Distributed Generation Valuationfrom a Ratemaking Perspective

Presentation to the ACC Workshop

Tom Beach, PrincipalCrossborder Energy

Consultant to the Solar Energy Industries Association

May 7, 2014

Overview

Basic conceptsFramework for DG ValuationKey Principles

◦Fairness◦Cost causation◦Customer choice

Critical New DataFinal Thoughts

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Distributed Generation is a resource.NEM is a billing arrangement for DG exports.• Without NEM, customers who install renewable DG have

certain rights under federal law (PURPA)• To interconnect with the grid• To offset their own load• To receive an avoided cost price for exports to the grid

• “Running the meter backward” is the essence of NEM.• Exports to the grid are credited/priced at the retail rate.• Does the retail rate credit accurately capture the value of the

power exported?

Most of the output of net-metered PV systems never touches the grid.

• Typically, one-half to two-thirds of PV output serves the on-site load, before power is exported to the grid.

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We’ve been down this road before……with other demand-side resources that

depend on customer adoption.◦ EE/DR have been incorporated as standard resources

in utility planning & regulation.

◦ Benefit / cost tests per the Standard Practice Manual

DG presents added challenges.◦ Interconnected to the grid, with safety and operational

impacts.

◦ Reduces demand and increases supply.

◦ Can produce 100% of the customer’s on-site usage.

◦ DG plus storage could compete with utility service.

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Benefit (+) / Cost (-) Testsfor Demand-side Programs

CategoryTotal

Resource Cost (TRC)

Ratepayer Impact (RIM)

Participant(PCT)

Capital and O&M Costs of the DG Resource

– –Utility Lost Revenues (Customer Bill Savings), plus Incentives

– +

Avoided Costs-- Energy-- Capacity-- T&D, including losses-- Ancillary Services-- Environmental-- RPS-- Other

+ +

Federal Tax Benefits + + 6Crossborder Energy

Example from Draft Nevada NEM Study(released by PUCN on May 1, 2014)

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Comprehensive RIM Test:Benefits and Costs of Net-metered DG

Benefits◦ Energy◦ Capacity◦ Ancillary Services◦ Transmission◦ Distribution◦ Environmental◦ Avoided Renewables◦ Other

Grid security Market price mitigation

Costs◦ Lost retail rate

revenues◦ DG Incentives◦ Integration costs

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Key Principles: fairness and cost causationAssess benefits and costs of DG over the life of

the DG system, like other resources. In the long-run, few costs are fixed.Recognize where DG is located. DG exports are generation.Costs to serve DG customers must consider

their different load profile.Appreciate the new risks borne by DG

customers.Customers’ DG investments are long-term

contributions to public purpose goals.

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SEIA Rate Design Principles

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1. Rates should be based on marginal costs which emphasize a long-run perspective.

2. Rates should encourage conservation and integration of renewables.

3. Rates should reduce peak demand.

4. Rates should include the development of time-of-use (TOU) tariffs.

5. Rates should be based on cost-causation principles.

6. Any rate design should not be discriminatory toward renewables.

7. Rates should have transparency, with enough availability of data so that the customer has predictability into what their rate should be.

8. Any rate redesign should minimize any impact to existing customers, such as grandfathering in existing customers (no retroactivity), with the option to opt into a new rate.

9. There should be a smooth transition to a new rate structure.

10. Customer charges should be avoided.

11. Rates should encourage economically efficient decision-making.

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Respect the Benefits DG Customers Provide

Enhanced reliability◦Enables distributed storage

Sited in the built environment◦Fewer land use & environmental impacts

A new source of capital for clean energy infrastructure

Competition for the utility’s retail powerCustomer engagement & choice

◦Appeal of clean tech / no moving parts◦DIY / self-reliance ◦ Jeffersonian ideal of the citizen (solar) farmer

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Critical Data (1)

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Long-run marginal or avoided cost data for each utility function.◦ Generation (energy and capacity)◦ Transmission (capacity and losses)◦ Distribution (capacity and losses)

Example: NERA regression method for marginal transmission capacity costs (10 years recorded, 5 years forecasted)

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Critical Data (2)

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Distribution substation loads◦ Correlate solar output with distribution system peaks

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It was the worst of times…

“3 Utilities Most Likely To Fall In Death Spiral, According To Morningstar”◦ Forbes, March 27, 2014

“Tipping Point Nears for Abandoning the Utility and Going Off-Grid: Morgan Stanley sees falling PV costs, Tesla’s big battery bet and rising electricity prices as cues for consumers to disconnect from the grid.”◦ Greentech Media, March 27, 2014

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It was the best of times…

“achieving the 2050 target [an 80% reduction in carbon emissions compared to 1990] will require… large-scale electrification of on-road vehicles, buildings, and industrial machinery….”◦ California Air Resource Board, Proposed First Update to the

Climate Change Scoping Plan (February 2014, at 37)

Primary Energy (EJ) California 2010 California 2050

Direct Fossil Fuel Use 5.59 64% 0.94 14%

Direct Biofuel Use 0 0% 0.73 11%

Electricity 3.11 36% 5.14 75%

Total all fuel types 8.70 100% 6.81 100%Source: J.H. Williams et al., “The Technology Path to Deep Greenhouse Gas Emission Cuts by 2050: the Pivotal Role of Electricity,” Science 335, 53 (2012), at Table 1. 16Crossborder Energy