Comments of the Edison Electric Institute Net Benefits and Costs of Distributed Solar Energy and Innovative Solar Deployment Models, DOE-EERE

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1 Comments of the Edison Electric Institute Net Benefits and Costs of Distributed Solar Energy and Innovative Solar Deployment Models, DOE-EERE Category 2 - Innovative Solar Deployment Models Edward H. Comer, VP, General Counsel & Corporate Secretary, (202) , ecomer@eei.org Edison Electric Institute, 701 Pennsylvania Ave., Washington DC Summary: Utilities have a proven record as energy innovators and have consistently worked to integrate new generation, transmission, and distribution technologies, including distributed solar. However, in order to protect customers, rate making principles based on utilities cost of service must remain in place. Some incentives were introduced in the past that have created distortions to DG consumers which must be addressed. Distributed solar is an important part of the future of the electric industry, but it should not be given rate treatment that results in higher costs to other customers. Through economic ratemaking and properly priced deployment models, utilities can help ensure the success of distributed generation (DG) technologies as well as the electric grid in a cost effective and long-lasting way. Utility involvement is critical to maximize the flow of benefits from DG systems to all customers, and utilities should be supported in taking a proactive approach to integrating DG resources in a cost-effective way that benefits the grid and all utility customers. Category 2: Innovative Solar Deployment Models Questions 1-5: Solar deployment Utilities are actively building and investing in solar, and expanding solar energy options for customers via green power programs, community solar programs, grants, rebates, and performance-based incentives was a record year for solar development, marked by the completion of several large, utility-scale solar projects. According to Bloomberg New Energy Finance, over 4,000 MW of solar was added to the grid in 2013, about a 25% increase over the previous year. The vast majority of these projects were either built by utilities or financed by utilities via power purchase agreements (PPAs). The pace of solar development is expected to continue in the coming years. There are an additional 3,700 MW of solar under construction or in advanced stages of development and another 5,400 MW of planned solar capacity that have received permits to begin construction. Over 15,700 MW of new solar capacity was announced in 2013, more than two and a half times what was announced in In addition to rapidly declining technology costs, the primary drivers of solar development to date have been federal and state policies and incentives, including tax credits, rebates, renewable electricity standards (RES), and performance-based incentives. These incentives have contributed to making installing solar increasingly attractive for both utilities and customers. 1

2 EEI member utility companies are pursuing distributed solar development in a number of different ways. In general, the types of programs explored by electric utilities fall into one or more of the categories outlined below, and often a single project cuts across multiple categories. Utility Ownership: Utilities are building and owning distributed solar generation both within and outside of their service territories and are meeting and in some cases exceeding RES mandates and goals. Some are starting with small pilot projects to collect data and learn how solar DG integrates with their systems. Others are several years into building and operating their own solar DG facilities and are expanding their efforts. Many utilities have identified strategic locations on their distribution systems where solar DG can help relieve congestion and provide the greatest benefit. Others are responding to increasing customer demand and interest in solar DG. Some utilities, which might lack prime solar resources in their own service territories, are building solar in other parts of the country where the solar resource is greatest. Partnering: Across the nation, utilities are forming innovative partnerships to expand solar development and meet the needs of customers large and small. They are working with commercial customers to install and operate, or procure through PPAs, as much renewable generation as the customer requires in order to achieve customer goals. Some utilities have developed unique tariffs that enable customers to customize their desired mix of resources. In many cases utilities are partnering with schools and community organizations to provide learning opportunities in addition to electricity. They are also partnering with local governments to power municipal buildings, and in the case of Oregon for instance, highway lighting. Electric utilities are also working with the military to help meet renewable energy requirements and goals at installations around the country. The Army and Air Force have both recently entered into partnerships with local utilities in the southwest to expand the development of solar on their bases in order to help meet their renewable energy and environmental goals. Community Solar: According to an IREC study, only 22-27% of rooftops are able to host rooftop solar. Community and shared solar programs are an additional mechanism that some utilities are creating to give customers, particularly those who may not be able to host a rooftop PV installation, the opportunity to access distributed solar by purchasing shares of solar systems or the output from a specific system to offset their own electricity consumption. Green Power Programs: Green power programs, available at nearly every utility, provide customers the opportunity to offset all or a portion of their consumption with renewable energy. In some cases, electricity from distributed solar facilities is used to support green power programs, enabling customers to purchase some or all of their electricity from renewable sources. Financing: Utilities are financing solar through a number of different mechanisms. Some offer financing options for customers to purchase a solar system with little or no upfront costs. Others are investing directly in third-party rooftop solar installers. Others are investing in solar funds operated by third parties that provide capital for distributed solar installations. Utilities also offer a range of financial incentives to support the expansion of solar DG, including upfront rebates and performance-based incentives. Research and Development: Many utilities are working in partnership with the U.S. Department of Energy, the Electric Power Research Institute (EPRI), and others to conduct pilot programs and other projects to learn more about the impacts of DG on their systems, study load patterns, 2

3 gauge customer interest in solar, and develop solutions for overcoming barriers to integrating and managing large penetrations of solar DG. Questions 1-4: Cost-of-Service ratemaking continues to be an effective model, though modifications may be needed. As mentioned in EEI s comments in response to Category 1 questions in this RFI, cost-of-service ratemaking is the foundation for designing electric rates, and this approach continues to be an effective model that protects customers. Updates to existing rate designs are needed to improve the cost-of-service model, however, to address the inequities introduced by net metering policies. Typically, the utilities fixed costs (generation capacity, poles, wires, metering, billing, call center, certain taxes and fees, etc.) are recovered from customers through rates that vary by usage. Under current net metering arrangements, a customer with DG receives a credit not only for the cost of fuel, but also for these other fixed costs, even though the customer remains connected to and continues to rely on the grid. This paradigm shifts costs to other customers, and over the long-term is an unsustainable model. Similar to traditional net metering, virtual net metering also poses challenges, often resulting in a situation where a retail credit is provided to customers purchasing power from a wholesale resource, without any accompanying reduction in load at their location. Even more evident in this situation is that the customers are given a credit that offsets their fixed charges while their actual interaction with the electric grid remains unchanged. They continue to rely on the grid as they always have. The growing interest in solar DG has prompted an examination of alternate rate design structures and how they can best support this growing resource while ensuring that the costs of operating and maintaining the grid continues to be paid for by those customers that are using it. Each of the alternative regulatory designs highlighted in the RFI have the potential to work as long as the prices paid by customers are aligned with the cost of providing them service, are fair, and do not shift costs to other customers or customer classes. To encourage innovation in the electric sector and enable a variety of services for customers, any policies affecting electric rates and solar business models should be flexible and non-discriminatory in their design. Policies should not favor one rate design over another. A number of different rate designs are feasible, as long as all customers pay their fair share of costs incurred to serve them, including both fixed and variable costs, and that costs are not inequitably shifted from customers who adopt distributed energy resources to other customers who do not. Market-based mechanisms are the best way to bring new resources, including distributed energy resources, to market; therefore, compensation for the output from customers who adopt distributed energy resources, such as solar DG should also be market-based. Such mechanisms provide transparency and certainty, enabling the most cost-effective resources to be acquired, and providing known data for regulators and investors to rely on when making decisions. Rate design policies should be technology neutral. Every resource has intangible benefits that are not currently quantified as part of the ratemaking process and new technologies are likely to come along that provide additional benefits not previously considered. Any approach to valuing 3

4 the intangible benefits of a single resource distorts the market unless these benefits are quantified for every resource, including the transmission and distribution system. If decision-makers choose to pay third party distributed generators for the speculative value of solar, they should also pay a similar amount to owners of central-station solar, utility-owned distributed solar, wind, hydro and other sources of electricity. All sources of electric generation provide significant value to the grid as well as substantial jobs and economic benefits. Electric utilities are typically major drivers of their state and local economies. These policies should not favor one business model over another. There are a number of innovative solar business models emerging around the country, some of which were highlighted earlier in these comments. One model should not be favored over another and utilities should have the flexibility to innovate and develop new business structures that provide additional choices and value for customers. Policies that may emerge should ensure regional, state, and local flexibility, such that a variety of business models may prosper and spur solar development. Geographic, political, regulatory, and cultural differences abound and what works in one service territory may not necessarily be feasible in another. Experience has shown that utility participation, input, visibility, and control over the assets connected to the utility s transmission and distribution system is essential for optimal siting and efficient operation of DG facilities, including solar. Especially as penetration of solar DG increases, the challenges in operating the electric grid to maintain safety and reliability mount and it is critical for a utility to be able to manage the solar DG assets connected to its system for the benefit of all customers. Specific commentary on rate design structures strengths/weaknesses Any of the rate structures highlighted in the RFI can work if the prices are right and customers are billed for their fair share of the costs. Net Metering: Net metering policies based on retail prices shift costs from customers with DG to those without DG. This arrangement is not sustainable over the long-term, as prices for customers without DG increase to pay for the costs avoided by those with DG. This is why caps were initially placed on the majority of net metering programs. The key to successful net metering is to price it correctly and couple it with good rate design to avoid cost shifting. Value of Solar Tariff: The value of solar tariff is only a method to calculate the remuneration paid to distributed solar. So far it has been implemented in buy all-sell all designs that separate consumption from production, which helps address the cost shift introduced by net metering. It does not fit, however, in the regulatory paradigm which bases rates on costs, not speculative values. There is currently no accepted standardized method for quantifying the value of solar DG and no clear economic benefits attributable to solar DG compared to lower-cost utility-scale solar or other generation resources. Any valuation should include the value of all comparable resources in the same way to maintain a level playing field and prevent market distortions. This process and methodology should work in a sustainable way to enable new DG to participate fairly in electricity markets. If such a process and methodology sets artificially high prices for electricity from DG, then it will result in market distortions that adversely impact both utilities and their customers. 4

5 Disaggregated Rate: Disaggregated rate structures are a move in the right direction and can lead to greater transparency and increased recovery of fixed costs. As with the other possible rate structures, the key is to ensure that resources are priced correctly. Fixed or Demand Charge Based Tariff: Fixed or demand charge based tariffs can lead to more accurate recovery of fixed costs, and also tend to be better aligned with principles of cost causation. Standby charges for conventional generation are a good example of a fixed charge rate design. One of the benefits of fixed charges is that they tend to be easy to understand and apply. It is also possible to apply the fixed charges to a distinct class of DG customers without having to reform the overall rate design for all customers. The key is to price the fixed charge right. Question 5: Suggestions for DOE as they analyze and develop alternative regulatory approaches and deployment models for distributed solar PV Any initiatives, including funding opportunities that DOE undertakes in an effort to facilitate and address the impacts of increased levels of solar DG should ensure utility participation. As mentioned throughout these comments, utilities are expanding solar DG, facilitating customer choices in clean energy, and are exploring new business models that further its development in a long-term sustainable manner. Moreover, utility involvement is critical to ensuring successful and optimal integration of DG and maximizing the flow of benefits to customers. DOE should also recognize that specific details regarding rate design are within the purview of state regulators, who are also actively working to address the challenges created by solar DG while providing choices and opportunities for utilities and customers to further expand new technologies. Any DOE initiatives should remain focused on high-level themes and leave the specific details for state regulators to consider. DOE should also not use any resources to influence or change state regulations. As mentioned previously, state and regional flexibility is essential for a diversity of innovative solar DG business models to thrive. DOE should study the lessons being learned in Germany, Hawaii and elsewhere about the costs of increasing penetration of DG. The penetration of rooftop solar in these areas is greater than elsewhere and, as data continues to accumulate, lessons from their experiences can be drawn and mistakes avoided. For example, according to a recent EPRI concept paper The Integrated Grid, the German distribution system will require $ billion in investment by 2030 in order for the grid to accommodate even higher penetrations of renewable energy. Also, to avoid a similar premature retrofit of equipment in the U.S., the Western Electric Industry Leaders urged in a recent report the installation of smart inverters on all new solar generators in the region to ensure their smooth integration onto the electric grid. Looking to the future, it is important to recognize that an optimal integration of variable resources into the grid (distribution or transmission) will require the use of energy storage technologies. These technologies are still cost-prohibitive in most circumstances. DOE should work towards reducing costs and improving the efficiency and operational characteristics of batteries and other energy storage technologies. Such advancements would help reduce costs and increase the grid benefits of distributed solar. 5