1. CPUC CSI Workshop CPUC CSI Stakeholder Workshop San Francisco, CA February 15, 2012

2. Energy and Environmental Economics, Inc. E3 has operated at the nexus of energy, environment, and economics since it was founded in 1989. The firm advises utilities, regulators, government agencies, power producers, energy technology companies, and investors on a wide range of critical issues in the electricity and natural gas industries. Offices in San Francisco, CA and Vancouver, B.C. 25 professional staff in economics, engineering & policy 2

3. About E3 E3’s expertise in 8 key practice areas has placed us at the center of energy planning, policy and markets in California and the West. 3 Emerging Technology Strategy Energy Markets and Financial Analysis Transmission Planning and Pricing Energy and Climate Policy Cost of Service and Rate Design International Electricity Policy and Planning Energy Efficiency and Distributed Resources Resource Planning and Procurement

4. E3 Support of CSI Self-Generation Incentive Program (2007) CPUC DG Cost-effectiveness Protocols (2009) Net energy metering cost-effectiveness study (2009) Detailed bill calculations and load research data to isolate the difference between bill savings and wholesale value across all of the customer classes Overall CSI Cost-effectiveness (2010) Evaluation of trajectory of standard cost tests including the Total Resource Cost, Program Administrator Cost test, and Ratepayer Impact Measure. 4

5. Agenda for Today Problem Statement Overview of Straw Man Proposal Self-assessment of Strengths and Weaknesses Detailed Considerations Discussion 5

6. Original Problem Statement Problem Statement It is difficult to make the cost reporting of total installed cost ($/watt) meaningful to a broad audience Proposed Solution Translate the reported costs ($/watt) into levelized cost of energy (LCOE) ($/kWh) that is more broadly understood 6 Evaluating the reported cost data reveals a more foundational problem in standardizing reported cost figures for 3 rd party owned and leased systems. However,

7. Why is this a problem? The existing ‘loose’ definition of reported costs is a proxy based on estimated fair market value makes analysis using the data suspect, and creates an artificial competitive landscape By reporting a proxy of the cost to consumers the CPUC cannot really pursue its consumer protection responsibilities By reporting the upfront cost only, the data cannot capture arguably the biggest innovation in the CSI program which is the financing models and 3 rd party ownership 7

8. Straw Man Solution Step 1: Create a standardized reporting metric for 3 rd party and leased systems that is conducive to calculating LCOE, the NPV of customer payments Update powerclerk and reporting vehicles for 3 rd parties Step 2: Calculate the estimated LCOE resulting from systems using the NPV and standard assumptions Could be either included in the CA Solar Statistics or developed through a ‘study’ that was released with regular CSI reports Repeat Step 1 and 2 to provide an approach to calculate comparable NPV $ and LCOE for self- financed systems 8

9. High level Proposed Approach Instead of the fair market value proxy, report the net present value (NPV) of customer payments for 3 rd party systems This value would populate a separate field in PowerClerk Stipulate the discount rate and other assumptions used To calculate LCOE, use standard LCOE formulation on the reported NPV with some stipulated assumptions Customer-owned systems will be more difficult than 3 rd party systems in this exercise 9

10. Example: Calculating the NPV & LCOE 10

11. Key Input Assumptions for NPV Proposal for input assumptions Use the average utility after-tax weighted average cost of capital for the discount rate in the NPV Current value is 7.56% Use standardized degradation factor For example 1% per year Calculate the full stream customer payments to the end of the available, and then assume customer exercises buy-out option Puts everyone on same basis with system ownership at the end No assumptions about early buy-out 11

12. Comparison to Customer-owned How do we make customer-owned systems comparable? Using standardized finanical pro-forma tool calculate ratios of NPV $ to upfront cost Use same assumptions on degradation and system life to calculate LCOE Assume inverter replacement and O&M costs Self Financing Models Assume self-financed residential is 100% home equity loan Assume self-financed commercial is financed with some debt and some equity, and is a taxable entity 12

13. Residential Home Equity Example EPBB Incentive 1.25% PV Degradation 20-year System Lifetime 13 30 $/kW-yr O&M Cost 10-year Inverter Lifetime 0.357 $/W Inverter Replacement Cost 100% Debt Financing through home equity Loan 5.50% Debt Interest Rate

14. Commercial Self-Financed Example PBI Incentive 1.25% PV Degradation 20-year System Lifetime 25 $/kW-yr O&M Cost 10-year Inverter Lifetime 14 0.357 $/W Inverter Replacement Cost Financing 60% Equity Financing (40% Debt) 7.67% Debt Interest Rate 10.72% Cost of Equity 5-year MACRS

15. Converting Upfront Cost to NPV$ Ratios to Estimate NPV $ from Installed Cost Example for Step 1 in Estimating LCOE for Self- financed systems without 3 rd Party Ownership Installed Cost = $8/W, 1kW, Residential Tier 10 $8/W * 0.59 = NPV $ 4.72/W 15

16. Calculating the LCOE for Self-financed 16

17. Discussion General reaction Usefulness of the NPV metric to the CPUC, developers Level of difficulty in calculating and reporting NPV vs. the Fair Market Value in the CSI incentive Details: assumptions that have to be stipulated Process to report estimated capacity factor 3 rd party systems; Discount rate, degradation, PV life, buyout / contract terms Self-financed systems Financing structure, rates, terms to calculate NPV$ Use same discount rate, degradation, and PV life 17

18. Thank you Contact: Snuller Price, Partner snuller@ethree.com Michael King, Senior Consultant mike@ethree.com Energy and Environmental Economics, Inc. 101 Montgomery Street, San Francisco, CA 94104 (415) 391 – 5100