Biting the Biggest Apple: New York’s New Plan to Reward Distributed Energy Resources

How do we compensate those who add clean electricity to our shared power grid? This fundamental question has affected the rate at which the U.S. has adopted, deployed, and put into use clean, distributed energy resources such as energy efficiency, batteries, electric vehicles, and rooftop and community solar.

At the core of our new distributed energy electricity system are resources that work better during specific times and weather conditions, and thereby have more value at some moments than others. So, it’s crucial to take time and location into account to properly identify the value of these clean energy resources and how they should be fairly compensated. Solving for price can spur much needed investment in renewable resources and lower the cost of clean energy development, while reducing emissions.

Last week, the New York Public Service Commission (PSC) brought us a step closer to figuring how to fairly compensate distributed energy by issuing a long-awaited order to establish an interim pricing structure that encourages the evolution of distributed energy markets and better aligns with Reforming the Energy Vision (REV), the state’s initiative to build a cleaner, more efficient, and customer-centric electric system.

Here’s what the order requires New York to do:

  • Market price for large energy resources – Adopt a more accurate, market-based approach for compensating large energy resources (like community solar and on-site large commercial solar projects) that add electricity to the grid. Instead of the traditional net energy metering model – which allows solar owners to sell their unused power back to the grid at the retail rate – New York will now allow compensation to align with the market value of electricity generated by large energy resources. This value can be higher or lower than the retail rate, the price people pay for each kilowatt hour.
  • Net metering for small energy resources – Keep net energy metering for existing and new home solar systems and wind projects that come online until 2020 for 20 years from their in-service date. This will give the small distributed energy resources market preparation time to transition to a market-based compensation mechanism.
  • Transition credit for community solar – Provide a temporary “market transition credit” to community solar projects that are likely to receive less compensation compared to what they would receive under a net metering mechanism. The credit will be phased out over time. This will help avoid suddenly disrupting the state’s burgeoning community solar market, while recognizing the value of the distributed energy benefits not quantified in the interim pricing mechanism.
  • Value carbon’s social cost – Set the Social Cost of Carbon, the overall cost to society from each ton of carbon dioxide (CO2) emitted, as the minimum value for the environmental benefits of clean resources.
  • Fair access to solar – Facilitate low- and moderate-income customers’ access to community solar projects by reducing or eliminating financial barriers, and identifying innovative approaches to encourage their participation.
  • Dollar-value based credit – In the new compensation approach, move away from offsetting how much power a customer adds to the grid against how much the customer uses. Instead, provide a monetary credit, where each kilowatt hour exported to the grid is converted into a dollar amount based on the energy, grid, and environmental value the resource creates.

This interim compensation approach moves New York closer to a marketplace in which customers, utilities, and energy developers are rewarded for investments decisions based on the “full” value their resources provide to the electric system.

However, more work is needed to establish better value systems for all the benefits distributed energy resources provide and to develop a more complete and accurate value-based compensation mechanism.

New York should also address the following aspects of clean energy valuation:

  • Distribution and transmission value – Distributed energy resources can cut down on the amount of costly transmission and distribution infrastructure necessary to deliver electricity because they reduce demand for electricity provided by utilities. So, the valuation method adopted needs to be more precise and capture the full distribution and transmission value of these resources.
  • Public health benefits – Clean, distributed energy resources reduce air pollution and provide significant public health benefits. In the future, once the market-transition credit is phased out, it will become even more important to compensate those who make electricity using clean resources for the value of public health benefits they provide.
  • Environmental value – Clean, distributed energy resources are environmentally valuable because they generate power without polluting, and they can help avoid the dirtiest central generators. The interim pricing mechanism provides an average flat rate for compensating environmental benefits. The mechanism needs to better align payments with actual environmental value created by these resources to encourage investment in distributed resources where and when they provide the most value to the system.

REV envisions an electricity market in which distributed energy resources are treated in much the same manner as traditional generators. To that end, New York’s wholesale market operator, NYISO, has already been working to integrate distributed energy resources into its scheme. By opening the wholesale electricity market to distributed resources, New York can unlock additional value streams and allow them to compete fairly with traditional generators. Increased competition in the market can lower energy costs for everybody.

Environmental Defense Fund looks forward to continue working with the PSC, utilities, and other parties to further refine clean energy valuation and develop a long-term solution that provides a healthy market for distributed energy resources.

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