Emerging Regulatory Models and Retail Utilities: Gazing into the Crystal Ball National Governors Association Center for Best Practices and NARUC Workshop Charles Goldman Staff Scientist and Department Head September 23, 2014
Outline Implications for utilities of a future with low load growth, high DG, and new demands Conceptual overview of incremental and fundamental changes to cost of service regulation and utility business models that are being discussed Analyzing impacts of Distributed PV at two prototypical utilities 2
Declining Electricity Load Growth Source: EIA 2012 Annual Energy Outlook; Faruqui (2013) 3
Energy Efficiency Potential in the West Load growth in West is almost flat (0.3%/year) over next 20 years in High DSM case (compared to WECC reference case (1.4%/year) High DSM case growth rates range from -0.6% to 2.8% across states and provinces Compound Annual Growth Rates (Annual Energy, 2010-2032) 5.0% 4.0% WECC Reference Case SPSC High DSM Case 3.0% 2.0% 1.0% 0.0% -1.0% AB AZ BC CA CO ID MT NV NM OR UT WA WY WECC Source: Barbose et al, 2014, Incorporating EE into Western Interconnection Planning, LBNL, January. 4
Installed Distributed PV prices continued to decline in 2013 Installed Price (2013$/W DC ) Median installed prices fell by $0.7/W (12-15%) from 2012-2013, across the three size ranges shown, and have fallen by an average of $0.5/W (6-8%) annually over the full historical period $12 $10 Residential & Commercial PV (Median Values) $8 $6 $4 $2 $0 10 kw 10-100 kw >100 kw Median prices for systems installed in 2013 (n=50,614): $4.7/W ( 10 kw), $4.3/W (10-100 kw), $3.9/W (>100kW) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Installation Year Note: Median installed prices are shown only if 15 or more observations are available for the individual size range Source: Barbose et al, LBNL, Tracking the Sun VII, 2014 5
Levelized PPA Price (2013 $/MWh) 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 Gen-Weighted Average PPA Price (2013 $/MWh) Utility-scale Solar: Downward Price Trends $250 $200 $150 $100 $50 $0 300 250 200 2007 (5 MW, 1 contract) 2006 (7 MW, 1 contract) 2009 (1,316 MW, 15 contracts) 2008 (770 MW, 3 contracts) 2014 (365 MW, 6 contracts) 2010 (1,827 MW, 25 contracts) 2011 (903 MW, 9 contracts) 2012 (790 MW, 6 contracts) 2013 (447 MW, 13 contracts) Generation-Weighted Average Individual Contract Levelized PPA prices now down around $50/MWh Two-thirds of sample has flat annual PPA pricing (in nominal dollars), while the rest escalate mostly at low rates intended to keep pace with inflation this means that average sample PPA prices decline over time in real dollars (top graph) 150 100 50 0 PPA Year: Contracts: MW: 2006 1 7 2007 1 5 2008 3 770 2009 15 1,316 2010 25 1,827 2011 9 903 2012 6 790 2013 13 447 2014 6 365 Source: M. Bolinger and S. Weaver, LBNL 2014, Utility Scale Solar 2013: Empirical Analysis of Project Cost, Performance and Pricing Trends in the U.S. 6
Alternative Regulatory and Electric Utility Business Models: Conceptual Overview Services Profit Achievement Profit Motivation Assets Ratemaking Variant Traditional IOU Meters- & Wires- Only T&D Owner/Operator Performance-based ratemaking Commodity Value 7
Incremental changes to existing utility business model: Are they sufficient and sustainable? Shareholder incentives Lost fixed cost recovery Rate base PV investments Retail rate design changes Profit from wholesale off-system sales 8
Alternative Regulatory and Electric Utility Business Models: Conceptual Overview Services Profit Achievement Profit Motivation Assets Ratemaking Variant Traditional IOU Meters- & Wires- Only T&D Owner/Operator Performance-based ratemaking Commodity Value 9
Alternative Regulatory and Electric Utility Business Models: Conceptual Overview Utility opens networks Services Profit Achievement Profit Motivation Assets Ratemaking Variant Traditional IOU Meters- & Wires- Only T&D Owner/Operator Performance-based ratemaking Commodity Value 10
Regulatory paradigms and utility business models depend upon Profit Motivation Assets Value Profit Achievement Sales Services Market structure/scope of asset ownership Vertical Retail integration competition Role of utility in providing valueadded services Utility provides Utility does not provide value-added services value added services Degree to which utility networks are open and accessible to third parties Risk to utility shareholders, customers and non-utility service providers Open and accessible Less risk Closed and inaccessible More risk 11
Impacts of Net-Metered PV Study: Project Scope and Objectives Scoping analysis of two prototypical investor-owned utilities: characterize the scale of potential financial impacts of distributed solar on utility shareholders and customers identify and explore key sensitivities and potential mitigation strategies Leverages LBNL pro-forma financial model of utility costs and revenues Three metrics: (1) achieved earnings, (2) return-onequity, and (3) average retail rates Objectives Help to frame, organize and inform ongoing discussions among policymakers, utilities, and stakeholders 12
Impacts of Net-metered PV Study: Structure of the analysis Two prototypical investor-owned utilities Southwestern vertically integrated utility Northeastern wires-only utility and default service provider Analytical elements Base case: A reference point against which sensitivities and mitigation measures can be measured Sensitivity cases: How do the impacts of PV depend on the utility operating and regulatory environment? Mitigation cases: To what extent can the impacts of PV be mitigated through regulatory and ratemaking measures? Key parameters of the analysis Distributed PV ramps up over 10 years, but utility costs and revenues modeled over 20 years to capture end-effects Consider range of PV penetration (2.5% to 10% of retail sales) in Base Case, while Sensitivity and Mitigation cases focus on 10% trajectory 13
Financial Impacts of DER (FINDER) Model LBNL FINDER Model can assess participant and non-participant bill impacts, apply various rate designs at the customer class level (e.g., residential and non-residential), and quantify detailed impact of DERs on distribution system investments 14
Reduction in Revenue Requirement ($B, 20-yr NPV @ WACC) Reduction as Percent of Total Costs Reduction in Revenue Requirement ($B, 20-yr NPV @ WACC) Reduction as Percent of Total Costs Utility cost reductions from PV Southwest Utility Northeast Utility 2.5 Fuel and Purchased Power O&M Depreciation Interest on Debt Return on Rate Base Taxes Percent of Total Costs (right axis) 5% 2.5 Purchased Power Depreciation Interest on Debt Return on Rate Base Taxes Percent of Total Costs (right axis) 5% 2.0 4% 2.0 4% 1.5 3% 1.5 3% 1.0 2% 1.0 2% 0.5 1% 0.5 1% 0.0 0% 2.5% 5% 7.5% 10% Customer Demand Met With PV by 2022 0.0 0% 2.5% 5% 7.5% 10% Customer Demand Met With PV by 2022 Differences in composition of cost reductions between utilities are due to their differing cost structures: i.e., SW Utility owns generation while NE Utility procures all generation requirements via purchased power Assumptions related to deferral of generation and T&D investments, and to fuel and purchased power costs, are explored further in sensitivity analysis 15
Summary of base case results ROE Impacts (Avg. 10-yr) Earnings Impacts (NPV 20-yr) Average Retail Rate Impacts (Avg 20-yr) PV Penetration 2.5% 10.0% 2.5% 10.0% 2.5% 10.0% Southwest Utility -0.3% -2.9% -3.9% -8.1% 0.0% 2.5% Northeast Utility -4.7% -18.1% -4.5% -15.4% 0.2% 2.7% Under base-case utility characterizations: PV reduces utility revenues, collected largely based on customer sales and demand, by a greater amount than it reduces utility costs Utility shareholders experience revenue erosion and lost earnings opportunities, leading to reduced ROE and achieved earnings Ratepayers experience increase in average retail rates, though those effects are generally less pronounced than shareholder impacts 16
Mitigation analysis overview Objective: Explore the efficacy and potential tradeoffs associated with regulatory and ratemaking measures for mitigating the impacts of PV Mitigation Measure Revenue Lost Earnings Increased Erosion Opportunities Rates Revenue-per-Customer (RPC) Decoupling Lost Revenue Adjustment Mechanism (LRAM) Shareholder Incentive Shorter Rate Case Filing Frequency No Regulatory Lag Current & Future Test Years Increased Demand Charge & Fixed Charge Utility Ownership of Customer-Sited PV Customer-Sited PV Counted toward RPS Primary intended target of mitigation measure May exacerbate impacts of customer-sited PV Mitigation scenarios borrow from measures implemented with energy efficiency programs, though are not an exhaustive set of options Mitigation analysis focuses on impacts under 10% PV trajectory, for illustrative purposes 17
Questions/Comments Chuck Goldman Phone: (510) 486-4637 Email: CAGoldman@lbl.gov 18
Resources: Publications 19
LBNL EE Business Model Quantitative Financial Analysis Satchwell, A., P. Cappers, and C. Goldman (2011). Carrots and Sticks: A Comprehensive Business Model for the Successful Achievement of Energy Efficiency Resource Standards. Utilities Policy; Volume 19, Number 4 (218-225). Cappers, P., A. Satchwell, C. Goldman, and J. Schlegel (2010). Benefits and Costs of Aggressive Energy Efficiency Programs and the Impacts of Alternative Sources of Funding: Case Study of Massachusetts. LBNL-3833E. August. Cappers, P. and C. Goldman (2009). Empirical Assessment of Shareholder Incentive Mechanisms Designs under Aggressive Savings Goals: Case Study of a Kansas Super-Utility. LBNL-2492E. August. Cappers, P., C. Goldman, M. Chait, G. Edgar, J. Schlegel, and W. Shirley (2008). Financial Analysis of Incentive Mechanisms to Promote Energy Efficiency: Case Study of a Prototypical Southwest Utility. LBNL-1598E. March. Cappers, P., C. Goldman, M. Chait, G. Edgar, J. Schlegel, and W. Shirley (2008). Quantitative Analysis of Alternative Energy Efficiency Shareholder Incentive Mechanisms. LBNL-2590E. August. 20
EE Business Models Analysis and Technical Assistance Use LBNL FINDER model to quantify the financial impact of EE on utility shareholders and their ratepayers Ongoing technical assistance effort funded by DOE OE: State regulatory commissions (e.g., Arizona, Kansas, Nevada, New Mexico) State energy offices (e.g., Massachusetts Dept. of Energy Resources) Investor-owned utilities (e.g., AmerenUE, Commonwealth Edison, Detroit Edison, APS, Tucson Electric, Kansas utilities, Nevada Power) State Energy Efficiency Action Network (e.g., regulatory policy exercise) 21
LBNL DER Valuation and Business Model Quantitative Financial Analysis Satchwell, A., A. Mills, G. Barbose, R. Wiser, P. Cappers, and N. Darghouth (Forthcoming). Financial Impacts of Net-Metered PV on Utilities and Ratepayers: A Scoping Study of Two Prototypical U.S. Utilities. Mills, A. and R. Wiser. (2014) Strategies for Mitigating the Reduction in Economic Value of Variable Generation with Increasing Penetration Levels. LBNL-6590E. March. Darghouth, N., G. Barbose, and R. Wiser (2013). Electricity Bill Savings from Residential Photovoltaic Systems: Sensitivities to Changes in Future Electricity Market Conditions. LBNL-6017E. January. Darghouth, N., G. Barbose, and R. Wiser (2012). The Potential Impact of Increased Renewable Energy Penetration Levels on Electricity Bill Savings From Residential Photovoltaic Systems. LBNL-6188E. November. 22
LBNL Future Regulatory and Utility Business Models Schwartz, L., P. Cappers, A. Satchwell, and C. Goldman (Forthcoming). A Typology of Current and Future Electric Utility Regulatory and Business Models Presentations California Municipal Utilities Association Annual Conference. April 2, 2014. Utility Business Models in a Low Load Growth/High DG Future. Napa, CA Legislative Energy Horizon Institute. October 24, 2013. State/Province Regulation in 2030: Gazing Into the Crystal Ball? Washington, D.C. CA Energy Efficiency Industry Council s Member Forum. September 17, 2013. Utility Business Models in a Low Load Growth/High DG Future. San Francisco, CA. NGA Policy Institute. September 11-12, 2013. Emerging Ideas to Modernize Utility Business Models. Denver, CO NARUC Summer Committee Meeting. July 23, 2013. Utility Business Models in a Low Load Growth/High DG Future. Denver, CO. WIEB Committee on Regional Electric Power Cooperation/State-Provincial Steering Committee Meeting. April 10, 2013. Utility Business Models in a Low Load Growth/High DG Future: Gazing Into the Crystal Ball? Boise, ID. 23