By Michael Gergen, David E. Pettit and Christopher Randall

solar panelsOn September 14, 2017, the New York Public Service Commission (NYPSC or the Commission) issued its Order on Phase One Value of Distributed Energy Resources Implementation Proposals, Cost Mitigation Issues, and Related Matters (the Implementation Order). The Implementation Order sets the methodologies by which utilities throughout the state of New York will determine the Value of Distributed Energy Resources (VDER). It follows the Commission’s March 9, 2017 Order on Net Metering Transition, Phase One of Value of Distributed Energy Resources, and Related Matters (the VDER Phase One Order), which the Commission issued in furtherance of the State’s Reforming the Energy Vision (REV) initiative and is analyzed in a prior Latham & Watkins Client Alert.

In accordance with the VDER Phase One Order, each utility in the state submitted an Implementation Proposal addressing calculation and compensation methodologies for Distributed Energy Resources (“DERs”). The Implementation Order largely approves the utilities’ Implementation Proposals, with certain modifications relating to the recovery of VDER costs, the methodology behind the Installed Capacity credit, and the calculation of Market Transition Credits. The Order also addresses certain issues associated with the Value Stack for DERs and cost mitigation.

In general, solar energy advocates have reacted negatively to the Implementation Order. They assert that there is significant variation in how utilities calculate their respective Utility Marginal Cost of Service (MCOS), which is used to establish demand reduction value (DRV) and locational system relief value (LSRV) for DERs in their service territories. Because the DRV and LSRV inform the overall Value Stack associated with DERs, solar advocates claim that DER compensation will vary wildly from utility to utility. To illustrate this point, they note that proposed utility MCOS values range from $226/kW (Con Edison) to $15/kW (Central Hudson). While the Commission’s Order acknowledges the desire among some commentators for a more standardized valuation methodology, it concludes that Phase One is too early to implement such measures and instead will consider this issue as part of VDER Phase Two.

Solar energy advocates also have expressed concerns that the utilities’ regular recalculation of DRVs and LSRVs based on their latest MCOS studies would not provide the kind of rate certainty that potential investors in DERs require. While the Implementation Order states that such dynamic pricing is necessary to promote efficiency, solar energy advocates counter that it is not stable enough to provide reliable pricing signals to investors. In response to this comment, the NYPSC agreed to fix a DER’s DRV for 3 years and LSRV for 10 years from the date on which a DER project achieves certain interconnection milestones.

The NYPSC, however, also took steps towards reducing development costs for DERs by initiating processes to increase the maximum size of DER projects from 2 MW to 5 MW and to facilitate consolidated billing systems. The Commission also delayed adopting proposed compensation structures for storage systems that are paired with eligible generation resources and set the Environmental Value for eligible projects at the latest Tier 1 REC procurement price published by NYSERDA at the time when the project’s developer makes the 25% interconnection payment required under the Standard Interconnection Requirements, or, if no such payment is required, then the time at which an interconnection agreement is signed.

The Implementation Order provides a timeline for next steps, which include the filing of utilities’ Value Stack tariffs and Staff recommendations on storage paired with eligible generation. New York’s utilities must file tariff amendments incorporating the modifications discussed in the Implementation Order with an effective date of November 1, 2017. The Implementation Order also provides that work to refine and improve the Value Stack, expand VDER eligibility, and address rate design issues remains ongoing as part of VDER Phase Two.