Richard Kauffman is supervising New York’s entire energy portfolio, including the New York State Department of Public Service, the New York Power Authority, the New York State Energy Research and Development Authority (NYSERDA), and the Long Island Power Authority. Under his leadership, New York has launched the Reforming the Energy Vision (REV), a far-reaching restructuring of regulations for the energy industry, and committed US-$ 5 billion through 2023 to support local renewable energy and efficiency markets. Not least, he has overlooked the establishment of the New York Green Bank and a $1 billion investment in the NY-Sun solar initiative.

SWE: Governor Cuomo introduced you as New York’s energy czar in January 2013 and since then you seem to be on a mission to fundamentally reform New York State’s energy sector. Originally active in the private sector in finance, what made you switch from Washington overlooking federal energy policies now to the state level?

Richard Kauffman: In New York state we are not on a sustainable path either economically or from a mission standpoint with our energy policies. When we talk about economically, it’s not just about the cause, it’s also about the economic development opportunities that could occur from a transition to a different kind of energy system.

When the governor convinced me to come to New York state, he had created a portfolio that included all the relevant authorities that affect this new energy policy, including the New York Public Service Commission and New York State Energy Research and Development Authority, which collects about a Billion Dollars annually from customers’ electric bill in the form of surcharges. Those funds are used to support renewable energy and energy efficiency projects in the state.

There is also the New York Power Authority, which produces about 20% of the power in New York State, via hydro power and load transmission. Additionally, the power costs are high on Long Island where the Long Island Power Authority (LIPA) operates and which is one of the largest government-owned utilities in the country Long Island has grid constraints. Since LIPA is owned by the state and since power costs are high this is an opportunity for us to really start using that as a place to create the next generation utility – a new energy system. The current grid is largely central station transmission, but what we want to see in the future are fewer central stations and more distributed solutions.

Now the question is, what is the bridge from where we are today to the future? I think our perspective is to try to stimulate markets and to create the right kind of regulatory incentives that are market based as opposed to mandates to change from government. . And so, everything that we’re trying to do is really designed to try to encourage markets.

One example is the telecommunication sector, which was completely rebuilt within 20 years by a change in rules and greater participation and innovations from the private sector. That same scale and speed of change could happen in the electricity sector if we change the rules and create better functioning markets.

“Utilities are compensated for the quantum of capital that they deploy, not for the efficiency of the capital that they deploy”

SWE: You estimated New York State needs 30 Billion Dollars to repair its energy grid in the next decade.

Kauffman: The electricity system and many of the regulations we have today were developed 100 years ago and it is the system which is built around [electricity] generation and pushed out to the customers. Whereas in other businesses the customer is first and then businesses are developed and built around what the customers want.

We are kind of going back to the time of Edison and others who helped develop the electricity grid. They thought that the electricity system was going to only be about a lighting system. But obviously, electricity has turned out to be a lot more than just lighting. We think that the new energy system today gives customers a lot more potential value out of the system. Nobody says they want to consume more electricity. They want to consume what the electricity system can offer to them in terms of value. That could relate to health benefits, convenience, independence, comfort, or entertainment. To give you one example in the health area there are companies that are thinking about having an at-home healthcare monitoring system for older people. That would require sensors in the home. It would require more resilient and reliable power and that would create the potential for a more efficient home automation system. The customer’s motivation is the health benefit — not energy efficiency or even environmental benefits, but it could create the opportunity for more energy efficient homes.

Another thing what we focused on in our reforms of the energy system are the regulatory incentives for utilities which have not really changed for the utilities since the time of Edison. What that means is the utilities get paid, they recover their cost of service, and they get a return on their capital that they deploy. And so, the profit for utility comes from a return on its capital. They don’t get any profit on their human capital, only the physical capital. That is one of the reasons, why the system has only a 55% capacity utilization and half the system is idle most of the time. The reason for that is it was built for the hottest hours of the year. Some of that is a requirement for reserve capacity needed for reliability. But a large portion of that excess capital is because utilities are compensated for the quantum of capital that they deploy, not for the efficiency of the capital that they deploy. What we’re trying to do now is to think about utilities as a kind of platform that has an economic incentive to improve their efficiency. And we also want the utilities to provide the opportunity for third parties or competitive providers to allow customers to develop the applications. The utilities will get paid for putting these kinds of applications the customer value on the utility platform. And again, that’s not something right now that utilities get compensated for. So there is a lot of resistance for example amongst the utility industry in the deployment of solar. A utility doesn’t get any incentive for putting solar on to their platform.

SWE: So how will that change?

Kauffman: A utility will get paid for that improvement in system efficiency and it will save the rate payers money. The assets will be owned by a combination of that utility and third party providers. Brooklyn for instance, is growing pretty rapidly in terms of the demand for electricity. So, for ConEd, the utility company, the business as usual would have been to build a substation in Brooklyn, which would cost 1 — 2 Billion Dollars. And it would mean, doing things the old way: 55% capacity utilization on average throughout the system, and a lot of idle time. But, because of the coming changes in rules and regulations, what ConEd has proposed instead is a greater use of distributed resources such as solar, combined heat and power and energy efficiency. That will cost customers less money than a substation and will thereby increase the system’s efficiency.

NY Green Bank is about availability of financing, not cost of financing

SWE: You also announced 1 Billion Dollar funding for the NY Green Bank, a state-owned financing for clean energy technologies in the green power sector at the beginning of this year. How are the responses so far?

Kauffman: The Green Brank is an effort to try to encourage markets or stimulate markets. It’s not a subsidy or direct investment. It provides financing in areas where there are financing market gaps in the private sector. Or in general, small projects have difficulties attracting bank debt because it is expensive for banks to lend to small projects. So, we can function as an aggregation entity where there are a number of proposals that we would receive where banks would be interested but the projects are not big enough. A financial institution would come to us and say: ‘Well, look, in exchange for some participation, we’d be willing to lend more if you would take a subordinating debt position or if you would provide a credit enhancement.’ So, by providing a 50-million dollar facility to that industry, we may help unlock the financing markets.

In other words, we’re not dictating to the market what financing products we are going to offer. We’re looking for places in the market where there are companies who are succeeding in the market with customers, but their growth is limited by the lack of availability of financing. That’s the part of the market we want to play in. It’s about availability of financing, not cost of financing.

SWE: To move solar and other renewables forward, companies in the U.S. have to accept very high «soft» costs – more than 50 % — when installing a solar system.

Kauffman: That is another point when it comes to efficiency. Even a state as big as New York can’t really influence hardware costs, but we can have an influence on “soft” costs of renewable energy or energy efficiency projects. The “soft” costs of solar in the U.S. relative to Germany are substantially different. And that really relates to a number of things, such as scale — Germany has much greater scale — and ease in which a customer can hook up to the grid, and the paperwork that’s required. Financing is also easier to do. So, there are a number of things that we can do at the state level that can reduce “soft” costs, such as the cost of customer acquisition and financing costs in the sense of having financing be more readily available.

SWE: When you look at the residential and the utilities market: How do you imagine how these markets are going to grow in New York state?

Kauffman: Well, again, that is going to be a function of markets. Utilities in New York State do not own [electricity] generation. They just own the wires and the distribution system. And they’re indifferent. If I use more electricity, they don’t get paid any more money. So, that’s decoupling and that’s generally considered a progressive policy regime, but they don’t have a positive incentive to encourage energy efficiency.

In New York, we have two-thirds of the energy generation located upstate (in the northern and western areas of the state), and only one-third of the demand is where the generation is. Here is the problem: We have a system which has already in a sense excess capacity with 55% capacity utilization. And in addition to that, we impose on customers a surcharge to support renewable energy. And we don’t have an economic incentive for the utilities for improving their capital efficiency nor are utilities incentivized to help customers conserve energy.

So, you could see that if we change the regulatory incentives in the price signals, we will wind up with more distributed generation, more distributed energy resources, which will include solar, batteries, and combined heat and power, fuel cells, and all of that not because we are creating a mandate, but because it will be ultimately cheaper for customers.

“In the United States, there are now more people in the solar industry than workers in the steel or auto industry.”

SWE: Germany with its mandate, the Renewable Energy Law, basically helped to build the Chinese monopoly for solar. How would you help the local industry to profit from this development?

Kauffman: I used to be on the board at QCells, so I know a lot about the German solar industry. We’re very respectful of what Germany has done and Germany is a model to show that quite a lot of renewable energy can be brought online at a very short period of time, if a country is committed to an objective. We are trying to learn from Germany and trying to learn from what other places have done.

So back to the point about markets, we are more about creating end markets for energy efficiency and renewable energy. It may not be that there are energy products per se, but there might be energy by-products of some other service that’s being offered to customers. We are not a government trying to build manufacturing from the top down; this is a strategy to build a reliable and affordable energy system in New York so manufacturers will want to be here and create jobs.

We just think that the state has some advantages that will attract manufacturers in the clean energy space. We have cheap hydropower that’s available. We have water which is going to be valuable to manufacturers of all sorts. We have lots of skilled workers that are here. In the United States, there are now more people in the solar industry than workers in the steel or auto industry. And very few of those jobs in those industries are manufacturing jobs.

If we develop markets, then we know there will be other value to manufacturers to be close to where the market is. We have excellent universities in the state and a growing semiconductor industry; some of those capabilities are very valuable to the solar industry. But fundamentally, we are going to let the market figure out what kind of jobs are going to be here.

The interview was conducted by Anja Limperis.