California Public Utility Commission is in the process of facilitating the utilities to develop distribution resource plans (DRPs) that incorporate DER into utility grid-planning and investment regimes. Currently, the Commissions’ mandate is for the utilities to determine the value of DER to their systems, specify where on their systems DER should be incorporated, and propose demonstration projects.

Solar in the Southeast

Developments in several Southeastern states, such as North Carolina, Georgia, Florida and South Carolina are highlighting changing shifts in attitudes toward solar in previously unfriendly jurisdictions. Policymakers in the Southeast are enabling both increased utility scale solar and the introduction of rooftop generation. For example, the Georgia legislature, thanks in part to a coalition comprised of environmentalists and conservative Republicans known as the green tea party, passed the Solar Power Free-Market Financing Act of 2015. The new law opens up third-party ownership of leased rooftop solar projects up to a maximum of 10 kW generation capacity.

Similarly, in South Carolina, utilities were required to submit their plans to implement the Distributed Energy Resource Program Act (DERPA), which mandates programs to achieve at least 2% renewable energy adoption by 2021, including plans to invest in or procure distributed resources. Earlier this year, Southern Carolina Electric & Gas (SCE&G) and Duke Energy reached separate agreements with state regulators, ratepayers and environmental advocates on programs for meeting this objective. SCE&G committed to invest $37 million to install approximately 84 MW of solar on the state’s electric grid by 2021, including 42 MW of utility-scale solar and 42 MW of residential, commercial-industrial, and community solar. Duke Energy agreed to a $69 million program to place in service 53 MW of utility-scale solar and 53 MW of residential and commercial solar.

Net Metering Debates

Utilities are not all for adapting to new and innovative business models, and in many states are continuing to push back against distributed generation. Net metering, which has incentivized hundreds of distributed energy projects, is a legislative policy that allows generators to sell unused electricity into the utility grid. Once supported by utilities, these policies are becoming more contentious across the country since in cost-of-service versus the rate-of-return regulatory jurisdictions, there is the argument that net metering prevents utilities from recouping their full return on grid investment. Utilities have raised concerns that net metering policies create an inequitable cost-sharing paradigm, whereby customers are paid for over-generation, but do not bear the responsibility or cost for updating and maintaining transmission lines.

For example, contention over net metering in Hawaii brought a regulatory proceeding to halt as the island’s utility maintained that costs are shifted to non-net metering customers. The utility recommended a model for distributed energy resources where owners would be compensated for net-metered electricity at $0.18 per kWh, which lengthens the payback period for solar infrastructure investments. Similarly, the Arizona Public Service Company (APS) established a charge for new rooftop solar panel installations connected to the electric grid through net metering, amounting to $0.70/kW—approximately a monthly charge of $4.90 for most customers.

Regulators and legislators from Nevada and California are considering whether NEM has run its course as a method to encourage solar adoption, or if the policy is a fair method of compensating rooftop generators. Utilities argue, not without merit in some cases, that they are purchasing electricity at a dollar rate greater than what it would take them to generate an equivalent amount of electrons. Moreover, electrons are only part of the story, as utilities still need to provide solar customers with standby power and voltage support to turn on their appliances and open their garage doors. Thus, NEM is heavily tied into the “grid-of-the-future” discussions as utility’s role evolves from vertical integration to DER network operators.

Offshore Wind

One of the drawbacks to renewables increasing their percentage share of the domestic energy mix is that these sources are intermittent with solar PV only generating electrons when the sun shines and wind turbines only turning when the wind blows. However consistent power - base-load - is still required, usually in the form of a fossil-fueled plant, or a nuclear facility. Offshore wind has long been touted as the next big addition to the U.S. energy mix since the wind blows harder and more consistently offshore, which would potentially allow this renewable energy source to replace some portion of base-load. Offshore wind had a rocky start in the United States as these large infrastructure projects face difficult regulatory obstacles, including a maze of permitting and environmental laws and requirements as well as classic NIMBY issues. One prominent example is the first proposed off-the-coast wind farm, Cape Wind, which has faced 14 years of litigation surrounding its development process. However, many are hoping that the start of construction of the Block Island Wind Farm off the coast of Rhode Island will trigger a gale force of offshore wind energy

Looking Ahead to 2016

The year ahead shows promise for the U.S. renewable industry—the COP 21 agreement and CPP set the stage for policies to drive and incentivize renewables, new states are opening as potential markets for both utility scale and residential rooftop solar and grid systems across the country are adapting to incentivize greater DER deployment. The stabilizing extension of the ITC and PTC ensures that these energy sources remain financeable in the New Year, and new financers may feel comfortable entering the market as the industry matures. With these policies in place, the U.S. has the opportunity to deploy more renewable infrastructure to meet stated targets, and those working in the renewable energy industry have cause for cheer this holiday season.

Topics: NY REV, Energy Policy, Energy Finance, Distributed Energy, YieldCo, Solar Energy, Renewable Energy, Wind, COP21, Renewable Energy 2015, Distributed Energy Resources, CPP, Green Tea Party, Net Metering, Net Energy Metering, NEM, DG, Energy Project Finance, Renewable 2015, Green Energy, Green Energy 2015, Solar Energy 2015, DER, Offshore Wind, Clean Power, clean power plan, Georgia Solar, 2015, energy, Wind Energy, Energy Project, Green 2015, California DRP

Managing Grid Security in a Distributed Energy Environment

Posted by Joshua L. Sturtevant on 11/24/15 10:49 AM

ThinkstockPhotos-480288900.jpgHistorically, utilities have shouldered the burden of mitigating the security risks inherent in energy generation, distribution and transmission. The utilities were, and continue to be, well-placed to do so as they benefit from historical knowledge, existing relationships with regulators and grid operators, large and highly-trained workforces and, perhaps most importantly, the ability to rate base. Although the nature of risks has evolved over the years, with terror threats and privacy concerns added to the list of conventional risks like weather events, traditional utilities have been up to the task with a few noteworthy exceptions.

However, the traditional model of energy generation and distribution is in midst of an evolution that, arguably, could be more impactful to the U.S. grid than deregulation has been. Even in competitive generation markets, retail interaction with customers has been handled almost exclusively by the utility as an energy aggregator with the ability to rate base. Places like New York are now serving as the test labs for alternate models as regulators there have been shifting their gazes toward distributed generation models where smaller, independent entities would drive power supply through resources co-located, or else located in proximity, with end users.

While there are undoubted opportunities embedded in such a model, it is also true that there are risks that need to be addressed. Distributed generation resources are arguably physically safer from attack than large, centralized plants and generally increase the resiliency of the grid. However, the opportunities being afforded to distributed generation developers and owners almost inherently means the entrance into the market of smaller, potentially inexperienced operators who, under most models, won’t have the same rate-basing opportunities as utilities.

It shouldn’t be difficult for even advocates of distributed generation-focused systems to see that such a system could be susceptible to everything from cyber attacks, both hindering the functions of the grid and creating privacy concerns, to hardware attacks, in a way that has not been the case in the past. Against this backdrop is the reality that the reliance on technology to manage the grid in a distributed generation environment will increase exponentially at just the point in history that the capabilities of threats to the grid have never been higher.

While these problems are clear, their resolutions remain murky. As a policy matter, it is still unclear where the burden for grid security will ultimately fall under new frameworks. As is often the case in the fragmented environment that is the hallmark of U.S. energy regulation, it is possible that burdens could fall unequally on classes of customers or on different market participants in different jurisdictions. In cases where burdens fall mainly on distributed generation owners, it is likely that at least one solution will be provided by insurers.

Insurers already address risks related to terror, weather, business interruptions and cyber threats among other things related to the issues noted above. However, insurance is already one of the largest, if not the largest, costs involved in the ongoing operation of renewable energy facilities after they are placed in service. Cobbling together a set of disparate coverages to mitigate risks would be too heavy a financial burden for most renewable energy operators. As a result, it is unclear that insurance products currently exist that would mitigate the risks created by the security burdens that could be placed on generators in the grid of tomorrow in a cost effective manner. We will explore this issue, as well as other issues related to microgrids, cyber security and the ‘New York Model’ of energy generation on this page in coming months. In the meantime, those who are interested in these issues can view past posts we have published on the topics here and here and view our roundtable discussion on New York’s Reforming the Energy Vision docket, which is driving some of the concerns noted above in that jurisdiction and beyond, here.

Special thanks to Morgan Gerard for her assistance with this post.

Topics: Utilities, NY REV, Power Generation, Microgrid, Energy Finance, Distributed Energy, Energy Management, Solar Energy, Renewable Energy

REV Conference Recap: Opportunities for Distributed Generation in New York

Posted by Joshua L. Sturtevant on 10/21/15 11:38 AM

REV PictureThe Sullivan & Worcester LLP Energy Finance team recently hosted an event on New York’s Reforming the Energy Vision (REV) initiative. In particular, the panel participants, including former New York Public Service Commission Commissioner Bob Curry, Mike Pantelogianis of Investec, Sarah Carson Zemanick of Cornell University and Jay Worenklein of US Grid Company, focused on how deals will get done under the new framework.

While REV is in its relative infancy, and while it is perhaps difficult to draw too many conclusions regarding business models as a result, the panelists nonetheless made some interesting points that policymakers would do well to take under consideration. In particular, the participants seemed to agree that uncertainty is one of the largest risks to investment coming into the market. Additionally, the panelists seemed to agree that getting the role of the utilities correct will not be an easy task, but could lead to interesting investment opportunities, particularly in the microgrid space.

The issues the panelists addressed can be added to others we have discussed in the past, including: 1) addressing technology risk; 2) ensuring reliability; 3) containing cost; and, 4) avoiding regulatory issues.

Those interested in viewing the program in its entirety can find it here: REV Roundtable

 

Topics: Carbon Emissions, NY REV, Structured Transactions & Tax, Energy Efficiency, Power Generation, Energy Finance, Distributed Energy, Energy Management, Renewable Energy

Reforming the Energy Vision (REV) Round Table Discussion

Posted by Joshua L. Sturtevant on 9/25/15 9:51 AM

skyline manhatten

New York’s Reforming the Energy Vision (REV) proceeding has the potential to change the way the electric industry functions in that state and beyond. The Empire State’s vision, which includes delegating distribution duties to utilities, reserving generation opportunities for third parties and shifting to a more renewable-focused generation mix, will change how business is done there while also potentially providing a template for other jurisdictions preparing for life under the EPA’s Clean Power Plan.

However, there are hurdles to overcome. Customers will not tolerate a reduction in reliability or resiliency. Nor will the benefits of clean generation be as joyously embraced if higher costs are the result. Outdated technological capabilities, security issues, job displacement and shareholder issues all create concerns that need to be addressed. That said, tremendous opportunities could exist for technology providers, generation platforms, financiers and others if the current vision of REV is implemented. Microgrid and cutting edge renewables are being promoted. Grid and demand management technologies will be in high demand, and legislative and financial support for projects will continue to ensure a favorable development environment for those with projects.

Please join the Sullivan & Worcester, LLP Energy Finance Team on October 1st live in our New York offices, or by dial-in, as we host a roundtable discussion on the REV proceeding and the unique business opportunities it could present. Panel participants include industry experts with unique perspectives on REV such as former New York Public Service Commission Commissioner Bob Curry, Mike Pantelogianis of Investec, Sarah Carson Zemanick of Cornell University and Jay Worenklein of US Grid Company. Interested parties can register here.

Topics: NY REV, Energy Policy, Energy Finance, Legislation, Distributed Energy, Energy Management

Understanding New York's 'Vision' -- Feature in Public Utilities Fortnightly

Posted by Merrill Kramer on 8/25/15 1:02 PM

With some of the highest electricity prices in the United States, and mindful of the massive disruptions to its electric service caused by Hurricane Sandy, New York has undertaken a major reform of its electric utility industry. This reform begins with the New York Public Service Commission (NYPSC), which has recently issued a broad-scale initiative to change the way utility service is provided that may serve as an example nationwide. The reforms will radically alter the way electric utility services are provided and priced to customers.

The far-reaching program is called the Reforming the Energy Vision, or "REV." Its major thrust seeks to decentralize power supply by encouraging businesses and retail customers to install small generating resources or "distributed energy" on site. The program includes incentives for installation of fuel-efficient power units, renewable resources such as solar and wind, and for development of microgrids and community solar. The NYPSC seeks to create a decentralized and resource diverse power supply system that can prove less susceptible to disruption caused by a single event, and replace it with a more reliable and dynamic system. The proposed reforms redefine the role of public utilities while seeking to ensure their financial survival in a decentralized power world.

Please see our publication in Public Utilities Fortnightly for more information on REV: Understanding New York's 'Vision'

Topics: Utilities, NY REV, Energy Policy, Microgrid, Energy Finance, Distributed Energy, Energy Management, Solar Energy, Renewable Energy

Managing the Rise of Distributed Energy - Emerging Utility Trends

Posted by Van Hilderbrand on 8/19/15 11:39 AM

Co-author Morgan Gerard

Much has been written and discussed over the last few years regarding the conventional utility’s “death spiral.” America’s power generation utilities have become increasingly fearful that a significant majority of their customers will generate their own electricity through innovative distributed energy technologies like rooftop solar. In other words, their customers become their competitors. As these customers migrate off the power grid, the utility’s revenues drop due to reduced load and the traditional monopoly model folds.

Utility Sunset 2Utilities have been aware of this emerging threat for some time. Now, as the price of renewables plunges and traditional coal-fired power plants are decommissioned under the Environmental Protection Agency’s Clean Power Plan, utilities have to respond to this changing environment with a new set of tools. In this post, we discuss a few trends developing across the country toward a cleaner, more affordable and more reliable grid.

Performance Based Rate Making

In Minnesota, the state’s leading utility, Xcel Energy, is pushing legislation (HF 1315) to create a performance based rate (PBR) regime that adjusts the utility’s revenue model to align with the state’s energy policy objectives while still protecting the utility’s business interests. Standard ratemaking in most states is based on the cost-of-service versus the rate-of-return. Instead of minimizing costs to achieve higher rates and greater revenues, the PBR de-couples the rate-of-return from the amount of kilowatt-hours sold, and focuses utility returns on its ability to meet a series of performance metrics that, for example, enhance the grid-system, energy efficiency, or customer value. PBR relies on setting a threshold performance level; thus, rewarding utilities for meeting targets and penalizing them for under-performance. An added benefit for utilities and ratepayers is that the PBR method may decrease the number of rate cases, which can be costly and time consuming. Thus, PBR can incentivize utilities to adapt to technological changes and promote distributed generation while continuing to recoup cost of investment and creating returns for shareholders.

Performance-based regulations will inevitably change the relationship between customers, utilities, and regulators. By tweaking their business model to meet state performance goals and create a distributed energy project-friendly market, traditional utilities in Minnesota will not only survive, they may thrive.

Platforms for Distributed Technologies

The New York Public Service Commission (NYPSC) is proactively exploring revamping incumbent utilities as “platforms for distributed technologies.” NYPSC’s Reforming the Energy Vision (REV) docket envisions these platforms as a transmission line “gatekeeper,” and the conventional utility will fulfill this role. The gatekeeper’s purview would include grid demand response, energy efficiency, and distributed generation. The NYSPC envisions utilities as Distributed System Platforms (DSP) constructing a multi-sided platform market with the utility functioning as the platform provider, similar to the interfaces found in the financial markets, credit card services, video game systems, and many internet businesses. In these markets, transactions take place in a triangular rather than linear exchange, in which buyers, sellers, and the platform provider each interact with two or more other parties rather than one counterparty exclusively. The platform provides the technology, protocols or structure through which users can interact. The NYPSC’s Staff has released its second White Paper that analyzes how to transition utilities towards the DSP market, and a feature of this transition seems to be a version of PBR that incentivizes distributed generation, low cost electricity and grid resiliency. Therefore, instead of spiraling to their deaths, New York utilities will have the opportunity to adapt as this market interface, connecting energy customers to energy producers-- a redefined role in a new energy industry as distributed generation clearing houses.

DG solarCalifornia has taken note of the REV trend and the California Public Utility Commission is in the process of creating distribution resource plans (DRPs) that incorporate distributed energy resources into utility grid-planning and investment regimes. Further, California’s model would place utilities in the role of brokering wholesale and retail grid energy, and perhaps empower the utility as a grid-edge operator similar to an independent system operator of a transmission grid. Again, such strategy may call for incentivized performance-based rate structures.

Net Metering Pushback

Utilities are not all for adapting to new and innovative business models, and in many states are continuing to push back against distributed generation. Net metering, which has incentivized hundreds of distributed energy projects, is a legislative policy that allows generators to sell back unused electricity into the utility grid. Once supported by utilities, these policies are becoming more contentious across the country since in cost-of-service versus the rate-of-return regulatory jurisdictions, there is the argument that net metering prevents utilities from recouping their full return on grid investment. Utilities have raised concerns that net metering policies create an inequitable cost sharing paradigm, whereby customers are paid for over-generation, but do not bear the responsibility or cost for updating and maintaining transmission lines.

For example, contention over net metering in Hawaii brought a regulatory proceeding to halt as the island’s utility maintains that costs are shifted to non-net metering customers. The utility recommends a model for distributed energy resources where owners would be compensated for net-metered electricity at $0.18 per kWh, which lengthens the payback period for solar infrastructure investments. Similarly, the Arizona Public Service Company (APS) established a charge for new rooftop solar panel installations connected to the electric grid through net metering, amounting to $0.70/kW—approximately a monthly charge of $4.90 for most customers. The policy was effective starting January 2014, and will be in effect until the next APS rate case.

Considering that utilities maintain ownership of the transmission lines, and in many jurisdictions that their energy generation role is still a necessity for grid stability and reliability, these companies retain a considerable amount of power over the destiny of our power markets. However, customers that have installed distributed energy projects like solar, expect to receive the net metering rates they were promised. As more utilities stop supporting net metering policies, distributed generation continues to proliferate. Thus, there needs to be a compromise between the utility, customers, and regulators that fairly accounts for all costs. Only then can a win-win solution be developed.

Thoughts for the Solar Customer, Developer, Investor

The unprecedented amount of distributed energy coming online will have to be accounted for in the future power generation industry model. Ultimately, the states will serve as arbiters that will guide the evolution of the electric industry. Many states are closely watching the developments in New York, Minnesota, California, Hawaii, and Arizona as each regulatory body considers its own solutions to balance renewable energy developments with grid maintenance, safety, and reliability. The attractiveness of distributed energy to the customer, developer, and investor will certainly depend on the solution chosen.

Topics: Utilities, NY REV, Energy Policy, Energy Efficiency, Energy Finance, Distributed Energy, Energy Management, Solar Energy, Renewable Energy

Nation’s Capital Explores Modernized Energy Distribution

Posted by Van Hilderbrand on 8/11/15 12:34 PM

Co-author Morgan Gerard

The District of Columbia’s Public Service Commission (PSC) opened Formal Case No. 1130 in June 2015 to explore modernizing energy distribution and the associated impacts of distributed generation and microgrids on the existing grid system. The PSC is soliciting comments on the docket until August 31, 2015. It appears that at this stage, the PSC’s interest is purely informational and that the PSC is interested in making the process collaborative. The PSC will be holding a kick off event on October 1, 2015 to set out an initial overview of the current energy distribution system in the District and to discuss the future plans of the Commission’s investigation.

DC ThinkstockPhotos-477221723The process of lighting up homes and businesses under the purview of the PSC can be divided into two components - generation and delivery. Generation was modernized in 1999 as the District was transformed into a non-utility competitive market. Today, District residents have the right to choose which company generates their electricity and can even opt-in to community solar or virtual net metering arrangements. Improving electricity distribution is the next challenge for the PSC and the city where grid resiliency, distributed generation, and energy efficiency concerns need to be balanced against maintaining grid safety, reliability, and cost-effective standards. These concerns are at the center of the PSC’s latest formal case.

The PSC is interested in distributed generation and microgrids because the nation’s capital suffers from that same challenge as other major U.S. cities - there simply isn’t enough vacant and available land to develop large scale projects. For cities to modernize and upgrade generation to cleaner resources, distributed generation in the form of residential and commercial rooftop solar, in-house combined heat and power systems (CHP), and demand-side energy efficiency upgrades may be the only options. To develop these resources, the PSC and the city must look to both incentivize the on-site generation resources and ensure their interconnectivity to the grid.

Emerging Electricity Delivery Modernization Concerns

One impact being explored in the formal case is the affect distributed generation and microgrids may have on the safety and reliability of the existing grid system as a whole. In many competitive generation states and jurisdictions like the District, the local utility maintains the distribution lines that connect grid level power producing assets to homes and businesses. As many smaller distributed generation assets come online, two concerns emerge that must be addressed. First, the distribution lines may become overwhelmed by the influx of new generation. Second, long transmission and distribution lines may no longer be the most efficient form of electricity delivery. Instead, localized distribution may be the answer to increase the efficiency of electricity production and consumption.

Microgrids play a major role in the idea of localized distribution. A microgrid is a smaller grid system that carries local distributed energy resources along local distribution lines. Microgrids can isolate or “island” themselves from the larger utility grid, thus improving resiliency as macrogrid events will not jeopardize power reliability within a particular microgrid. For example, an islanded microgrid system would have been useful in the District when an outage of a Potomac Electric Power Company (“PEPCO”) transformer in Maryland caused power disruptions in downtown D.C. and at the White House. If a system of localized generation and distribution networks had been in place, the transformer outage may not have plunged these areas into darkness.

The evolution of privately owned microgrids may be particularly challenging since the utility currently owns the entire fixed wire distribution network. Additionally, regarding distributed generation, the utility is the sole arbiter of what assets are able to come online without a regulatory or legislative mandate. Thus, the proceeding initiated by the PSC may look to address the barriers that inhibit the proliferation of these efficiency measures in the District.

PSC—Eyes on REV

In an age of carbon consciousness, energy efficiency and cyber attacks, the PSC is interested in figuring out how to make distributed generation and microgrids a part of the modern strategy. Given the early stage of this proceeding, it is unclear how energy delivery modernization will be accomplished, but the District will likely keep a close eye on the New York process for lessons learned with its Reforming the Energy Vision (REV) docket. REV is revamping incumbent utilities as “platforms for distributed technologies,” and envisions these platforms as a transmission line “gatekeepers” with grid demand response, energy efficiency, and distributed generation coordination under the utilities’ purview. The modest four page PSC Order initiating the delivery modernization proceeding is not yet proposing measures of REV proportion, but notably the New York process has been thus far a cooperative proceeding with the incumbent utilities, which may serve as a model for collaboration in the nation’s capital.

Topics: Utilities, NY REV, Energy Security, Energy Policy, Energy Efficiency, Microgrid, Distributed Energy, Solar Energy, Renewable Energy

Lessons from the Recent NY REV Conference

Posted by Joshua L. Sturtevant on 8/7/15 10:14 AM

Several members of the S&W Energy Finance Team attended Infocast's recent NY REV Summit. Speakers ranged from utility and regulator representatives to CEOs of technology and service providers, all eager to discuss the latest in New York's ongoing Reforming the Energy Vision (REV) proceeding. Several key themes emerged during the two day event:

1. Collaboration between stakeholders to ensure a viable final rule is key. While the Department of Public Service (DPS) has, by all accounts, been running a very efficient and inclusive stakeholder feedback process (despite a lack of participation by consumer rights groups), it will not be surprising to see more divergent views emerge as details emerge and implementation becomes more imminent. Therefore, it may become increasingly difficult to keep all stakeholders in the fold.

2. Structuring the rule to avoid FERC (and other regulatory) issues is a concern. Many expect REV to serve as a template for other states going forward. It can similarly be viewed as a test case/battleground for those who stand to lose out under alternative power futures. Many speakers mentioned early-stage collaboration with the FERC to ensure that later challenges are avoided, or at least more easily overcome.

3. Technical issues need to be resolved. Several speakers noted that cyber security risks associated with giving generation responsibilities to independent entities is a very real issue that needs to be contended with. The idea of overcoming the hurdles caused by handling 'two way traffic' with antiquated metering and distribution equipment was also discussed.

4. The role of utilities - and repercussions of changing roles - need more thought. While the conceptual shift of utilities toward transmission entities has merit, challenges in the form workforce retraining/redeployment, legislatively mandated rates of return, losses of shareholder value and transfers of property all need to be addressed.

5. Reliability cannot be ignored. Even if the ultimate vision of widespread, clean distributed generation is highly desirable to many New Yorkers, many speakers noted that there would also be little tolerance for reductions in reliability along the way. This could have practical implications for the time it takes to transition from the current status quo to the new vision - and proponents may need to pragmatically accept that lead times on these changes could be measured in years rather than months or quarters.

For the latest on REV, readers can review the latest DPS white paper which was released last week. Additional background can be found in last year's "Reforming the Energy Vision" staff report. Energy Finance Report readers should also keep their eyes open for a save-the-date for S&W's own REV event on October 1st, and can contact Josh Sturtevant for more details.

Topics: Utilities, NY REV, Energy Policy, Energy Finance, Distributed Energy

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The Energy Finance Report analyzes developments in energy finance as well as provides updates and perspectives on market trends and policies.

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