New York Stumbles in Finalizing Value-Based Solar Credits

miles-farmer-450September 18, 2017 by Miles Farmer, Clean Energy Attorney

New York’s quest to expand access to clean energy has taken a worrying turn. In issuing an order setting forth its plan to implement its new solar policy that credits solar projects based on the benefits they provide (known in the utility world as the “Value of Distributed Energy Resources” policy), the New York Public Service Commission (PSC) unfortunately approved flawed utility proposals that undercount the value of solar resources and that will make it impossible for many solar projects to predict part of their revenues from the policy and obtain financing on that basis. The finalization of the solar credit policy is an important step that will allow projects to move forward. But we expect less market growth than could otherwise have been achieved with a better implementation plan. Significant improvements will be necessary as New York builds upon this policy to refine its rates for solar and other distributed energy resources.

The disconnect: this order does not match Governor Cuomo’s nation leading clean energy vision

Without a doubt, thanks to Governor Cuomo’s leadership, New York has been a clean energy leader. New York is a founding member of the U.S. Climate Alliance and is carrying out ambitious initiatives like New York’s 50 x ’30 renewables target, a commitment to secure 2,400 MW of offshore wind, and a plan to facilitate the development of more than 3,000 MW of solar. The PSC’s Reforming the Energy Vision (REV) initiative aims to help realize these goals while empowering customers and better aligning utility and market incentives to drive clean energy and other investments to locate and operate where and when they are most needed.

But tackling the complex regulatory reforms necessary to achieve this vision is easier said than done. To reach its laudable goals, the PSC will need to apply greater scrutiny to utility proposals where they fall short, and it must do more to send clear long-term market signals to clean energy investors so that they have enough confidence to support the projects necessary to achieve New York’s goals.

Background on New York’s approach to setting rates for solar and other distributed energy technology

New York’s order finalizing its solar crediting policy follows up on a previous Commission order that established the structure for new solar credit rates covering mid-size solar arrays like those atop big box stores, factories, and apartment buildings, or adjacent to communities in previously vacant land (i.e. projects bigger than rooftop systems on single family homes but smaller than huge solar farms akin to large-scale power plants). New York’s goal in adopting the new structure is to move beyond the state’s traditional net metering policy under which participating customers’ meters essentially run backward whenever their solar panels produce electricity, to a system reflecting with greater precision solar’s benefits (which include, for example emissions avoidance, energy production, and the ability to alleviate grid constraints by reducing total demand at times when the system is under stress).

New York anticipates that this will facilitate a more sustainable long-term market that encourages investments in the locations where projects are most needed, and that are capable of operating in a manner that better serves the system. For example, the new policy could encourage developers to pair solar arrays with storage so that energy can be injected into the system when it is most needed, or induce them to be built in a west-facing manner. (West-facing panels produce less total energy than south-facing ones in the course of a day, but often produce energy when the grid needs it the most: later in the day when demand is typically higher.) At the time New York adopted that credit structure, we recognized the potential merits of this philosophy (as discussed here), but also explained that complexity and uncertainty in the credit structure threatened to prevent it from realizing its full potential (as discussed here).

Flaws in the Commission’s order finalizing the solar credit policy

In comments to the Commission, we and other clean energy advocates and solar developers (the companies that ultimately have to deliver these projects on the ground) emphasized the importance of establishing clear rules so that long-term revenues could be forecasted to support project financing, focusing on one particular portion of the credit value for some projects that could be improved in the order implementing the policy. Disappointingly, the Commission rejected our requests, leaving that part of the credit formula completely unpredictable beyond a 3-year time horizon.

The order also approved utility proposals that undercount the benefits of solar. Because part of the credit value is based on the degree to which solar projects help utilities avoid making investments in traditional infrastructure like substations, poles and wires, a critical detail of the policy is the formula by which utilities calculate the value of avoided investments. The Commission’s order evaluated plans submitted by the utilities that included formulas calculating this value. Unfortunately, as our coalition and experts we commissioned dug into the details of the utilities’ proposals, we found that they significantly undercounted the benefits of distributed clean energy projects.

For example, the proposals of NYSEG RG&E and Central Hudson all calculated this value based only on the costs of building growth-related network investments and upstream electricity distribution infrastructure such as trunkline feeders. But as we pointed out in our comments on the proposals, solar and other clean energy investments help avoid or defer investments in a much wider range of infrastructure (for example, by extending the life of existing substations), so this formula arbitrarily and significantly undercounted the total value. We also explained that Central Hudson’s formula, while based more granularly on system costs at particular locations, included a large number of questionable and untested assumptions that rendered it inappropriate to adopt without further examining those assumptions. Despite extensive comments highlighting these problems filed in the record, the Commission’s order approved the flawed methodologies without modification.

Where do we go from here?

The significance of this mistake and of the Commission’s order overall depends in large part on how these utility formulas are used in the future and how the next phase of developing the credit policy proceeds. In Phase 2 of the process, the Commission will update its credit formula and also develop a system for crediting smaller rooftop projects located on homes and small businesses. A shorter term follow up to the Commission’s order will extend the policy to credit more technologies that hold the potential to reduce New York’s emissions (including stand-alone storage and potentially combined heat and power systems).

Fortunately, a positive design feature in the Commission’s credit structure insulates many projects covered by the current policy from the flawed utility methodologies for calculating avoid distribution infrastructure value, because they are instead credited with a pre-determined ‘market transition credit’ that accounts for the difficulty of calculating this value. If the utility methodologies are used as a basis for Phase 2, that would create a bigger problem.

Further, the Commission sets a range of other policies that depend upon utility costs, like programs to reduce customer demand in response to grid constraints, and rules for approving energy efficiency investments based on the value they provide. The flawed methodologies approved in this order must not be extended to a broader range of policies. And the Commission must apply greater scrutiny to utility proposals in other proceedings, to prevent the approval of flawed utility proposals with little or no modification from becoming a trend (unfortunately we saw a similar dynamic play out with regard to certain aspects of a recent Commission order governing the utility planning process).

In Phase 2, the Commission should carry out a formal process for vetting the proposals and order the utilities to fix mistakes and make improvements. Some components of this process—namely the formulas known as Marginal Cost of Service Studies that are being used to establish the value of avoided infrastructure—need to be litigated in the same or similar manner as a rate case. Without full discovery and the other procedural aspects afforded in a litigated proceeding, it will be difficult if not impossible for stakeholders to meaningfully engage and ultimately correct significant flaws in those critically important filings. Fortunately, at recent working group meetings setting forth the plan for Phase 2, Department of Public Service staff have shown a willingness to structure the next stage of the proceeding in this manner.

It remains possible that the Commission’s order will be nothing but a slight bump in the road to a clean energy future for New York. But for that to happen, New York must do more to ensure that its policies in fact enable the achievement of Governor Cuomo’s nation-leading clean energy and climate goals.

The views expressed in this blog are those of the author, and do not necessarily represent the views of the Sustainable FERC Project or Natural Resources Defense Council.

Written by Miles Farmer