innovations in utility business models and regulation camput 2015 energy regulation course june 23,...
TRANSCRIPT
Innovations in Utility Business Models and Regulation
CAMPUT 2015 Energy Regulation Course
June 23, 2015
Kingston, Ontario
© 2015 Concentric Energy Advisors, Inc. All rights reserved.
Discussion Topics
1. Why are regulators interested in changing the utility business model and regulatory framework?
2. How might the role of the distribution utility change?
3. What changes in regulation and ratemaking are being contemplated?
4. What are non-utility stakeholders looking to gain?
5. What is the potential impact for utilities in terms of fixed cost recovery, earnings, and growth opportunities?
6. Will customers and “society” be better off?
7. Examples
• New York’s Reforming the Energy Vison (“REV”)
• Ofgem’s Low Carbon Networks
• US Utility Investments in Gas Supply
2 Concentric Energy Advisors, Inc.
Electricity Industry Change Drivers • Declining costs and improved efficiency of emerging energy
technologies• IT/IS: ability to manage “big data”• Ability to monitor and control flows on distribution networks
Technology & Innovation
• Active engagement of stakeholders in energy development with NIMBY now redefined to imply “not on my planet”
• Willingness of policy makers (and some customers) to pay more for green
Concern for the Environment
• Frustration with FERC electricity capacity market outcomes Wholesale Markets
• Competition among certain states to be “first” in the United States, inspired by RIIOPolicy-Maker Leadership
• Diminishing tolerance for outages• Desire to lower energy costs• Increased responsiveness to new products and services
Customers
• 4-6% CapEx growth (much of it non-revenue producing) vs. 1% sales growthCapEx > Sales
3 Concentric Energy Advisors, Inc.
New York’s REV Policy Objectives and Value Proposition
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Engage & Empower
Customers
Create Markets for Distribution
P&S
Improve System
Efficiency
Fuel and Resource Diversity
System Reliability
and Resiliency
Reduce Carbon
Emissions
Supply
Distribution Market
Customers
Clean
• Lower wholesale prices in the NYISO by flattening customer loads through DERs and Time-Varying Rates
• Reduce the amount of electricity purchased from the NYISO and replace peak capacity plants with DERs
• Invest in Smart Grid technologies: smart meters, distribution automation, and network communications
• Invite third-party proposals to address network constraints (“non-wires alternatives”)
• Create real-time markets for third parties and customers to sell services to the “Distributed System Platform” and generate fee-based revenues for new DSP services
• Promote widespread deployment of cost-effective DG and other DERs
• Encourage third-parties to sell innovative products and services to customers
• Reduce customer energy expenditures
• Replace carbon-emitting fuels with solar power, energy efficiency, large scale renewable resources and clean DERs
Policy Objectives
Energy Bill Components
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Breadth of REV Issues to be Resolved
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DSPPlatform
Services & Pricing
REV Outcomes
New Infrastructure
Regulation & Ratemaking
DER & Large Renewable Ownership
PromoteInnovation
Substantial T&D Investment Required
New Regulatory & Business Models
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The array of REV obligations, processes and working groups is placing incredible demands on the Commission and all stakeholders
REV Track 1
REV Track 2
Non-Wires Alternatives
Demonstration Projects
Large Scale Renewables
Microgrids
Technology Platform
Market Design
Tariffs
Contracts
Affiliate Codes of Conduct
Energy Efficiency
Benefit Cost Analysis
Consumer Protection
Dispute Resolution
Interconnection
DG Emissions Rules
Digital Marketplace
Energy Billing
Low & Moderate Income
Net Metering
Community Choice Aggregation
Clean Energy Fund
NY Sun
Energy Affordability
REV Proceeding (Utility Obligations)
REV Proceeding (Stakeholder Groups)
REV Proceeding (Staff-Led Initiatives)
Other Related Proceedings
6 Concentric Energy Advisors, Inc.
Dual-Track Regulatory Process (Track 1)
Track 1 is focused on development of the Distributed System Platform (“DSP”) model. The Order on Track 1 was issued on February 26 th but most details are being worked out through stakeholder collaborative processes.
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⦁ The utility will be the DSP provider and serve three roles:
1. Market operations
2. Grid operations
3. Integrated system planning
⦁ Utility ownership of DG is restricted to markets unlikely to be served by competitive suppliers
⦁ Utilities were required to propose “non-wires alternatives” by May 1
⦁ Utilities must propose demonstration projects to test new business models by July 1
⦁ Several working groups have been established to focus on technical details related to the development of a benefit-cost framework for REV, the integration of DERs in Grid planning and operating decisions, the establishment of markets for DER and the development of supporting information systems
⦁ Utilities to file DSP implementation plans by January 15, 2016
Track 1: Distributed System Platform
Utilities will serve as the DSP
providers, coordinating
customer activities, and
supporting competitive
energy service providers that
offer value-enhancing services.
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Outcomes-Based Ratemaking
• Performance metrics
• Targets
• Incentive/ penalty mechanisms
Long-Term Rate Plans
• “Optimal” CapEx plans and cost recovery
• Equity returns
• May have RIIO attributes
Rate Design
• Address net metering and fixed cost recovery issues
• Reflecting externalities in rates
• Pricing innovative services
Dual-Track Regulatory Process (Track 2)
Track 2 will evaluate regulatory changes and ratemaking issues that must be considered in order to establish a new cost recovery and revenue framework for the electric utilities. A Staff Straw Proposal this summer will invite comments with an order later this year.
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Track 2: Regulatory Framework & Ratemaking Issues
The utilities (and Wall Street) are
interested in how these three
elements will work together to
provide compensatory
returns on equity
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Stakeholder Perspectives
Solar Industry
• It may not be necessary to invest a lot in the distribution network – greater clarity regarding locations where solar has the greatest value will help direct installations to where they are needed. Compensation should reflect this value and any other sources of value, including carbon
Third-Party P&S Providers• Protect new markets by keeping utilities
out of any potentially profitable businesses
• Utilities should be required to provide third-party providers with customer and system information at low (or no) cost
Environmental Advocates• Pay for carbon as a price signal that will
help replace dirty gas peakers with energy efficiency and solar power
Energy Efficiency Providers
• Concerned about the substitution of market solutions for utility-sponsored EE programs
Industrial Customers• Worried about rates
Low-Income Customers• Representatives of this customer group are
concerned that they will not benefit from REV, and are more likely to be harmed by REV particularly if a greater proportion of fixed costs are recovered through customer charges
Technology Vendors• Interested in selling equipment and
information services to utilities
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Impact on Electric Distribution Utilities
Responsibilities and Accountability• Potential for separation of
the DSP function or future transfer to a third party
• Confined to serving markets that are not attractive to competitive suppliers
• Potential erosion of the relationship with customers
• Accountable for outcomes not entirely within utility control
• Utilities may be on the hook if distribution system reliability suffers as a result of reliance on third-party solutions
Fixed Cost Recovery• Increased attention to
fixed cost recovery is likely to lead to improved rate designs featuring demand charges and/or higher customer charges
• Cost-shifting and subsidies will be exposed in the new framework
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Earnings and Growth• There is no clear path to
earnings growth, particularly if political pressures result in a desire to limit distribution rates (and rate base investments) rather than focusing more holistically on total energy bills
• Potential for earnings if focus shifts from cost recovery to value of services provided by the utility
• Limited opportunity to own DERs
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The Ultimate Question: Will Customers Benefit?
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Changes to distribution network planning and operations must not result in a policy-induced deterioration of reliability
Continued reliability & enhanced network resiliency
There may be a timing gap between investments (and costs) to implement REV and energy bill savings
Lower total energy bills
Affordable electricity service for residential customers
Creative solutions will likely be required to achieve broad public support for REV
It is likely that “clean” will be more expensive, either through compensation for carbon or some other means
Acknowledged value for an improved environment
New products and services will require that third-party providers show up and remain committed to the market – even though they lack the “obligation to serve”
Direct or indirect benefits from new products and services
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Case Study: Low Carbon London
12 Concentric Energy Advisors, Inc.
Sponsor UK Power Networks
Program Funding
Ofgem’s Low Carbon Networks (LCN) Fund (precursor to the NIA and NIC programs ) allows up to £500m to support projects sponsored by the Distribution Network Operators to try new technology, operating and commercial arrangements, and an annual competition for up to £64 million to help fund a small number of flagship projects.
TargetThe highest concentration of electricity demand and CO2 emissions in Great Britain, and the most demanding carbon reduction targets (60% of 1990 levels by 2025) for London.
Project Funding4 year innovation project co-funded by LCN £21.7 million and £6.6 million from UK Power Networks and 3rd party project partners
ApproachThe project brought together some of the best low carbon skills and capabilities available in forming the overall project team drawn from both UK Power Networks and project partners.
Results
• Dynamic time of use tariff trial• Wind-integration trials with both residential and I&C customers• Active smart management of EV charging to effect peak load shedding• Implementation of project learning directly into UK Power Networks ED1 business
plan • Creation of largest contiguous smart meter dataset in GB• Largest household energy use and appliance survey for over 30 years• Pioneering work on distribution system state estimation
Potential Impacts
The project sponsors estimate £9.5bn of gross benefits for GB, of which £1.0-2.0bn expected to accrue to DNOs from their making use of flexible demand and the remaining £7.5 - £8.5bn to the electricity system more broadly as a result of avoided carbon emissions and carbon penalties.
Case Study: Utility Investment in Long-Term Gas Supply
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Northwest Natural
NorthWestern
XcelBlack Hills
Questar
FPLSouthern
Duke
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Utilities Investing in Long-term Gas Supply
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Case Study: Rationale for Utility Investment in Gas Supply
• Gas and electric utilities are incorporating upstream resources into rate base to serve as a physical and financial hedging tool
• Addresses greater reliance on natural gas as a fuel of choice
• Longer-term financial hedging vehicles are available, but come with credit and collateral obligations
• Producers are cash-constrained and more willing to engage with creditworthy utilities
• Regulators in several states have approved upstream investments on a cost-of-service basis where customer benefits are evident
15 Concentric Energy Advisors, Inc.
Concentric Energy Advisors
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James M. Coyne, Senior Vice President, is an industry
expert who provides financial, regulatory, strategic, and
litigation support services to clients in the power and gas
utilities industries. Drawing upon his industry and
regulatory expertise, he regularly advises utilities, public
agencies and investors on business strategies, investment
evaluations, cross-border trade, rate and regulatory policy,
capital cost determinations, valuations, fuels and power
markets. He is a frequent speaker and author of numerous
articles on the energy industry and regularly provides
expert testimony before federal, state and provincial
jurisdictions in the U.S. and Canada.
He testifies on matters pertaining to the cost of capital,
capital structure, business risk, alternative ratemaking
mechanisms and regulatory policy. Prior to Concentric, Mr.
Coyne worked in senior consulting positions focused on
North American utilities industries, in corporate planning
for an integrated energy company, and in regulatory and
policy positions in Maine and Massachusetts. Mr. Coyne
holds a B.S. in Business from Georgetown University with
honors and an M.S. in Resource Economics from the
University of New Hampshire.
Concentric Energy Advisors, Inc.
Concentric Energy Advisors
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Transaction & Financial Advisory
Energy Market Analysis
Regulatory Policy, Support and Ratemaking
Management and Operations
Litigation Support
• Concentric is a management consulting and financial advisory firm focused on the North American energy industry.
• We offer a broad range of advisory and support services, and our expertise spans all aspects of the natural gas, power, and oil markets.
• Our workforce is comprised of energy industry experts who have held positions with utility companies, state and federal regulatory agencies, energy marketers, and global energy companies.
Our services span five major practice areas
Concentric Energy Advisors, Inc.