Business of Renewable Energy and Finance

Questions in the assignment document are:

1. Make an investment in a renewable energy business. You recently inherited $10million which must be invested in renewable or alternative energy. Where will you put your money in the businesses of renewable and alternative energy? Determine where/how and why you would invest in which type of company: Your own start-up company. An existing small renewable company. An established company. Determine in which of these segments of these energy businesses available you would invest: IPP – developer, owner/operator of utility-scale solar IPP – developer, owner/operator of utility-scale wind Distributed energy resource company – roof-top solar, battery storage company, or an EV company Investor-owned utility with a renewable generation energy operation Write no more than a 2-pager answering the following questions: In which type of company would you invest (from the above list)? In which segment of the energy business would you invest (from the above list)? Describe why and the key drivers of your decision?

2. What is your view of the future of the business of renewable energy? Write no more than a 2-pager answering the following questions: What is your view of long-term electricity prices and why? Which direction with long-term renewable energy costs go and why? How and where will one make money in renewable generation in the future? Will solar plus battery storage be commercially viable for base load generation? How and why? Is Net Zero carbon attainable in the US by 2050? If yes, how and why? if no, why not? Part 8: Clean Energy
Transformation and
Alternative Energy
1
2
Clean Energy Transformation
Integrating Wind,
Solar, Storage, EV
Policy, Customer,
Markets, Demand
Technology
Is the Future
Distributed?
Other Transformations
Alternative Energy
Is the Future
AC or DC?
3
Clean Energy Transformation
• Integrating Wind, Solar, Storage, Electric Vehicles
• Policy, Customer, Markets, Demand
• Technology
• Alternative Energy
• Is the Future Distributed?
4
Electric Vehicles + Solar & Wind: Perfect Match?
5
Integrating Energy Transformation
Policy, Customer, Markets, Demand
•
•
•
•
•
•
•
•
•
•
•
Administration
Regulation/Re-Regulation/De-Regulation
Ban on Natural Gas Hookups
Social Good
Pricing/Rates/Rate Design & Profits
Sustainable Grid
Net Zero
ESG
New Entrants
Congestion/Interconnection Queue
Electrification
6
Beyond Solar – DER Portfolio
Energy Storage
CHP
PEV
Demand Side
Management
Microgrid
7
Reimagine The Power System Of The Future
8
Possible Services and Benefits
9
Example: Valuing DER/DG Benefit to Distribution
System
• Timing
• Service is only valuable if it is online in time
• How do you ensure distributed energy resource (DER) turns up at the right time?
• Location
• Service is only valuable if it is in the right location
• How do you ensure DER turns up at the right location?
• Amount/Capacity
• Service is only valuable if it is in the right amount
• How do you ensure enough DER turns up?
• Availability
• Service is only valuable if it is available when required
• How do you ensure DER is available when required?
• Can a Utility Decrease the Capacity of its Distribution System due to DERs
10
Example: Valuing DER/DG Benefit to Distribution
System
• How much of distribution system cost is linked to demand?
• Should a general distribution value be given to rooftop solar?
• If so, are you implying that the marginal benefit of solar exceeds:
• Call center and billing costs
• Poles
• Vegetation management
• Policy goals
• Distribution automation
• Cyber security
• What is different about energy efficiency?
11
Is the Future Distributed? Local Value vs
Economies of Scale
•
Is the local value of solar sufficient to make up for the higher levelized cost of energy
(LCOE) compared to utility scale?
•
Does distributed solar allow a utility to build a smaller distribution network?
Transmission? Generation?
•
Remember – LCOE does not take into account system costs or intermittency
Source: Lazard Levelized Cost of Storage
Analysis, 5.0
12
Alternative Energy
• Green Hydrogen
• Fuel Cells
• Small Modular Nuclear Reactor (SMR)
• Geothermal
• Carbon Capture & Sequestration
• Electrification – On-Road and Off-Road
13
Make an investment in a renewable or alternative energy business
• Invest it in which company and why:
• Your own start-up company
• An existing start-up company
• An established company
• Invest in which type of business and why:
• IPP – Developer, Owner/Operator of utility-scale solar
• IPP – Developer, Owner/Operator of utility-scale wind
• DER – eg. Roof top solar, battery storage, electric vehicles
• Investor-owned utility with a renewable generation energy operation
• Other
14
Answer the following
• In which type of company would you invest?
• In which segment of the clean energy business would you
invest?
• Describe why and the key drivers of your decision.
15
What is your view of the future of the business of
renewable and alternative energy?
• What is your view of long-term electricity prices and why?
• What direction will long-term clean energy costs go and why?
• How and where will one make money in renewable generation
and/or alternative energy in the future?
• Will solar battery storage be commercially viable for base load
generation?
• How and why?
• Is net zero carbon attainable by 2050 in the US?
• If yes, why and how? If no, why not?
• Is zero carbon attainable?
16
Course Wrap-up and Evaluation
17
Course Summary
• We just scratched the surface of the challenges and
opportunities related to clean energy transformation
• Renewable and alternative energy is one of the most
exciting areas in the energy business today
• We only touched on three of the alternative energy
resources – solar, wind, and storage
• The future is driven by customer, technology, and policy
• The economic fundamentals and business models are
complex and changing rapidly
18
Evaluation
• I hope you enjoyed the course and leaned something
along the way!
• Please complete the course evaluation.
19
Reach for the Sun!
Tilt at Wind Mills!
20
MBA 833 Mod IV 2024 Final Exam
1. Make an investment in a renewable energy business.
You recently inherited $10million which must be invested in renewable or alternative energy.
Where will you put your money in the businesses of renewable and alternative energy?
Determine where/how and why you would invest in which type of company:
Your own start-up company.
An existing small renewable company.
An established company.
Determine in which of these segments of these energy businesses available you would invest:
IPP – developer, owner/operator of utility-scale solar
IPP – developer, owner/operator of utility-scale wind
Distributed energy resource company – roof-top solar, battery storage company, or an
EV company
Investor-owned utility with a renewable generation energy operation
Write no more than a 2-pager answering the following questions:
In which type of company would you invest (from the above list)?
In which segment of the energy business would you invest (from the
above list)?
Describe why and the key drivers of your decision?
2. What is your view of the future of the business of renewable energy?
Write no more than a 2-pager answering the following questions:
What is your view of long-term electricity prices and why?
Which direction with long-term renewable energy costs go and why?
How and where will one make money in renewable generation in the future?
Will solar plus battery storage be commercially viable for base load generation?
How and why?
Is Net Zero carbon attainable in the US by 2050? If yes, how and why? if no,
why not?
The Business of Renewable
Energy
Grid Edge Resources
What Are Grid Edge Resources?
Name
Description
Energy Efficiency
Installing upgrades for customers to use energy more
efficiently
Demand Response
A program where utilities offer a financial incentive in
exchange for being able to control customer loads at
certain times
Rate Design
Using pricing to encourage customers to alter usage,
creating system benefits
• Distributed Energy Resources (DERs) – generation that is located on the distribution system (usually
refers to behind-the-meter resources)
• Virtual Power Plants (VPPs) – aggregated DERs and demand response resources that provide
services that provides the services of a power plant (sometimes the term includes EE)
• Distributed Energy Resource Management Systems (DERMS) – software platforms that manage
DERS
Grid Edge Resources
•
•
•
Residential Load Control
•
EV managed charging
•
Vehicle to grid (V2G)
•
HVAC/thermostat
•
Hot water heaters
•
Other
•
Dishwashers
•
Clothes washers/dryers
Non-Residential Curtailable Load
•
Industrial processes
•
Data centers
•
Similar measures as residential
load control
DERs
•
Solar
•
Battery storage
•
Backup generation
Cost Classifications
• Energy
–
Unit: kWh
–
Examples: fuel, purchased power, net of reagents
–
~20-30% of costs
• Customer
–
Unit: per customer
–
Examples: cost of connection, billing, customer support
–
~20-25% of costs
• Demand (Capacity)
–
Unit: kW
–
Comprised of production/generation, transmission, and distribution
–
~45-55% of costs
–
“Like maintaining a highway with 100 lanes”
–
Increasingly driven by “net peaks” (net of intermittent, non-load following resources) rather
than gross peaks in usage
Firm Capacity and Load
Obligation
Electricity Provider
Electricity Consumer
No Obligation
Non-Firm Capacity –
Firm Capacity – generator
generator not necessarily
expected to provide electricity
expected to provide electricity
when needed
when needed
Firm Load – utility has
obligation to serve, even if
the customer does not
consume the expected
amount of electricity
Non-Firm Load – utility is not
obligated to serve
• Firmness of capacity/load often treated and priced as binary, but operationally is often
a spectrum
– Coal and natural gas resources are generally considered firm but still fail
sometimes, especially during extreme weather events
– Price signals may reduce load. Although this is firm load, over the system, a
certain amount of price response could be relied upon
– Does solar and wind offer firm capacity? How about energy storage?
Basic Ratemaking
Step 1: Revenue
Requirement
Step 2: Cost
Allocation
• How much should the utility
collect?
• Who should pay?
Step 3: Rate
Design
• How should prices be set?
• A segment of customers start using less energy (kWh)
• The utility is losing money, but how much? What is the impact on rates?
– Assume rate case in year 2 and 4 with respective test years of 1 & 3
Year
1
2
3
4
5
Revenue Requirement
$10,000k
$10,100k
$10,100k
$10,500k
$10,500k
Actual Revenue
Collected
$9,900k
$10,050k
$9,700k
$10,500k
$10,400k
Net Loss to Utility
($100k)
$50k
$400k
$0k
$100k
+$100k
+$100k
+$500k
+$500k
Change in Rates
(compared to year 1)
DSM/EE
Cost Effectiveness Tests
Test Name
What is Measures
Implication
Ratepayer Impact Measure Change in rates
(RIM)
If ∆ revenues > ∆ utility
costs, then rates will go
down (and vice-versa)
Program Administrator
Test/Utility Cost Test (UCT)
Change in utility bills (RIM
test without “lost
revenues”)
If ∆ revenues > ∆ utility
costs, then net utility bills
will go down (and viceversa)
Total Resource Cost (TRC)
– variant is the Societal
Cost Test (SCT)
Net impact on both
participants and nonparticipants (Societal Test
includes externalities)
If NPV under the TRC is
positive, it creates value
considering both
participating and nonparticipating customers
Participant Test
Change in participant
benefits
If NPV is positive, then it is
in the participant’s interest
to enroll
Benefits Across Multiple Tests
What costs are being avoided and benefits created through a DSM/EE program?
Name
Description
Unit
Notes
Generation capacity
Avoided cost of building the
next power plant to serve
peak load
$/kW
Largest category of costs;
firmness of capacity is
critical
Transmission
capacity
Avoided cost not
building/upgrading parts of
the transmission system
$/kW
Difficult to measure –
methodologies vary greatly
Distribution capacity
Avoided cost of not
building/upgrading parts of
the distribution system
$/kW
Difficult to measure –
methodologies vary greatly
Energy
Avoided cost of not
producing additional kWh
$/kWh
Mostly avoided cost of fuel
or purchased power
Other
Avoided cost of compliance
with policies, non-energy
benefits, etc.
Varies
Depends on PUC
acceptance, which cost
effectiveness test is being
used
Ratepayer Impact Measure (“RIM Test”)
•
Measures: Will rates go up or down?
•
Benefits: avoided costs
•
Costs: all program costs bourn by utilities/program administrators and lost revenues (ratepayer costs)
Consider an EE program with a 1-year measure life, 1,000 participants, and reduces the following per
participant – 500 kWh per year, coincident peak by 1 kW, and non-coincident peak by 2 kW
Rate
Units Affected
Total
Generation Capacity
$100/coincident kW
1,000 kW
$150,000
Transmission Capacity
$5/coincident kW
1,000 kW
$5,000
Distribution Capacity
$2.5/non-coincident kW
2,000 kW
$5,000
Energy
$0.05/kWh
500,000 kWh
$25,000
Avoided Cost Benefits
$135,000
Incentives
$750 per participant
1,000 participants
$750,000
Program Administration
$1,000,000/year
1 year
$1,000,000
Lost Revenues
$0.15 per kWh
500,000 kWh
$75,000
Costs
Net Benefit/Cost
$1,825,000
($1,690,000)
0.07
Benefit/Cost
score
Changing Measure Life (still RIM test)
Consider an EE program with a 25-year measure life, 1,000 participants, and reduces the following per
participant – 500 kWh per year, coincident peak by 1 kW, and non-coincident peak by 2 kW
–
Ignoring discounting for simplicity
Rate
Units Affected
Total
Generation Capacity
$100/coincident kW
25,000 kW
$2,500,000
Transmission Capacity
$5/coincident kW
25,000 kW
$125,000
Distribution Capacity
$2.5/non-coincident kW
50,000 kW
$125,000
Energy
$0.05/kWh
12,500,000 kWh
$625,000
Avoided Cost Benefits
$3,375,000
Incentives
$750 per participant
1,000 participants
$750,000
Program Administration
$100,000/year
25 years
$2,500,000
Lost Revenue
$0.15 per kWh
125,000,000 kWh
$1,875,000
Costs
$5,125,000
Net Benefit/Cost
($1,750,000)
0.66
Benefit/Cost
score
Program Administrator/Utility Cost Test
•
Measures: Will utility bills go up or down?
•
Benefits: avoided costs
•
Costs: all program costs bourn by utilities/program administrators
–
Lost revenues are not included since any increase in rates is netted out due to energy savings
resulting in lower bills
Rate
Units Affected
Total
Generation Capacity
$100/coincident kW
25,000 kW
$2,500,000
Transmission Capacity
$5/coincident kW
25,000 kW
$125,000
Distribution Capacity
$2.5/non-coincident kW
50,000 kW
$125,000
Energy
$0.05/kWh
12,500,000 kWh
$625,000
Avoided Cost Benefits
$3,375,000
Incentives
$750 per participant
1,000 participants
$750,000
Program Administration
$100,000/year
25 years
$2,500,000
Lost Revenue
$0.15 per kWh
125,000,000 kWh
$1,875,000
Costs
Net Benefit/Cost
$3,250,000
$125,000
1.04
Benefit/Cost
score
Participant Test
•
Measures: Will participants benefit?
•
Benefits: participant incentives, participant bill savings, applicable tax credits or other incentives
•
Costs: participant’s contribution to any costs
•
Assume the participant’s estimated net cost (after applying the incentive) is $1,000
Rate
Units Affected
Total
Incentives
$750/participant
1,000 participants
$750,000
Bill Savings
$0.15/kWh
12,500,000 kWh
$1,875,000
Participant Benefits
Participant contribution
to costs
$2,625,000
$1,000/participant
1,000 participants
$1,000,000
Participant Costs
$1,000,000
Net Benefit/Cost
$1,625,000
2.6 Benefit/Cost
score
Total Resource Cost (TRC)/Social Cost Test (SCT)
•
Measures: Will all utility customers benefit (participants and non-participants)?
–
If SRC then includes externalities (i.e., is the state/nation better off?)
•
Benefits: avoided costs, additional resource savings (i.e., gas/water savings), monetized environmental and
non-energy benefits (if social cost test)
•
Costs: administrative costs, participant contribution to costs
Rate
Units Affected
Total
CO2 Reduction (SCT)
$30/ton CO2
5,375 tons
$161,250
Other Non-Energy
Benefits (SCT)
$50,000/year
25 years
$1,250,000
Avoided Cost Benefits
$3,375,000
Benefits
$4,786,250
Program Administration
$100,000/year
25 years
$2,500,000
Participant contribution
to costs
$1,000/participant
1,000 participants
$1,000,000
Costs
$3,500,000
Net Benefit/Cost
$1,286,250
1.37
Benefit/Cost
score
Additional Considerations
• Free riders: Customers who would have taken the same action regardless of the
incentive
• Spillover Effect: Customers who are influenced by the program without receiving an
incentive
• Take-back effect: Customers respond to an EE upgrade by increasing load or
reducing energy conservation
• Persistence/Failure/Removal: The equipment may fail, be uninstalled, or replaced
before the end of its estimated useful life
• EM&V – evaluation of programs could be based on a 3rd party evaluation,
measurement, and verification report rather than a model/engineering assessment.
EM&V can be affected by an additional range of real-world factors that may not be
included in models
• Firmness of capacity savings how reliable is it that the capacity savings will appear
during the system peak or peaks relevant to T&D capacity?
• Pilots vs Programs – pilots may not need to be cost-effective immediately but should
demonstrate potential to be in the long-term
• Programs for low-income customers are often approved with relatively lower cost
effectiveness scores
Utility Business Models
• Typically, the DSM/EE Mechanism will specify a methodology for
measuring the net benefit of a program and offer the utility a
performance incentive based on the benefit
– Example: performance incentive = 10% of NPV under Utility Cost
Test
• Some utilities are allowed to recover lost revenues
– Intended to solve “throughput incentive” issue – make utilities not
incentivized to increase sales
– Example: recover 3 years of lost revenues
Evaluating a Hypothetical Program
Assume the UCT’s NPV is used to determine net benefits and the utility
receives a 10% incentive
RIM
UCT
SRC
PCT
Score
0.66
1.04
1.37
2.6
Net Benefit
($1,690,000)
$125,000
$1,286,250
$1,625,000
Performance
Incentive
$12,500
• What cost-effective test(s) do you think are best?
• If you were a regulator, would you approve this program?
• If you were a utility executive, would you propose this program?
• What can be done to improve this program?
A Real-life Example
Same as
“UCT”
• Example from Southern California Edison
–
Analysis from E3
–
Source: Understanding Cost-Effectiveness of Energy Efficiency Programs: Best Practices,
Technical Methods, and Emerging Issues for Policy-Makers (epa.gov)
–
The California Standard Practice Manual is often referred to in these proceedings
Activity – Evaluating a Battery Storage DR Program
•
•
A utility is considering a demand response program that
would use customer-owned battery energy storage systems
as a grid resource
–
Customers are getting a reliability benefit from the
batteries
–
Between 30-36 DR events per year
–
Input
Value
The program cannot drain the batteries below 20%
charge
Generation Capacity
$150/coincident kW
–
Ignore round-trip efficiency
Monthly DR incentive
$6/kW
–
DR events only target generation capacity (assume no
T&D capacity value)
Coincident kW expected
from battery during DR
event
3 kW
Program Administration
Costs
$500,000/year
Calculate a UCT and PCT score and consider the following:
–
Should this program get T&D value?
–
Can anything be done to increase the avoided cost
benefits?
Number of Participants
10,000
–
If you were a regulator, would you approve this
program?
Performance Incentive
11% UCT Net Benefits
–
Does this program “replace” a power plant? Does it
deserve the term “Virtual Power Plant”?
Customer Cost of Battery
$12,000
–
If you were a utility executive, would you propose this
program?
–
Is the program attractive to customers?
Rate Design
Rate Design Goals
• Recognize Cost Causation
–
No unjust or undue discrimination
• Incent Beneficial Consumption Patterns
–
Sends efficient price signals)
• Ensure Cost Recovery
–
recover revenue requirement, provide stable cash flows and minimize the need for future rate cases
• Be Customer Friendly
–
Be understandable, non-controversial as to the total bill amount
• Meets Public Policy Goals
–
As determined by the Utility Commission and state government
–
Often avoiding cross-subsidies, encouraging energy efficiency, encouraging new beneficial
technologies, helping vulnerable customers, helping state economy, etc.
Good Rate Design Incents Efficient Usage
• Unlike DR programs, rate design does not give direct control of load
to the utility
– Consider the effect on the “firmness” of capacity reductions
Sources: NC Public Staff
https://files.nc.gov/pubstaff/documents/files/Ratemaking%20Presentation%20%28318%29.pdf
Types of Charges
• Customer Charge
– Example: Base Facilities Charge
– Theory: Recovers costs per customer, such as billing costs
• Energy Charge
– Per kWh energy charge
– Theory: Recovers cost of producing energy
• Demand Charge
– Per kW demand charge
– Theory: Recovers capacity/demand costs
• Many variants on each charge
– Examples: TOU rates for energy charges, coincident demand
charges, minimum bills, etc.
• What charges can energy efficiency, DSM, behind-themeter solar, or energy storage help customer avoid?
Typical Rate/Unit Cost Calculations
𝐶𝑜𝑠𝑡
= Unit Cost
𝑈𝑛𝑖𝑡𝑠
𝐶𝑜𝑠𝑡
= price
𝐷𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑎𝑛𝑡
$1 𝑀𝑖𝑙𝑙𝑖𝑜𝑛 𝐶𝑢𝑠𝑡𝑜𝑚𝑒𝑟 𝐶𝑜𝑠𝑡𝑠
= $10 Customer Unit Cost
100𝑘 𝐶𝑢𝑠𝑡𝑜𝑚𝑒𝑟 𝑏𝑖𝑙𝑙𝑠
$1 𝑀𝑖𝑙𝑙𝑖𝑜𝑛 𝐶𝑢𝑠𝑡𝑜𝑚𝑒𝑟 𝐶𝑜𝑠𝑡𝑠
= $10 Customer Charge
100𝑘 𝐶𝑢𝑠𝑡𝑜𝑚𝑒𝑟 𝑏𝑖𝑙𝑙𝑠
$1 𝑀𝑖𝑙𝑙𝑖𝑜𝑛 𝐸𝑛𝑒𝑟𝑔𝑦 𝐶𝑜𝑠𝑡𝑠
= $0.10 Energy Unit Cost
10 𝑀𝑖𝑙𝑙𝑖𝑜𝑛 𝑘𝑊ℎ
$1 𝑀𝑖𝑙𝑙𝑖𝑜𝑛 𝐸𝑛𝑒𝑟𝑔𝑦 𝐶𝑜𝑠𝑡𝑠
= $0.10 Energy Charge
10 𝑀𝑖𝑙𝑙𝑖𝑜𝑛 𝑘𝑊ℎ
$1 𝑀𝑖𝑙𝑙𝑖𝑜𝑛 𝐷𝑒𝑚𝑎𝑛𝑑 𝐶𝑜𝑠𝑡𝑠
$1 𝑀𝑖𝑙𝑙𝑖𝑜𝑛 𝐷𝑒𝑚𝑎𝑛𝑑 𝐶𝑜𝑠𝑡𝑠
10𝑘 𝑘𝑊 𝑆𝑢𝑚𝑚𝑒𝑟 𝑃𝑒𝑎𝑘
= $100 Capacity Unit Cost
200𝑘 𝑘𝑊
= $5 Demand Charge
Calculating correct determinants is critical and can
be complex (weather normalization, future test
years, etc.)
Impact of Rate Designs:
for Average Customer in the Rate Class
Rate Design A
Rate Design B
Fixed Charge
Determinant
1
Price
$30.00
Charge
$30
Peak Energy
7,000
$0.07
$490
Off-Peak Energy
Peak Demand Charge
Total Bill
8,000
100
$0.04
$6.00
$320
$600
$1,440
Fixed
Charge
Energy
Charge
Total Bill
Determinant
Price
Charge
1
$30.00
$30
15,000
$0.094
$1,410
$1,440
What are the savings if an EE measures reduces 2,000 kWh and 30 kW of Peak Demand?
Peak Energy
Off-Peak Energy
Peak Demand Charge
Total Savings
Determinant
Reduction
Price
Savings
1,000
1,000
30
$0.07
$0.04
$6.00
$70
$40
$180
$290
Energy Charge
Total Savings
Determinant
Reduction
2,000
Price
$0.094
Savings
$188
$188
Impact of Rate Designs:
for Non-Average Customer in the Rate Class
Rate Design A
Rate Design B
Fixed Charge
Determinant
1
Price
$30.00
Charge
$30
Peak Energy
7,000
$0.07
$490
Off-Peak Energy
Peak Demand Charge
Total Bill
8,000
400
$0.04
$6.00
$320
$2,400
$3,240
Determinant
Price
Charge
1
$30.00
$30
15,000
$0.094
$1,410
$1,440
Fixed
Charge
Energy
Charge
Total Bill
• This customer has a much lower load factor despite consuming the same amount of energy
(kWh)
• As a result, the demand charge increases their bill substantially
• This can be a challenge for customers with low load factors such EV charging stations
• Is the demand charge necessary for cost recovery and to avoid cross-subsidization?
• By having a demand charge, what price signals are being sent to the customer?
Time of Use (TOU) Rates
Hour Beginning
12 am 1 am
2 am
3 am
4 am
5 am
6 am
7 am
8 am
9 am
10 am 11 am 12 pm
1 pm
2 pm
3 pm
4 pm
5 pm
6 pm
7 pm
8 pm
9 pm
10 pm 11 pm
January
February
Peak
March
Discount
DEP-NC, R-TOU-CPP Prices
April
May
June
July
Discount
Peak
August
Critical Peak: 41.015 cents/kWh
Peak: 23.197 cents/kWh
Off-Peak: 12.953 cents/kWh
Discount: 10.404 cents/kWh
September
October
November
Peak
Discount
December
• Marginal and embedded costs vary based on the time of the day → so should prices
• This model included both capacity and energy costs in considering the TOU periods
–
Based on a “Cost Duration” model
–
Only energy costs are affected in the short run
• Social impacts will differ based on design and features of customers
Aligning TOU Periods with LOLE
Demand Charge Reform
Versions of TOU Rates
Source: Ahmad Faruqui, “Zen and the Art of Rate Design”
Tradeoff Between Risk and Potential Bill Savings
Source: Ahmad Faruqui, “Zen and the Art of Rate Design”
Structural Savings from TOU
Example from PSE&G from New Jersey
• TOU rates are often set to have 50% structural savers
• Utilities can ask for a migration adjustment to avoid regulatory lag
Source: Ahmad Faruqui, “Zen and the Art of Rate Design”
Potential Savings from TOU
Source: Ahmad Faruqui, “Zen and the Art of Rate Design”
Do Customers Respond to Prices?
• Yes but:
• Effects may differ based on the design, weather, etc.
• Effect is bigger with technology
Source: Ahmad Faruqui, “Zen and the Art of Rate Design”
Measuring Costs and Cross-Subsidization
Cross-Subsidization: The practice of charging higher prices to one type of customer class that lowers prices
for another group (i.e. misalignment with the cost to serve)
No ratemaking is going to fully “eliminate” cross-subsidizations
Embedded Cost Cross-Subsidization
Marginal Cost Cross-Subsidization
• Are customers paying their fair share of
historical costs?
▪ Are customers paying their fair share of
future/incremental costs?
• Each group of customers brings costs (as
allocated in the Cost of Service Study) and
revenues to their rate class
• Analogy: paying my share of the dinner we ate
last night
Customers revenues > Customers costs
Customers costs > Customers revenues
▪ Customers will add marginal costs and revenues to
the utility
▪ Analogy: paying my share of the dinner we are
going to have tomorrow
− Different prices from the dinner we ate last night
Customers subsidizing others
Customers being subsidized
Embedded Cost Analysis
Step 1: Revenue
Requirement
• How much should the utility
collect?
Energy
Units
kWh
Units without solar
Units with solar
Embedded CoS
without solar
Embedded CoS with
solar
Embedded CoS
savings
% Savings
16,436
11,563
Step 2: Cost
Allocation
• Who should pay?
Step 3: Rate
Design
• How should prices be set?
Distribution
Production and
Demand
Transmission Demand
non-coincident
coincident kW
kW
7.62
3.83
7.17
1.11
Customer
Total
# Customers
1
1
$569
$137
$715
332
$1,753
$400
$129
$207
332
$1,068
$169
$8.08
508
0
$685
30%
6%
71%
0%
39%
Residential Cross-Subsidy Analysis
Source: ViewFile.aspx (ncuc.gov)
Large General Service Analysis
Source: ViewFile.aspx (ncuc.gov)
A Net Energy Metering Analysis
Marginal Cross-Subsidy
Embedded CrossSubsidy
Duke Energy Progress
$30-$35
$35-$40
Duke Energy Carolinas
$58-$63
$25-$30
Duke Energy Progress
$28-$33
$0-$5
Duke Energy Carolinas
$4-$9
($2)-$2
Before Reform
After Reform
• This analysis considered both benefits and costs
• The marginal cost analysis mirrored a RIM test
• Only considered the impact of one year since rates and compensation
changes each year
• The embedded cost analysis used values from the ratemaking process – unit
costs from the most recent cost of service study
Part 7: Distributed Energy Resources,
Grid Edge Resources and Distributed
Generation
1
Discussion Outline
• Distributed Energy Resources (DER)
• Grid Edge Resources
• Distributed Generation (DG)
• Net Zero – Capacity and Energy
• Retail Pricing and Rate Design
• Value of Solar and Value of Grid Net Energy
Metering (NEM)
2
Distributed Energy Resources
3
Distributed Energy Resources
Supply Side Resources
Rooftop PV, Renewable
Generation, Combined
Heat and Power,
Integrating Resources
Energy Storage, Microgrids,
Data Analytics, Plug-in
Electric Vehicles
Demand Side
Resources
Energy Efficiency, Rooftop
PV, Electric Vehicles,
Demand Side Management,
Pricing/Rate Design, Home
Area Network, Smart
Devices
4
Grid Edge Resources
• Energy Efficiency
• Demand Response
• Rate Design
• Distributed Energy Resources (DER)
• Virtual Power Plants (VPP)
• Distributed Energy Resource Management Systems (DERMS)
5
Distributed Generation (DG)
•
Commercial Rooftop
Solar
•
Residential Rooftop
Solar
6
The Business of Distributed Generation (DG)
• Economics
• Environmental
• Utility bill savings
• Price hedge
• Forward cost/Price curves
• RE100/EV100
• Sustainability goals
• Demand Side Management
• Value Streams
•
•
•
•
•
Tax credits
Property tax abatements
NEM bill credit
Rebates
Feed-in tariffs
•
•
•
•
•
Rate Design
Peak Demand Control
Energy Efficiency
Electric Vehicles
Battery Storage
7
Zero Net Energy (ZNE) and Extreme EE
The ZNE Movement: An aspirational goal for GHG reduction using EE
and Solar PV Aspiration is reality. All new Meritage homes are close to ZNE Ready, in
some markets like Orlando, Solar PV is now standard with new homes.
First ZNE “tract” home
“ZNE Ready” established by DOE
All new CA homes will be ZNE
2010
2013
2020
Space Space
Water Lights
Plug Outdoor Solar
Cooling Heating
Heating
Lights
PV
Appliances Loads
Ventilation
Total
8
…Zero Energy is not Zero Capacity
9
10
Rate Design Balance
100% Volumetric
– DG Solar
– Energy
Efficiency
100% Demand
– Storage
– DR
100% Fixed
– EV
– Consumptio
11
n
Illustrative Residential Electric Bill – $/kWh
Cost
Illustrative Large C&I Electric Bill – $/kWh
Revenue
Fuel and VOM
Generation
Transmission
Distribution
Metering, Billing
Cost
Revenue
Fuel and VOM
Energy Usage
Revenue
Generation
Variable
Revenu
Fixed Revenue
Transmission
Distribution
Demand Charge
Revenue
Metering, Billing
Fixed Revenue
12
Cost Recovery Structure Favors NEM Customers
For a Typical Customer Before Adding Solar:
•
Energy
• ~20% of residential cost of service
• ~90% of revenue through volumetric energy charge
• Easiest charge to offset through NEM
•
Customer
• ~20% of residential cost of service
• ~8% of revenue through fixed charge
•
Demand (Capacity)
• ~60% of residential cost of service
• 0% of revenue through demand charge
13
Conventional Rates Roughly Reflect CoS with Non-Solar
Customers Because of Correlation Between Usage and
Demand
16
12
D
e m and
8
4
0
0
1
2
3
Average Usage (kWh)
4
5
14
Solar Removes Correlation Between
Demand and Usage
20
16
Demand 12
8
4
0
0
1
2
3
Average Usage (kWh)
4
5
15
The Average NEM Customer Exports
~60% of the Energy They Produce
Exports as Percent of Solar Generation
Residential Solar Customers, 2019
Perc
ent
of
Solar
Cust
ome
rs
40%
35%
30%
25%
20%
Export
Consume
15%
10%
5%
0%
0%
10%
20%
30%
40%
50%
60%
Percent Exports
70%
80%
90%
100%
16
Solar Production is not Coincident with Loss of
Load Risk Hours
~90% of annual
expected loss of load
risk for DEC occurs in
Winter
The hours ended 7
through 9 have the
highest loss of load risk
Peak loss of load
expected risk period
Rooftop solar
generation produces
little energy during
these hours
Average DEC-SC Solar Generation on System Winter Peak Day, 2019
18,000
7
16,000
6
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
1
2
D
E
C
S
y
s
t
e
m
L
o
a
d
(
M
3
W
)
5
4
Aver
age
Solar
3
2
1
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
Hour Ended
System Load
Solar Generation
17
0
Balancing the System in Real Time
• System operators match generation to
demand in real time on a minute-to-minute
and hour-to-hour basis.
• In any given minute or hour an NEM
customer may be consuming power from
the grid if their solar rooftop system is not
producing enough power for their homes
needs.
• Conversely, in any given minute or hour, the
rooftop system may be producing more
power than needed at the home resulting in
exports of power to the grid.
At any point in time power can flow
from the grid into the home or
conversely from the home onto the grid
16
• Does the current net energy metering (NEM)
framework accurately price the cost to
serve the customers and pay customers the
marginal value of the excess power?
18
Is Distributed Renewable Generation Being
Priced Appropriately?
• Traditional residential rate design relies on correlation between demand and average
usage, which breaks down for NEM customers
• Are the costs from NEM customers accurately reflected in the price?
• Are the benefits that NEM customers provide accurately reflected in the price?
• If NEM customers are undercharged, other residential customers pay higher prices after a rate
case (cross-subsidization)
• The utility would in theory be indifferent, but needs to consider
implications of higher residential prices
• Do you think that the local value of distributed solar will be enough to justify itself compared
to utility-scale assets?
19
NEM Pricing
•
Retail Rate
•
Wholesale Power Price (Avoided Cost)
•
Hybrid Rate
20
Net Metering – Solar Installed
Cumulative Year over Year View
All Jurisdictions Cumulative
Net Metering Interconnections
(MWac)
All Jurisdictions Cumulative Net
Metering (# of installs)
35000
350
30000
300
25000
250
20000
200
15000
150
10000
100
5000
50
0
0
2009
2010
2011
2012
2013
2014
2015
2016
2010
2011
2012
2013
2014
2015
2016
2009
2019
2019
21
Value of Solar
•
Cost and Value Components
•
Externalities
22
Value of Solar (VoS) Comparison
Table source: LBNL study – Putting the Potential Rate Impacts of Distributed Solar into Context
Core VoS rates fall within 50-150% of the utility’s average residential rate
23
Value of Solar and NEM Benefit-Cost Studies by
Sponsor
24
SC DER – Net Energy Metering (NEM) Methodology
+/+/-
Avoided Energy
Energy Losses/ Line Losses
+/-
Avoided Capacity
+/-
Ancillary Services
+/-
Transmission and Distributed Capacity
+/-
Avoided Criteria Pollutants
+/-
Avoided CO2 Emission Costs
+/-
Fuel Hedge
+/-
Utility Integration & Interconnection Costs
+/-
Utility Administration Costs
+/-
Environmental Costs
=
Total Value of NEM Distributed Energy Resource
25
Value of Grid (And Existing Power System)
•
Storage Device
•
Balancing Device
•
Motor Starting (inertia, in rush)
•
Back-up Power Supply
26
Exercise
NEM and VOS Report Out and Class Discussion
27
NEM/VOS Exercise
• Based on the brief introduction to the topic of NEM and VOS;
Each group will choose one of the following methods and
defend:
• Full retail rate credit for DG
• Wholesale price credit for DG
• A hybrid credit (to be described by the group)
• Each group will prepare and turn in no more than a 2 page
paper describing their position.
• Groups will present positions to the class.
28
NEM Assignment
Bepreparedto discuss andanswerthe following questions:
• How should the net excess energy produced by rooftop DG be compensated –
at the wholesale power price or at the retail power price? At a hybrid price?
And why?
• At what price should rooftop DG produced and consumed on-site be
compensated?
• What costs and values should be considered when determining the price?
• Should NEM customers be able to offset 100% of their utility bill with NEM
generated electricity?
• Is there a cross-subsidization issues to be considered and accounted for?
• Why or why not?
• What sound DG solar economic fundamentals for the rooftop solar business
are needed to be commercially successful and sustainable?
29
Solar
Why? | Clean energy, particularly solar PV, is BOOMING
UNC Kenan-Flager MBA 833
2
Why? | The trend is expected to continue
Significant supply with few alternatives on the horizon
There is 50% more
capacity sitting in
interconnection
queues than all of
today’s connected
generation fleet.
Source: LBL Utility-Scale Solar, 2023 Edition
Why? | The trend is expected to continue
The declining cost of solar has directly translated into lower PPA prices.
Lower cost = more demand
Why? | The trend is expected to continue
Total Addressable Market suggests there is ample opportunity for growth
Why? | Corporate procurement driving demand
▪ More than 350 companies have committed to 100%
renewables.
▪ A majority of companies seeking to achieve goal in
the range of 2020 – 2030.
▪ Corporations signed contracts to purchase a record
19.9 GW of zero-carbon power in 2022
▪ Most active procurement focused in organized
(deregulated) markets
A Select Group of the RE100
What? | Characteristics of Solar PV
What? | Characteristics of Solar PV
Residential
Commercial
Utility-Scale
5 – 20 kW
~100 kW – 2 MW
> 2 MW
Distribution-level interconnection
Distribution-level interconnection
Transmission-level interconnection
Highest $/W CAPEX
Med-High $/W CAPEX
Lowest $/W CAPEX
Highest $/MWh compensation
Med-High $/MWh compensation
Low $/MWh compensation
What? | Characteristics of Solar PV
Production variability becomes smoother (more predictable) over longer time periods
Confidence of production output is expressed in terms of probability (P50, P90, P99).
What? | Challenges of Intermittency
What? | Challenges of the Duck Curve
How? | Project Financing – Sources & Uses
Tax credits provide a 3rd source of funding vs. traditional project finance
Permanent Sources & Uses
Sources:
$
%
Uses:
$/W
$
%
Term Loan
71,080,000
40.00%
Construction Costs
1.040
135,200,000
76.08%
Federal Tax Equity
47,760,000
26.88%
Acquisition Price
0.050
6,500,000
3.66%
Sponsor Equity
58,860,000
33.12%
Interconnection Upgrades
0.077
10,000,000
5.63%
Developer Fee
0.135
17,500,000
9.85%
Support Obligations
5,000,000
2.81%
Financing Fees
2,500,000
1.41%
Closing Costs
Total Uses
1,000,000
177,700,000
0.56%
100.00%
Total Sources
177,700,000
100.00%
Term Loan: Debt provided by a lender. Principal typically sized to provide a 1.25 – 1.30x coverage ratio
Federal Tax Equity: Investment provided by Tax Equity Investor in order to utilize Investment Tax Credit (“ITC”) or
Production Tax Credit (“PTC”), as well as depreciation benefits
Sponsor Equity: Funding that isn’t provided by debt or tax equity must be provided by the project’s sponsor (developer)
How? | Project Financing – OPEX
Solar PV has no fuel cost and low O&M, making it a relatively low risk investment
Simplified Cashflows for PV Solar
125
Technology
100
75
50
25
Operating Cost
($/kWh)
Coal-fired combustion turbine
0.02 — 0.04
Natural gas combustion turbine
0.04 — 0.10
Coal gasification combined-cycle (IGCC)
0.04 — 0.08
Natural gas combined-cycle
0.04 — 0.10
Wind turbine (includes offshore wind)
Less than 0.01
Nuclear
0.02 — 0.05
Photovoltaic Solar
Less than 0.01
Hydroelectric
Less than 0.01
0
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20
-25
-50
-75
-100
-125
Inflation Reduction Act | HUGE!
•
•
•
•
•
Investment Tax Credits – extended through 2032
• Technology neutral (standalone storage
eligible)
Production Tax Credits – extended through 2032
• Technology neutral (Solar PV eligible)
New tax credits
• Hydrogen Production (45V)
• Advanced Manufacturing Production (45X)
• Nuclear Power PTC (45U)
• Advanced Energy Project (48C)
• Clean Fuel PTC (45Z)
• Sustainable Aviation Fuel (40B)
Transferrable tax credits
Bonus tax credits
• Energy Communities
• Domestic content
Financial Model Overview
and Bidding Exercise
Guiding Questions
A single-axis tracker (“SAT”) can
boost production by ~200 kWh/kW
but also costs about $0.08/W more
to build than a fixed-tilt (“FT”)
system. It also increases O&M
expenses by approximately $2/kW.
Is SAT a worthwhile trade for this
project?
With Fixed-Tilt
With Single-Axis Trackers
Guiding Questions
• The ITC steps down starting in
2020.
• What is the effect of a project
slipping from 2019 to 2020?
• How much additional sponsor
equity would be needed?
ITC Rates
Effective 2017
2019
2020
2021
2022
30%
26%
22%
10%
Guiding Questions
• What has been the average
decline in the cost of solar?
• Has the decline been consistent?
Guiding Questions
• Many loans are benchmarked to
SOFR.
• What is the effect of rising
interest rates?
Guiding Questions
1. If PPA rate drops to $0.055, how much would build costs need to decline to keep
the same unlevered return?
2. How do post-PPA assumptions effect project returns?
3. What are the effect on returns in project life can be extended to 35 years? 40
years?
4. How does a reduction in EPC affect the federal tax equity investment? How does it
affect project returns? Are the two comparable?
5. Post-PPA rates (is a 10 year or 30 year PPA better?)
6. What build costs are needed to make a viable project?
Bidding Exercise | 2017 Available Portfolios
• You are a solar developer evaluating 5
possible acquisitions.
• Prepare a bid on a portfolio from one of
the states on the left.
• How will you counteract the risks
(explicit and implied) of the portfolio
you’ve selected?
Winning Bidders
Portfolio
CA
MN
NC
NY
TX
# of Bids
Winning Bidder
Bid Price