New York is on the path to transforming its electric industry. Since the Reforming the Energy Vision (REV) proceedings kicked off with the goal of creating a more robust and efficient electric grid, the State is now a step closer in the quest to reduce greenhouse gas emissions by 40 percent from 1990 levels. And, thanks to the New York Public Service Commission (PSC), the road is looking a lot smoother.

Last month, the PSC rolled out the Benefit Cost Analysis Order, a methodology for how electric utilities should weigh the costs and benefits of proposed investments that affect the grid. With this new order, utilities will be required to calculate the net benefits associated with portfolios of distributed energy investments, such as rooftop solar and energy storage, and compare them with traditional utility investments, like substations, power lines, and poles.

This decision is crucial for New York’s clean energy future because utilities must now value the environmental benefits of distributed energy sources, and quantify how these different alternatives can work together to create a cost-effective, resilient grid. For example, in the face of severe congestion on the grid, utilities could expand the electric system to meet growing demand. Alternatively, they could incentivize a number of different distributed resources to help bring demand down by, for instance, encouraging customers to install solar panels, participate in demand response programs, or invest in energy efficiency to avoid a grid expansion.

Although a future with lots of distributed energy is a valuable goal, it is important that these resources be clean. Not all distributed energy is the same. Diesel generators, for example, may in fact be dirtier than centralized electricity because they produce harmful local pollutants, including particulate matter (PM), Nitrogen Oxide (NOx), and Sulphur Dioxide (SO2), as well as globally polluting carbon emissions. By ensuring New York invests in clean distributed energy sources, we can help displace dirtier, centralized generation, which relies on coal and other fossil fuels, while also protecting the health of local communities.

Overall, the Benefit Cost Analysis Order ensures that the environment will be taken into account when assessing new investment options by mandating that utilities:

1. Value carbon emissions: The PSC determined that the best way to value avoided carbon emissions is by using the Social Cost of Carbon, which measures the overall cost to society from each ton of Carbon Dioxide (CO₂) emitted, and as of 2015, it costs society about $40 per ton. Using the Social Cost of Carbon implies that the future net benefits of clean distributed energy resources will be valued higher relative to dirty ones.

2. Consider a portfolio of distributed energy resources: The PSC’s order states that utilities must conduct a benefit-cost analysis on portfolios of distributed energy resources, rather than individually for each alternative solution. This is very important because many clean, distributed energy resources work better when combined with other sources, providing greater benefits than individual projects. For example, a battery storage investment may not be cost-beneficial if evaluated alone, but when looked at jointly with a solar installation, it could provide significant savings and benefits for the electricity system and the environment.

3. Apply the benefit-cost analysis to renewable energy “tariffs”: The order states that the benefit-cost analysis must be used as guidance for constructing payments to customers who generate their own electricity, whether from clean or dirty distributed energy sources. Essentially, utilities will have to determine pricing based on the benefits and costs associated with customers’ contributions to the grid, including the environmental impacts these distributed generation sources impose or avoid. This will lead to more efficient tariffs that correctly price carbon emissions, and result in more clean, distributed generation investments.

These are important steps to ensure the future of the New York electric grid will be cleaner and more efficient. Unfortunately, there is one significant part of the order that will cause dirty, distributed energy options to look more financially attractive than clean ones.

As it stands, the order specifies that utilities are required to use a high discount rate: the “weighted average cost of capital,” which reflects how much it costs the utility to borrow money to invest. A high discount rate values all current costs and benefits more than future costs and benefits. This is problematic for clean energy investments because of how the benefits and costs of clean and dirty technologies are incurred over time. Clean technologies generally have large upfront costs with significant environmental benefits in the long run, whereas dirty technologies are usually cheaper to install but will have harmful environmental costs in the future. So, with a high discount rate, a diesel generator could look relatively more valuable than a solar panel, as the upfront costs are lower for the former. If lower discount rates were applied instead, clean energy sources would look a lot more attractive and lead utilities to increasingly encourage the adoption of these types of investments.

The PSC’s order is a model for utilities and public utility commissions across the country to follow, so that non-traditional investments in the grid can be accurately valued. EDF will continue to advocate for utilities to properly value clean energy resources, so that projects are implemented in a way that can benefit customers and the environment in the long run.

By Beia Spiller 

Originally Published on March 8, 2016

The Energy Exchange Blog is a forum where EDF‘s energy experts discuss how to accelerate the transition to a clean, low-carbon energy economy. Follow them on Twitter here: @EDFEnergyEX