1. Copyright © 2015 The Brattle Group, Inc. I Can’t Do it On My Own The Economics of Distributed PV/Battery Systems to Reduce Grid Reliance USAEE 2015 Roger Lueken Will Gorman Phil Hanser James Mashal October, 2015 PRESENTED BY

2. USAEE 2015 | brattle.com1 Agenda Introduction and Motivation Methods Results Implications for Utilities and Future Work

3. USAEE 2015 | brattle.com2 Agenda Introduction and Motivation Methods Results Implications for Utilities and Future Work

4. USAEE 2015 | brattle.com3 Introduction and Motivation Solar PV installations have been growing exponentially Cumulative U.S. capacity is 10 – 15 GW DC and doubling every 1 – 2 years Three factors are driving the growth of solar ▀ Reductions in installed system costs ▀ Favorable incentives, including feed- in tariffs; the Federal investment tax credit; local and state tax incentives; and carbon pricing in some regions ▀ New financing options and business models, such as solar leases (Solar City and SunEdison) Distributed solar has maintained a significant market share, despite high costs relative to utility-scale installations Sources and Notes: GTM Research U.S. Solar Market Insight 2014 Year in Review, LBNL Tracking the Sun VIII (2015) Median U.S. Installed Price U.S. Cumulative and Annual PV Installations, by Year Annual U.S. Solar PV Installations

5. USAEE 2015 | brattle.com4 Introduction and Motivation Drivers of distributed PV/battery systems ▀ Analysts have predicted a growth in distributed batteries collocated with distributed PV ▀ Distributed battery storage can manage the intermittency of PV on-site, reducing grid- related costs ▀ Distributed storage can also provide other system-level benefits −Deferred T&D investment −Avoided energy and capacity costs −Improved reliability ▀ Customers may be motivated to install distributed PV/battery systems for several reasons: −Reduced electricity bills, due to favorable rates, subsidies, and three-part rate structures with demand charges and time of use rates −Improved reliability by serving as backup power and reducing reliance on the central grid −Reduced CO 2 emissions Tesla Energy Powerwall System-Wide Annual Benefits and Costs of Distributed Storage in ERCOT Source: Brattle, The Value of Distributed Electricity Storage in Texas Source: Tesla

6. USAEE 2015 | brattle.com5 Introduction and Motivation This trend raises a few questions… How realistic is it for residential customers to use a PV/battery system to either go completely ‘off-grid’, or reduce their reliance on the grid? −How large would a PV/battery system need to be? −Are there economic benefits to customers? −Are CO 2 emissions reduced significantly? −How will costs and benefits change in the future as the costs of PV/battery systems continue to fall? −Are some areas of the country more favorable to distributed PV/battery systems than others? We analyze how PV-battery systems of various sizes can reduce a residential customer’s dependence on the central grid, how they affect customer costs, and how they reduce CO 2 emissions

7. USAEE 2015 | brattle.com6 Agenda Introduction and Motivation Methods ▀ Model Structure and Optimization Heuristic ▀ Load and Solar Profiles ▀ Cost and Performance Assumptions ▀ Miscellaneous assumptions Results Implications for Utilities and Future Work

8. USAEE 2015 | brattle.com7 Methods Model Structure and Optimization Heuristic We use a linear optimization model to simulate how system size and cost change as customers meet a greater fraction of their load from on-site generation ▀ Objective Function: −Minimize total customer costs (battery, PV, energy, and outage costs) ▀ Constraints: −The customer must meet a specified percentage of annual load from the PV/battery system −Battery heuristic: Each hour, charge if on-site generation exceeds load, unless fully charged; discharge if on-site generation is less than load, unless fully discharged. −The customer must pay the retail rate for energy purchases and is reimbursed the retail rate for energy sales (feed-in tariff) ▀ We simulate customers in 5 cities: Austin, TX; Sacramento, CA; Orlando, FL; Newark, NJ; Omaha, NE ▀ Outage costs calculated assuming 2013 SAIDI metrics (less than 3 hours of outage per year) and $9,000/MWh value of lost load

9. USAEE 2015 | brattle.com8 Methods Load Profiles ▀ Hourly residential load data derived from DOE’s OpenEI database −Load data is simulated based on residential building models and the EnergyPlus simulation software −Simulated load includes both end uses dependent on weather (HVAC) and independent of weather (plug loads) ▀ Data shows daily and seasonal load patterns Average Annual Hourly Load Profile Sources and Notes: DOE Office of Energy Efficiency & Renewable Energy. We used hourly load profiles for homes in each of the 5 cities

10. USAEE 2015 | brattle.com9 Methods Solar Profiles PV generation simulated using NREL PVWatts software ▀ Simulates hourly PV generation, using input system characteristics and hourly weather data ▀ We used default system characteristics and typical meteorological year (TMY3) data for each city Average Annual Hourly PV Generation Profiles Sources and Notes: National Renewable Energy Laboratory (2015).

11. USAEE 2015 | brattle.com10 Methods Costs and Performance Assumptions Sources and Notes: PV cost data are from the SEIA’s Q1 2015 Solar Market Insight Report, and PV lifespan from the PSCo DSG Study report. Our battery life efficiency is based off of Tesla Powerwall specification and warranty. Storage cost is based on the wholesale uninstalled 10 kWh Tesla Powerwall. These costs understate the true lifetime costs of the battery as Tesla excludes installation and inverter and these capital costs do not take into account O&M. We use a 5% interest rate with no deductions. PV System PV Installed System Cost$3.5 $/W-DC System SizeVaried Lifespan20 years Annual Charge Rate8% PV PerformancePVWatts Default Battery Storage System Installed Cost$350/kwh System SizeVaried DurationVaried Round Trip Efficiency 92% Lifespan10 years Annual Charge Rate12% Annual Cost$45.33/kwh LocationRetail Rate [cents/kWh] Sacramento, CA12.49 Austin, TX11.09 Nebraska10.68 New Jersey16.46 Orlando12.49 Sources and Notes: Retail rates from 2013 EIA 861 for the local utility. Wholesale prices are average monthly prices for the nearby zone pulled from Velocity Suite, ABB Inc. ▀ We make cost and performance assumptions that are generally favorable to PV and battery ▀ We assign retail rates based on EIA data −We assume customers pay a flat retail rate −We assume customers receive a feed-in tariff, i.e. they receive the retail rate for power sold −Currently very few residential customers pay demand charges or time-of-use rates Cost and Performance Assumptions Modeled Retail Rates

12. USAEE 2015 | brattle.com11 Agenda Introduction and Motivation Methods Results ▀ System Size ▀ System Costs ▀ Implied Cost of Carbon ▀ Sensitivity to Solar PV Costs Implications for Utilities and Future Work

13. USAEE 2015 | brattle.com12 Results System Size System size is heavily dependent on a customer’s level of self-reliance ▀ Achieving moderate levels of self-reliance (25% - 50%) requires small PV systems and little to no storage ▀ Achieving high levels of self-reliance requires significant oversizing −Driven by occasional periods of several days with continuous low solar insolation, often during winter months −Increasing self-reliance from 90% to 100% requires increasing PV and battery sizes by 2x – 8x System Size Versus Level of Self-reliance Sources and Notes: The default optimization model assumes FIT payments leading to a bias towards larger PV systems rather than larger batteries

14. USAEE 2015 | brattle.com13 Results System Operations Even for moderately sized systems, customers are net exporters many hours Customers that are highly self- reliant must often export very large amounts of power each hour ▀ Going from 90% to 100% self- reliance requires significant oversizing and results in very large hourly exports Average Hourly Net Load, 4 kW PV system Average Hourly Grid Sales Sacramento home with varying levels of self-supply

15. USAEE 2015 | brattle.com14 Results Battery Sizing and Operation At low levels of self-reliance, batteries are sized to fully cycle frequently (daily cycling) At high levels of self-reliance, batteries are oversized and fully cycle only a few times per year (seasonal cycling) Battery State of Charge with 50% Grid Power Notes: Sacramento. The default optimization model assumes FIT payments leading to a bias towards larger PV systems rather than larger batteries. Battery State of Charge with 1% Grid Power

16. USAEE 2015 | brattle.com15 Results System Costs ▀ Cost premiums increase as moderately customers become more self- reliant. Above 90% self-reliance, cost premiums increase exponentially. −For example, in Sacramento retail prices were $0.12/kWh in 2013. Meeting 50% of load locally would cost the equivalent of $0.18/kWh, or a 50% premium. Meeting 100% of load locally would cost $0.84/kWh, a premium of 600% Self-Reliance Versus Costs

17. USAEE 2015 | brattle.com16 Results Implied Cost of Carbon ▀ The amount of emissions offset is primarily a function of the PV system size and the marginal fuel type ▀ Storage creates no significant emission reductions, and in some systems may increase emissions. ▀ Implied cost of carbon calculated based on the cost increase of the system divided by the emission reduction benefits ▀ Without storage, implied cost of carbon is ~$90/ton if gas is on the margin, and ~$45/ton if coal is on the margin. Implied Cost of Carbon due to PV-battery systems Notes: Assumed CO 2 emission rates for gas plants of 1,135 lb/MWh and for coal of 2,250 lb/MWh

18. USAEE 2015 | brattle.com17 Results At what cost does PV become lower cost than utility supplied power? Solar costs are declining rapidly and may eventually become lower cost than utility-provided power ▀ Over the fifteen year period from 1998 - 2014, installed PV costs have declined by ~6.5% per year Across the 5 locations analyzed, we find solar PV would breakeven with retail rates at $1.76 - $2.70/W DC Sources and Notes: Assumes PVWatts generation profile from National Renewable Energy Laboratory (2015), PV charge rate of 8%, and local annual retail rates. Breakeven Cost of PV for Retail Customers Residential PV Price Projections

19. USAEE 2015 | brattle.com18 Agenda Introduction and Motivation Methods Results Implications for Utilities and Future Work

20. USAEE 2015 | brattle.com19 Implications and Future Work ▀ Up to a point, customers willing to pay a premium can generate the majority of their power locally with PV/storage systems ▀ However, it is infeasible for customers to completely disconnect −Costs and system sizes rise exponentially −Results in significant exports, possibly causing grid stability problems ▀ PV systems do reduce emissions; however there are currently more cost- effective options −Energy efficiency −Utility-scale solar −Coal to gas switching ▀ Distributed solar may become cost competitive in the not-too distant future ▀ Utilities should continue to innovate and develop rate designs and incentives that will maximize customer benefits through the optimal deployment of distributed PV/battery systems

21. USAEE 2015 | brattle.com20 Contact Information The views expressed in this presentation are strictly those of the presenter(s) and do not necessarily state or reflect the views of The Brattle Group. ROGER LUEKEN Associate │ Washington, DC Roger.Lueken@brattle.com +1.202.419.3321 PHILIP HANSER Principal│ Cambridge, MA Phil.Hanser@brattle.com +1.617.234.5678 WILL GORMAN Research Analyst │ Cambridge, MA Will.Gorman@brattle.com +1.617.659.5100

22. USAEE 2015 | brattle.com21 About The Brattle Group The Brattle Group provides consulting and expert testimony in economics, finance, and regulation to corporations, law firms, and governmental agencies around the world. We combine in-depth industry experience, rigorous analyses, and principled techniques to help clients answer complex economic and financial questions in litigation and regulation, develop strategies for changing markets, and make critical business decisions. Our services to the electric power industry include: Climate Change Policy and Planning Cost of Capital & Regulatory Finance Demand Forecasting & Weather Normalization Demand Response & Energy Efficiency Electricity Market Modeling Energy Asset Valuation & Risk Management Energy Contract Litigation Environmental Compliance Fuel & Power Procurement Incentive Regulation Market Design & Competitive Analysis Mergers & Acquisitions Rate Design, Cost Allocation, & Rate Structure Regulatory Compliance & Enforcement Regulatory Strategy & Litigation Support Renewables Resource Planning Retail Access & Restructuring Strategic Planning Transmission

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