On March 9, 2017, the New York Public Service Commission (NYPSC) issued an order announcing a transition from a traditional net energy metering (NEM) compensation mechanism for certain energy resources to a new compensation scheme referred to as “Value of Distributed Energy Resources” (VDER). The VDER order is an integral piece of the NYPSC’s grid and market modernization initiative called Reforming the Energy Vision (REV).
REV represents New York’s efforts to reinvent the state’s energy regulatory structure in order to modernize the grid and introduce a new energy economy with more distributed energy resources and customer choice. New York is not the first state to pivot from NEM. Since 2013, Hawaii, Nevada, Arizona, Maine, and Indiana have moved away from net metering. As other states grapple with upgrading aging grid infrastructure, the continuation of NEM will surely be a topic of heated debate.
Traditional NEM compensation awards an end-use customer with a credit for each kilowatt-hour that the customer’s generating unit injected into the grid. This one-to-one offset of kilowatt-hours, that is, volumetric crediting, proved to be a simple and attractive incentive for users to add generation to their premises. If the generation source was of a certain type, customers could also avail themselves of other incentive programs such as renewable energy credits, tax credits and, rebates.
NEM’s critics argue the offset of kilowatt-hours means that the customer is not responsible for the “delivery” of the power being offset and, thus, the customer is not paying distribution charges. Because the grid nonetheless needs to be maintained for all customers, critics argue those who do not enjoy NEM benefits effectively pay a higher share of distribution system maintenance.
In the order, the NYPSC acknowledged that NEM played an important role in growing the distributed generation market in the state. According to the order, the state must move to a smarter, more information-based compensation mechanism in order to foster the continued growth of DERs. The NYPSC stated that NEM does not provide sufficient information to serve as a basis of efficient investment decisions or to identify and compensate for the values that can be provided to the system or costs imposed on the system. In an effort to mitigate the potential market disruption of the shift to VDER, the order grandfathers certain projects utilizing NEM under existing tariffs.
The VDER order establishes the “Phase One” foundational policies of the VDER methodology to be utilized in the “VDER Phase One Tariff.” The complex VDER compensation methodology will rely on the calculation of certain values applied to hourly net injections at the utility meter. Such values make up the “Value Stack” that includes the following: energy value, installed capacity value, environmental value, demand reduction value, and locational system relief value.
Phase One Value Stack compensation will be available to all projects and technologies that are presently eligible for NEM as well as energy storage when paired with an eligible VDER resource. Thus, on-site generation that is exported to the grid on a net-hourly basis will receive compensation in accordance with the Value Stack methodology. Behind-the-meter generation that is instantaneously consumed on-site (that is, not exported to the grid) will be treated as load reduction and will offset the customer’s consumption and volumetric charges associated with that consumption. Importantly, if a customer seeks to avail itself of the Phase One Value Stack compensation, that customer must have a meter capable of recording net-hourly injections to the grid. If a customer has an insufficient meter, it will need to work with the interconnecting utility to obtain one.
The order also grandfathers in the eligibility of existing projects enrolled in NEM to retain the ability to bid into the Renewable Energy Standard Tier 1 solicitations issued by the New York State Energy Research and Development Authority. However, projects that earn compensation from the Value Stack will not be so eligible.
The reason is that the environmental value of the generation is already a component of the Value Stack and VDER compensation. As such, the interconnected load-serving entities who compensate customers for such environmental value will receive the environmental credits.
There are important, but opposing, implications related to the order. First, New York’s efforts will certainly resonate with other states that are also grappling with the continuation of NEM, and some may adopt a VDER approach as a compromise to outright abandonment of NEM. Thus, this could facilitate the continued development of DERs in such states.
On the other hand, a move away from NEM to a more economically justifiable model such as VDER could discourage development in renewable power as customers, developers, and financiers become disenchanted with the complexity and variability of the Value Stack and resulting VDER values.
How these two opposing influences ultimately impact renewable energy development remains to be seen. In the interim, states will continue to consider NEM when debating how to integrate renewable energy resources into an aging electric grid. ■
— Nicholas A. Giannasca is a partner and Carlos E. Gutierrez serves as counsel at Davis Wright Tremaine in the practice’s New York office.