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Filename, Version

Fair Rate Setting for a Renewable Future

Renewable Cities Forum, Vancouver BC,

May 2015

• Requires forecasting the future, balancing competing interests, and meeting financial goals.

• Involves both economic analyses and public policy decision making.• Rates should be sufficient to meet the utility's revenue requirements,

while providing lowest possible cost to the ratepayer over the long run.• Rates should be based on the actual costs of service, and reflect changes

in costs of service over time. • Rates should fairly allocate the different costs of providing service among

groups of customers.• Customers are grouped in “classes” with similar characteristics, e.g.

quantity, type, and pattern of energy use• Customers within a class should be treated equally• No class or customer should be unduly discriminated upon

Basic Principles of Electric Rate Setting

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Objectives for Rate Design

Revenue adequacyRevenue stability and predictability

Price stability and predictabilityEconomic efficiency in supply and consumption

Recognition of positive and negative externalitiesFairness in apportionment of cost of service

Avoidance of undue discriminationFreedom from controversy as to proper interpretation

Convenience of payment Economy of collectionFeasibility

Simplicity Certainty Understandability Acceptability

Rate Setting Process

Step 1: Revenue Requirements Analysis

The analysis of the revenues required to meet the Utility's operating and maintenance expenses, and to finance upcoming capital improvements.

Step 2: Cost of Service and Cost Allocation

The analysis of distributing the revenue required by the utility to customer classes so that the revenues recovered from each customer class are based on the cost to serve it.

Step 3: Rate Design

The process of shaping rates, charges and credits for each customer class so that the customers in each class not only contribute their portion of revenue requirements but also receive appropriate price signals consistent with policy goals.

Revenue Requirements Analysis: Common Electric Utility Embedded Costs

• Power Plants & Fuel (Capital & O&M)• Energy Purchases • Reserve Capacity Requirements• Transmission & Distribution (Capital & O&M)

– wires, poles, transformers, substations, relays, meters, etc.

• Regulatory Costs• Customer Assistance Programs

– e.g. low-income programs, efficiency incentives

• Customer service – call centers, interconnection, billing, payment processing, collections

• Other staff – management, regulatory, legal, engineering, maintenance, admin...

• Financing Costs / Debt Service

Embedded Cost Characteristics

These costs have different characteristics, that have implications for forecasting and cost allocation:

– Fixed vs Variable / Volumetric– Sunk vs Future Investments– Certain vs Uncertain (w/varying levels of risk)– Average vs Marginal– Linear or Non-linear (scale economies)– Flat vs Time Dependent (temporal)

Customer Characteristics

• Energy over time (kWh)– How Much – When – Level of Variability

• Energy Demand at a point in time (kW)– Average – Maximum – Level of Variability

• Elastic vs Inelastic Demand, ability to load shift• Size of Service required• Reliability level required• Location

Rate Setting Options

Possible Components:Customer ChargeMinimum Bill requirementDemand ChargesStandby Charges Energy ChargesFuel ChargesTransmission & Delivery ChargesRegulatory ChargesCustomer Assistance Program

Charges

Possible Structures:Fixed chargesLinear tariffNon-linear tariffs (Inverted or Declining Blocks)Peak pricingTime-of-Use PricingDynamic Pricing

Common Residential Electric Tariff Structure

• Low Fixed Customer Charge ($5-12)• Volumetric Energy Charge (often inclining)• Volumetric T&D Charges• Volumetric Regulatory, CAP, etc.• Taxes

No demand chargeNo standby chargesNo minimum bill

Most costs are recovered through

volumetric charges

Solar Customer Energy Profile

Source: Regulatory Assistance Project

Solar Customers (aka “Prosumers”)

• Generate renewable energy (and no pollution / GHGs)• Reduce amount of energy that must be distributed across wires • Reduce demand while operating, but...• Increase variability of demand• Reduce daytime peak loads, but not evening peak loads• Increase speed and rate of ramp requirements• Increase voltage and frequency fluctuation• Increase need for reactive power• Need the grid available and reserve capacity at all times to meet

all home electric needs if sun not shining / system down• Need extra metering and billing services

System Benefits from Distributed Solar

Utility looks at avoided long run marginal costs:Avoided generation / market purchasesAvoided line lossesAvoided transmissionAvoided distributionAvoided reserve requirementsAvoided environmental compliance costs

Costs of Distributed Solar

Costs to Solar Owner:Equipment: modules, inverters, racking, conduitInstallation labor & maintenance

Costs to Utility:Interconnection StudiesMeter(s) and service upgradesSystem integration: frequency regulation, voltage regulation,

reactive power management, reserve capacity, weather monitoring & performance modeling

Program costs: metering, billing, customer service, incentivesLost Revenue from reduced sales

Common DG Compensation Models

Net Metering:Customer is billed on the “net” of their kWh

consumption vs production over a billing cycle:

Net excess generation may roll over month by month, be credited at wholesale rate, or surrendered to the utility

Home consumes 800 kWh– Rooftop PV system produces 500kWh

Customer pays for the difference: 300 kWh

Challenges of Net Metering

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• If the retail rate exceeds the value of local solar generation to the system, the utility under-recovers the cost of service, having to spread that cost across all customers– If customers net to zero, they do not contribute anything to

distribution, fixed costs

• Under net metering in a tiered rate structure, customers with higher consumption are compensated at a higher value per kWh than customers in lower tiers– Doesn’t encourage energy efficiency / conservation– Disincentive for energy efficient homes to go solar– Equity issue between solar customers– Regressive

PG&E Tier Structure

Common DG Compensation Models

Feed In Tariffs (FIT)The solar generator is paid for every kWh produced,

and the power goes directly onto the grid.

Options:• Fixed rate• Floating rate: wholesale rate (variable) + fixed premium• Wholesale rate / avoided cost• Escalating or declining over time• May differ by technology, size or location

Proposed [DG] Tariff Structures

Customer Charge and/or Fixed Distribution ChargeFlat charge per account to cover fixed costs, distributionDisproportionately affects low-income and low-energy

consumersReduces volumetric (per kWh) charges, reducing value of net

metering and incentive to conserve energy

Minimum BillEvery customer must pay a minimum amount each month,

regardless of net usageProvides greater revenue certainty to utility and investorsEnsures customers who net meter to zero still pay something for

fixed costs and grid services

Proposed [DG] Tariff Structures

Demand ChargesApplied to peak or average residential demand, or only based

on solar capacity (flat $X/kW/mo charge)Approximates cost to serve customers with greater grid

impacts and service requirements

TOU Rates and Dynamic RatesTime-variant rates based on cost of power during peak and

off-peak periods, or actual real-time market pricesAligns actual costs of energy with customer rates in real timeEncourages customers to peak shift, reducing costsWith NEM, provides solar generators with higher value for

solar generation that aligns with peak demand/prices

Proposed [DG] Tariff Structures

Bidirectional Distribution RateConsumer pays full retail rate for energy consumed from the

gridConsumer credited for energy exported to the grid, but also

pays distribution charge or grid access charge for exported energy

So what is a fair solar tariff?

1. What components should be included/considered in setting solar tariffs, and residential tariffs at large?

2. What utility costs should solar customers still bear?3. How should we pay for costs to maintain T&D grids?4. How should we value local solar? Who should bear costs of PV?5. How to we maintain affordable rates for all? 6. Should non-energy societal benefits (e.g. health and

environmental) be incorporated into solar tariffs?7. Should leasing/PPA companies get the same compensation as

homeowners for solar DG?8. How does DG differ from home energy efficiency, and how

should that be reflected in rates?

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Filename, Version

Residential Value of Solar

Tariff

Renewable Cities Forum, Vancouver BC, May 2015

• Serving Austin Since 1895• 8th largest publicly owned electric utility in US

– 420,000 customer accounts (serving >1 million residents in Greater Austin)

– Peak Demand: 2,700 MW – Owns & operates 11,398 miles of

distribution grid• 20.7% renewable, 43.5% GHG-free energy

supply (FY 2013)• Transfers $105 million/yr to City of Austin

Austin Energy At-A-Glance

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Austin Energy serves 4% of Texas residents, yet

accounts for 30% of Texas’ solar capacity

How’d we get here?

Austin – the Solar Capital of Texas?

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• Early market development efforts– US DOE Solar America City– 40 local solar companies

• 100% green power for municipal operations – Onsite solar PV (>50 sites)– GreenChoice participation

Municipal commitment to renewable energy

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10 year rebate history:$43M for 3,477 residential

projects to date

$21M for 191 commercial projects committed to date

Among lowest installed costs in the country

Pioneered Value of Solar, promoting conservation and improving equity among customers

40% of Texas’ distributed solar is in AE territory!

Developed strong local solar market, with 40+ solar companies

AE Solar Highlights

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2020: Austin Energy Resource, Generation & Climate Protection Plan

200 MW solar goal adopted from 2007 Climate Protection Plan

October 2013: Council Resolution 53

Amended Generation Plan to include 100MW carve out for local solar, half of which “customer-owned”

August 2014: Council Resolution 157 increased renewable energy and solar goals

Increased local solar goal to 200 MW by 2020, with at least 100 MW “customer-controlled” (behind-the-meter)

Local Solar Goals

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30

7153

0

40

80

120

160

200

Capa

city

(MW

)

Progress Toward Local Goals*

Municipal, Schools, and Non-Rebated

Residential

Commercial

Webberville

2013 Resolution 53

2014 Resolution 157

*MW-ac installed & In Progress as of 12/1/14

Commercial: 7 MW

Residential: 15 MW

Municipal, Schools, and Non-Rebate: 3 MW

Webberville PPA: 30 MW

Signed W. Texas PPA: 150 MW

Needed to Reach Customer Owned Local Goal: 75 MW

Needed to Reach Utility Owned Local Goal: 70 MW

Needed to Reach Utility Owned Non-Local Goal:

600 MW

Austin’s Solar Goal: 950 MW by 2020

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Including 750 MW utility scale, 200 MW local (at least 100 MW customer-sited)

Includes systems installed and in process. Data as of Oct 1, 2014

Currently Installed or Planned: 205 MW-acRemaining: 745 MW-ac

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY140

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

22000

24000

Schools Municipal Non-Rebated Commercial CBI Commercial PBI Residential

Customer-Sited Solar 2004 to 2014 (MW-ac)

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• Avoided cost study– Attempts to quantify value at which the utility is “neutral” to

paying for locally generated PV

• First study conducted in 2006 by Clean Power Research, value used internally

• Value has fluctuated historically based on market changes• Alternative to net energy metering• Integrated into residential solar tariff in 2012• Reviewed annually and value adopted by Council through

budget process

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What is Value of Solar (VoS)?

• Meter consumption and production separately• Customer billed for whole house consumption

– All energy consumed onsite, whether from grid or solar system

• Customer credited for solar production– Credited for all solar generation, whether used onsite

or sent back to grid, at VoS rate• Solar credit = [Total kWh produced] x [VoS factor]

– Balance applied to electric bill until it zeroes, remaining credits roll over month-to-month

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Residential Solar Tariff Approach

Understanding the Residential Solar Bill

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The solar customer is billed on Whole House Consumption under five tier rate schedule. Whole House Consumption is calculated by adding the net energy consumed from the grid to the PV production.

The solar customer is then credited for their PV production at the Value of Solar Rate.

If the Total Current Charges result in a negative amount, a credit will roll forward to the next month’s bill.

Residential Solar Rate Benefits

• Austin Energy Recovers Full Cost of Service• Solar residential customer subject to same billing structure for consumption

and applicable charges as non-solar residential customers • Solar customer can easily assess their total energy consumption• Five tier rate encourages energy efficiency

• Customer Compensation Tied to an Objective “Value of Solar” • The Value of Solar is adjusted yearly as market values change• Solar energy production value does not decrease if customer saves energy• Low and high energy users compensated equally for solar production • Solar energy value consistent, helps customers understand their investment

• Able to Implement in Billing System• Consumption calculated by adding net grid consumption to solar production• Billing design for consumption remains unchanged

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Value of Solar Assessessment Components

Value Component BasisGuaranteed Fuel Value Avoided cost of fuel to meet electric loads and

transmission and distribution losses, based on the solar production profile. This is inferred from ERCOT market price data & guaranteed future natural gas prices.

Plant O&M Value Avoided costs associated with natural gas plant operations and maintenance by meeting peak load through renewable sources.

Generation Capacity Value

Avoided capital costs of generation by meeting peak load through renewable sources, inferred from ERCOT market price data.

Transmission and Distribution Capacity Value

Avoided transmission costs resulting from the reduction in the peak load by renewable sources.

Environmental Compliance Value

Avoided cost to comply with environmental regulations and local policy objectives

VoS & Natural Gas

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Actual Residential Expenditure

• The avoided fuel cost component accounts for over half of the VoS• This component is driven by the projected future price of natural gas• Natural gas futures prices have dropped each of the last 4 years

Natural Gas Futures Prices used for VOS, 2011-2014

VoS addresses several challenges of Net Metering

• Recovers fixed costs

• Improves equity– Between solar

customers– Between solar and

non-solar customers

• Better reflects value of local generation

• Promotes efficiency & conservation

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under NEM