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Oct

ob

er

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VICE PRESIDENTRUSSELL A. FEINGOLD

PRICING CONCEPTS AND REGULATORY ISSUES FOR DISTRIBUTED ENERGY RESOURCES

AGA STATE AFFAIRS COMMITTEE MEETING – CHICAGO, ILLINOIS

• The evolution of pricing concepts for Distributed

Energy Resource (DER) customers

• The regulatory trends related to DER pricing

approaches and issues

TODAY’S DISCUSSION

2

A CHANGING ELECTRIC LOAD PATTERN FOR DER CUSTOMERS

3

• Full Requirements Customer (Traditional)

• Partial Requirements Customer (DER)

Supplied from Grid

Supplied from Grid

Exported to Grid

THE FAMOUS “DUCK CURVE” IN CALIFORNIA

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• The “Morning Ramp” is flattening out• The ‘Mid-Day Load” is decreasing• The “End of Day Ramp” is greatly steepening

Source: CAISO Load Data

ENERGY GENERATED FROM DERs AND THE AVOIDED COST OF ENERGY

5Source: CAISO Day-Ahead Price Data for March 31, 2016

Pri

ce (

$/M

Wh

)

• The export of electricity from

DERs into the utility’s grid

does not necessarily occur at

the times of the utility’s

highest marginal energy costs.

• This means that the avoided

cost of energy for DER should

be the weighted average

avoided cost at the margin for

energy in the hours when

solar DG operates.

• Net Energy Metering (NEM) is a tariff and billing mechanism for customers with DER connected to the utility’s distribution grid.

• Under a utility’s NEM tariff, the customer receives a “bill credit” for any self-generation that is produced and exported to the grid.

• Bill credits for the generation produced by the customer are applied to a customer’s monthly bill at the same retail rate that the customer pays for the energy that is consumed.

NET ENERGY METERING: AN INITIAL APPROACH TO COMPENSATING DER CUSTOMERS

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CUSTOMER CREDITS FOR MONTHLY NET EXCESS GENERATION (NEG) UNDER NET METERING

NEG credited at retail rate; credits do not expire

NEG credited at retail rate at first, then credits expire or are reduced (e.g., to the avoided cost rate at the end of year)

www.dsireusa.org / July 2016

DC

NEG credited at less than retail rate (e.g., avoided cost rate)

NEG is not compensated

No statewide mandatory net metering rules

• NEM is inextricably tied to the utility’s underlying rate design.

• As a utility’s retail rates change, the compensation to the customer for DER under the NEM tariff changes.

• If utility rates increase, the compensation for DER increases which can be a perverse incentive if DER is a declining cost energy resource.

• Utilities argue that NEM allows the DER customer to avoid paying its fair share of fixed costs for the distribution grid.

• Recovery of fixed costs are shifted to other customers.

• DER advocates respond that the value of DER to the utility exceeds the fixed costs associated with serving DER customers.

NET ENERGY METERING: A GROWING RATEMAKING AND REGULATORY CONTROVERSY

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• The solar industry is experiencing strong growth and increased customer penetration levels.

• The cost of solar is continuing to fall with increased demand and production levels.

• Rising utility retail rates with low energy sales growth and increasing infrastructure investments.

• Some utilities are concerned about the potential “death spiral.”

NET ENERGY METERING: WHAT’S FUELING THE DEBATE TODAY?

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High DER compensation and falling PV costs (More DER load)

Utility sells less kWh to DER customer

DER becomes even more competitive with higher retail rates

Utility must recover fixed costs over fewer kWh and retail rates increase

RETAIL RATE DESIGN - NOT NET ENERGY METERING – IS THE REAL ISSUE

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Energy($/kWh)

Generation$/kWh)

Transmission($/kWh)

Distribution$/kWh

Customer$/Month)

Cost-Based Rate Traditional Rate

Energy($/kWh)

Customer($/Month)

NEM Rate Credit

NEM Rate Credit (Variable)

Cost impacts within a customer class will occur whenever the rate design does not reflect the underlying cost of service.

Variable

Fixed

Fixed

THE CREATION OF CROSS-SUBSIDIES UNDER RATE DESIGN FOR DER CUSTOMERS

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Value of DG < Rate Compensation Value of DG > Rate Compensation

Other utility customers subsidize DG customers

DG customers subsidize other utility customers

Under-recovery of utility’s fixed costs (1) Level of DG penetration is reduced

Upward pressure on utility retail rates Investment capital may exit the market

Reduced utility shareholder returns (1)

(1) Unless utility is made whole through revenue decoupling

Net Energy Metering

Other Value-Based Methods

REFLECTING THE PERCEIVED VALUE OF DER THROUGH A UTILITY’S RETAIL RATES

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Net Energy Metering Tariff Value of DER Tariff

Compensation is directly tied to the utility’s retail rates

Compensation is independent of the utility’s retail rates

• The level of compensation is driven by rate design

• The level of compensation is based on:

• Cost-based, unbundled rate design (“smart rate”)

• The value of solar (VOS) or other renewables technology

• Traditional rate design (two-part or three-part rate structures)

• DER capital or financing costs

Compensation is a function of cost allocation and rate design by class

• Customer receives value for energy, capacity, and other benefits DER provides; and customer buys all power at normal retail rate

• Either one combined class or separateclasses for DER and non-DER customers

• It is a form of Feed-In Tariff or Buy/Sell transaction

RATE REFORM OPTIONS FOR DER CUSTOMERS

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Rate Design Option Explanatory Comments

Demand Charge A charge based on a customer’s maximum kW demand over a pre-specified time period (maximum demand across all hours of the month or during peak hours only

Fixed Monthly Charge A flat charge per month assessed to each customer irrespective of the customer’s load characteristics

Minimum Bill Payment of a threshold amount each month even if the customer’s computed monthly bill is less than the minimum amount

Capacity Charge An additional charge to DER customer’s based on its installed capacity, with the size of the charge based on the customer’s generation capability

DG Output Fee An additional charge to DER customers based on the total amount of electricity they produce from DERs

Connection Fee A one-time fee assessed to DER customers to reflect the cost of the utility’s distribution grid not recovered due to the current NEM rate design

Flattened Rate Structure A rate design change which addresses the inherent economic inefficiencies associated with inverted block rates

Buy-Sell/”Value of Solar” Structure

DER customers pays for all electricity consumed at the utility’s full retail rate; separately compensated for electricity generated at the “value” of the electricity

Time Varying Rates The variable charges of the utility’s existing rate structure are time-differentiated to reflect the identified variation in costs

AUSTIN ENERGY’S VALUE OF SOLAR TARIFF

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BILLING OF AUSTIN ENERGY’S VOS TARIFF

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COMPUTING THE VALUE-OF-SOLAR FACTOR

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Value Component Computational Basis

Fuel Value Avoided cost of fuel to meet electric loads as well as T&D losses, based on the solar production profile. This is inferred from ERCOT market price data and future natural gas prices.

Plant O&M Value Avoided costs associated with natural gas plant operations and maintenance to meet peak load through renewable resources.

Generation Capacity Value Avoided capital costs of generation to meet peak load through renewable resources, inferred from ERCOT market price data.

Transmission and Distribution Capacity Value

Savings in transmission and distribution costs resulting from the reduction in peak load by renewable resources.

Environmental Compliance Value Avoided cost to comply with environmental regulations and local policy objectives

VALUE-OF-SOLAR FACTOR FOR 2014

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0.055

$0.01

$0.02

$0.01

$0.02

0

0.02

0.04

0.06

0.08

0.1

0.12

2014

Environ.Compliance Value

Distr. CapacityValue

Trans. CapacityValue

Gen Capacity Value

Plant O&M Value

Fuel Value

Leve

lized

Val

ue

($

/kW

h)

Total: $0.115/kWh

MINNESOTA’S VOS CALCULATION

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SRP’S RESIDENTIAL DEMAND PRICE PLAN PILOT

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(1) SRP’s Plan Pilot is open to 5,000 customers with DG facilities(2) SRP will continue to compensate DG customers under its net metering policy at

the variable price in the applicable tariff

Rate Structure ComponentWinter

(Nov-Apr)Summer

(May-June/ Sep-Oct)Summer Peak

(Jul-Aug)

Service Charge (per Month):Amp Service 0-200:Amp Service Over 200

$32.44$45.44

$32.44$45.44

$32.44$45.44

Demand Charge (per kW):1st 3 kWNext 7 kWAll Additional kW

$3.55$5.68$9.74

$8.03$14.63$27.77

$9.59$17.82$34.19

Energy Charge (per kWh):On-Peak - All kWhOff-Peak - All kWh

$0.0430$0.0390

$0.0486$0.0371

$0.0633$0.0423

Time Periods:On-Peak: WeekdaysOff-Peak: Weekdays, Weekends, and Holidays (6)

5-9 a.m.; 5-9 p.m.All Other Hours

1-8 p.m.All Other Hours

1-8 p.m.All Other Hours

SOME CLOSING THOUGHTS…

• The best rate design discussions occur outside the rate case hearing room.

• Stakeholder engagement must first focus on the core objectives and concepts of rate design

• Try to initially separate from the revenue implications and energy bill impacts.

• There has to be a foundational consensus reached on the cost of grid operations and the value of DER to the grid.

• Only then can the details of service offerings and rate design alternatives be considered.

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Russell A. Feingold724-935-3027

feingoldra@bv.com