Should utilities own distributed generation?

1. Should utilities own distributed generation? Restructuring Roundtable December 8, 2006 Presented by: John Nimmons, J.D. Lead Consultant, DER Incentives Project EPRI DER Public/Private Partnership 415.381.7310 jna@speakeasy.org

2. ‘Creating & Demonstrating Utility DER Incentives’ Collaborative Sponsors & Participants • Government & Research • Mass. Div. of Energy Resources • Mass. Technology Collaborative • Mass. Dept. of Telecomm & Energy • California Energy Commission • Electric Power Research Institute • New Jersey Board of Public Utilities • New York State Energy Research & Development Authority • Nat’l Assn. of State Energy Offices • U.S. Dept. of Energy • U.S. Environmental Protection Agency • Utilities • Edison Electric Institute • National Grid • Northeast Utilities • NStar • Pacific Gas & Electric • San Diego Gas & Electric • Southern California Edison • Tennessee Valley Authority • DG Vendors/Developers • Cummins Power Generation • EnerNOC • Northern Power Systems • RealEnergy • Solar Turbines • TurboSteam • UTC Power • Customer Representatives • Democracy and Regulation • Energy Consortium • Los Angeles County Sanitation Dist. • General Services Administration • Public Interest& Other • Conservation Law Foundation • Conservation Services Group • EPRI Team • Ellen Petrill, Director • David Thimsen, Proj. Mgr. • John Nimmons & Assoc. • Madison Energy Consultants • Energy & Environmental Econs. • Regulatory Assistance Project

3. What’s ‘distributed’ generation? • Distinct from ‘central’ or ‘merchant’ generation • produces electrons, but similarity ends there • very different scale, markets, technologies, functions, etc. • Typical State definitions: • ‘small-scale’generation (e.g., 3kW – 10MW; Connecticut: 65 MW) • near the load that it serves • ‘within’, or connected to, the distribution system • using preferred technologies or resources • PV, CHP, fuel cells, small wind turbines, etc • solar, biogas, biomass, wave or tidal energy, etc. • Mass. restructuring statute defines DG narrowly “a generation facility or renewable energy facility connected directly to distribution facilities or to retail customer facilities which alleviate or avoid transmission or distribution constraints or the installation of new transmission facilities or distribution facilities.” (G.L.Chap.164, §1, 1997)

4. T&D impacts are one value among many,as New England stakeholders and others now recognize Also see: http://masstech.org/dg/benefits.htm, http://www.epri.com/OrderableitemDesc.asp?product_id=000000000001011026&targetnid=267828&value=04T101.0&marketnid=267715&oitype=1&searchdate=8/19/2004

5. Recasting the question • Ask not whether utilities should own DG – askwhether a diverse & sustainable energy portfolio should include DG • If so, how can we structure the energy business to best achieve that? • Not by ruling out options at the outset, but by – • Exploring models that offer some promise • Deciding where utilities can add value, and what roles they're best situated to play

6. Rethinking the answer • 1998-2000: California PUC DG Proceedings • utility ownership of DG was highly contentious • some DG providers adamantly opposed it • 2003-04: EPRI / SoCal Edison Collaborative • DG providers wanted utilities to play a more central role – • provide system & customer information, facilitate siting, offer integration services – maybe even own DG! • 2006: Mass. DG Collaborative recommended that DTE – • “open a docket to investigate if utilities can install and own DG as a distribution resource” • 2006: MADRI – major barriers to DG still include: • uncertainty about viable business models • regulatory disincentives to electricity providersto promote or implement distributed solutions

7. Mass. DOER / MTC / EPRI Project: ‘Creating & Demonstrating Utility DER Incentives’ • Are there viable business models for IOU participation in DG markets? – i.e., approaches that benefit: • participating customers • non-participating customers • utility shareholders • society at large • Can we quantify their stakeholder impacts – who benefits, who pays, and what drives this? • What regulatory changes might be needed to support promising business models? • Can we test these business & regulatory approaches in pilot projects? Also see: http://masstech.org/dg/winwin.htm, http://masstech.org/dg/EPRI-STAC.htm,

8. Business cases under consideration • Customer-owned, utility-facilitated • CCHP • PV, with energy efficiency • Utility-owned, on customer premises • CCHP, on either side of the meter • PV, with energy efficiency • Biogas, from dairy or other customer operations

9. Quantifying stakeholder impacts • ‘Single installation’ calculator model shows – • who benefits and who pays for various types of DG • which costs and benefits drive the outcome • ‘Aggregate impact’ calculator model shows impacts of DG penetration levels on – • utility revenues or customer bills • utility rates • utility net income • utility return on equity • net societal savings

10. Stakeholder impacts: single installationUtility-owned, customer-sited CCHP

11. Stakeholder impacts: single installationUtility-owned, customer-sited PV with EE

12. Stakeholder impacts: single installationUtility-owned, customer-sited biogas generation

13. Net societal savings Utility revenues or customer bills Utility ROE Utility net income Utility rates Stakeholder impacts: in the aggregate • Output from ‘single installation’ calculator feeds into ‘aggregate impacts’ calculator • Aggregate impacts will be shown this way: See E3’s Energy Efficiency Benefits Calculator at http://www.epa.gov/cleanenergy/actionplan/outreach.htm, now being adapted for distributed generation through the Mass. DOER / MTC / EPRI Project.

14. What regulatory changes are needed? • Depends on which business cases appear most likely to yield win/wins • Customer-owned DG, especially baseload, presents different questions (‘lost revenue’ recovery, etc.) • Utility-owned DG may require rethinking 21st-century utility roles, reinventing U.S. utilities as – • energy (not ‘electricity’ or ‘gas’) suppliers and stewards • facilitators and integrators of more diverse resource choices • venture partners with other energy industry players, leveraging each others’ strengths to benefit ‘shared’ customers • Anticompetitive issues are important in this area;regulators need to ensure a level playing field • Once promising business cases are identified, theCollaborative's efforts will focus on regulatory needs

15. Conclusions • Where multiple stakeholders can benefit from DG and none are harmed, regulation should encourage it • Where investor-owned utilities can add value and increase societally beneficial DG deployment, regulation should accommodate that • Non-utility stakeholders increasingly value this approach • Massachusetts stakeholders, led by DOER, MTC, DTE, and EPRI, aim to identify viable business models and regulatory approaches, and build tools that others can use to test them • The collaboration continues, and everyone can play • Pilot projects are to follow, and everyone can learn