Helping Utilities Make Smart Solar Decisions Distributed Solar Transactions: NEM and Beyond MEC Conference October 2013

Helping Utilities Make Smart Solar Decisions About SEPA 2 Educational 501(c)3 non-profit Membership Utilities Joint Action Agencies, G&Ts, RTOs, FPAs Wholesale Marketers, IPPs Manufacturers Project Developer/ Installer/ Distributors Business & Professional Services Affiliates Formed by utilities for utilities 20 years of service Balanced perspective Research, education, collaboration and advisory services 430+ Utilities 52% of electricity customers +90% of installed solar capacity 500+ solar stakeholders

Helping Utilities Make Smart Solar Decisions Aligning Solar and Utilities Sampling of 340 Utility Members 3

Helping Utilities Make Smart Solar Decisions Role of DG in Top 10 Solar States 4

Helping Utilities Make Smart Solar Decisions Critical DG Issues Grid integration –Distribution grid operational concerns – safety, reliability, operations, and grid management Customer expectations –Satisfaction tied to the experience of “going solar” –Customers now perceive “choice” in electricity source Business impacts of net metering –Revenue loss –Rate inequity, upward rate pressure –Obscured subsidies/lack of transparency 5

Helping Utilities Make Smart Solar Decisions Net Metering: What’s the Issue? 6 Is net metering in and of itself the problem? Or is it net metering in combination with how rates are currently designed?

Helping Utilities Make Smart Solar Decisions SEPA Position on NEM Customer-sited solar generation will play an increasingly important role in the energy mix for utilities and consumers. NEM policies promote the deployment of customer-sited distributed solar generation in many markets. However, NEM and rate design, inherently linked, need to evolve to transparently allocate costs and benefits, compensating all parties for their value contribution. This transition will only be effective when utilities, the solar industry and customers collaborate to create a sustainable solar distributed generation marketplace. 7

Helping Utilities Make Smart Solar Decisions Financial Impacts of NEM Timing dictates impacts on shareholders & customers 8 Impact on non-solar ratepayer Total Annual Incentive + = Impact redistributed to ratepayers Revenue Requirement: Authorized returns Tax and depreciation Operations and Maintenance Total Annual Incentive: Sum of Production-based incentive payments Variable Costs: Operating costs saved after solar installation Fuel and potentially O&M Fixed Costs: Costs previously incurred in deploying utility infrastructure Generation, T&D, etc. Impact on shareholders Revenue Requirement Not Collected = Shareholder Impact (Between rate cases) (Post-rate case)

Helping Utilities Make Smart Solar Decisions Ratemaking and NEM Types of Utility Charges Allocation of Costs Typical ResidentialTypical Non-Residential Customer Charges ($/month) Metering Billing Metering Billing Demand Charges ($/kW) N/A Generation, Transmission, and Distribution capital investments Volumetric Energy Charges ($/kWh) Generation, Transmission, and Distribution capital investments Fuel costs Variable O&M expenses Fuel costs Variable O&M expenses Adjustor Clauses ($/kWh) Fuel adjustment clauses Renewable program costs Fuel adjustment clauses Renewable program costs 9 Impacted For more information, see SEPA’s “Ratemaking, Solar Value and Solar Net Energy Metering – a Primer” (July 2013) Not Typically Impacted

Helping Utilities Make Smart Solar Decisions Rate Design Alternatives Amend rate design to recover fixed costs by broadening the application of fixed or demand charges to all customer classes Fixed Cost Recovery “Line-item” accounting of services provided by utility to customer and by customer to utility (e.g., interconnection, integration, energy, capacity, system deferrals, etc) Net services are billed to customer or utility (as applicable) Cost of Service Model Customer billed for all consumption under currently applicable utility retail rate Utility purchases solar output based on predetermined rate Dual Rate Alternative 10

Helping Utilities Make Smart Solar Decisions Demand-Based vs. Volumetric Demand-based Rate Design (Typical Non-Residential) Volumetric Rate Design (Typical Residential) 11 NEM Transaction

Helping Utilities Make Smart Solar Decisions Value of Solar Overview Solar FiT, Clean Contract, etc. 12 Rate is established through a transparent and repeatable analysis, potentially annually Customer continues to pay their full retail rate based on consumption PV systems are interconnected on the “utility side” of the meter PV system production is individually monitored Customers are compensated based on system production and the VOS rate Market analysis is used to establish incentives to facilitate PV market above and beyond the VOS (if necessary) Incentive program design demonstrates support, with established declines, if necessary VOS sends appropriate market signals VOS can be established for the system as a whole, or it can be designed to send specific locational signals Maintain simplicity for both communications and transaction administration Retains conservation signal for customer The Value of Solar (VOS) transaction is based on a rate, reflecting the benefits and costs of distributed PV resources, which is offered to customers in exchange for PV output Attributes of the VOS transaction model

Helping Utilities Make Smart Solar Decisions Value of Solar Components 13 Value BucketDefinition Energy Distributed PV produces energy that would otherwise need to be produced by the utility. This energy comes at a fixed value (i.e., not subject to price volatility). Generation Capacity Solar production correlates (in part) with most utility system peaks. This can result in some level of generation capacity deferral (depending upon the capacity value of solar and the utility’s forecast need for new generation). T&D Deferral Distributed PV may have the potential to defer some T&D expenses, due to reduced loadings on equipment. System Losses Distributed PV is sited at the load, rather than remotely; therefore, losses associated with transmitting the energy across the T&D system are avoided. Environmental Solar can reduce the environmental compliance costs utilities may face (e.g., SOx and NOx). In some jurisdictions, increased levels of distributed solar can lower the otherwise applicable RPS requirements, saving the utility compliance costs. System Integration Cost allocated to intermittent resources for additional operating reserves that are required to maintain system reliability.

Helping Utilities Make Smart Solar Decisions Value Analysis and Period Similar valuations presented differently 14 Source: T. Hoff et al, “The Value of Distributed Photovoltaics to Austin Energy and the City of Austin”; March 17, 2006 CPS Energy – VOS Study

Helping Utilities Make Smart Solar Decisions Importance of Program Design 15 Fixed Value Customers receive a fixed Levelized Cost of Energy (LCOE) Price locked in for term of agreement (20 years) Curve refreshed routinely but new value applies to new customers only Floating Value Customers given a fixed LCOE based on the VOS Value recalculated every X years Refreshed LCOE applies to all customers Tiered Step-down VOS is an endpoint Incentives used to bridge today’s transaction price to true VOS Step-down can be throttled to speed up or slow down transition depending upon market conditions Calculating a Value of Solar is only the first step What VOS buckets are applicable to our utility? Can they be easily monetized? Can we calculate the VOS in house or is outside expertise required? What happens with grandfathered customers? Is there a transition plan? How often will the VOS be refreshed? Does the refresh apply to everyone or just new installs? Will the price be levelized or priced based on a forecast annual curve? Is the VOS going to cause solar transactions, or are incentives required?

Helping Utilities Make Smart Solar Decisions Pitfalls of Stakeholder Processes Stakeholder perception that outcomes have been predetermined, with stakeholder process used only to justify results Talking “at” stakeholders rather than discussing “with” stakeholders Positive components of the plan getting overshadowed by items stakeholders disagree with 16

Helping Utilities Make Smart Solar Decisions Stakeholder Engagement Plan Communicate the End Objective FIRST Clearly articulate to stakeholders what the end objective of the process will be –Ex 1: a viable and transparent solar transaction that supports XYZ Utility’s goals, keeps costs down for distributors, and creates a functioning solar market –Ex 2: review of VOS compared to current program (retail rate +incentive until 2016), with determination if a change needs to occur Lay out at the beginning what the stakeholder process will look like, how feedback/suggestions will get incorporated, and what will happen with the stakeholder process ends 17

Helping Utilities Make Smart Solar Decisions Stakeholder Engagement Plan Identify players/roles, and outline process Level of EngagementPhases of Process 18 Observer Passive involvement; treated as an audience who is receiving the information with no ability to provide input Open participation Reviewer Moderate involvement; allowed to provide feedback on initial decisions and have that feedback incorporated where appropriate Affected stakeholders only Collaborator High level of involvement; seat at the table as decisions are being made with a voice in the process Targeted & influential group Value of Solar Setting the input assumptions into model and the refresh frequency Program Design Transforming program to VOS framework, necessary incentives, timing, etc GFCs Treatment of Grandfathered Customers compared to new customers; transition plan (if any)

Helping Utilities Make Smart Solar Decisions 19 Julia Hamm President & CEO Eran Mahrer EVP, Strategy & Research Contact Information