The REV — the industry shorthand for the New York Public Service Commission’s Reforming the Energy Vision proceeding — sounds exactly like “rêve,” the French word for “dream.”

It’s only fitting given the aspirations of the REV docket: to create the first distributed energy markets of their kind.

It’s an idea that many in the industry never even dreamed of.

How the REV aligns utility models with societal goals

Today’s utility industry faces a long list of challenges — from aging infrastructure and stagnant demand growth to federal emissions standards and renewables integration. But rather than tackle any number of these issues separately, the REV seeks to solve one overarching problem at the root of them all: The utility business model is not aligned with societal goals.

Take the traditional utility view of energy efficiency as an example. Utilities have historically condemned efficiency and policies that promote it because it reduces their kilowatt-hour electricity sales, which in turn reduces their earnings.

“For the first 100 years, utilities — like most businesses — had their revenues tied to how much a customer uses. The more usage, the more revenue,” Ken Daly, president of National Grid’s New York business, told Utility Dive in an interview after the NY PSC issued an order adopting a policy framework for REV. “That’s not alignment – that’s the reverse of alignment.”

The problem here is not necessarily the utility, NY PSC Chair Audrey Zibelman told Utility Dive in an interview last fall — it’s the regulatory model that ties utility earnings to electric sales.

Revenue decoupling changed that. “The utility is now incented to actually get the customer to use less energy,” Daly said. But the REV order takes this idea to “a whole new level.”

Utilities are very effective at maximizing profits given their regulatory environment, Zibelman explained. If regulators tie earnings to driving efficiency, utilities will find a way to make it work.

Similar to the industry's historical aversion to energy efficiency, utilities in many regions of the country are wary of rooftop solar, largely because it makes operating the grid more difficult while spreading the costs of doing so over a smaller customer base. It’s a problem no utility wants to have.

The underlying tension between utilities and distributed resources derives from the fact that there are two different markets evolving at different paces with different rules, according to Kristie DeIuliis, a principal consultant with DNV GL. Utility revenue models never contemplated the potential for distributed resources, she added.

Instead of having utilities passively resist solar and other distributed energy resources, the REV aims to align utilities with societal goals and enable them to harness the full potential of the technologies coming onto the grid.

If the goal is to incentivize the utility to get customers to leverage distributed resources, "the way to do that is by integrating it with the needs of the electric grid,” Daly said.

The REV vision is to integrate distributed technologies into the grid to the point where they help manage the increasingly complex needs of New York's power system.

The challenges of New York’s super-peaky grid

Like many other U.S. regions, New York's average electricity demand has been growing at a slower rate than its peak demand. The growing gap between average demand and peak demand has created a utility system that’s been designed to meet “superpeaks,” which occur for only a few hours every year.

The cost of meeting the superpeaks alone reaches about $450 million per year, according to Zibelman.

Instead of building power plants to help meet these superpeaks, Zibelman wants New York to better manage the existing grid through the flexibility in demand and the wave of distributed resources that are already coming onto the grid.

“We don’t need to build new assets or bring in new supply,” Daly said. “We just better optimize the supplies that are already out there.”

“We’re moving away from a centralized grid where everything is solved at the level of the bulk power system,” Zibelman said at an industry conference last year.

Unspoiled by the usual tensions between utilities and new market entrants, the REV order establishes the framework needed to leverage distributed energy resources as assets on the grid.

Utilities must transform into “market-makers” who solve problems at the edge of the system, Zibelman explained. “The ability to manage load is the solution, not the problem.”

“The whole premise of … trying to use distributed resources to manage the grid is that we could invest in DERs as an alternative to some traditional investment,” Stuart Nachmias, vice president of energy policy and regulatory affairs at Consolidated Edison (ConEd), told Utility Dive in an interview. “There’s a lot of value to DERs.”

Distributed energy markets are logical extension of deregulation

The REV is a logical extension of the evolution that began with deregulation in the 1990s, Zibelman said. As the former COO of the PJM Interconnection, Zibelman was one of the driving forces behind the creation of wholesale power markets back then. 

But while the vision outlined by the REV order takes deregulation to the next level, it may take longer to develop distributed energy markets. “Unlike the wholesale markets, where there were actually a number of market players who had a lot of independent generation, we don’t even have what I would call the asset base for distributed resources — yet,” Zibelman said.

ConEd confirmed as much. “Right now, in terms of ownership of distributed resources, we got nothing, third parties don’t have much — there’s not a lot out there,” Nachmias said, adding that “it will evolve.”

The New York PSC plans to build out the asset base for distributed energy by animating the clean technology markets through economic signals. These resources will be placed “on a competitive par” with centralized power plants, according to the order — a radical re-envisioning of the vertically-integrated, one-way grid of the 20th century.

Zibelman dreams of a future where the grid will enable the coming wave of distributed energy resources, one that integrates and optimizes DERs for the benefit of the customer and the overall system. It’s still in its early stages, but the power industry may be witnessing the birth of the first distributed energy market of its kind.

“Once we’re ready, you’re going to see a much more localized grid,” National Grid’s Daly said.