Advanced Topics in geothermal heat exchange

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Why Ground-Source Heat Pumps?. Significantly lowers energy use among the nation's largest GHG/energy sector (buildings)Cost-effectiveLow environmental impactThese should be everywhere. But they're not... Why?. Key Barriers (ORNL). High first cost of GHP systems to consumersLack of consumer kno

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Advanced Topics in geothermal heat exchange

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1. Advanced Topics in geothermal heat exchange Class 1, Part 1: A policy context for thinking about geothermal heat pump technologies Adam Reed, J.D.

2. Why Ground-Source Heat Pumps? Significantly lowers energy use among the nation’s largest GHG/energy sector (buildings) Cost-effective Low environmental impact These should be everywhere. But they’re not... Why?

3. Key Barriers (ORNL) High first cost of GHP systems to consumers Lack of consumer knowledge and/or trust or confidence in GHP system benefits Lack of policymaker and regulator knowledge of and/or trust or confidence in GHP system benefits Limitations of GHP design and business planning infrastructure Limitations of GHP installation infrastructure Lack of new technologies and techniques to improve GHP system cost and performance

4. Key Actions (ORNL) Assemble independent, statistically valid, hard data on the costs and benefits of GHPs Independently assess the national benefits of aggressive GHP deployment Streamline and deploy nationwide REC programs to provide GHP infrastructure Develop and deploy programs to provide universal access to GHP infrastructure Develop the data, analysis, and tools to enable lowest life-cycle cost GHP infrastructure Expand geographic areas where high-quality GHP design infrastructure exists Expand geographic areas where high-quality GHP installation infrastructure exists

5. What Next? Research Data Gathering and Dissemination Loop Tariffs What about expanding geographic access (6 & 7)?

6. Is DMEA’s Loop Tariff Replicable? Where? Brings down first cost for owners. Reduces energy consumption. Why would a utility invest in something that reduces the amount of energy it sells? How is a Co-op different from an investor-owned utility? Co-ops are governed by member-owners, who elect the directors of the Co-op. IOUs are regulated by the Public Utilities Commission.

7. Economics of IOU’s Electric power (and gas too) is a “natural monopoly.” Massive fixed costs = insurmountable barriers to entry for new competitors More efficient for one firm to serve a locality We regulate natural monopolies to achieve lower prices and more service, simulating the results of a perfectly competitive market. Regulators set the rates, and this behavior causes utilities to behave in a peculiar fashion.

8. Rate setting The rate for electricity should equal the utility’s revenue requirements ($ needed to cover operating expenses and cost of capital) divided by the amount of electricity sold: P = R / u These terms are determined in a “rate case”

9. Revenue Requirements R = O + B(r) R= revenue requirement O= operating expenses B= base rate (AKA “plant”) r = rate of return An IOU will fight with regulators over the definition of each one of these terms.

10. Rates are set – now what? The utility may earn more or less revenue in a given year than was expected in the rate case. What happens when the utility sells more electricity, and thus earns more revenue, than expected? What about the opposite occurrence? Pop quiz: you manage an IOU. Simpson, your new VP of sustainability, tells you he has this gonzo plan to reduce electricity use among customers and save the planet. Do you promote Simpson for his ingenuity, or release the hounds?

11. Here’s why: _ P = R / u P is held constant between rate-makings If u increases, the market cannot adjust prices downward until the next rate case. Result: utility windfall. If u decreases, the market cannot adjust prices upward until the next rate case. Result: inability to meet debt service obligations on capital.

12. Legal Basis for Regulation Some industries are “clothed in the public interest”: Property does become clothed in the public interest when used in a manner to make it of public consequence, and affect the community at large. When, therefore, one devotes his property to a use in which the public has an interest, he, in effect, grants to the public an interest in that use, and must submit to be controlled by the public for the common good, to the extent of the interest he has thus created. Munn v. Illinois, 94 U.S. 113, 126 (1877) State legislatures may prescribe regulations on such industries for the common good, and such regulations are not a per se violation of constitutional prohibition against “takings”

13. Limits to regulation of utilities 10th Amendment: powers not granted to the federal government in the Constitution are reserved to the states, or the people. Dormant commerce clause: states cannot discriminate against out-of-state power to favor local industries. Supremacy clause: states cannot regulate where the federal government has “occupied the field.” Procedural due process: states must provide adequate procedural protections for utilities in the regulatory process. Takings clause: states that do not allow the utility to earn a reasonable rate of return will violate the takings prohibition.

14. Colorado’s Public Utilities Commission (PUC) Regulates utilities in the state under the Colorado Constitution and an enacting statute. Assigns territory Sets service standards Regulates retail rates Controls abandonment

15. Legal standards for rate setting Rates must be “just and reasonable.” State courts afford the PUC wide discretion beyond that. Base rate includes only “used and useful” property. Exploitative rates are just as illegal as too-low rates What rate of return? That which permits the utility “to earn a return on the value of property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties; but it has no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures.”

16. Getting Utilities to Play Ball on Efficiency Demand side management incentives: allow utilities to earn higher rates of return on DSM investments than on other investments. (what about rate-payers?) Forward capacity markets (for states that have deregulated): allow power producers and efficiency producers to bid on the spot market to meet the transmission provider’s needs. (efficiency tends to be much cheaper than generation) Decoupling: breaking the link between the utility’s financial viability and the amount of electricity it sells.

17. Discussion What does all of this mean for GSHPs? Is it enough to provide the market with good data about GSHPs, or are the barriers to efficiency inherent in utility regulation indicative of a larger problem that we need to address? How do the prospects for GSHPs differ between electric cooperatives and investor-owned utilities? Should we have different policies as a result?

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