This is the fourth in a six-part series on utility business model reform provided by Rocky Mountain Institute, America's Power Plan, and Advanced Energy Economy Institute, originally published by Utility Dive.
Incentives inherent in the traditional cost-of-service utility revenue model discourage utilities from investing in non-traditional solutions. This is because non-traditional solutions, such as demand management programs and distributed energy resources (DER), are normally treated as operating expenses, which are passed through to customers without earning a return. Instead, if a utility invests in a traditional "poles and wires" solution, it is given the opportunity to earn a rate of return — creating a profit motive. But it doesn't have to be this way.
Con Edison's Brooklyn Queens Demand Management (BQDM) program, where the New York Public Service Commission (PSC) adopted incentives to encourage Con Edison to contract for third-party services that drive down project costs, shows one way to create a win-win-win scenario for the utility, third-party companies and customers.
The BQDM program resulted from a settlement in Con Edison's 2013 rate case. Rising electricity demand in Brooklyn and Queens was identified as causing potential capacity constraints on a portion of its grid that could overload existing infrastructure and lead to reliability concerns as early as 2018.
The original solution proposed, at an estimated cost of $1 billion, relied on traditional approaches, including a new distribution substation, expanding an existing 345 kV switching station and constructing a sub-transmission feeder to connect the two stations. Instead, the PSC ordered Con Edison to look at non-traditional investments as ways to manage demand growth, and offered innovative incentives to adopt these alternatives: