U.S. Justice Louis Brandeis’ observation that states serve as the “laboratories for democracy” couldn’t ring more true than in the energy sector.  A handful of states are pioneering new approaches (in New York we call it Reforming the Energy Vision, or REV) to advance policies to capture and accelerate the vast economic and environmental benefits of the clean energy economy.

Due to mounting costs, aging infrastructure, increasingly frequent extreme weather events and our imperative to address climate change, we must fundamentally shift how we generate, consume, and store energy.  While companies like Facebook, Amazon and Uber have embraced connectivity and distributed technologies to transform the ways we socialize, shop, and travel, our energy system has changed little since the time of Thomas Edison.  We produce electricity in large power plants and transmit it through power lines in a system that is built to support the few hours each year when demand is highest.

That status quo creates cost, reliability, and environmental problems. In New York, paying year-round for a system sized to meet the 100 hours of peak demand costs us between $1.7 and $2.6 billion a year.  Furthermore, inefficiencies in electric generation, delivery, and consumption mean only a fraction of what we produce gets used, even though we pay for it all. The status quo also poses resiliency challenges: during Hurricane Sandy, millions of New Yorkers were left without power for days on end. Finally, the conventional system driven by fossil fuel generation will not enable us to meaningfully reduce harmful carbon emissions.

The good news is that our constraint is not technology. Instead, the constraint lies in outdated business models.  Innovations in distributed generation, demand response, energy efficiency, microgrid, and energy storage technologies can reduce waste and emissions while enhancing resiliency, providing economic solutions to each of these challenges. In publicy owned parts of the system, we are developing a robust smart grid backbone — from generation, transmission and distribution — to enable the State to capture the full benefits of these and other technologies. Yet today, the operators of our power distribution grid, the private utilities, have no economic incentive to support new clean energy solutions. In many cases, they have a disincentive to do so.

As part of Governor Cuomo’s REV initiative to build a cleaner, more affordable and resilient energy system, we are addressing this misalignment of incentives in two ways.

First, the State is redesigning regulations to change how utilities run their traditional core business.  A project in Con Edison’s territory, called Brooklyn Queens Demand Management (BQDM), provides an example of how utilities can advance clean, local energy solutions to more cost-effectively address system needs. Under business as usual, Con Edison would have built a $1 billion substation to meet system constraints. Instead, the utility is deferring this investment by embracing local clean energy resources to meet the community’s growing energy needs at a substantially lower cost. This win-win saves customers money while reducing emissions through energy efficiency, distributed generation and storage. Going forward, a new regulatory landscape that includes performance based rate-making and new price signals for load management will encourage New York utilities to adopt these kinds of solutions as the first choice, before making investments in traditional infrastructure.

Second, we are encouraging utilities and third parties to develop entirely new business models that harness latent value embedded in the utility platform and enable greater adoption of new energy solutions customers want.  New York has formally issued a challenge to our investor-owned utilities, technology providers, and project developers to launch REV demonstration projects. While BQDM is an example of how utilities will be modernizing their core traditional business and procurement methods, it is not a REV demonstration project.  REV demonstration projects will test innovative business models that create new revenue streams outside of the traditional rate base and motivate the utility to partner with and support third party clean energy providers.

Illustrative examples of these new business models could include a utility offering marketing services — leveraging data analytics or customer touch points to help DER providers lower customer acquisition costs and increase customer access to clean energy.  Or, a utility could offer financial services such as on-bill recovery, credit enhancement, or aggregation of customer-sited clean energy projects to lower financing costs.  Other business models could relate to platform administration services, operations and maintenance services, or premium energy services.  REV demonstration projects testing these kinds of business models are meant to be first-of-their kind, not one-of-a-kind, and will help inform the rule changes necessary for new solutions and business models to scale.

Now is the time to come forward with groundbreaking solutions that illuminate our energy future, improve customer value, create jobs, and lower emissions. Today, any third party solutions provider can submit their REV demonstration concept at www.nyserda.ny.gov/revdemos.  And on September 24th, 2015 during Climate Week NYC, the State will be hosting our inaugural “REV Summit” to connect third parties with utility partners.

Ultimately, these innovations in both the core utility business model and in new revenue opportunities will align the interests of the utility with its customers and third party DER providers to accelerate deployment of innovative technologies.

A common criticism of government (and the private sector) is that “we don’t invest for the long term.”  The “lab” known as New York State is taking a long-term view. Every day utilities spend capital on infrastructure that can last 50 years. We need to make sure we’re building the system of today and tomorrow, not the system of the past.  We need to empower market actors to delight and surprise customers with new energy products and services that improve their quality of life.  Our two-fold approach to modernizing the utility business is pro-consumer, pro-growth, pro-innovation, and pro-environment. Those are elements that should be attractive to everyone — we hope other states will follow our lead in building their own REV labs to deliver the benefits customers want and the planet so desperately needs.

Author: Richard Kauffman, Chairman of Energy and Finance, Office of Governor Andrew M. Cuomo

This is part of the Future of Electricity project blog series.

Image: Electric power transmission lines are seen in Neuhof, near Hamburg July 13, 2012. REUTERS/Morris Mac Matzen