Financial Impacts of Distributed Energy Resources (FINDER) Model - - PowerPoint PPT Presentation

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Financial Impacts of Distributed Energy Resources (FINDER) Model - - PowerPoint PPT Presentation

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Financial Impacts of Distributed Energy Resources (FINDER) Model Andrew Satchwell Nevada E-MAP Stakeholder Workshop November 10, 2016 LBNL Work at the Intersection of Distributed Resources (DERs) and Utility Regulatory and Business Models

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Financial Impacts of Distributed Energy Resources (FINDER) Model

Andrew Satchwell Nevada E-MAP Stakeholder Workshop November 10, 2016

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LBNL Work at the Intersection of Distributed Resources (DERs) and Utility Regulatory and Business Models

Quantifying the Financial Impact of DERs on Utility Rates and Profitability Impacts of Retail Rate Design and Net Metering on DER Economics Electric Utility Regulatory and Business Models Technical Assistance DER Valuation at High Penetration Concept Papers on Future Utility Regulatory and Business Models

Publications available at: emp.lbl.gov Focus of briefing

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Overview of LBNL Technical Assistance on Utility Business Models and DERs

  • With funding from DOE, LBNL provides technical

assistance to state PUCs on utility business models to align utility profit motivation and profit achievement with state policy goals

– LBNL has provided technical assistance to utility regulators in several different jurisdictions (e.g., AZ, KS, MA, IL, MO, NV)

  • This effort often takes the form of quantitative modeling of

a specific utility or amalgamation of all regulated utilities in a state and quantifying the impacts of a utility’s successful achievement of aggressive energy savings goals, increasing DER penetrations, and alternative approaches to the traditional utility business model

  • The outputs to the modeling effort are presented to all

stakeholders in an open forum to facilitate discussion and explore the impacts of alternative regulatory policy

  • ptions and ratemaking reforms

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Overview and Background of the FINDER Model

  • A pro-forma financial model initially developed

to better understand financial implications of energy efficiency (EE) on shareholders and ratepayers

– Created as a deliverable (“Benefits Calculator”) for the National Action Plan for Energy Efficiency (NAPEE)

  • With DOE OE funds, LBNL significantly

enhanced capabilities and scope of model over last 8 years

  • FINDER Model is capable of modeling impacts
  • f EE and DERs on utility costs and revenues

and calculating impacts at utility- and customer class-level

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SLIDE 5

FINDER Model Architecture

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Electricity Demand Module

  • Customers
  • Retail sales
  • Peak demand
  • T&D losses

Electricity Production Module

  • Utility owned generation portfolio
  • Purchased power contracts

Resource Planning Module

  • Sales and peak demand forecast
  • Timing, generation type and capacity of

utility-owned generation investment Cost of Service Module

  • Fuel and purchased power
  • Non-fuel O&M
  • Capital expenditures
  • Avg. debt cost
  • Debt interest
  • Authorized return on equity
  • Return on ratebase
  • Depreciation
  • Taxes

Ratemaking Module

  • Frequency of rate cases
  • Test year
  • Regulatory lag
  • Allocation of costs to rate components
  • Billing determinants
  • Retail rates
  • Cost trackers, adjustments and balancing

accounts

  • Off-system sales revenue

Distributed Energy Resource Module

  • DER type
  • DER impacts (feeds Electricity Demand

module)

  • DER costs and utility cost recovery (feeds

Cost of Service Module)

  • Alternative business models (feeds

Ratemaking Module) Shareholder Impact Module

  • After-tax earnings
  • After-tax return-on-equity

Ratepayer Impact Module

  • Customer bills (Collected revenue)
  • All-in retail rates (Collected

revenue per kWh of retail sales)

FINDER Model Range of Inputs and Outputs

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Scoping Study on Financial Impacts of Net- Metered PV

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  • Southwestern vertically integrated utility
  • Northeastern wires-only utility and default service provider

Two “prototypical” investor-owned utilities

  • Base case: A reference point against which sensitivities and mitigation

measures can be measured

  • Sensitivity cases: How do the impacts of PV depend on the utility operating

and regulatory environment?

  • Mitigation cases: To what extent can the impacts of PV be mitigated through

regulatory and ratemaking measures?

Analytical elements

  • Customer-sited PV ramps up over 10 years, reaching 2.5% to 10% of retail

sales (Sensitivity and Mitigation cases focus on 10% PV penetration)

  • Utility costs and revenues modeled over 20 years to capture end-effects

Dimensions of the analysis

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Customer-sited PV reduces utility retail sales and peak demand

Southwest Utility Northeast Utility

  • Customer-sited PV reduces sales on a one-for-one basis, but

reduces demand by less because timing of maximum PV output does not perfectly coincide with customer peak demand

  • Marginal impact of PV on peak demand also declines as the

timing of the net system peak shifts as PV penetration grows

6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 20 25 30 35 40 45 50 Peak Customer Demand (MW) Retail Sales (TWh/yr) Retail Sales - No PV (left axis) Retail Sales - 10% PV (left axis) Peak Demand - No PV (right axis) Peak Demand - 10% PV (right axis)

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Utility cost reductions from PV

Southwest Utility Northeast Utility

  • Differences in composition of cost reductions between utilities are due to

their differing cost structures: i.e., SW Utility owns generation while NE Utility procures all generation requirements via purchased power

  • Assumptions related to deferral of generation and T&D investments, and

to fuel and purchased power costs, are explored further in sensitivity analysis

0% 1% 2% 3% 4% 5% 0.0 0.5 1.0 1.5 2.0 2.5 2.5% 5% 7.5% 10% Reduction as Percent

  • f Total Costs

Reduction in Revenue Requirement ($B, 20-yr NPV @ WACC) Customer Demand Met With PV by 2022 Fuel and Purchased Power O&M Depreciation Interest on Debt Return on Rate Base Taxes Percent of Total Costs (right axis) 0% 1% 2% 3% 4% 5% 0.0 0.5 1.0 1.5 2.0 2.5 2.5% 5% 7.5% 10% Reduction as Percent

  • f Total Costs

Reduction in Revenue Requirement ($B, 20-yr NPV @ WACC) Customer Demand Met With PV by 2022 Purchased Power Depreciation Interest on Debt Return on Rate Base Taxes Percent of Total Costs (right axis)

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Under base-case assumptions, PV reduces achieved ROE

  • Customer-sited PV reduces revenues by a greater amount than it

reduces costs, leading to reduction in ROE (“revenue erosion effect”)

  • Impacts are larger for the NE utility, because of its higher assumed

growth in fixed costs and its proportionally smaller rate base

Southwest Utility Northeast Utility

  • 2%
  • 1%
  • 0%
  • 3%

7.0% 7.5% 8.0% 8.5% 9.0% 10% 7.5% 5% 2.5% 0% Achieved After-Tax ROE (Avg.; 10-yr) Customer Demand Met With PV by 2022

  • 14%
  • 9%
  • 5%
  • 18%

5.0% 5.5% 6.0% 6.5% 7.0% 10% 7.5% 5% 2.5% 0% Achieved After-Tax ROE (Avg.; 10-yr) Customer Demand Met With PV by 2022

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Achieved earnings reduced by lost future investment opportunities

  • PV reduces earnings as a result of both revenue erosion and also

deferred capital investments (“lost earnings opportunity effect”)

  • Earnings impacts from deferred capital investments are most relevant

to the SW Utility, which owns generation and transmission, though both utilities also experience earnings erosion from deferred distribution investments (in the base case)

Southwest Utility Northeast Utility

  • 8%
  • 8%
  • 4%
  • 4%

$5,500 $5,750 $6,000 $6,250 $6,500 10% 7.5% 5% 2.5% 0% Achieved After-Tax Earnings ($M NPV; 20-yr) Customer Demand Met With PV by 2022

  • 15%
  • 12%
  • 9%
  • 4%

$500 $550 $600 $650 $700 10% 7.5% 5% 2.5% 0% Achieved After-Tax Earnings ($M NPV; 20-yr) Customer Demand Met With PV by 2022

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Average customer rates increase slightly under base case assumptions

  • Under base case assumptions, PV reduces sales and peak demand by

a greater amount than it reduces costs, which causes average retail rates to increase

  • Note, though, that these estimated rate impacts represent average

impacts across all customers, thus do not directly measure cost shifting between PV and non-PV customers or for any individual customer class

Southwest Utility Northeast Utility

2.5% 1.3% 1.0% 0.0% 14.0 14.2 14.4 14.6 14.8 10% 7.5% 5% 2.5% 0% All-in Average Retail Rates (cents/kWh; 20-yr) Customer Demand Met With PV by 2022 2.7% 1.5% 0.7% 0.2% 19.0 19.2 19.4 19.6 19.8 10% 7.5% 5% 2.5% 0% All-in Average Retail Rates (cents/kWh; 20-yr) Customer Demand Met With PV by 2022

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Sensitivity analysis summary

  • Impacts are directionally consistent, but their magnitude varies widely
  • Shareholder impacts (ROE and earnings) are particularly sensitive to

utility operating and regulatory environment, especially for NE Utility

  • Greatest sources of sensitivity vary by metric and utility: e.g., for NE

utility, choice of test year and load growth causes large swings in shareholder impacts, but value of PV is key for ratepayer impacts

Southwest Utility Northeast Utility

  • 50%
  • 40%
  • 30%
  • 20%
  • 10%

0% 10%

ROE Earnings Rates

Change from No-PV to 10% PV

Sensitivity Range Base Case

  • 50%
  • 40%
  • 30%
  • 20%
  • 10%

0% 10%

ROE Earnings Rates

*All sensitivity cases focus on impacts under 10% PV trajectory for illustrative purposes

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Mitigation analysis overview

Mitigation Measure Revenue Erosion Lost Earnings Opportunities Increased Rates Revenue-per-Customer (RPC) Decoupling

  • ○

Lost Revenue Adjustment Mechanism (LRAM)

  • ○

Shareholder Incentive

  • ○

Shorter Rate Case Filing Frequency

  • ○

No Regulatory Lag

  • ○

Current & Future Test Years

  • ○

Increased Demand Charge & Fixed Charge

  • ○

Utility Ownership of Customer-Sited PV

  • ○

Customer-Sited PV Counted toward RPS

  • Primary intended target of mitigation measure

○ May exacerbate impacts of customer-sited PV

  • Mitigation scenarios borrow from measures implemented with energy efficiency

programs, though are not an exhaustive set of options

  • Mitigation analysis focuses on impacts under 10% PV trajectory, for illustrative

purposes

Objective: Explore the efficacy and potential tradeoffs associated with regulatory and ratemaking measures for mitigating the impacts of PV

Example results 14

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Decoupling and LRAM mitigate revenue erosion effect

  • RPC decoupling and LRAM mitigate revenue erosion impacts from

customer-sited PV, thereby improving ROE, but degree of mitigation varies by utility and depends on design (e.g., k-factor)

  • Mitigation of shareholder impacts in these cases necessarily entails an

increase in average retail rates, illustrating one form of tradeoff

Achieved ROE Average Retail Rates NE Utility

6.9%

  • 1.2%
  • 0.4%

+1.2% +0.4% 0% 5% 10% Base 0% Base 10% RPC Decoupling - No k RPC Decoupling - with k LRAM Achieved After-Tax ROE (Avg.; 10-yr) 16.09 +0.23

  • 0.02

+0.08 +0.03 5 10 15 20 Average Rate (cents/kWh Avg.; 10-yr)

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Utility ownership of PV may provide substantial earnings opportunities offsetting the impacts

  • Utility ownership and

capitalization of customer-sited PV provides increased earnings,

  • ffsetting most or all the financial

impacts to shareholders

  • NE Utility could see substantial

increases in earnings by investing in customer-sited PV especially given otherwise limited opportunities for capital investment

  • Utility ownership or financing of

customer-sited PV may raise significant policy and/or regulatory issues around risk sharing, competition, and generation asset ownership

Achieved Earnings SW Utility NE Utility

6,484

  • 528

+865 +86 2,000 4,000 6,000 8,000 Base 0% Base 10% Utility Ownership - All PV Utility Ownership - 10% of PV Achieved Earnings ($M NPV; 20-yr) 681

  • 105

+701 +70 200 400 600 800 1,000 Base 0% Base 10% Utility Ownership - All PV Utility Ownership - 10% of PV Achieved Earnings ($M NPV; 20-yr)

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Counting customer-sited PV towards utility RPS compliance mitigates rate impacts

  • Applying renewable energy

certificates (RECs) generated by customer- sited PV to utility RPS compliance reduces a portion of RPS compliance costs and reduces average retail rates

  • There is no change in

shareholder impacts as RPS compliance costs are a pass-through to customers (and RECs do not offset investments in renewable generation)

Average Retail Rate SW Utility NE Utility

12.80 +0.23

  • 0.14

5 10 15 Base 0% Base 10% Count toward RPS Average Rate (cents/kWh Avg.; 10-yr) 16.09 +0.23

  • 0.19

5 10 15 20 Base 0% Base 10% Count toward RPS Average Rate (cents/kWh Avg.; 10-yr)

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Conclusions

  • Even at penetration levels significantly higher than today, the

impacts of customer-sited PV on average retail rates may be relatively modest (though we stress that our analysis does not isolate cost-shifting per se)

  • In comparison, impacts on utility shareholders are potentially

much more pronounced, though they depend highly upon the specifics of the particular utility

  • Various “incremental” changes to utility business or regulatory

models (as opposed to wholesale paradigm shifts) can mitigate the impacts of customer-sited PV on utility ratepayers and shareholders

  • However, those measures generally entail important tradeoffs,

either between ratepayers and shareholders or among competing regulatory and policy objectives

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Future Research Topics and Model Enhancements

What are the combined impacts of EE and PV? What are the participant and non- participant impacts of EE and PV, and are they different? What is the impact of electric vehicles on utility earnings and ROE? What is the efficacy of and implications for utility ownership of customer-sited DERs?

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Questions?

Project Team:

Andy Satchwell | asatchwell@lbl.gov | 510-486-6544 Peter Cappers | pacappers@lbl.gov | 315-637-0513

Publications:

emp.lbl.gov/publications

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