1. Distributed Generation Valuation from a Ratemaking Perspective Presentation to the ACC Workshop Tom Beach, Principal Crossborder Energy Consultant to the Solar Energy Industries Association May 7, 2014

2. Overview Basic concepts Framework for DG Valuation Key Principles ◦ Fairness ◦ Cost causation ◦ Customer choice Critical New Data Final Thoughts Crossborder Energy2

3. Distributed Generation is a resource. NEM is a billing arrangement for DG exports. Without NEM, customers who install renewable DG have certain rights under federal law (PURPA) To interconnect with the grid To offset their own load To receive an avoided cost price for exports to the grid “Running the meter backward” is the essence of NEM. Exports to the grid are credited/priced at the retail rate. Does the retail rate credit accurately capture the value of the power exported? Most of the output of net-metered PV systems never touches the grid. Typically, one-half to two-thirds of PV output serves the on-site load, before power is exported to the grid. 3Crossborder Energy

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5. We’ve been down this road before… …with other demand-side resources that depend on customer adoption. ◦ EE/DR have been incorporated as standard resources in utility planning & regulation. ◦ Benefit / cost tests per the Standard Practice Manual DG presents added challenges. ◦ Interconnected to the grid, with safety and operational impacts. ◦ Reduces demand and increases supply. ◦ Can produce 100% of the customer’s on-site usage. ◦ DG plus storage could compete with utility service. 5Crossborder Energy

6. Benefit (+) / Cost (-) Tests for Demand-side Programs Category Total Resource Cost (TRC) Ratepayer Impact (RIM) Participant (PCT) Capital and O&M Costs of the DG Resource –– Utility Lost Revenues (Customer Bill Savings), plus Incentives – + Avoided Costs -- Energy -- Capacity -- T&D, including losses -- Ancillary Services -- Environmental -- RPS -- Other ++ Federal Tax Benefits ++ 6Crossborder Energy

7. Example from Draft Nevada NEM Study (released by PUCN on May 1, 2014) Crossborder Energy7

8. Comprehensive RIM Test: Benefits and Costs of Net-metered DG Benefits ◦ Energy ◦ Capacity ◦ Ancillary Services ◦ Transmission ◦ Distribution ◦ Environmental ◦ Avoided Renewables ◦ Other  Grid security  Market price mitigation Costs ◦ Lost retail rate revenues ◦ DG Incentives ◦ Integration costs 8Crossborder Energy

9. Key Principles: fairness and cost causation Assess benefits and costs of DG over the life of the DG system, like other resources. In the long-run, few costs are fixed. Recognize where DG is located. DG exports are generation. Costs to serve DG customers must consider their different load profile. Appreciate the new risks borne by DG customers. Customers’ DG investments are long-term contributions to public purpose goals. 9Crossborder Energy

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11. SEIA Rate Design Principles 11 1. Rates should be based on marginal costs which emphasize a long-run perspective. 2. Rates should encourage conservation and integration of renewables. 3. Rates should reduce peak demand. 4. Rates should include the development of time-of-use (TOU) tariffs. 5. Rates should be based on cost-causation principles. 6. Any rate design should not be discriminatory toward renewables. 7. Rates should have transparency, with enough availability of data so that the customer has predictability into what their rate should be. 8. Any rate redesign should minimize any impact to existing customers, such as grandfathering in existing customers (no retroactivity), with the option to opt into a new rate. 9. There should be a smooth transition to a new rate structure. 10. Customer charges should be avoided. 11. Rates should encourage economically efficient decision-making. Crossborder Energy

12. Respect the Benefits DG Customers Provide Enhanced reliability ◦ Enables distributed storage Sited in the built environment ◦ Fewer land use & environmental impacts A new source of capital for clean energy infrastructure Competition for the utility’s retail power Customer engagement & choice ◦ Appeal of clean tech / no moving parts ◦ DIY / self-reliance ◦ Jeffersonian ideal of the citizen (solar) farmer 12Crossborder Energy

13. Critical Data (1) 13 Long-run marginal or avoided cost data for each utility function. ◦ Generation (energy and capacity) ◦ Transmission (capacity and losses) ◦ Distribution (capacity and losses) Example: NERA regression method for marginal transmission capacity costs (10 years recorded, 5 years forecasted) Crossborder Energy

14. Critical Data (2) 14 Distribution substation loads ◦ Correlate solar output with distribution system peaks Crossborder Energy

15. It was the worst of times… “3 Utilities Most Likely To Fall In Death Spiral, According To Morningstar” ◦ Forbes, March 27, 2014 “Tipping Point Nears for Abandoning the Utility and Going Off-Grid: Morgan Stanley sees falling PV costs, Tesla’s big battery bet and rising electricity prices as cues for consumers to disconnect from the grid.” ◦ Greentech Media, March 27, 2014 15Crossborder Energy

16. It was the best of times… “achieving the 2050 target [an 80% reduction in carbon emissions compared to 1990] will require… large-scale electrification of on-road vehicles, buildings, and industrial machinery….” ◦ California Air Resource Board, Proposed First Update to the Climate Change Scoping Plan (February 2014, at 37) Primary Energy (EJ) California 2010California 2050 Direct Fossil Fuel Use 5.59 64% 0.94 14% Direct Biofuel Use 0 0% 0.73 11% Electricity 3.11 36% 5.14 75% Total all fuel types 8.70 100% 6.81 100% Source: J.H. Williams et al., “The Technology Path to Deep Greenhouse Gas Emission Cuts by 2050: the Pivotal Role of Electricity,” Science 335, 53 (2012), at Table 1. 16Crossborder Energy