Advanced Energy Perspectives

New York’s Transition from Net Energy Metering Offers a New Way to Value Distributed Resources, but Raises Concerns about RECs

Posted by Ryan Katofsky and Danny Waggoner

Apr 27, 2017 2:04:15 PM

    

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If you’re a regular reader of Advanced Energy Perspectives then you know that we’ve written several times on New York’s groundbreaking Reforming the Energy Vision (REV) proceeding. We’ve also written about rate design and efforts around the country to address net energy metering (NEM). Some NEM reform efforts are better than others. In some cases, utilities have been seeking to raise fixed charges on NEM customers or to impose per-kW monthly demand fees, arguing that NEM customers are not paying their fair share of the costs of the grid. These charges reduce the attractiveness of onsite distributed generation (DG) by shifting utility revenue collection from volumetric charges (per kWh) to monthly charges that cannot be reduced with onsite generation. In our view, such approaches are overly focused on maintaining certainty of revenue for utilities, and as a result fail to adequately consider the value of DG to the grid, such as deferring or avoiding future investments in generation, transmission, and distribution assets.

New York, under its Reforming the Energy Vision (REV) process, is taking a different approach. In its recent order on the Value of Distributed Energy Resources (DER), New York’s Public Service Commission (PSC) put forth an innovative structure for valuing the benefits of electricity from DG that is exported to the grid (and which, under traditional NEM, would be credited at the retail rate). But the order also revealed some problematic features of New York’s treatment of onsite renewable energy generation and the value of its environmental attributes – features worth revisiting as the Value of DER proceeding continues.

NEM is, without a doubt, a simple and effective policy for promoting onsite generation. NEM provides a range of benefits, including greater choices and control for customers, emissions reductions, and not least, the growth of the DG industry. The main technology to benefit has been solar, but NEM typically applies to several advanced energy technologies, including wind power, fuel cells, and combined heat and power. But NEM is a blunt instrument, in part a product of the simple (i.e., not smart) meters historically provided to most customers, which only measure net production or consumption during a monthly billing period, and bill (or credit) the customer accordingly. Because NEM customers are usually (but not always) credited at the full retail rate, this approach means that the retail rate effectively serves as a proxy for the value of the electricity generated.

Also without a doubt, NEM causes a shift in utility revenue collection – customers with DG that receive NEM pay less to the utility, and as a result, the utility must collect those dollars from its other customers. But a revenue shift does not necessarily mean that there is a net cost shift; after adding in the benefits that the NEM customers are providing to the grid, they may indeed be “paying their fair share” or even more than their fair share. To the extent that there is a net cost shift to other customers, it is probably pretty small in most cases. Nevertheless, as DG penetration has risen, more focus is being paid to revenue shifting. As noted above, some utilities have tried to lock in more revenue from NEM customers, but fixed charges are just as much of a blunt instrument as NEM – and are rightly viewed as targeting DG and its owners. A more comprehensive approach would be to develop ways of more accurately valuing DG and using that as a basis for compensation to DG owners for the electricity they generate. It is now possible to transition to this more refined – and fair – approach.

A basic premise of REV is that DER provides not only individual customer benefits, but also grid benefits. Compensating for these benefits therefore becomes an important way of making REV real. To promote DER deployment, the New York PSC created programs for Community DG, which allows customers to make use of a shared renewable energy installation, and remote net metering, which allows project owners to transfer NEM credits from one of their properties to another. The proliferation of NEM-eligible projects created a need to review how DG is compensated. After more than a year of work, including several months of a collaborative stakeholder process, on March 9, the PSC issued its order instituting an interim successor to NEM.

We don’t have space here to go into all the details, but in a nutshell, the order puts in place, on an interim basis, a means of compensation based on a “value stack” that is built out of  several component benefits: energy, wholesale capacity, environmental, and distribution system capacity. This value-stack approach only applies to certain NEM-eligible projects, namely new Community DG projects and behind-the-meter projects where the customer is already charged on a demand-based rate. This means that so-called mass-market customers (residential and small commercial) are unaffected and can continue to receive traditional NEM credit for new projects until 2020, or until a certain market threshold is met, at which point the PSC will begin a process to develop a transition for them as well.

In order to keep the interim approach simple, it only applies to exported energy, which will be compensated based on the value stack as opposed to the retail rate. Also, the netting period will be hourly instead of monthly, because some elements of the value stack change in value from hour to hour.

We support hourly netting as a more precise approach, but in our view, limiting the value calculation to exported power and ignoring generation that is produced and consumed behind the meter undervalues the environmental and distribution system benefits of onsite installations relative to Community DG projects. Imagine two otherwise identical solar projects – one a behind-the-meter rooftop project on a big box store, the other a Community DG project, both on the same circuit. Despite having the same impact on the system, the latter would get compensated for the environmental benefits and distribution system capacity for its entire output (because all the generation from a Community DG project is exported) whereas the rooftop system would only receive these values for exports.

The interim methodology also sets out a transition path for new Community DG projects. Compensation for the earliest projects will basically equal retail NEM rates, but compensation will step down in tranches, using a “market transition credit” that decreases with each successive tranche. The value of the credit, which will vary by utility, will be set such that total compensation steps down 5% from tranche to tranche. Once a project is assigned a tranche, the credit value is fixed for 20 years. We are optimistic that this system will prove viable for Community DG projects and result in projects getting financed and built, which is good news for the industry and for customers.

The aspect of the order we are most concerned about, however, is the treatment of environmental benefits associated with onsite generation. Renewable Energy Certificates (RECs) are well-established vehicles for valuing such attributes and are commonly used across the country for both compliance with state policies (like renewable portfolio standards, or RPS) and for voluntary renewable energy purchases. What is problematic is how the PSC chose to value those RECs and the constraints it put on the ability of the owner of RECs to trade, sell, or retire them, particularly for RECs associated with DG that is produced and consumed behind the meter (i.e., not exported).

First, for energy generated and consumed behind the meter, the order allows only non-tradeable RECs to be minted. These RECs cannot be sold – a significant change in policy for some behind-the-meter resources, which were able to sell RECs into the New York RPS that expired in 2015, and was replaced by a new Clean Energy Standard (CES). Now, owners of onsite DG will only be able to retire such certificates to demonstrate compliance with their own sustainability goals. This represents a significant revenue source for system owners that is no longer available.

For RECs associated with exports, the project owner  has only two options – sell them to the local utility at a fixed price (currently set at $24/MWh) for the next 20 years or make a one-time irrevocable choice to keep the RECs and forgo the payment for their environmental value. But if they choose this option, they cannot sell the RECs to someone else. They can only retire them for their own purposes.

These policies taken together remove a significant amount of value from renewable energy projects. In most other states, RECs are treated as the property of the project owners, who are free to trade, sell, or retire them based on their own business plans or sustainability goals. The New York system, in contrast, only recognizes the value of a portion of the output and prohibits any market-based trading or selling of RECs.

As for the non-tradeable certificates that can only be retired by the customer, the order casts doubt on whether they can even be counted toward voluntary sustainability goals. New York’s Clean Energy Standard, which sets a renewable energy requirement of 50% by 2030, has a unique design that counts both utility purchase obligations and voluntary market actions – private renewable purchases for personal or corporate sustainability goals – toward the state’s Clean Energy Standard. This means that as companies and individuals invest their own money in renewables to meet their own sustainability goals, their actions will reduce the need for utilities and other load serving entities to purchase renewable energy to fulfill CES obligations. While it is unclear whether there will be a 1-to-1 replacement, it casts doubt on whether voluntary actions will lead to additional renewable energy generation, as opposed to simply replacing renewable energy that utilities and other load serving entities would have had to have purchased anyway. Given this level of uncertainty over whether voluntary renewable energy purchases will amount to additional greenhouse gas reductions, a key motivation for the voluntary market, the growth prospects of the voluntary market in New York are unclear.

The severe restrictions on RECs, which we argued against when they were included in the original Commission Staff proposal, have led the Coalition of On-Site Renewable Energy Users and Developers (CORE) – whose members include companies like Bausch & Lomb and Gallagher Bus Service as well as institutions like Cornell University, Rochester Institute of Technology, and SUNY Cortland – to file a petition for rehearing of the order. In their petition, they lay out a host of reasons why the PSC’s approach needs to be modified. We support CORE’s call for rehearing to reopen this issue.

Despite our concerns over the treatment of RECs, we see the New York PSC’s Value of DER Order as a laudable effort to redefine compensation for a grid with a much higher penetration of DER. We will continue to engage on the issue as the Commission considers how to make the value of DER more technology neutral and provide more precise valuation in the next phase of the proceeding.  

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Topics: State Policy Update

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