Electric utility companies are subject to perverse incentives.
Utilities provide large infrastructure services that are for the usage of the public. In the United States, they are regulated or overseen by some type of public authority or commission, regardless of whether or not they are private companies.
Private utility companies must balance the needs of all of their stakeholders: shareholders who want the utility to make a profit, consumers who want access to their products (oil, heat, gas, energy, water, sewage, etc.) at a reasonable price, and regulators that must ensure those things stay in balance.
According to Energy Law in a Nutshell by Joseph Tomain and Richard Cudahy, this is traditional formula to determine a utility’s revenue requirement:
If you work the equation, you can see that it encourages utilities to make capital investments to so that they maximize the value of that set rate of return.
That brings us to a situation faced by Consolidated Edison (Con Edison), an private electric utility company in New York, that has a demand problem. Based on the formula above, the initial proposal as part of their last rate case, included the request for construction of new substation, a switching station, and transmission feeders to the tune of $1 billion in an area which forecasts point to demand overrunning capacity for a 40-48 hours period.
$1 billion is a huge capital investment. We will not do the actual numbers, but you can see obviously that
- It represents quite the profit opportunity
- The cost to “fund” that profit would be passed down to consumers (residential and commercial) by increases on their electric bills
However, if a utility company could find another way, a cheaper way and more sustainable way, it would be better for consumers in the short and longer term. Why?
- No one, whether an individual paying a monthly electric bill or a company that needs to keep the lights on, wants to see a rate increase
- The state government does not want to see that increase either
- Utilities, eventually, will run out of places to build!
- The search for alternative solutions, green technology solutions, really, will spur innovation in the industry
Have you heard of “REV”?
The New York State Public Service Commission has formed an initiative to tackle energy management, practices, and regulations within the state. The official initiative is called Reforming the Energy Vision (REV) and it sets forth six target policy outcomes in these areas:
- Customer knowledge
- Market animation
- System-wide efficiency
- Fuels and resource diversity
- System reliability and resiliency
- Carbon reduction
Con Edison comes up with a $200 million alternative
On December 12, 2014, the New York Public Service Commission approved the proposal by ConEd, the Brooklyn/Queens Demand Management (BQDM) program, to address the Brownsville demand issue which, per traditional approach, would have required that $1 billion.
Instead, they are piecing together a solution to:
- Implement operational measures, such as voltage reduction
- Build more limited infrastructure (estimate $12.3 million for capacity bank installations) to expand capability to support load transfers from other areas
- Implement non-traditional utility-side and customer-side solutions – ConEd issued an RFI (Request For Information) for proposals on:
- Energy efficiency
- Energy management/audit software
- Energy storage
- Customer engagement
- Demand response
The result would, at a minimum, defer the need for a new substation to sometime between 2017-2019. An additional proposal and some other infrastructure work could potentially defer it even further to 2026. This is a big win for green technology and a chance to prove the idea that alternative energy solutions can work.
In reading the full filing, there are still some concerns. ConEd has asked for certain incentives to help “align” their needs with those of the customers, specifically allocated to this proposal. The various organizations that provided comment have all, except for one – Independent Power Producers of NY (IPPNY) – are overall supportive of the proposal with certain caveats and cautions.
A more sane approach to utility infrastructure improvement is not going to happen overnight, but we can all agree that the BQDM Program is a step in the right direction. Initiatives like REV, which is being watched countrywide to see what can be learned and what benefits are there to be had, are moving us in to where we need to be in the next 20 years for sustainable energy deployment and development.