ratemaking for the future · slide 2 background •synapse energy economics is a research and...
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Ratemaking for the Future:Trends and Considerations
MGA Utility Business Model of the Future Meeting
St. Paul
July 14, 2016
Melissa Whited
Synapse Energy Economics
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Slide 2
Background
• Synapse Energy Economics is a research and consulting firm specializing in
energy, economic, and environmental topics.
• Rate design and incentive regulation consulting for public interest clients
(consumer advocates, environmental groups, and public utility commissions).
• Recent Work:
▪ Caught in a Fix: The Problem with Fixed Charges for Electricity. Prepared for Consumers Union. 2016.
▪ Utility Performance Incentive Mechanisms (PIMs): A Handbook for Regulators.Prepared for the Western Interstate Energy Board. 2015.
▪ Demand charges & fixed charges in rate cases: Massachusetts, Colorado, Missouri, Nevada, Utah, Maine
▪ Other rate design work: New York REV docket, Hawaii net metering, California TOU rates
▪ Decoupling dockets: Maine, Hawaii, Nevada, Colorado
▪ Grid Mod dockets: Massachusetts, New Hampshire, Rhode Island
www.synapse-energy.com - Melissa Whited
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Addressing the Challenges
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ResidentialCommercial
Industrial
Total Retail Sales
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14
GW
h
4
Challenges
• Environmental goals
• Integration of distributed generation
• Ensuring DG customers pay their “fair share”
• Integration of EVs
• Declining sales
• Aging infrastructure
Image: G
lenn
ia, Flickr
www.synapse-energy.com - Melissa Whited
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Options
Rate Design
Demand Charges
Time of Use Rates
Fixed Charges
Net Metering
2.0
Minimum Bills
EV Rates
Alternative Regulation
PBR
DecouplingIncentives
5www.synapse-energy.com - Melissa Whited
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Rate Design
www.synapse-energy.com - Melissa Whited 6
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Principles of Rate Design
7
Revenue Adequacy & Stability
Opportunity to recover allowed revenues; stability in revenues from year to year.
Efficient Price Signals
Send appropriate price signals to ensure efficient resource usage
Fairness Rates should apportion costs fairly; avoidance of
undue discrimination
Stability of Rates Changes should be gradual
Practical Considerations
Simplicity, understandability, acceptability
These must be balanced, as they may be in tension.
www.synapse-energy.com - Melissa Whited
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Intersection of Historical and Future Costs
Rate Design impacts
Customer Behavior
Rates Recover
Embedded Costs
Customer Behavior
Drives Future Costs
Utility Revenue Recovery
• Need for T&D upgrades
• Need for additional peaking generation
• Environmental impacts
• Install solar? • Conserve
energy?• When to use
electricity?
www.synapse-energy.com - Melissa Whited 8
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Slide 9
Biggest Concerns
Consumer Advocates
• Fairness• DG customers
should pay their fare share
• Customer control
Environmental Advocates
• Efficient price signals• Encourage
efficient consumption patterns
• Encourage clean energy
Utilities
• Revenue adequacy
• Business model implications
www.synapse-energy.com - Melissa Whited
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Slide 10
Rate Elements
Rate Component Cost drivers
Fixed customer charge$/Customer Month
Recovers customer-related costs (costs of meters, service drops, meter reading, and billing and collecting)
Energy charge$/kWh
Energy-related costs (costs that vary with energy usage)
Demand charge$/kW
Demand-related costs (associated with customer’s maximum demands on system)
www.synapse-energy.com - Melissa Whited
Residential & small commercial
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Trends in Fixed Charges
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Slide 12
Increase Fixed Charges
www.synapse-energy.com - Melissa Whited
Benefits Drawbacks
Simple. Reduces customer control over bills.
Reduces utility’s revenue recovery risks. Penalizes low-usage and low-income users.
Ensures a certain amount of revenue
recovery from each customer, including
DG customers.
Does not send accurate price signals about time or
location of use.
Reduces variable rate, thereby reducing incentives
for DG and energy efficiency.
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13
Proposals to increase the fixed charge
• Many utilities proposing steep fixed charge hikes, with an average proposed increase of 96%• 75 recent fixed charges identified in Synapse’s report
www.synapse-energy.com - Melissa Whited
Legend
No recent proposals
Increase of 1% - 99% proposed
Increase of 100% or more proposed
DC
$55.00Hawaiian Electric Co.
$42.00Redding Electric Utility
$30.00Omaha Public Power District
$29.00Central Hudson Gas & Electric
$21.00Santee Cooper
$25.00Wisconsin Public Service
Source: Synapse Energy Economics, Caught in a Fix, 2016
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14
Fixed Charges Falling out of Favor
www.synapse-energy.com - Melissa Whited
Approved in Full25%
Scaled Back33%
Rejected in Full41%
1
Recent Decisions
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Trends in Minimum Bills
www.synapse-energy.com - Melissa Whited
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Slide 16
Option 2: Minimum bills
www.synapse-energy.com - Melissa Whited
Benefits Drawbacks
Improves revenue recovery.Unless minimum bill is large, may not have much
impact on utility revenue stability.
Ensures that all customers pay for a
minimum amount of system costs.
Low-usage customers (often low-income) may
see their bills increase
Better price signals than a high fixed
charge.
Doesn’t provide more accurate price signals
about timing or location of consumption (or
production) of energy.
• Does not reduce volumetric (energy) charge, but increases bills for NEM customers who offset most or all of their consumption from the grid.
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Slide 17
Minimum Bills in Practice
• Fairly common, but not a long-term solution.
•Hawaii:
▪ Minimum Bill is $17.00
▪ Still needed to change net metering to cope with cost shifting and integration challenges
www.synapse-energy.com - Melissa Whited
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Trends in Time-Varying Rates
www.synapse-energy.com - Melissa Whited
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TOU Pricing; TOU with CPP
www.synapse-energy.com | ©2015 Synapse Energy Economics Inc. All rights reserved.
12:00 AM 6:00 AM 12:00 PM 6:00 PM 12:00 AMEle
ctri
city
Pri
ce (
cents
/kW
h)
Time of Use (TOU) Pricing
TOU Rate
Flat Rate
12:00 AM 6:00 AM 12:00 PM 6:00 PM 12:00 AMEle
ctri
city
Pri
ce (
cents
/kW
h)
Critical Peak Pricing
Flat Rate
Critical Peak
Pricing
CPP pricing is in effect only for “critical event” days when the system is most stressed.
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Slide 20
Time-of-use rates
www.synapse-energy.com - Melissa Whited
Benefits Drawbacks
More accurately reflects the use of system:
Compensates PV more for generation during peak
hours and less during off-peak hours. Encourages
all customers to shift load to off-peak periods.
Must be implemented with significant
customer education and customer
protection measures for vulnerable
groups.
Reasonably simple.
May be difficult and contentious to
determine timing of peak periods and
price differentials
Preserves price signals to encourage efficiency
and DG; preserves customer control
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Slide 21
Penetration of Residential Customers on Time Varying Rates
Source: U.S. Energy Information Administration as of January 2015
www.synapse-energy.com - Melissa Whited
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Slide 22
Moving Toward Time-Varying Rates?
• California to transition to default TOU rates
•Maryland: default Peak Time Rebates
•Arizona: >50% of customers on a TOU rate
•Discussions ongoing across the country:
▪ New York
▪ Minnesota
▪ DC
www.synapse-energy.com - Melissa Whited
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Slide 23
Understanding and Acceptance of TOU
www.synapse-energy.com - Melissa Whited
My Current Rate Plan is Easy to Understand
My Plan Provides Opportunities to Save Money
SMUD Pricing Pilot:• High customer
satisfaction with TOU
• Only 4% drop-out rate
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Trends in Demand Charges
www.synapse-energy.com - Melissa Whited
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Slide 25
Demand charges
www.synapse-energy.com - Melissa Whited
Benefits Drawbacks
May more accurately reflects costs
imposed on system by customer relative to
a flat rate.
Does not recognize the temporal aspect of costs
and benefits related to energy consumption or
production.
Improves utility revenue recovery.Demand charges based on non-coincident peak are
not cost-based for residential customers.
Complex and difficult for residential customers to
respond to.
May effectively act as a fixed charge, reducing
incentives for DG and energy efficiency.
• Imposes a monthly charge based on customer’s maximum demand (possibly limited to peak hours).
• Energy charge is reduced commensurately.
• May increase or decrease bills for NEM customers.
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26
Demand Charges: Nice in Theory?
• 2/3 of utilities with residential demand charges base the charge on a
customer’s non-coincident peak demand.1
• Data for a MA utility show that 60% of individuals’ maximum monthly demands
fell outside of the system peak periods.
• Demand charges concentrate the price signal on one hour, not all peak
hours. TOU rates provide a better signal.
1 Rocky Mountain Institute (2016) A Review of Alternative Rate Designs
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27
A Better Demand Charge?
• Some utilities have residential demand charges that only apply during peak hours, including:
oDuke Energy Carolinas
oArizona Public ServicePeak Hours
Customer A
Customer B
• Does this go far enough?o Customer A and Customer B pay the
same bill under a demand charge.
• Could we do better?
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28
A Better Demand Charge?
Peak Hours
Customer A
Customer B
• TOU rates would • Send a price signal to reduce
demand in all peak hours
• Result in Customer B paying a higher bill than Customer A.
TOU Rate
$/kWh
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29
Impacts on Low Use Customers
• Simulated impact of introducing a demand charge (assuming no change in
usage patterns)
18%
26%
14%
2%
-1%
-6%-10%
-16%
0-199 kWh 200-399kWh
400-599kWh
600-799kWh
800-999kWh
1000-1199kWh
1200-1399kWh
1400+kWh
Average % Change in Bill
Calculated from load data load data for National Grid, Massachusetts.
Flat Rate
Demand Rate
FixedCharge
$10.00 $10.00
$/kWh $0.12 $0.06
$/kW --- $9
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30
Demand Charges in Practice
• Only 25 utilities currently offer
demand charges.
• For most of those utilities,
enrollment is quite low (<1%).
• Where offered, energy-only time-
of-use rates are generally
preferred to demand rates.
• Demand charges may appeal to a
small subset of customers (e.g.,
large residential customers with
ability to control key end-uses).
Arizona Public Service 11%
Black Hills Power 8%
Alabama Power .01%
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31
Recent Residential Demand Charge Proposals
• Demand-charge proxies:
• Rhode Island
• Massachusetts
• Colorado
• Oklahoma
• Proposed a mandatory demand charge
• Draft settlement would create a demand charge pilot, but not a mandatory rate
• Arizona
• UNS: Dropped demand charge proposal for non-solar customers
• APS: June 2016 proposal for time-limited demand charges for most customers
Proposals universally opposed by intervenors
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Trends in Net Metering
www.synapse-energy.com - Melissa Whited
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Slide 33
Net Metered Capacity
www.synapse-energy.com - Melissa Whited
Source: US Energy Information Administration as of January 2015
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Slide 34
Proposed or Enacted Changes to Net Metering Policies in 2015
Source: NC Clean Energy The 50 States of Solar
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Slide 35
Net Metering Modifications and Payback Periods
State Policy Payback (Years) Before Policy
Payback (Years) After Policy
AZMandatory demand
charges14 26
HIReduced payment for excess generation & higher fixed charge
6 7
MAIncreased fixed
charge4.5 4.7
NVIncreased fixed
charge & reduced payment for excess
11 21
Melissa Whited– Synapse Energy Economics
Initial, draft results:
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Slide 36
Considerations Before Implementing NEM 2.0
• Is there a demonstrated problem?
▪ Utility revenue adequacy?
• Can be addressed through decoupling
▪ Cost-shifting?
• Has a thorough analysis been conducted?
• Does the analysis account for the long-term benefits provided by DG?
• Are there opportunities for low-income solar, community solar, or municipal solar?
• What impact will NEM 2.0 have on DG adoption?
▪ Many states implemented NEM to support DG development.
▪ Payback periods should be modeled to understand the implications on DG adoption of a NEM 2.0 rate.
www.synapse-energy.com - Melissa Whited
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Trends in Electric Vehicle Pricing
www.synapse-energy.com - Melissa Whited
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38
EV Context
• EV market growing throughout US
▪ AEO 2015 projects PEV stock increasing by factor of 5 from 2015 to 2030
• EVs have potential to reduce emissions cost-effectively
But…
• EV benefits depend on when they charge, what powers them
▪ Powering with coal increases GHGs and local pollutants
▪ Powering on-peak could result in significant capacity, distribution, and generation costs relative to powering off-peak
www.synapse-energy.com - Melissa Whited
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EV Rates
• California
• SDG&E
• PG&E
• SCE
• SMUD
• New York
• Con Edison
• Nevada
• NV Energy
• Michigan
• Detroit Edison
• Consumers
• I&M
• Arizona
• Arizona Public Service
• Alaska
• Alaska Electric Light & Power
• Georgia
• Georgia Power Company
• Hawaii
• HECO
• Indiana
• Indianapolis Power & Light
• Kentucky
• KU Energy
• LG&E
• Virginia
• Dominion Virginia Power
www.synapse-energy.com - Melissa WhitedSlid
e 39
Many utilities around the country offer residential EV TOU rates
It works!Most charging
occurs during off-peak hours.
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40
Demand Charges & EVs
•Workplace Charging During Daytime
• But most C&I customers have a demand charge
▪ = Strong disincentive to charge multiple vehicles
www.synapse-energy.com - Melissa Whited
EVs could help offset solar overgeneration
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Slide 41
EV Rate Innovation
• SCE offers C&I EV TOU rates, which enable workplaces to avoid crippling demand charges
• SDG&E testing hourly location-specific rates
• V2G (Vehicle to Grid Integration)
▪ BMW aggregates EVs to provide grid services in Bay area
▪ eMotorWerks absorbs excess energy on grid and provides dispatchable demand response. Savings shared with EV owners.
www.synapse-energy.com - Melissa Whited
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Regulatory Responses
Slide
42www.synapse-energy.com - Melissa Whited
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Alternative Regulation
• Revenue Decoupling
▪ Addresses revenue adequacy concerns
• Performance-Based Regulation
▪ Performance incentives can provide new revenue streams
▪ RIIO Totex Approach
• Utilities earn a return on a portion of total expenses, regardless of whether they are capital or O&M expenses
• Reduces incentive to invest in capital
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Slide 44
Revenue Decoupling
• Common approach to addressing utility incentive to sell more electricity
• Under discussion in several states, including MO, CO, NV
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Source: Lowry et al., Alternative Regulation, 2015.
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Performance Incentive Mechanisms
1. Identify dimensions of utility performance to track
3. Set a performance target
2. Develop metrics for tracking and reporting performance
4. Add a financial reward or penalty
Performance Metrics
Performance Incentive Mechanisms
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PIMs can be implemented incrementally, allowing for flexibility
Whited, et al. (2015) Utility Performance Incentive Mechanisms (PIMs): A Handbook for Regulators. Available at www.synapse-energy.com
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Pitfalls to Avoid
Undue
rewards or
penalties
• Excessive rewards (or penalties) undermine the whole concept of incentive
mechanisms.
• Potential solutions:
• Use an incremental approach: start low and monitor over time.
• Careful PIM design (e.g., shared savings).
Unintended
consequences
• An incentive for one performance area may cause the utility to under-
perform in areas that do not have incentives.
• Potential solutions:
• Focus on performance areas that are isolated from others.
• Be cautious of implications for other performance areas.
• Consider implementing a diverse, balanced set of incentives.
Regulatory
burden
• PIMs can be too costly, time-consuming, or too much of a distraction.
• Can be a problem for utilities, regulators, and stakeholders.
• Potential solutions:
• Streamline using existing data, protocols, and simple designs.
• Reduce the amount of money at stake.
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Pitfalls to Avoid
Uncertainty • Metrics, targets, and financial consequences that are not clearly defined
reduce certainty, introduce contention, and are less likely to achieve
policy goals.
• Potential solutions:
• Carefully specify metric and target definitions, soliciting utility and
stakeholder input where possible.
• Adjust targets and financial consequences only cautiously and
gradually so as to reduce uncertainty and encourage utilities to
make investments with long-term benefits.
Gaming and
Manipulation
• Utilities may have an incentive to manipulate results.
• Potential solutions:
• Identify verification measures.
• Consider using independent third parties (that are not selected or
paid by the utility) to collect or verify data.
• Avoid complex data analysis techniques that are difficult to audit
and reduce transparency.
Whited, et al. (2015) Utility Performance Incentive Mechanisms (PIMs): A Handbook for Regulators.
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Contact
About Synapse Energy Economics• Synapse Energy Economics is a research and consulting firm specializing in
energy, economic, and environmental topics. Since its inception in 1996, Synapse has grown to become a leader in providing rigorous analysis of the electric power sector for public interest and governmental clients.
• Staff of 30+ experts
• Located in Cambridge, Massachusetts
www.synapse-energy.com - Melissa Whited Melissa Whited
Melissa Whited
Synapse Energy Economics
617-661-3248
www.synapse-energy.com