Communicating Cost Shifting Under Net Metering

Communicating Cost Shifting Under Net Metering MREA Annual Meeting March 10, 2014 John Gasal (Connexus Energy) Doug Larson (Dakota Electric Association)

Topics 1. Defining QF and Net Metering 2. QF Production / Load mismatch 3. Identify cost shifting under present net metering in Minnesota 4. Legislation 5. QF Rate Design 6. Value of Solar 7. MREA position on DG and Net Metering 2

Source: RMI presentation for Dept of Commerce presentation 3

Perspective Consumers in Minnesota can self-generate with or without PURPA or net metering. DG reduces utility sales without necessarily reducing costs and shifts costs to other consumers with or without net metering Need to address net metering requirements and service for other consumers with DG 4

What is PURPA? Public Utility Regulatory Policies Act Legislation Federal 1978 Minnesota 1981 MN Statutes (216B.164) and MN Rules (Chapter 7835)» Establishes rates and conditions of service for Qualifying Facilities» All electric utilities (IOU, municipal, cooperative) are subject to state requirements. 5

What is a Qualifying Facility? QF status is provided to: Small power production facilities (80 MW or less) Renewable (hydro, wind, solar) Biomass Waste Geothermal Cogeneration facilities 6

QF Utility Purchase PURPA requires electric utilities to purchase the power made available from QFs. Key federal provision is purchase at avoided cost This regulation overrides the all requirements contract between the G&T and a distribution cooperative. 7

Minnesota QF Statute: 216B.164 Scope and Purpose Intent is to give maximum possible encouragement to cogen and small power production consistent with protection of ratepayers and the public My interpretation: Encourage but balance interests Consistent with rate principle of avoiding undue discrimination (subsidies) 8

Minnesota QF Statute: 216B.164 Purchases Small Facilities (Cooperatives & Municipals) For QFs less than 40 kw: Customer will be billed for net energy supplied by utility according to applicable rate schedule Net energy input to the utility system will be compensated at the average retail energy rate by class Additional cost of such purchases may be reimbursed to the distribution cooperative by the G&T 9

Average Retail Energy Rate Annual Class Revenue - Fixed Charge Revenue - Demand Charge Revenue = Subtotal Class Annual kwh Sales = Average Retail Energy Rate 10

G&T Reimbursement 11 /kwh Retail Rate Paid To Net Metering Customer 7 /kwh G&T Wholesale Rate to Dist Coop G&T Reimburses Coop for distribution Component of 4 /kwh for Excess Generation. Note: Socializes cost to all consumers. Shifted Costs include distribution and fixed G&T costs. 11

Dollars GRE Reimbursed $120,000 $100,000 GRE Systems Net Metering Reimbursement for Distribution Rate Component Number of Accounts $ Reimbursed 350 300 $80,000 250 200 $60,000 $40,000 192 210 246 285 317 150 100 $20,000 121 50 $0 2008 2009 2010 2011 2012 2013 0 12

Minnesota QF Statute: 216B.164 Purchases Other Facilities For QF facilities with capacity of 40 kw and greater: Utility must purchase all energy and capacity made available by the QF QF will be paid full avoided capacity and energy costs as: Negotiated by the parties, Set by the Commission, or Determined through competitive bidding approved by the Commission 13

Net Metering - Defined Net metering is an energy billing policy. Allows utility customers to offset some, or all, of their electricity use with a distributed generation system, such as a solar system or wind turbine. The meter records when a customer is drawing power from the utility grid (i.e., using more energy than they are producing) and also when power is being sent back to the grid (i.e., using less energy than they are producing). At the end of a billing month, the customer is either charged for the net energy used or paid for the net surplus energy produced. 14

How net metering is applied in MN Net Metering (referred to as Net Energy Billing in MN Statutes and Rules) allows QF energy production greater than a consumer s energy consumption at one point in time to be used to offset consumption at other points in time when the QF energy production is less than a consumer s energy consumption. In essence the utility provides an energy storage/balancing service at no charge. 15

Net Metering #1 400 kwh 855 kwh 855 kwh Load Less 400 kwh Gen = 455 kwh net purchase by consumer from utility 16

How net metering is applied in MN Continued If QF production exceeds consumption during a defined billing period, then the net production in excess of consumption is purchased by the utility at the applicable average retail energy rate. 17

Net Metering #2 900 kwh 855 kwh 855 kwh Load Less 900 kwh Gen = 45 kwh net purchase by utility from consumer 18

Net Metering in MN Source: Minnesota Department of Commerce (2012) Solar Wind Est. % of Retail # Cust Total kw # Cust Total kw Sales IOU 838 8,446 93 1,820 0.033% Municipal 40 276 5 67 0.005% Cooperative 179 1,096 241 5,038 0.073% 19

Net Metering in Other States Source NRECA: DISTRIBUTED GENERATION - Finding a Sustainable Path Forward 43 states have adopted net metering Implementation requirements vary: QF production in excess of consumption: Prohibit any payment to consumer for net exports to utility Credits rolled over to the next month, generally up to one year Excess forfeited by consumer at end of year Consumer paid at utility avoided cost Consumer paid at average retail energy rate 20

Net Metering in Other States Source NRECA: DISTRIBUTED GENERATION - Finding a Sustainable Path Forward Implementation requirements vary: Eligible DG resources: QFs under PURPA Only renewable technologies Size: Most states limit size of units that qualify for net metering 10 kw to 40 kw common for net metering However, some are several MWs or no size limit Participation limits: Some states limit total number of consumers that may participate in net metering Other states limit total capacity of consumer-owned DG Specified % of utility historic peak load Other states, like MN, have no participation limits 21

Total PV Installations and Top States by Annual PV Installations (MW) 2012 Total PV Installations by State Source: GTM Research/SEIA, U.S. Solar Market Insight Report, 2012 Year in Review, Executive Summary, 2013. 22

QF Production vs. Utility Load How does the production from wind and solar qualifying facilities compare with utility load requirements? Graphs: Wind Average Day Monthly Peaks Solar Average Day Intermittency 24

GRE System Energy Low side (MWh) Wind Energy (MWh) 600,000 580,000 560,000 Wind output compared to load (Hourly ) Hourly Load Profile 47,000 45,000 540,000 43,000 520,000 500,000 41,000 480,000 460,000 39,000 440,000 420,000 Hourly Wind Profile 37,000 400,000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Hour 35,000 GRE System LoadLowSide (MWh) Wind Energy 25

GRE System Low Side Avg. Monthly Load (MW) Avg. Monthly Wind Output (MW) 1,800 1,600 Wind output compared to load (Monthly) Monthly Load Profile 175 155 1,400 135 1,200 1,000 115 800 95 600 Monthly Wind Profile 75 400 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 55 Average GRE LoadLowSide (MW) Average Wind Load 26

Solar Daily Average 27

Solar Intermittency Clear versus Cloudy day Source: Cooperative Research Network, Impact of Photovoltaic (PV) Generation on Distribution Systems, January 2013 28

What do these graphs tell us? 1. Intermittent resources provide energy When the wind blows When the sun shines 2. Utility must build and operate essentially the same system whether a consumer installs a renewable QF system or not 29

Cooperative Statewide Analysis Identify the economic impact (shifted costs and bill impacts to non-qf consumers) of present net metering provisions in Minnesota under various scenarios when a typical residential consumer installs a QF. Calculation using data from Form 7 31

Utility Cost Components by % Distribution Depreciation, 4.6% Variable Component Wholesale Power Purchases, 32.0% Distribution O&M; A&G, 11.7% Customer Accounts & Service Expense, 3.8% Taxes, 2.0% Interest, 3.2% Fixed Component Wholesale Power Purchases, 40.7% Distribution Operating Margins, 1.9% 32

Net Metering Scenarios Scenario 1 Scenario 2 Scenario 3 Generator Size Sized to load (I.E., Match annual KWh usage) 39.9 kw 39.9 kw Excess energy paid at Retail Rate MISO avoided cost 33

Base Case, no Net Metering Annual values shown for residential customer Scenario 1 Without Net Metering Factor Revenue Cost Distribution monthly charge $ 204 Volumetric Energy Charge $ 1,751 Distribution $ 872 Gen & Trans (Fixed) $ 606 Generation (Variable) $ 476 Total $ 1,955 $ 1,955 Cost shifting gain / (loss) $ - 34

Scenario 1 Net metering, customer offsets usage Scenario 1: Net metering = load Without Net Metering With Net Metering Factor Revenue Cost Revenue Cost Distribution monthly charge $ 204 $ 204 Volumetric Energy Charge $ 1,751 Distribution $ 872 $ 872 Gen & Trans (Fixed) $ 606 $ 606 Generation (Variable) $ 476 Total $ 1,955 $ 1,955 $ 204 $ 1,479 Cost shifting gain / (loss) $ - $ (1,275) Note: 12.6 kw solar generation @ 16% capacity factor can supply average customer @ 1375 kwh/ month. 35

Net Metering Cost Impact Scenario 2: Generation = 39.9 kw 39.9 kw Generation Annual output @ 16% capacity factor =~ 55,429 kwh Less Customer Annual usage (16,503) kwh Net Excess sales to utility 35,926 kwh Cost Shifting Impact: {(Retail Rate) (MISO Energy price)}* Excess kwh 36

Scenario 2 Net metering, customer over sizes @ 39.9 KW Scenario 2: Net metering @ 39.9 kw Without Net Metering With Net Metering Factor Revenue Cost Revenue Cost Distribution monthly charge $ 204 $ 204 Volumetric Energy Charge $ 1,751 Distribution $ 872 $ 872 Gen & Trans (Fixed) $ 606 $ 606 Generation (Variable) $ 476 Payment for Excess Generation $ 2,215 Total $ 1,955 $ 1,955 $ 204 $ 3,693 Cost shifting gain / (loss) $ - $ (3,489) 37

Scenario 3 Excess generation priced at marginal cost (MISO) Scenario 3: Net metering @ 39.9 kw, excess payment @ MISO Without Net Metering With Net Metering Factor Revenue Cost Revenue Cost Distribution monthly charge $ 204 $ 204 Volumetric Energy Charge $ 1,751 Distribution $ - $ 872 $ 872 Gen & Trans (Fixed) $ - $ 606 $ 606 Generation (Variable) $ - $ 476 $ - Payment for Excess Generation $ - $ - Total $ 1,955 $ 1,955 $ 204 $ 1,479 Cost shifting gain / (loss) $ - $ (1,275) 38

Net Metering Rate Impact To Non-Participants % of residential customers with DG Percent Rate Increase Scenario 1 Scenario 2 Scenario 3 DG sized to only offset usage 39.9 kw Gen, excess sold at retail 39.9 kw Gen, excess sold at MISO 0% 0% 0% 0% 1% 1% 2% 1% 2% 2% 4% 2% 3% 2% 6% 2% 4% 3% 9% 3% 5% 4% 11% 4% 10% 8% 24% 8% 15% 13% 42% 13% 20% 18% 66% 18% 25% 25% 102% 25% 30% 32% 158% 32% 39

Findings Changes are needed for net metering of QF systems to be financially sustainable: New rate designs for QF customers to pay the utility costs, fixed and variable, that are incurred to provide them reliable electric service when their QF is not operating. Excess production purchased by the utility at avoidable wholesale cost. This is about grid fairness 40

Our Concerns are Not Unique Concerns over cost shifting are increasingly being expressed by utilities across the country Recent articles: California Arizona Colorado 41

California Net Metering Study Purpose: Who benefits from Net Metering? Who bears the economic burden? Net Metering statistics (year end 2012) 150,000 net metering accounts 1,300 MW distributed generation (96% solar) 2,400 GWh (~1.1% of sales) Report: http://www.cpuc.ca.gov/nr/rdonlyres/bd9ead36-7648-430b-a692-8760fa186861/0/cpucnemdraftreport92613.pdf 42

CA Net Metering Study Summary Net Metering @ 5% saturation will raise rates 3.2% Residential inclining rate structure problematic w/o DG, customers pay 54% over cost of service With DG, customers pay 12% under cost of service Net Metering customers Larger than average customer Had income of $91,210 (78% higher than CA median) 43

44 Third-Party Owned Systems

The Future Beyond Net Metering Edison Electric Institute(EEI) / Natural Resources Defense Council (NRDC) issued Joint Statement to State Utility regulators on 2/12/2014 Solar at a residence does not align with customers energy use, requiring use of grid. Policy makers need to rethink how costs are recovered new rate designs & approaches 45

EEI / NRDC Plan Recovery of non-fuel costs (i.e., fixed) should reflect cost of maintaining & operating the grid and should not be tied to energy sales. Owners of on-site DG must provide compensation for utility services they use. Rate designs will develop to reward customers for using electricity more efficiently (Real time pricing, demand charges). Complete document - http://docs.nrdc.org/energy/files/ene_14021101a.pdf 46

EEI Example Rate Design http://www.narucmeetings.org/presentations/wood_iee%20handout%20naruc%20nov%2018%202013.pdf 47

MREA DG Principles Net metering and distributed generation should be costneutral for our members. The purpose of net metering needs to be clarified in statute. The purpose of net metering is to allow electric consumers to offset their individual loads, not become independent power producers. Payments for excess generation should be eliminated and replaced with rolled-over credits that expire after a year. Generation should be properly sized to a consumer s load. Net-metered customers have a responsibility to pay for the services they use. A system-wide cap on net metered accounts (based on overall system capacity) needs to be established to maintain the reliability and affordability of the electric distribution system. 49

2013 Legislation Substantial changes were made to net metering and solar energy requirements for investor-owned utilities. Cooperative and municipal utilities were not affected by this legislation for now. 50

2013 Omnibus Energy Bill - Final Final Bill Provision Starting Point Co-ops / Muni s IOU s Renewable Energy Standard (RES) 25% -> 40% No change No change Solar Energy Standard (SES) 10% by 2030 No 1.5% by 2020, exclusions in iron/paper industry Net Metering 40 kw -> 1000 kw No change 1 MW with size/system limits Solar Incentive Fund (tax) 1.33% of revenue No Xcel only - $5M/yr Solar rate incentive 20 cents / kwh No Xcel only Community Solar Required & utility cannot own No Required for Xcel, others optional. Utility can own. Made in Minnesota Subsidy CIP or RDF $ No 5% of CIP $ 51

Renewable Advocates Groups interested in increasing renewable energy are pleased with 2013 but continue to press for more. Fresh Energy Issued a summary of top 13 accomplishments in 2013. These include items related to net metering and solar energy as follows: Minnesota passes a new solar energy standard. Requires all public utilities to generate at least 1.5 percent of their electricity from solar energy resources by the year 2020 making it the most aggressive standard in the Midwest. 52

Renewable Advocates Continued Solar energy is made more accessible. Minnesota adopted a nation-leading community solar policy that will allow consumers to subscribe to a solar project and receive credit on their bill for their portion of the project s electricity production (just as they would if the solar panels were on their own roofs). Minnesota s net metering policy is expanded. Expansion of Minnesota's net metering policy applied to public utilities. Additionally, the legislature passed a policy called a value of solar tariff, to encourage utilities buy power from small- and medium-sized solar projects at a rate that reflects the true value of that power to the utility, ratepayers, and society. 53

Renewable Advocates Continued The Minnesota Legislature affirms the value of energy efficiency. In 2013 legislators passed a policy that states costeffective energy savings is an energy resource preferable to all other resources. Minnesota moves ahead on clean energy. Fresh Energy worked to gain legislative approval of several studies that will prepare Minnesota for its transition to a clean energy future. Our staff also participated in the stakeholder process to help identify the barriers and solutions toward achieving a fossil fuel-free energy system. 54

Raise fixed charge All customers Only DG customers Rate Design Options Demand charges for residential Buy All / Sell All 56

Considering Special Rate for QF Consumers QF & non-qf consumers are allocated the same distribution costs. How we recover in rate design may be different though Need to recognize: Net metering, and Non-reported customer owned DG 57

Monthly Fixed Charge Higher Fixed Charge for DG consumers and a lower energy charge Impact everyone or focus on DG? Statutory interpretation? Cost Recovery This is about grid fairness! 58

Demand Charges Demand charge can recover fixed capacity related costs A more elegant way to recover fixed costs Tied to cost causation and use of the system Will a third billing component result in even fairer cost recovery? Allows consumers to shape load and bill More complicated than energy only billing New concept for many consumers Too much of a stretch to apply to DG only under present statutory language? 59

Buy All / Sell All Proposed by Xcel in 2012 Two separate transactions Consumer continues to purchase all electric service from the utility Consumer sells all QF output to the utility Big Question: At what price? 60

Buy All / Sell All 400 kwh 855 kwh 855 kwh Load 400 kwh Gen Department of Commerce relabeled the Buy All / Sell All Method into the Value of Solar (VOS). 61

Value of Solar - What Utility pays customer for all output of solar. Pricing based on formula-based methodology. Levelized price for 25 years Utility recalculates each year which then applies for customers adding solar that year. See Subd. 10.Alternative tariff; compensation for resource value of 2013 MN Statute 160B.14: https://www.revisor.leg.state.mn.us/statutes/?id=216b.164 63

Value of Solar - Process MN Department of Commerce (DOC) conducted a number of stakeholder meetings Included rounds of written comments Cooperative responses coordinated by MREA DOC submitted VOS methodology to MN PUC January 31, 2014 Next step PUC to evaluate comments & make decision. Scheduled for March 12 Link to MN Department of Commerce Value of Solar Stakeholder Process http://mn.gov/commerce/energy/topics/resources/energy-legislation-initiatives/value-of-solar-tariff-methodology%20.jsp 64

Cents / kwh 16 14 12 Value of Solar Value of Solar Example from Department of Commerce Example from Dept of Commerce Total: 13.4 /kwh 3.1 Environmental Distribution 10 8 6 4 2 0.3 0.8 2.4 0.2 6.6 Transmission Generation & reserves O&M Fuel Cost 0 65

Dollars / MMBtu VOS Natural Gas Pricing Assumption $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $- 66

Long term renewable strategy Need sustainable rates Meet our members' needs 68

Finding (continued) Resolving cost shifting issues must be done prior to allowing 3 rd party financing. This will be an evolutionary journey over many years. Tweaks to net metering or Value of Solar are initial steps. Expect rate design to be more complex as time progresses. 70

Our Concerns are Not Unique Concerns over cost shifting are increasingly being expressed by utilities across the country 71

Discussion