Distributed Generation Valuation from a Ratemaking Perspective Presentation to the ACC Workshop

1. Distributed Generation Valuationfrom a Ratemaking PerspectivePresentation to the ACC Workshop Tom Beach, Principal Crossborder Energy Consultant to the Solar Energy Industries Association May 7, 2014

2. Overview • Basic concepts • Framework for DG Valuation • Key Principles • Fairness • Cost causation • Customer choice • Critical New Data • Final Thoughts Crossborder Energy

3. Distributed Generation is a resource.NEM is a billing arrangement for DG exports. • Without NEM, customers who install renewable DG have certain rights under federal law (PURPA) • To interconnect with the grid • To offset their own load • To receive an avoided cost price for exports to the grid • “Running the meter backward” is the essence of NEM. • Exports to the grid are credited/priced at the retail rate. • Does the retail rate credit accurately capture the value of the power exported? • Most of the output of net-metered PV systems never touches the grid. • Typically, one-half to two-thirds of PV output serves the on-site load, before power is exported to the grid. Crossborder Energy

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5. We’ve been down this road before… • …with other demand-side resources that depend on customer adoption. • EE/DR have been incorporated as standard resources in utility planning & regulation. • Benefit / cost tests per the Standard Practice Manual • DG presents added challenges. • Interconnected to the grid, with safety and operational impacts. • Reduces demand and increases supply. • Can produce 100% of the customer’s on-site usage. • DG plus storage could compete with utility service. Crossborder Energy

6. Benefit (+) / Cost (-) Testsfor Demand-side Programs Crossborder Energy

7. Example from Draft Nevada NEM Study(released by PUCN on May 1, 2014) Crossborder Energy

8. Comprehensive RIM Test:Benefits and Costs of Net-metered DG • Benefits • Energy • Capacity • Ancillary Services • Transmission • Distribution • Environmental • Avoided Renewables • Other • Grid security • Market price mitigation • Costs • Lost retail rate revenues • DG Incentives • Integration costs Crossborder Energy

9. Key Principles: fairness and cost causation • Assess benefits and costs of DG over the life of the DG system, like other resources. • In the long-run, few costs are fixed. • Recognize where DG is located. • DG exports are generation. • Costs to serve DG customers must consider their different load profile. • Appreciate the new risks borne by DG customers. • Customers’ DG investments are long-term contributions to public purpose goals. Crossborder Energy

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11. SEIA Rate Design Principles • Rates should be based on marginal costs which emphasize a long-run perspective. • Rates should encourage conservation and integration of renewables. • Rates should reduce peak demand. • Rates should include the development of time-of-use (TOU) tariffs. • Rates should be based on cost-causation principles. • Any rate design should not be discriminatory toward renewables. • Rates should have transparency, with enough availability of data so that the customer has predictability into what their rate should be. • Any rate redesign should minimize any impact to existing customers, such as grandfathering in existing customers (no retroactivity), with the option to opt into a new rate. • There should be a smooth transition to a new rate structure. • Customer charges should be avoided. • Rates should encourage economically efficient decision-making. Crossborder Energy

12. Respect the Benefits DG Customers Provide • Enhanced reliability • Enables distributed storage • Sited in the built environment • Fewer land use & environmental impacts • A new source of capital for clean energy infrastructure • Competition for the utility’s retail power • Customer engagement & choice • Appeal of clean tech / no moving parts • DIY / self-reliance • Jeffersonian ideal of the citizen (solar) farmer Crossborder Energy

13. Critical Data (1) • Long-run marginal or avoided cost data for each utility function. • Generation (energy and capacity) • Transmission (capacity and losses) • Distribution (capacity and losses) • Example: NERA regression method for marginal transmission capacity costs (10 years recorded, 5 years forecasted) Crossborder Energy

14. Critical Data (2) • Distribution substation loads • Correlate solar output with distribution system peaks Crossborder Energy

15. It was the worst of times… • “3 Utilities Most Likely To Fall In Death Spiral, According To Morningstar” • Forbes, March 27, 2014 • “Tipping Point Nears for Abandoning the Utility and Going Off-Grid: Morgan Stanley sees falling PV costs, Tesla’s big battery bet and rising electricity prices as cues for consumers to disconnect from the grid.” • Greentech Media, March 27, 2014 Crossborder Energy

16. It was the best of times… • “achieving the 2050 target [an 80% reduction in carbon emissions compared to 1990] will require… large-scale electrification of on-road vehicles, buildings, and industrial machinery….” • California Air Resource Board, Proposed First Update to the Climate Change Scoping Plan(February 2014, at 37) Crossborder Energy