1. 1 Modeling Distributed Generation Adoption using Electric Rate Feedback Loops USAEE Austin, TX – November 2012 Mark Chew, Matt Heling, Colin Kerrigan, Dié (Sarah) Jin, Abigail Tinker, Marc Kolb, Susan Buller

2. Modeling Distributed Generation Adoption using Electric Rate Feedback Loops USAEE 2012 – Pacific Gas & Electric Company 2 Contents Background/Motivation Methodology Results and Next Steps

3. Modeling Distributed Generation Adoption using Electric Rate Feedback Loops USAEE 2012 – Pacific Gas & Electric Company 3 Background (1/2) What is DG? In this context, DG is generation (primarily solar PV) on the customer side of the meter, where most of the power displaces grid-supplied energy. How Much DG is in PG&E’s Service Area? 27% of nationwide rooftop systems are located within our service area, compared to 5% population 69,000 rooftop PV systems installed as of July 31, 2012, growing at approximately 1,000/month 693 MW -- 290 MW Res, 403 Non-Res solar DG, compared to over 20 GW max demand What are the Key Drivers? Declining costs of PV technology Availability of attractive ownership structures (lease, PPA) High percentage of customer base is green-minded High marginal customer rates, which customers can avoid paying through DG Supportive policy in California (eg. direct subsidies, Net Energy Metering (NEM), Virtual NEM) Political climate in California strongly supportive of DG

4. Modeling Distributed Generation Adoption using Electric Rate Feedback Loops USAEE 2012 – Pacific Gas & Electric Company 4 Background (2/2) Why is it significant to PG&E? Continued growth without fundamental changes in rates will allow DG adopters to avoid paying for grid and other services that they receive –In California, residential customers are charged in 4 tiers, with marginal rates increasing with increasing monthly usage –Residential customers with the largest monthly usage are most incentivized to adopt DG; revenues lost from these adopters are much larger than costs avoided –“Cost shift” refers to the increase in costs among non-adopters, when policy allows DG adopters to pay less than their share of costs to the utility they generate Because of present rate structure, a shrinking population high-use customers (those most likely to adopt) will cover these costs through higher rates Why is a model needed? In a decoupled environment, high rates drive DG adoption; DG adoption drives rates even higher Impacts of different policies are hard to intuitively predict because of the positive feedback dynamic The model guides PG&E’s leadership on how to best enable a sustained DG industry without unfairly harming non-adopters  Goal of analytical effort is to evaluate the impact of different DG policies

5. Modeling Distributed Generation Adoption using Electric Rate Feedback Loops USAEE 2012 – Pacific Gas & Electric Company 5 Contents Background/Motivation Methodology Results and Next Steps

6. Modeling Distributed Generation Adoption using Electric Rate Feedback Loops USAEE 2012 – Pacific Gas & Electric Company 6 LVOEs depend on previous years’ rates; LCOEs are based on technology cost and performance assumptions. Adoption is based on Cost Effectiveness, which is based on the Levelized Cost of Energy (LCOE) of DG technologies and the Levelized Value (LVOE) produced by the DG units. Rates module uses adoption information to calculate the new rates, which in turn are fed back into the LVOE module to restart the loop DG Model Structure Adoption RatesLVOE LCOE Levelized Cost of Energy Levelized Value of Energy

7. Modeling Distributed Generation Adoption using Electric Rate Feedback Loops USAEE 2012 – Pacific Gas & Electric Company 7 Cost-Effectiveness Module Capital costs (including finance structure) O&M costs Fuel costs Electric efficiency Thermal efficiency Tax benefits Incentives Electric rates (forecast) Gas rates (forecast) Generation profiles Compensation mechanisms (e.g., NEM, FiT) Capacity factor Degradation rates Discount rate LCOE Inputs LVOE Inputs Common Inputs DG Technology Cost- Effectiveness Adoption Module

8. Modeling Distributed Generation Adoption using Electric Rate Feedback Loops USAEE 2012 – Pacific Gas & Electric Company 8 Customers Segmented to Forecast Adoption Adoption Module Adoption and Energy Impacts to Rates Inputs from Cost Effectiveness Module Regression Model on Adoption from 2003-2010 Historic Cost Effectiveness Projected Cost Effectiveness Adoption Behavior Usage Rate Type Income Homeownership Geography Historic Customer Characteristics

9. Modeling Distributed Generation Adoption using Electric Rate Feedback Loops USAEE 2012 – Pacific Gas & Electric Company 9 DG Adoption Causes Rate Increase Procurement Cost Integration Cost Interconnection Cost Capacity Cost Rev. Required Customer Charge Demand Charge Energy Charge Number of Customers Maximum KW kWh consumption * * * RATE Although RRQ will decrease because of net avoided cost (expense), this does not offset the lost revenue from decreasing kW and kWh sales. Rev. Collected Incentives & Admin Cost v Cost of doing business 1a 1b 2

10. Modeling Distributed Generation Adoption using Electric Rate Feedback Loops USAEE 2012 – Pacific Gas & Electric Company 10 Contents Background/Motivation Methodology Results and Next Steps

11. Modeling Distributed Generation Adoption using Electric Rate Feedback Loops USAEE 2012 – Pacific Gas & Electric Company 11 Results Main Insights from Model The DG model is being used to prepare for high DG scenarios The scenario that would create the greatest cost shift is “virtual net metering” – where all customers could count remotely located PV against their current consumption, under the current rate structure Because of rate structure, costs caused by DG are shifted to customers who are unable to lower their usage or adopt DG – a fairness issue Rate changes to address high bill impacts also significantly reduce cost shift from DG Cost Shift $

12. Modeling Distributed Generation Adoption using Electric Rate Feedback Loops USAEE 2012 – Pacific Gas & Electric Company 12 Next Steps Work with stakeholders on rate reform Seek sustainable future with healthy DG market and customer choice Explore alternatives to Net Energy Metering (NEM) that provide fair compensation Reduce the highest rate tiers Make rate structure less volumetric, to reflect actual costs of service

13. 13 Thank You Mark Chew mark.chew@pge.com