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State energy plan would alter New York utilities

New York State is proposing to turn its electric utilities into a new kind of entity that would buy electricity from hundreds or thousands of small generators and set prices for that electricity and for the costs of running the power grid.

The proposal anticipates a radically different electric system, dominated by decentralized production, much of it of renewable, intermittent energy sources like solar or wind power. The Public Service Commission is considering how the utilities would have to change.

Instead of distributing electricity themselves, the utilities would effectively direct traffic, coordinating distribution of electricity produced by a multitude of smaller entities, according to an outline published last month by the commission, which regulates utilities.

“It’s really quite a revolutionary change that’s being proposed,” said Charles A. Zielinski, a lawyer in Washington who specializes in electricity and who was chairman of the New York commission from 1978 to 1981. “It’s a big deal,” Mr. Zielinski said. “If New York can pull this off, it would be huge.”

In the 1990s, the state pushed companies like Con Edison to sell their generating stations to independent producers, and to become primarily distribution entities. Now they would become traffic cops in a two-way flow of power.

The new report predicts the gradual decline of big generating stations. In their place, the commission envisions rooftop solar panels, small wind turbines and small generating stations using natural gas to make both electricity and steam, which would be used for cooling or heating their immediate area. Some of these generators would be linked in “micro-grids” intended to stay afloat during a blackout.

The underlying idea is that the existing system of regulation does not encourage the utilities or independent parties to produce a cleaner, more efficient energy grid.

The Public Service Commission will hold a public session on the proposal next Monday.

One group that could be hurt is the companies that build and own central power stations. But Gavin J. Donohue, the president and chief executive of their trade association, the Independent Power Producers of New York, said his members could prosper building smaller, “distributed” generators as well, depending on how the rules are written.

Distributed generation could provide electricity to local areas even after a hurricane or other natural disaster. “The state has made a real compelling case, certainly in light of natural disasters and storms we’ve dealt with, to deliver energy in a more innovative, progressive way,” Mr. Donohue said.

Ahmad Faruqui, an electricity expert at the Brattle Group, a national consulting firm, said the New York report was drawing widespread interest because it addressed a critical national issue: how the proliferation of rooftop solar installations is making the current system of pricing electricity obsolete. Utilities calculate the costs of maintaining their systems, and add a charge onto every kilowatt-hour sold.

But as solar installations reduce the amount of energy that some customers buy, others are faced with paying a higher and higher share of the fixed costs. Some experts predict that this will end in catastrophe and refer to it as the “utility death spiral.

“The rate design they’ve had for years is not going to work,” Mr. Faruqui said.

But the Public Service Commission proposal has few numbers and does not project how energy costs in the future might compare with costs today.

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Advocates of efficiency argue that the price per kilowatt-hour might rise, but with households and industries using fewer kilowatt-hours, their bills would decline.

It is also not clear from the report how the new framework would ensure the presumed environmental benefits, like lower output of climate-changing emissions. And some experts say that if the system encouraged more small generators fed by natural gas, it might also move the production of conventional pollutants into more populated areas. Burning natural gas in thousands of locations would make it almost impossible to capture carbon from power plants and pump it underground to avoid worsening climate change.

But the proposal also holds out the possibility that investments in small-scale generation, or in reducing peak demand, could be far better focused than they are today. Stuart Nachmias, a vice president of Consolidated Edison, said the value of such investments to the system depended on precisely where they were located, and whether they were in places that would otherwise require new spending on substations or feeder cables.

For example, Mr. Nachmias said, Con Ed would pay more for extra kilowatt-hours of energy, or reduction in peak demand, in places that were currently overloaded. “But if the wires are fine and there’s capability, it’s not going to help us,” he said. “If it’s a nighttime peaking area, solar isn’t going to help us.”

He said, however, that under the proposed system, Con Ed might find it cost effective to subsidize energy storage in such areas, or tiny gas-fired plants.

The proposal, hailed by Gov, Andrew M. Cuomo and other state officials, comes at a time of uncertainty for utilities around the country. And it represents a shift in focus, from trying to balance supply and demand over a broad area to concentrating on the neighborhood level.

But the concept faces several challenges. The economics of wind plants do not favor small or isolated turbines. Solar power is also cheaper in larger concentrations. In both cases, local generation would reduce the amount of energy lost in transmission, but it is far from clear that the saving would outweigh the economies of scale from bigger plants.

New York is one of only three American states that could try out such a system on its own, because the electricity market operator that serves its consumers, balancing supply and demand and setting prices, lies entirely within its borders.  The others are Texas and California.