valuation of nem solar: a wholesale power market perspective

Draft Confidential - Attorney Client Privilege

Valuation of NEM Solar: A Wholesale Power Market Perspective

November 21, 2019

Jon Olson, DirectorEnergy Trading & Contracts

November 21, 2019 1

Agenda – NEM solar valuation, a wholesale power market perspective

2

• Glossary

• Background information - the grid and NEM solar integration

• Operational characteristics of NEM solar

• Factors to consider in wholesale power market valuation: - Energy- Capacity- Financial risk management

• Examples illustrating the factors using SMUD metered data*

• Summary* Actual metered energy production data from utility scale solar and large scale, NEM solar commercial customers are used to present concepts. Examples are provided to illustrate the valuation of all resources solely from the wholesale power market perspective, and the wholesale power market perspective is just one of several aspects of NEM solar valuation.

November 21, 2019

Glossary

3

• Ancillary services – Market products that are used to maintain grid stability and reliability• Automatic Generation Control (AGC) – Equipment that automatically adjusts power output of generating units to

maintain system reliability• Balancing Authority – The responsible entity that integrates resource plans ahead of time, maintains demand and

resource balance within a Balancing Authority Area, and supports interconnection frequency in real time• Balancing Authority of Northern California (BANC) – An entity providing balancing services to 7 organizations• California Public Utility Commission (CPUC) – An entity that regulates privately owned utility companies in California• Capacity – The maximum output an electricity generator, demand-side resources or batteries can deliver to a grid over a

specific period of time, measured in megawatts (MW) or kilowatts (kW)• Enhanced day ahead market (EDAM) - A market in development that seeks to maintain reliability, as the penetration of

variable energy resources increases• Energy Imbalance Market (EIM) - a real-time bulk power trading market that improves the integration of variable energy

resources because of its wide geographic area and its 5 minute real-time dispatch • Electricity – A form of energy • Energy – The amount of electricity produced by a generator, consumed by a customer, or stored by a battery over a

specific period of time and measured in megawatt-hours (MWh) and kilowatt-hours (kWh)• Federal Energy Regulatory Commission (FERC) – An agency that regulates the energy industry• Financial risk management – The process of understanding and managing financial risks that a business faces• Generator, electricity – An asset that converts energy into electricity (e.g. hydro-electric generators, wind turbines, solar

generators and natural gas generators)• NEM – Net energy metering• North American Electric Reliability Corporation (NERC) - A regulatory body that assures grid reliability and security• Power – The output an electricity generator, demand resources or batteries deliver to a grid, measured in megawatts (MW)

or kilowatts (kW)• Power Plant – An asset that provides electricity to the grid • Power portfolio – SMUD owned power plants, transmission lines, contracts and retail electricity consumption obligations

managed by SMUD to provide safe, reliable electricity at affordable rates to SMUD customers • Resource adequacy capacity–Capacity requirements set by the CPUC to ensure sufficient capacity to meet peak demand• Regulation down – An ancillary service in which a generator receives an automated signal to decrease output• Regulation up – An ancillary service in which a generator receives an automated signal to increase output• System demand – The amount of power provided by SMUD to meet customer electricity use, including electricity travel

losses, over a specific time interval measured in megawatts or kilowatts • System supply – A portfolio of assets available to meet system demand • Western Electricity Coordinating Council (WECC) – An organization that has been delegated to assure grid reliability

and security of the Western Interconnection’s Bulk Power System• Western Interconnection Bulk Power System – This system includes more than 35 balancing authorities and spans 14

western states and parts of Mexico and CanadaNovember 21, 2019

Background information

November 21, 2019 4

80 kW installed near SMUD’s electric charging station

What is the grid?

November 21, 2019 5

SMUD’s grid is part of the Western Interconnection’s Bulk Power System

November 21, 2019 6

Western InterconnectionBalancing Authority

of Northern California (BANC)

SMUD

NEM Solar

To reliably meet system demand, SMUD balances supply and demand every 4 seconds

November 21, 2019 7

System supply

System demand=

Hydro-electric and natural gas power plants have automatic generation control (AGC) to automatically maintain supply and demand balance.

Similar to cruise control on a car, the speed is set, and the motor adjusts to maintain the speed.

hydro-electric

naturalgas

wind

solar

NEM

Operational characteristics of NEM solar

November 21, 2019 8

12 kW installed at SMUD’s Customer Service Center

As the sun rises, solar energy increases, power system demand decreases

November 21, 2019 9

Power system demand

Power systemsupply

When NEM solar produces energy, SMUD’s power system demand

decreases To balance the system, SMUD’s power plants

reduce energyproduction

To meet reliability standards

demand = supply

As the sun sets, solar energy decreases, power system demand increases

November 21, 2019 10

To balance the system, SMUD’s power plants

increase energy production

Power system demand

Power systemsupply

NEM solar energy production decreases,

increasing power system demand


demand = supply

Solar energy production is variable, impacting SMUD’s system demand


To balance the system, SMUD’s power plants

increase energy production

Power system demand

Power systemsupply

NEM solar energy production decreases with cloud cover, fog

and smoke, increasing power system demand


demand = supply

My rooftop NEM solar energy production –actual metered data - sunny versus cloudy day

12November 21, 2019

Like car engines, generators that ramp up and ramp down incur costs


City Driving Highway Driving

More starts and stops Fewer starts and stops

Speed changes frequently Speed changes periodically

Harder on the engine Easier on the engine

Requires more gas for each mile Requires less gas for each mile

City driving costs more than highway driving

It costs more to operate a power grid

that has variable energy resources.

Power market valuation of NEM solar


Wholesale power market value of NEM solar

15

• What is the wholesale power market?

• Energy value of NEM solar

• Capacity value of NEM solar

• NEM solar impact on financial risk management

November 21, 2019

The wholesale power market is key to managing SMUD’s power portfolio


Transmission linesnatural

gaswindsolar

hydro-electric

SMUD owned assets

The wholesale power market

Customer energy demand

Available productsEnergyCapacityAncillary Services(Regulation up/regulation down)

NEM

Illustrative: Day-ahead wholesale power market


hourlysystemdemand The day

before the operating day,

system demand

and system supply

balance hourlygiven

forecasts

Total consumption

During the operating day, conditions vary from the forecast and the portfolio is rebalanced


Factors impacting Demand Factors impacting SupplyTemperature Temperature

Clouds Clouds

Wind Wind

Distribution outages Power plant outages

Smoke Natural gas prices

Customer behavior Hydro runoff

Transmission Limitations

During the operating day, SMUD participates in the Western Energy Imbalance Market (EIM)

19

• SMUD began participating in April of 2019• Entered market to help integrate renewables• 9 participants (orange in map)• 5 minute, automated market• Price incorporates the cost of carbon• Day ahead market redesign, EDAM, is next

major step for integrating more renewables

EIM market participants – orange are current

Take away: SMUD is committed to renewable integration and EIM helps SMUD maximize the value of every dollar SMUD spends

November 21, 2019

Net wholesale power market energy value

20

Wholesale power market energy value

NEM energy ongoing

integration costs

Net wholesale

power market energy value

Benefit Cost

November 21, 2019

Illustrative benefit: energy imbalance market valuation of delivered energy given 5 minute prices

21November 21, 2019

0.00

0.01

0.02

0.03

0.04

0.05

0

50

100

150

200

250

300

350

400

450

500

11:00 AM

11:05 AM

11:10 AM

11:15 AM

11:20 AM

11:25 AM

11:30 AM

11:35 AM

11:40 AM

11:45 AM

11:50 AM

11:55 AM

Energy imbalance m

arket price ($/kWh)

Ener

gy (

kW)

10/16/2019 NEM commercial customer energy production(500 kW installed capacity)

Energy Production 5 minute wholesale energy price

Illustrative cost - ongoing integration costs of solar

22

City driving versus

highway driving

November 21, 2019

0

50

100

150

200

250

300

350

400

450

500

11:00 AM

11:05 AM

11:10 AM

11:15 AM

11:20 AM

11:25 AM

11:30 AM

11:35 AM

11:40 AM

11:45 AM

11:50 AM

11:55 AM

Ener

gy (

kW)

Solar energy production variesCustomer electric consumption is flat

SMUD power plants ramp up and ramp down to balance

Solar energy consumed by customer SMUD supplied energy consumed by customer

Solar surplus energy fed back to grid Illustrative customer electric consumption

Net wholesale power market capacity value

23

Less resource adequacy capacity

More intra-hour

flexible capacity

Net wholesale

power market

capacity value

Benefit Cost

November 21, 2019

Illustrative benefit: resource adequacy capacity need is less with NEM solar


Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Mon

thly

Res

ourc

e A

dequ

acy C

apac

ity N

eed

(MW

)

Residual resource adequacy capacity need NEM solar contribution

Illustrative cost: NEM solar increases the need for flexible resource capacity within the hour


230kW

300kW

370kW

375kW

0

50

100

150

200

250

300

350

400

450

500

11:00 AM

11:05 AM

11:10 AM

11:15 AM

11:20 AM

11:25 AM

11:30 AM

11:35 AM

11:40 AM

11:45 AM

11:50 AM

11:55 AM

Ener

gy (

kW)

Solar energy consumed by customer SMUD supplied energy consumed by customer

Solar surplus energy fed back to grid Illustrative customer electric consumption = 325 kW

140 kW downward flexibility

needed on grid

(370-230)

75 kW upward flexibility needed on grid

(375-300)

NEM solar impacts SMUD’s management of financial risk


Fuel price risk

Energy price volatility & higher cost investment

plan

Risk DecreasesRi

sk in

crea

ses

Fuel price risk: NEM solar energy reduces SMUD’s financial exposure to fuel prices


Financial risk to the price of natural gas of portfolio #1

Financial risk to the price of natural gas of portfolio #2

More solar energy production = More fuel diversity

SolarSolar

Natural Gas

WindHydro

WindHydro

Natural Gas

>

Energy risk impact: NEM solar energy increases energy price risk


Price

Quantity

Solar energy production is variable, increasing price volatility

Supply curve

Demand curveat 5:00 pm

Demand curveat 6:00 pm

P2P1

Q2Q1

12

Energy risk impact: NEM solar energy increases energy price risk


Price

Quantity

Supply curve

Demand curve at12:00 pm on asunny May day

Demand curve at 6:00 pm$ 0

P3

Q43

4

Energy prices go negative when power plants that are needed to meet system demand later in the day cannot reduce output and are forced to bid lower than their marginal cost

P4Q3

Illustrative: wholesale energy prices do go negative, May 5, 2019


When prices go negative, SMUD pays

twice

Once to produce the energy, and once to sell it into the

market-0.02

-0.01

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

1:00 AM

2:00 AM

3:00 AM

4:00 AM

5:00 AM

6:00 AM

7:00 AM

8:00 AM

9:00 AM

10:00 AM

11:00 AM

12:00 PM

1:00 PM

2:00 PM

3:00 PM

4:00 PM

5:00 PM

6:00 PM

7:00 PM

8:00 PM

9:00 PM

10:00 PM

11:00 PM

12:00 AM

Energy P

rice ($/kWh)ki

low

att-h

ours

(kW

h)

Forecast energy - large commercial NEM solar (kWh)Actual energy - large commercial NEM solar (kWh)Energy price ($/kWh)

$0.12

$0.16

$0.28

$0.00

$0.035

-0.020.000.020.040.060.080.100.120.140.160.180.200.220.240.260.280.300.320.34

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1:00 AM

2:00 AM

3:00 AM

4:00 AM

5:00 AM

6:00 AM

7:00 AM

8:00 AM

9:00 AM

10:00 AM

11:00 AM

12:00 PM

1:00 PM

2:00 PM

3:00 PM

4:00 PM

5:00 PM

6:00 PM

7:00 PM

8:00 PM

9:00 PM

10:00 PM

11:00 PM

12:00 AM

$/kWh

kilo

wat

t-hou

rs (k

Wh)

Large commercial NEM solar energy on 5/5/19 (MWh)SMUD's residential time of day rate/NEM 1.0 cost ($/kWh)Energy price ($/kWh)Cost for local utility scale solar ($0.035/kWh)

Energy risk impact: Higher cost investment plan since NEM costs more than utility scale solar


Similarpower market benefitfor less

withutility scale solar

Examples using metered data from large scale solar to illustrate valuation factors


15 kW installed at SMUD’s Customer Service Center

Examples that illustrate factors that capture the power market value of NEM solar


0

200

400

600

800

1,000

1,200

1,400

12:00AM

06:00AM

12:00PM

06:00PM

12:00AM

06:00AM

12:00PM

06:00PM

12:00AM

06:00AM

12:00PM

06:00PM

Syst

em D

eman

d (M

W)

All other supply System demand

October 14, 2019 October 15 October 16

0

200

400

600

800

1,000

1,200

1,400

12:00AM

06:00AM

12:00PM

06:00PM

12:00AM

06:00AM

12:00PM

06:00PM

12:00AM

06:00AM

12:00PM

06:00PM

Syst

em D

eman

d (M

W)

All other supply Commercial NEM large solar & utility scale solar System demand


Illustrative: Large scale solar energy production varies


1% drop in solar

energy production

from October 14

41% drop in solar

energy production

from October 15

Illustrative: Other plant adjusts output to counterbalance solar energy variability


0

200

400

600

800

1,000

1,200

1,400

12:00AM

06:00AM

12:00PM

06:00PM

12:00AM

06:00AM

12:00PM

06:00PM

12:00AM

06:00AM

12:00PM

06:00PM

Syst

em D

eman

d (M

W)

Flexible power plant All other supply less flexible resource

Commercial NEM large solar & utility scale solar System demand

October 14, 2019 October 15, 2019 October 16

Energy production from a flexible power plant decreases during solarenergy production

Illustrative: NEM integration costs are captured by the change in plant efficiency


6.6

6.8

7.0

7.2

7.4

7.6

7.8

8.0

0

100

200

300

400

500

600

700

800

12:00AM

06:00AM

12:00PM

06:00PM

12:00AM

06:00AM

12:00PM

06:00PM

12:00AM

06:00AM

12:00PM

06:00PM

Plant efficiency (MM

Btu/MW

h)

Plan

t out

put f

rom

bal

anci

ng p

lant

(M

W)

Flexible power plantPlant heat rate - the amount of natural gas required for each unit of energy


Less efficient energy

production & higher

marginal carbon

emissions

More efficient energy

production & lower

marginal carbon

emissions

Illustrative: The efficiency of the balancing plant is lower when solar energy is producing


6.6

6.8

7.0

7.2

7.4

7.6

7.8

0

20

40

60

80

100

120

12:00AM

06:00AM

12:00PM

06:00PM

12:00AM

06:00AM

12:00PM

06:00PM

12:00AM

06:00AM

12:00PM

06:00PM

Balancing P

lant Efficiency (M

MB

tu/MW

h)

Pla

nt o

utpu

t fro

m m

eter

ed s

olar

pla

nts

(MW

) October 14, 2019 October 15 October 16Less

efficient energy

production & higher

marginal carbon

emissions

More efficient energy

production & lower

marginal carbon

emissions

Lower plant efficiency increases energy production costs and carbon emissions


October 14 October 15 October 16

All other hours

All other hours

All other hours

Plant efficiency Lower Higher Lower Higher Lower Higher

EnergyCost Increase

Energy costis 2.8% higher

during solar hours


during solar hours


during solar hours

Carbon Difference

3% more carbon/MWh

during solar hours

1.6% more carbon/MWh

during solar hours

0.8% more carbon/MWh

during solar hours

Fuel price risk

Risk Decreases

NEM solar reduces SMUD’s financial exposure to fuel prices


Illustrative: fuel diversity improves with more solar energy production


0

200

400

600

800

1,000

1,200

1,400

12:00AM

06:00AM

12:00PM

06:00PM

12:00AM

06:00AM

12:00PM

06:00PM

12:00AM

06:00AM

12:00PM

06:00PM

Syst

em D

eman

d (M

W)

Natural gas energy production All other supply

Commercial NEM large solar & utility scale solar System demand

October 14, 2019 October 15, 2019 October 16

Natural gas energy production is

10% less

Solar is 70% higher

Energy price

volatility

Risk

incr

ease

s

NEM solar increases energy price risk


Illustrative: Solar energy impacts the wholesale energy market price


0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0

200

400

600

800

1,000

1,200

1,400

12:00AM

06:00AM

12:00PM

06:00PM

12:00AM

06:00AM

12:00PM

06:00PM

12:00AM

06:00AM

12:00PM

06:00PM

Energy im

balance market 5 m

inute prices ($/kWh)

Syst

em D

eman

d (M

W)

All other supply Commercial NEM large solar & utility scale solarSystem demand 5 minute energy price


0

10

20

30

40

50

60

70

80

90

100

110

12:00 AM

1:00 AM

2:00 AM

3:00 AM

4:00 AM

5:00 AM

6:00 AM

7:00 AM

8:00 AM

9:00 AM

10:00 AM

11:00 AM

12:00 PM

1:00 PM

2:00 PM

3:00 PM

4:00 PM

5:00 PM

6:00 PM

7:00 PM

8:00 PM

9:00 PM

10:00 PM

11:00 PM

Ener

gy im

bala

nce

mar

ket e

nerg

y pr

ice

($/M

Wh)

10/14/2019 EIM energy prices 10/15/2019 EIM energy prices10/16/2019 EIM energy prices

Prices vary moreduring hours of solar energy production

Market prices vary more during hours of solar energy production


Illustrative: market price volatility is higher during hours of solar energy production


October 14 October 15 October 16

All other hours

All other hours

All other hours

Mean Price 27 35 34 38 34 36

Standard Deviation 8 6 15 5 9 4>>>

Wholesale energy price is lower

Wholesale energy price is more

volatile

Mean price decreases

Pric

e vo

latil

ity in

crea

ses

During solar energy production hours

Summing it up…


NEM solar valuation -The power market perspective


Energy

Benefit: Provides energy to grid

Cost: Incurs ongoing grid integration costs

Cost: Higher marginal carbon emissions (Valuation discussed further during meeting #4)

CapacityBenefit: Contributes to resource adequacy capacity needs

Cost: Increases need for intra-hour flexible capacity

Financial Risk

Benefit: Reduces fuel price risk

Benefit & Cost: Increases energy price volatility

Cost: NEM solar costs more than local, utility scale solar

valuation of nem solar: a wholesale power market perspective

Documents