New York State’s electric grid serves vastly different population areas, from New York City’s densely packed boroughs to the sparse farmland upstate. However, there is a problem with how this grid delivers energy that is the same. The problem is a lack of innovation, an aging system that “has not changed since the time of Edison”, explains Richard Kauffman, New York’s chairman of energy and finance.
With only about 1.3 percent of an electric bill counted as profit, there is little reason for New York’s energy providers to change the energy grid. Basically, there is no incentive for utility companies to bring innovation that will lower these costs to customers. “In exchange for monopoly rights, they [utilities] get recovery of all their costs of service,” Kauffman says. “The return on capital is the principal way utilities make a profit.”
“In other businesses, there’s been all kinds of ways of thinking about changes in business models, adoption of new technologies, trying to figure out how to reduce costs, because the benefit of reducing cost is more profitability. There’s very limited opportunity for that under the current rules,” he adds.
Other problems are with the grid itself. The energy system is designed to provide electricity when it will be used the most, during the warmest days of the year for homes and when businesses are operating at their peak. Kauffman says the state has an average capacity utilisation of 54 percent and when electricity is not required for peak demand, there is an energy inefficiency which creates capital inefficiency.
He explains New York has spent $17 billion on its energy system over the last 10 years and plans to spend $30 billion over the next decade, not on improvements or making the system “smarter,” but on “really just keeping what we’ve got.”
The ageing system has also led to an unreliable electric grid, with storm after storm showing the fragility of New York’s infrastructure, most recently in 2012, when Hurricane Sandy left over one million people near the coast without electricity. When the late October storm made landfall, it damaged utility equipment that caused power outages and prolonged repairs meant days and weeks passed before New Yorkers could heat their homes. In some cases, power wasn’t restored until 2013.
New York Governor Andrew Cuomo went to the communities and saw the struggling recovery. “When you don’t have electricity, it’s cold. You’re really suffering,” Kauffman recalls. “He could see that, and he could see how long it took for recovery.”
REFORMING THE SYSTEM
A lack of innovation, inefficiency and unreliability led leaders in New York to the realisation that the electric system that powered the past century is not sustainable. “Business as usual is not sustainable. It’s not sustainable from an economic standpoint because the cost of the system continues to go up,” Kauffman says.
New York’s solution is Cuomo’s Reforming the Energy Vision (REV), a $5 billion plan to make New York a US leader in building the “grid of tomorrow,” a reliable electric system that provides the cost benefits of centralised utility stations with the innovation and flexibility of distributed solutions.
REV seeks to overhaul New York’s electric system and build an integrated grid that offers customers cost advantages, resiliency and green benefits if a distributed energy solution makes sense in a customer’s area.
“REV is not just about a decentralised system,” Kauffman explains. “What our objective is, and again a way to think about this networked grid, is to have an emphasis on deploying distributed solutions in locations where distributed solutions are going to be good for all of the customers there.”
The reform will bring regulatory changes that force utilities to act as distribution companies. To spur innovation in the market, utilities will not be allowed to own distributed solutions. The goal of REV is not to break up the monopoly utilities hold over how New Yorkers get energy, but to redefine the role utilities play in the future.
“By changing the role of the utilities, we want to encourage more competitive markets,” Kauffman said. He likened utility companies’ relationship to distributed energy solutions in an integrated grid to cloud computing, where the cloud acts as the mainframe and personal devices remain flexible and continue to improve.
“In addition to providing electricity, utilities have to operate a platform which is more capital efficient, which integrates distributed resources in areas where it’s going to help the grid as a whole and to provide more demand-response, energy efficiency and clean energy to customers,” he says.
While the decision to invest in an integrated grid is business first, REV has set ambitious environmental targets too. By 2030, it aims to reduce 40 percent of greenhouse gas emissions from 1990 levels, generate 50 percent of electricity from renewables and decrease energy consumption from buildings by 23 percent of 2012 levels.
‘ALIGNING THE FOOD CHAIN’
REV will not be possible without private sector help and Cuomo and New York’s leaders in government knew this when they hired Kauffman, dubbed the energy ‘tsar,’ in February 2013, to lead the change. Kauffman says his background, including a role as chief executive of clean energy private equity firm Good Energies and senior advisor to former US Secretary of Energy Steven Chu, made him “aware of the power of market-based forces.”
Experience in both the public and private sectors has shown Kauffman how government can work to fix a broken system like New York’s electric grid. “If markets solved everything, you wouldn’t need government,” he argues. “There are many opportunities where government can intervene to unlock markets.”
A term he’s introduced to the state’s energy overhaul is “aligning the food chain”, creating a relationship between existing markets and policies that establish new markets. “If you can align this whole food chain, then you are able to have a dynamic between markets, company formation and manufacturing.”
To get this done, New York’s energy governing body, New York State Energy Research and Development Authority (NYSERDA), has established multiple programmes to spur private investment in grid innovation, the most notable being the New York Green Bank.
The New York Green Bank launched in September 2013, shortly after Kauffman’s arrival, as a $1 billion initiative to use “public-support dollars” to unlock markets. The green bank has invested money in energy projects that promise innovation, but need funding to scale up or reduce customer acquisition. This has helped catalyse $350 million from partners such as Bank of America Merrill Lynch, Citigroup and Deutsche Bank that will be leveraged more than three times for projects that otherwise would not be built.
“It’s a provider of debt products in collaboration with the private sector to fill in where there is a gap in financing markets,” Kauffman points out.
One example of this is with small-scale wind developer United Wind. The Brooklyn-based company received a $4 million investment from the New York Green Bank in October 2015. With funding to prove its distributed wind financing model, United Wind announced in January a $200 million investment from a Toronto private equity firm that will help expand its operations.
In a previous interview with sister publication Low Carbon Energy Investor, Alfred Griffin, president of the New York Green Bank, said the goal was to work with the private sector to help bridge financing gaps for economically viable projects. “We’re looking to play roles that facilitate bringing greater numbers of private capital providers into New York’s clean energy marketplace,” Griffin said at the time.
THE RIGHT TIME
New York is taking the lead among US states by investing in an integrated grid, but Kauffman claims the entire country would benefit from similar improvements. He states New York has shared business ideas between states and has followed what others have already done.
New York followed California’s lead, Kauffman says, when it launched the NY-Sun Initiative. The solar financing programme began in 2012, before Cuomo announced REV, but received $1 billion two years later to further expand solar capacity throughout the state.
“We’re not taking advantage of those opportunities […] doing business as usual,” Kauffman argues. “The data is not just in New York, it’s around the country. The places that embrace this energy transition – there’s a tremendous economic development opportunity.”