Recently, the staff of the New York State Department of Public Service issued its recommendations in the Value of Distributed Energy Resources Proceeding. The 68-page report provides a comprehensive discussion regarding the compensation and valuation of distributed energy resources (DER). Among its many recommendations, the report provides that existing rooftop solar systems should continue to receive compensation under their current net energy metering (NEM) contracts for a period of 20 years from the date of initial operation. However, customers can also leave NEM and adopt the new proposed compensation method. Other recommendations include:

  • Utilities would develop fee-based, “Virtual Generation Portfolios” – a pool of new DER projects that will be developed in conjunction with private energy companies.
  • Interim measures for Community Distributed Generation (CDG) projects that are in the advanced stage of development. For a limited 90-day period, a specific amount of CDG projects can qualify for compensation under the current NEM framework in order to aid the transition to the new methodology and ensure that early CDG development can deliver on increasing DER access to all New Yorkers.
  • Distributed Generation projects, such as solar for large commercial customers, fuel cells, farm waste generators and micro combined heat-and-power would also transition to the new methodology following action by the New York Public Service Commission.
  • Behind-the-meter generation should be recognized for its environmental value and for contributing to the state’s overall Clean Energy Standard (CES) goal. 

Initial comments on the report are due December 5, 2016, with reply comments due December 19, 2016. Action by the New York Public Service Commission on these recommendations is expected in January 2017. 

The Public Utilities Commission of California (CPUC) recently introduced a draft regulatory incentive proposal addressing issues regarding the utilities’ business models, financial interests and role with respect to distributed energy resources (DER) deployment. Given the potential magnitude of this rulemaking to the utilities’ business models, I suggest that utilities and other stakeholders nationwide follow this docket closely.

The pilot program is offering regulatory incentives to the state’s three large investor owned utilities (IOUs) for the deployment of cost-effective DERs. The current proposal offers a shareholder incentive for the deployment of cost-effective DERs that displace or defer a utility expenditure, based on a fixed percentage of the payment made to the DER provider (customer or vendor). Below is a quote from the order that explains the concept:

“There are two roadblocks . . . to understanding financial value. Many in the regulatory community believe that:  (1) the utility’s return on equity is the sole value driver; and (2) regulators set returns on equity at a rate equal to the cost of equity. Neither of these perceptions is correct, and understanding why is key to developing effective utility incentive mechanisms. 


Many regulatory reform discussions focus on the utility’s return on equity as the sole driver of financial value, but that does not align with the concept of investor value creation. It is not the absolute level of a company’s return on equity (r), but rather the difference between r and its cost of equity (k), that creates the value opportunity that drives the stock price. (Appendix B, p. 6)

This discussion leads to the following correction to the investment incentive proposition espoused by many:

INCORRECT:  r > 0 utilities have an incentive to expand 

CORRECT:  r > k   utilities have an incentive to expand 

  r = k   utilities are indifferent as to whether they expand

  r < k   utilities have a disincentive to expand Capital, like any other input to a production process, is not free.

This should have intuitive appeal. Does it seem likely that utilities would rush to expand their facilities if regulators allow them to earn, for example, a 2 percent return on such investment? Clearly there is some minimum acceptable level of return. The cost of capital, by definition, is that minimum return hurdle.

This corrected incentive structure should give some readers pause. Many, if not most, regulators say that they set utility rates of return equal to the cost of capital. If that condition held, utility management focused on creating value should not care whether it ever makes any plant investment. Just as buying apples for 50 cents and selling them for 50 cents creates no value for the grocery store owner, raising capital at a cost of 10 percent to invest in assets that earn 10 percent is similarly a financial wash—no matter how large the investment, it creates no investor value. (Appendix A, p. 3)” 

Comments and responses to the questions are to be filed no later than May 2, 2016. Reply comments may be filed not later than May 16, 2016. Some of the questions to be addressed are:

  • Is the proposed incentive, in the range of 3.5% grossed up for taxes, approximately correct?
  • Are there other disincentives to the deployment of DERs that this proposal does not address that should be considered at the same time? If so, please explain.  
  • Is the suggested process for identifying and approving DER projects that would generate an incentive reasonable and appropriate? How could the process be improved? 

The Challenges: Getting regulatory approval for smart grid projects. Monetizing benefits.

The Help: Electric Power Research Institute’s (“EPRI”) new guidebook for cost/benefit analysis of smart grid demonstration projects. Even utilities who are not doing stimulus demonstration projects can find the book beneficial. It presents a step-by-step framework and standardized approach for estimating the benefits and costs of smart grid demonstration projects. This volume, released last month, updates and supersedes the material in the original volume one published in 2011, but goes further by providing in-depth information on the monetization of benefits. According to EPRI, it contains detailed discussion of the first 21 steps, from initial project definition to monetization of benefits and applies these steps to a specific smart grid technology to illustrate how the methodology can be applied.

EPRI says the guidebook is unique in its level of technical specificity and in the range of technologies it is intended to cover. It will complement previous publications that deal with the concepts of cost/benefit analysis as applied to the smart grid. Finally, it is intended to help utilities produce evaluations that meet reporting requirements for DOE-funded smart grid projects, as well as provide the types of information that regulatory commissions are likely to require in order to approve the investments for cost recovery through regulated rates.

This graphic is from a presentation made by EPRI at the NARUC Annual Meeting on November 13, 2011 and it is still relevant:

In addition to the EPRI material, the Business Case/Cost Recovery Resources link on this blog has several additional resources utilities may find helpful. Happy 2013!

Through a recent press release, the Illinois Commerce Commission stated that Ameren Illinois’ AMI plan could not be approved because it would have to rely on either including gas meters or a compliance period longer than ten years, neither of which is allowed in the statute. Additionally, the Commission determined that the cost-benefit analysis presented by the company relied on incomplete or speculative calculations, referring to the plan as

vague and incomplete and bordered on not being a plan at all, but rather more of a general statement of intention to install smart meters in some parts of its service territory.

ICC Chairman Doug Scott said, “When and where the company meets its legal obligation it provided scant information. I am troubled by the inadequacy of the plan.” Commissioner John Colgan noted that while there are benefits to customers from a smart grid system, Ameren witnesses did not demonstrate any, leaving commissioners nothing to work with or modify. “I wish we had better information,” he said.