Fair Rate Setting for a
Renewable Future
Renewable Cities Forum, Vancouver BC, May
2015
Filename, Version
1
Basic Principles of Electric Rate Setting





Requires forecasting the future, balancing competing interests, and
meeting financial goals.
Involves both economic analyses and public policy decision making.
Rates should be sufficient to meet the utility's revenue requirements,
while providing lowest possible cost to the ratepayer over the long run.
Rates should be based on the actual costs of service, and reflect changes
in costs of service over time.
Rates should fairly allocate the different costs of providing service
among groups of customers.

Customers are grouped in “classes” with similar characteristics, e.g.
quantity, type, and pattern of energy use

Customers within a class should be treated equally

No class or customer should be unduly discriminated upon
2
Objectives for Rate Design
Revenue adequacy
Revenue stability and predictability
Price stability and predictability
Economic efficiency in supply and consumption
Recognition of positive and negative externalities
Fairness in apportionment of cost of service
Avoidance of undue discrimination
Freedom from controversy as to proper interpretation
Convenience of payment
Simplicity
Certainty
Economy of collection
Understandability
Feasibility
Acceptability
Rate Setting Process
Step 1: Revenue Requirements Analysis
The analysis of the revenues required to meet the Utility's operating and
maintenance expenses, and to finance upcoming capital improvements.
Step 2: Cost of Service and Cost Allocation
The analysis of distributing the revenue required by the utility to
customer classes so that the revenues recovered from each customer
class are based on the cost to serve it.
Step 3: Rate Design
The process of shaping rates, charges and credits for each customer class
so that the customers in each class not only contribute their portion of
revenue requirements but also receive appropriate price signals
consistent with policy goals.
Revenue Requirements Analysis:
Common Electric Utility Embedded Costs
• Power Plants & Fuel (Capital & O&M)
• Energy Purchases
• Reserve Capacity Requirements
• Transmission & Distribution (Capital & O&M)
– wires, poles, transformers, substations, relays, meters, etc.
• Regulatory Costs
• Customer Assistance Programs
– e.g. low-income programs, efficiency incentives
• Customer service
– call centers, interconnection, billing, payment processing, collections
• Other staff
– management, regulatory, legal, engineering, maintenance, admin...
• Financing Costs / Debt Service
Embedded Cost Characteristics
These costs have different characteristics, that
have implications for forecasting and cost
allocation:
–
–
–
–
–
–
Fixed vs Variable / Volumetric
Sunk vs Future Investments
Certain vs Uncertain (w/varying levels of risk)
Average vs Marginal
Linear or Non-linear (scale economies)
Flat vs Time Dependent (temporal)
Customer Characteristics
• Energy over time (kWh)
– How Much
– When
– Level of Variability
• Energy Demand at a point in time (kW)
– Average
•
•
•
•
– Maximum
– Level of Variability
Elastic vs Inelastic Demand, ability to load shift
Size of Service required
Reliability level required
Location
Rate Setting Options
Possible Components:
Customer Charge
Minimum Bill requirement
Demand Charges
Standby Charges
Energy Charges
Fuel Charges
Transmission & Delivery Charges
Regulatory Charges
Customer Assistance Program
Charges
Possible Structures:
Fixed charges
Linear tariff
Non-linear tariffs
(Inverted or Declining
Blocks)
Peak pricing
Time-of-Use Pricing
Dynamic Pricing
Common Residential Electric Tariff Structure
• Low Fixed Customer Charge ($5-12)
• Volumetric Energy Charge (often inclining)
• Volumetric T&D Charges
Most costs are
recovered
• Volumetric Regulatory, CAP, etc.
through
volumetric
• Taxes
charges
No demand charge
No standby charges
No minimum bill
Solar Customer Energy Profile
Source: Regulatory Assistance Project
Solar Customers (aka “Prosumers”)
• Generate renewable energy (and no pollution / GHGs)
• Reduce amount of energy that must be distributed across wires
• Reduce demand while operating, but...
• Increase variability of demand
• Reduce daytime peak loads, but not evening peak loads
• Increase speed and rate of ramp requirements
• Increase voltage and frequency fluctuation
• Increase need for reactive power
• Need the grid available and reserve capacity at all times to meet
all home electric needs if sun not shining / system down
• Need extra metering and billing services
System Benefits from Distributed Solar
Utility looks at avoided long run marginal costs:
Avoided generation / market purchases
Avoided line losses
Avoided transmission
Avoided distribution
Avoided reserve requirements
Avoided environmental compliance costs
Costs of Distributed Solar
Costs to Solar Owner:
Equipment: modules, inverters, racking, conduit
Installation labor & maintenance
Costs to Utility:
Interconnection Studies
Meter(s) and service upgrades
System integration: frequency regulation, voltage regulation,
reactive power management, reserve capacity, weather
monitoring & performance modeling
Program costs: metering, billing, customer service, incentives
Lost Revenue from reduced sales
Common DG Compensation Models
Net Metering:
Customer is billed on the “net” of their kWh
consumption vs production over a billing cycle:
Home consumes 800 kWh
– Rooftop PV system produces 500kWh
Customer pays for the difference: 300 kWh
Net excess generation may roll over month by month, be
credited at wholesale rate, or surrendered to the utility
Challenges of Net Metering
• If the retail rate exceeds the value of local solar generation to
the system, the utility under-recovers the cost of service,
having to spread that cost across all customers
– If customers net to zero, they do not contribute anything to
distribution, fixed costs
• Under net metering in a tiered rate structure, customers with
higher consumption are compensated at a higher value per
kWh than customers in lower tiers
– Doesn’t encourage energy efficiency / conservation
– Disincentive for energy efficient homes to go solar
– Equity issue between solar customers
– Regressive
15
PG&E Tier Structure
Common DG Compensation Models
Feed In Tariffs (FIT)
The solar generator is paid for every kWh produced,
and the power goes directly onto the grid.
Options:
• Fixed rate
• Floating rate: wholesale rate (variable) + fixed premium
• Wholesale rate / avoided cost
• Escalating or declining over time
• May differ by technology, size or location
Proposed [DG] Tariff Structures
Customer Charge and/or Fixed Distribution Charge
Flat charge per account to cover fixed costs, distribution
Disproportionately affects low-income and low-energy
consumers
Reduces volumetric (per kWh) charges, reducing value of net
metering and incentive to conserve energy
Minimum Bill
Every customer must pay a minimum amount each month,
regardless of net usage
Provides greater revenue certainty to utility and investors
Ensures customers who net meter to zero still pay something
for fixed costs and grid services
Proposed [DG] Tariff Structures
Demand Charges
Applied to peak or average residential demand, or only based
on solar capacity (flat $X/kW/mo charge)
Approximates cost to serve customers with greater grid
impacts and service requirements
TOU Rates and Dynamic Rates
Time-variant rates based on cost of power during peak and
off-peak periods, or actual real-time market prices
Aligns actual costs of energy with customer rates in real time
Encourages customers to peak shift, reducing costs
With NEM, provides solar generators with higher value for
solar generation that aligns with peak demand/prices
Proposed [DG] Tariff Structures
Bidirectional Distribution Rate
Consumer pays full retail rate for energy consumed from the
grid
Consumer credited for energy exported to the grid, but also
pays distribution charge or grid access charge for exported
energy
So what is a fair solar tariff?
1. What components should be included/considered in setting
solar tariffs, and residential tariffs at large?
2. What utility costs should solar customers still bear?
3. How should we pay for costs to maintain T&D grids?
4. How should we value local solar? Who should bear costs of PV?
5. How to we maintain affordable rates for all?
6. Should non-energy societal benefits (e.g. health and
environmental) be incorporated into solar tariffs?
7. Should leasing/PPA companies get the same compensation as
homeowners for solar DG?
8. How does DG differ from home energy efficiency, and how
should that be reflected in rates?
Residential
Value of Solar
Tariff
Renewable Cities Forum, Vancouver BC, May
2015
Filename, Version
21
Austin Energy At-A-Glance
• Serving Austin Since 1895
• 8th largest publicly owned electric utility in US
– 420,000 customer accounts (serving >1
million residents in Greater Austin)
– Peak Demand: 2,700 MW
– Owns & operates 11,398 miles of
distribution grid
• 20.7% renewable, 43.5% GHG-free energy
supply (FY 2013)
• Transfers $105 million/yr to City of Austin
22
Austin – the Solar Capital of Texas?
Austin Energy serves 4% of
Texas residents, yet
accounts for 30% of Texas’
solar capacity
How’d we get here?
23
Municipal commitment to renewable energy
• Early market development efforts
– US DOE Solar America City
– 40 local solar companies
• 100% green power for municipal
operations
– Onsite solar PV (>50 sites)
– GreenChoice participation
24
AE Solar Highlights
10 year rebate history:
$43M for 3,477 residential
projects to date
$21M for 191 commercial
projects committed to date
40% of Texas’ distributed solar
is in AE territory!
Developed strong local solar
market, with 40+ solar
companies
Among lowest installed costs
in the country
Pioneered Value of Solar,
promoting conservation
and improving equity
among customers
25
Local Solar Goals
Progress Toward Local Goals*
2020: Austin Energy Resource, Generation
& Climate Protection Plan
200
200 MW solar goal adopted from 2007 Climate
Protection Plan
Amended Generation Plan to include 100MW
carve out for local solar, half of which
“customer-owned”
August 2014: Council Resolution 157
increased renewable energy and solar
goals
160
Capacity (MW)
October 2013: Council Resolution 53
2014 Resolution 157
120
2013 Resolution 53
80
3
15
7
40
30
0
Municipal, Schools, and Non-Rebated
Residential
Increased local solar goal to 200 MW by 2020,
with at least 100 MW “customer-controlled”
(behind-the-meter)
Commercial
Webberville
26
*MW-ac installed
& In Progress as
of 12/1/14
Austin’s Solar Goal: 950 MW by 2020
Including 750 MW utility scale, 200 MW local (at least 100 MW customer-sited)
Commercial: 7 MW
Currently
Installed or
Planned:
205 MW-ac
Remaining:
745 MW-ac
Needed to Reach Utility
Owned Non-Local Goal:
600 MW
Residential: 15 MW
Municipal, Schools, and
Non-Rebate: 3 MW
Webberville PPA:
30 MW
Signed W. Texas PPA:
150 MW
Needed to Reach Utility
Owned Local Goal: 70
MW
Includes systems installed and in process. Data as of Oct 1, 2014
Needed to Reach
Customer Owned Local
Goal: 75 MW
27
Customer-Sited Solar 2004 to 2014 (MW-ac)
24
22
20
18
16
14
12
10
8
6
4
2
0
FY04
FY05
Schools
FY06
Municipal
FY07
FY08
Non-Rebated
FY09
FY10
Commercial CBI
FY11
FY12
Commercial PBI
28
FY13
Residential
FY14
What is Value of Solar (VoS)?
• Avoided cost study
– Attempts to quantify value at which the utility is “neutral” to
paying for locally generated PV
• First study conducted in 2006 by Clean Power Research,
value used internally
• Value has fluctuated historically based on market changes
• Alternative to net energy metering
• Integrated into residential solar tariff in 2012
• Reviewed annually and value adopted by Council through
budget process
29
Residential Solar Tariff Approach
• Meter consumption and production separately
• Customer billed for whole house consumption
– All energy consumed onsite, whether from grid or solar
system
• Customer credited for solar production
– Credited for all solar generation, whether used onsite
or sent back to grid, at VoS rate
• Solar credit = [Total kWh produced] x [VoS factor]
– Balance applied to electric bill until it zeroes, remaining
credits roll over month-to-month
24
Understanding the Residential Solar Bill
The solar customer is billed on Whole House
Consumption under five tier rate schedule.
Whole House Consumption is calculated by
adding the net energy consumed from the grid
to the PV production.
The solar customer is then credited for their
PV production at the Value of Solar Rate.
If the Total Current Charges result in a negative
amount, a credit will roll forward to the next
month’s bill.
31
Residential Solar Rate Benefits
• Austin Energy Recovers Full Cost of Service
• Solar residential customer subject to same billing structure for consumption
and applicable charges as non-solar residential customers
• Solar customer can easily assess their total energy consumption
• Five tier rate encourages energy efficiency
• Customer Compensation Tied to an Objective “Value of Solar”
•
•
•
•
The Value of Solar is adjusted yearly as market values change
Solar energy production value does not decrease if customer saves energy
Low and high energy users compensated equally for solar production
Solar energy value consistent, helps customers understand their investment
• Able to Implement in Billing System
• Consumption calculated by adding net grid consumption to solar production
• Billing design for consumption remains unchanged
Value of Solar Assessessment Components
Value Component
Basis
Guaranteed Fuel Value Avoided cost of fuel to meet electric loads and
transmission and distribution losses, based on the solar
production profile. This is inferred from ERCOT market
price data & guaranteed future natural gas prices.
Plant O&M Value
Generation Capacity
Value
Transmission and
Distribution Capacity
Value
Environmental
Compliance Value
Avoided costs associated with natural gas plant
operations and maintenance by meeting peak load
through renewable sources.
Avoided capital costs of generation by meeting peak
load through renewable sources, inferred from ERCOT
market price data.
Avoided transmission costs resulting from the
reduction in the peak load by renewable sources.
Avoided cost to comply with environmental regulations
and local policy objectives
33
VoS & Natural Gas
• The avoided fuel cost component accounts for over half of the VoS
• This component is driven by the projected future price of natural gas
• Natural gas futures prices have dropped each of the last 4 years
Natural Gas Futures Prices
used for VOS, 2011-2014
Actual Residential Expenditure
34
VoS addresses several challenges of Net Metering
• Recovers fixed costs
• Improves equity
– Between solar
customers
– Between solar and
non-solar customers
under
NEM
• Better reflects value of
local generation
• Promotes efficiency &
conservation
4