The Net Metering Controversy SEC588S17 Solar Colloquium Session 02b The Net Metering Controversy August 24, 2017

Session 02b - Value to class members Review of the technological, economic, and policy factors related to Net Metering Examination of the interaction between solar electricity generators and the untilities Representative presentation & discussion for Colloquium members

Proposed format for Colloquium Presentation and Discussion: Background Historical perspective Definitions Present State Engineering and technology efforts Business and economic components Policy frameworks FutureState Trends Forecast

What has fueled Solar Energy growth? Technological Factors Silicon solar cells and modules Inexhaustible input power at zero cost Societal Factors Concerns about fossil fuel and nuclear power plants An increasing awareness of sustainability issues Economic Factors Steady reduction in cost of PV systems Favorable government policies and business climate

What might impede this growth? PV system components Dependence on materials that are not earth-abundant High labor costs New PV system components Problems with smart components Certain economic and business factors Hostile interactions with utilities, utility regulating bodies Net metering issues Power demand charges Expansion of low cost natural gas supply and use in utility scale electricity generation

Policies that impact Residential and Commercial PV Systems Renewable Portfolio Standards (RPS) All PV scales are included in these standards Incentives Federal Investment Tax Credits (ITC) – Reduces Initial Investment State Tax Credits Utility incentives Public Utility Commission (or Legislature enacted) Policies Net Electrical Metering – Reduces Annual Cash Payments Power Demand Charges – Potential for Large Additional Monthly Fees

Net Electrical Metering – Case 1 (Power import) PV input = 0 PV system Solar Meter Utility Service Panel UtilityMeter To House Loads UM runs forward

Net Electrical Metering – Case 2 (Self-Consumption) PV input < Utility input PV system Solar Meter Utility Service Panel UtilityMeter To House Loads UM runs forward, but reduced

Net Electrical Metering – Case 3 (Power export) PV input > Utility input PV system Solar Meter Utility Service Panel UtilityMeter To House Loads UM runs in reverse

Net Metering At the end of each month, a utility bill is calculated: Electricity Generation = Number of kWh purchased from utility (after self-consumption) – Number of kWh exported to utility – Residual credits (in kWh) from “energy bank” This is all carried out at the retail rate Once a year, the residual credits are cashed in: This is carried out at the wholesale rate For APS, the “settle-up” date is 12/31

The Real Problem The Solar Enterprise needs the Electrical Utilities and the Electrical Grid BUT The Electrical Utilities and the Electrical Grid do not need the Solar Enterprise

Additional Utility Issues The electrical power generated by distributed PV (and other renewable approaches) is not generated and sold by the utilities A belief that increasing PV deployment will lead first to load defection and ultimately to grid defection The utilities make money from a guaranteed return on capital investment, and since they don’t own the PV systems, they can’t add that value to the rate base

Timeline In 2013, APS proposed increases in fixed-charges, ACC scaled them back to a $5/month grid access charge In 2015, APS proposed increasing the grid access charge to $21/month In 2015, ACC opened the Value of Solar (VOS) docket for a more comprehensive view APS withdrew its proposals UES filed its general rate case proposal (May, 2015)

Timeline, cont. Also in 2015, Salt River Project implemented mandatory demand charges In November 2015, TEP opened a general rate case hearing In April 2016, ACC started VOS public hearings In June 2016, APS opened a general rate case hearing In August 2016, ACC divided the UES rate case into two parts, approving some routine matters, waiting until VOS docket finishes for rest

Timeline, cont. And in October 2016, an Adminstrative Law Judge (ALJ) issued a Recommended Opinion and Order (ROO) on the VOS Docket In December 2016, the ACC held open hearings on the VOS/ROO docket and decided that NEM must end In March 2017, APS and the “Solar Industry” announced a settlement agreement related to the APS rate case docket Also in August 2017, the ACC held public hearings on the Rate Case Docket and approved the Solar Settlement – NEM ends September 1, 2017 for all new solar customers

Core Issue in the NEM Controversy What should the utilities pay for rooftop - generated electricity exported to the grid?

Recommended Opinion and Order (10/16) Utility Position The best way to find the true Value of Solar energy is through a Cost of Service Study (COSS) “The appropriate level of compensation to rooftop solar customers for their contribution to demand-driven infrastructure cost savings should be based on how effective the rooftop solar system is at offsetting peak loads”

Recommended Opinion and Order (10/16) Solar Advocates Position The COSS approach is irrelevant as it calculates costs and revenues, not an evaluation of the net benefits of rooftop solar COSS “omits savings for transmission and distribution costs, and does not include environmental and economic benefits” COSS allocates costs based on solar customers’ total load, instead of delivered load

Recommended Opinion and Order (10/16) ACC Staff Position Rooftop exports should be valued with an Avoided Cost Methodology “specific eligible costs and values of energy, capacity, and other services delivered to the grid” The above methodology should be used in conjunction with a Resource Comparison Proxy Methodology “a weighted average cost of utility Power Purchase Agreements and utility-owned grid-scale PV systems” Both to use 5-year rolling averages

Recommended Opinion and Order (10/16) So what are the Value of Solar calculations?? COSS -- 2.9 cents/kWh Cost/Benefit (with Externalities) -- 25 cents/kWh Resource Comparison Proxy -- 10-13 cents/kWh

Recommended Opinion and Order Testimony to ACC VOS hearing, 12/29/16 “A recent paper written by researchers at NREL addresses the expectations or outcomes of a value of solar procedure in a general fashion and points out that two market scenarios can emerge, based on a comparison between the LCOE for a residential PV system and the VOS tariff. If the VOS tariff is less than the LCOE, the installation costs are not likely to be recouped, and additional incentives are needed to reduce the difference and sustain the solar market. If the VOS tariff is greater than the LCOE, an acceptable payback period is achieved, and the solar market is self-sustaining. As an example, I have calculated the LCOE for my residential PV system in Phoenix and my results are 11cents/kWh with no incentives and 7cents/kWh with the ITC included. The VOS tariff established at this time through the present net metering policy is the retail rate and is about 12cents/kWh. This value then, would make the solar market price-competitive and self-sustaining. But if the VOS tariff were to be reduced to the current wholesale value of 3cents/kWh, which is the value recommended by APS, we can expect the solar market to diminish dramatically.”

Original APS proposal Fixed charge increase for all rate payers $8.67/mo  $14.50/mo (R2) $16.91/mo  $24.00/mo (R1 and R3) Elimination of net metering, replacement with net billing for new solar customers New power demand charge

Original APS Proposal for Net Billing Import energy from APS - $0.135/kWh Export energy to APS - $0.0299/kWh Settle account at the end of every month – no “energy bank” permitted, although credits carry forward

Terms of APS General Rate Case (08/15/17) Net Metering will be replaced by Net Billing The Export Tariff will be established with Resource Proxy and/or Avoided Cost Methodology The Export Tariff for new rooftop solar customers would be $0.129/kWh. The export rate would decline 10% annually for new rooftop solar systems, but customers would lock in their rates for 10 years when they sign up.

Terms of APS-Solar Industry Settlement (03/01/17) New rate design options Time-of-use rates Non-mandatory residential demand charge rates The agreement also establishes a 20-year grandfathering period for customers who file an interconnection application before a decision is issued in the rate case.

Payback –> 10.5 – 13.5 years

Impact on Residential PV System – Net Billing Payback – 19.5 years