Category Archives: Energy innovation

Emerging technologies and institutional change to meet new challenges while satisfying consumer tastes

Understanding core facts before moving forward with NEM reform

There is a general understanding among the most informed participants and observers that California’ net energy metering (NEM) tariff as originally conceived was not intended to be a permanent fixture. The objective of the NEM rate was to get a nascent renewable energy industry off the ground and now California has more than 11,000 megawatts of distributed solar generation. Now that the distributed energy resources industry is in much less of a need for subsidies, but its full value also must be recognized. To this end it is important to understand some key facts that are sometimes overlooked in the debate.

The true underlying reason for high rates–rising utility revenue requirements

In California, retail electricity rates are so high for two reasons, the first being stranded generation costs and the second being a bunch of “public goods charges” that constitute close to half of the distribution cost. PG&E’s rates have risen 57% since 2009. Many, if not most, NEM customers have installed solar panels as one way to avoid these rising rates. The thing is when NEM 1.0 and 2.0 were adopted, the cost of the renewable power purchase agreements (PPA) portfolios were well over $100/MWH—even $120MWH through 2019, and adding in the other T&D costs, this approached the average system rate as late as 2019 for SCE and PG&E before their downward trends reversed course. That the retail rate skyrocketed while renewable PPAs fell dramatically is a subsequent development that too many people have forgotten.

California uses Ramsey pricing principles to allocate these (the CPUC applies “equal percent marginal costs” or EPMC as a derivative measure), but Ramsey pricing was conceived for one-way pricing. I don’t know what Harold Hotelling would think of using his late student’s work for two way transactions. This is probably the fundamental problem in NEM rates—the stranded and public goods costs are incurred by one party on one side of the ledger (the utility) but the other party (the NEM customer) doesn’t have these same cost categories on the other side of the ledger; they might have their own set of costs but they don’t fall into the same categories. So the issue is how to set two way rates given the odd relationships of these costs and between utilities and ratepayers.

This situation argues for setting aside the stranded costs and public goods to be paid for in some manner other than electric rates. The answer can’t be in a form of a shift of consumption charges to a large access charge (e.g., customer charge) because customers will just leave entirely when half of their current bill is rolled into the new access charge.

The largest nonbypassable charge (NBC), now delineated for all customers, is the power cost indifference adjustment (PCIA). The PCIA is the stranded generation asset charge for the portfolio composed of utility-scale generation. Most of this is power purchase agreements (PPAs) signed within the last decade. For PG&E in 2021 according to its 2020 General Rate Case workpapers, this exceeded 4 cents per kilowatt-hour.

Basic facts about the grid

  • The grid is not a static entity in which there are no changes going forward. Yet the cost of service analysis used in the CPUC’s recent NEM proposed decision assumes that posture. Acknowledging that the system will change going forward depending on our configuration decisions is an important key principle that is continually overlooked in these discussions.
  • In California, a customer is about 15 times more likely to experience an outage due to distribution system problems than from generation/transmission issues. That means that a customer who decides to rely on self-provided resources can have a set up that is 15 times less reliable than the system grid and still have better reliability than conventional service. This is even more true for customers who reside in rural areas.
  • Upstream of the individual service connection (which costs about $10 per month for residential customers based on testimony I have submitted in all three utilities’ rate cases), customers share distribution grid capacity with other customers. They are not given shares of the grid to buy and sell with other customers—we leave that task to the utilities who act as dealers in that market place, owning the capacity and selling it to customers. If we are going to have fixed charges for customers which essentially allocated a capacity share to each of them, those customers also should be entitled to buy and sell capacity as they need it. The end result will be a marketplace which will price distribution capacity on either a daily $ per kilowatt or cents per kilowatt-hour basis. That system will look just like our current distribution pricing system but with a bunch of unnecessary complexity.
  • This situation is even more true for transmission. There most certainly is not a fixed share of the transmission grid to be allocated to each customer. Those shares are highly fungible.

What is the objective of utility regulation: just and reasonable rates or revenue assurance?

At the core of this issue is the question of whether utility shareholders are entitled to largely guaranteed revenues to recover their investments. In a market with some level of competitiveness, the producers face a degree of risk under normal functional conditions (more mundane than wildfire risk)—that is not the case with electric utilities, at least in California. (We cataloged the amount of disallowances for California IOUs in the 2020 cost of capital applications and it was less than one one-hundredth of a percent (0.01%) of revenues over the last decade.) When customers reduce or change their consumption patterns in a manner that reduces sales in a normal market, other customers are not required to pick up the slack—shareholders are. This risk is one of the core benefits of a competitive market, no matter what the degree of imperfection. Neither the utilities or the generators who sell to them under contract face these risks.

Why should we bother with “efficient” pricing if we are pushing the entire burden of achieving that efficiency on customers who have little ability to alter utilities’ investment decisions? Bottom line: if economists argue for “efficient” pricing, they need to also include in that how utility shareholders will participate directly in the outcomes of that efficient pricing without simply shifting revenue requirements to other customers.

As to the intent of the utilities, in my 30 year on the ground experience, the management does not make decisions that are based on “doing good” that go against their profit objective. There are examples of each utility choosing to gain profits that they were not entitled to. We entered into testimony in PG&E’s 1999 GRC a speech by a PG&E CEO talking about how PG&E would exploit the transition period during restructuring to maintain market share. That came back to haunt the state as it set up the conditions for ensuing market manipulation.

Each of these issues have been largely ignored in the debate over what to do about solar rooftop policy and investment going forward. It is time to push these to fore.

A misguided perspective on California’s rooftop solar policy

Severin Borenstein at the Energy Institute at Haas has taken another shot at solar rooftop net energy metering (NEM). He has been a continual critic of California’s energy decentralization policies such as those on distribution energy resources (DER) and community choice aggregators (CCAs). And his viewpoints have been influential at the California Public Utilities Commission.

I read these two statements in his blog post and come to a very different conclusions:

“(I)ndividuals and businesses make investments in response to those policies, and many come to believe that they have a right to see those policies continue indefinitely.”

Yes, the investor owned utilities and certain large scale renewable firms have come to believe that they have a right to see their subsidies continue indefinitely. California utilities are receiving subsidies amounting to $5 billion a year due to poor generation portfolio management. You can see this in your bill with the PCIA. This dwarfs the purported subsidy from rooftop solar. Why no call for reforming how we recover these costs from ratepayers and force shareholder to carry their burden? (And I’m not even bringing up the other big source of rate increases in excessive transmission and distribution investment.)

Why wasn’t there a similar cry against bailing out PG&E in not one but TWO bankruptcies? Both PG&E and SCE have clearly relied on the belief that they deserve subsidies to continue staying in business. (SCE has ridden along behind PG&E in both cases to gain the spoils.) The focus needs to be on ALL players here if these types of subsidies are to be called out.

“(T)he reactions have largely been about how much subsidy rooftop solar companies in California need in order to stay in business.”

We are monitoring two very different sets of media then. I see much more about the ability of consumers to maintain an ability to gain a modicum of energy independence from large monopolies that compel that those consumers buy their service with no viable escape. I also see a reactions about how this will undermine directly our ability to reduce GHG emissions. This directly conflicts with the CEC’s Title 24 building standards that use rooftop solar to achieve net zero energy and electrification in new homes.

Along with the effort to kill CCAs, the apparent proposed solution is to concentrate all power procurement into the hands of three large utilities who haven’t demonstrated a particularly adroit ability at managing their portfolios. Why should we put all of our eggs into one (or three) baskets?

Borenstein continues to rely on an incorrect construct for cost savings created by rooftop solar that relies on short-run hourly wholesale market prices instead of the long-term costs of constructing new power plants, transmission rates derived from average embedded costs instead of full incremental costs and an assumption that distribution investment is not avoided by DER contrary to the methods used in the utilities’ own rate filings. He also appears to ignore the benefits of co-locating generation and storage locally–a set up that becomes much less financially viable if a customer adds storage but is still connected to the grid.

Yes, there are problems with the current compensation model for NEM customers, but we also need to recognize our commitments to customers who made investments believing they were doing the right thing. We need to acknowledge the savings that they created for all of us and the push they gave to lower technology costs. We need to recognize the full set of values that these customers provide and how the current electric market structure is too broken to properly compensate what we want customers to do next–to add more storage. Yet, the real first step is to start at the source of the problem–out of control utility costs that ratepayers are forced to bear entirely.

The CPUC takes a small step towards better rationality in rate setting

Last month the California Public Utilities Commission (CPUC) issued a decision in Phase II of the PG&E 2020 General Rate Case that endorsed all but one of my proposals on behalf of the Agricultural Energy Consumers Association (AECA) to better align revenue allocation with a rational approach to using marginal costs. Most importantly the CPUC agreed with my observation that the energy system is changing too rapidly to adopt a permanent set of rate setting principles as PG&E had advocated for. For now, we will continue to explore options as relationships among customers, utilities and other providers evolve.

At the heart of the matter is the economic principle that prices are set most efficiently when they adhere to the marginal cost or the cost of producing the last unit of a good or service. In a “standard” market, marginal costs are usually higher than the average cost so a producing firm generates a profit with each sale. For utilities, this is often not true–the average costs are higher than the marginal costs, so we need a means of allocating those additional costs to ensure that the utilities continue to be viable entities. California uses a “second-best” economic method called “Ramsey pricing” that applies relative marginal costs to serve different customers to allocate revenue responsibility.

I made four key proposals on how to apply marginal cost principles for rate setting purposes:

  1. Proposes an updated agricultural load forecasting method that is more accurate and incorporates only public data and currently known variables that can predict next year’s load more accurately.
  2. Use PCIA exit fee market price benchmarks (MPBs) to give consistent revenue allocation across rate classes and bundled vs departed customers.
    1. Include renewable energy credits (REC) in the marginal energy costs (MEC) to reflect incremental RPS acquisition and consistency with the PCIA MPB.
    2. Use the resource adequacy (RA) MPB for setting the marginal generation capacity cost (MGCC) due to uncertainty about resource type for capacity and for consistency with the PCIA MPB.
  3. Marginal customer access costs (MCAC) should be calculated by using the depreciated replacement cost for existing services (RCNLD), and new services costs added for the new customers added as growth.

PG&E settled with AECA on the first to change its agricultural load forecasting methodology in upcoming proceedings. The CPUC agreed with AECA’s positions on two of the other three (RECs in the MEC, and MCAC). And on the third related to MGCC, the adopted position differed little materially.

The most surprising was the choice to use the RCNLD costs for existing customer connections. The debate over how to calculate the MCAC has raged for three decades. Industrial customers preferred valuing all connections, new and existing, at the cost of new connection using the “real economic carrying cost” (RECC) method. This is most consistent with a simple reading of marginal cost pricing principles. On the other side, residential customer advocates claimed that existing connections were sunk costs and have a value of zero for determining marginal, inventing the “new customer only” (NCO) method. I explained in my testimony that the RECC method fails to account for the reduced value of aging connections, but that those connections have value in the market place through house prices, just as a swimming pool or a bathroom remodel adds value. The diminished value of those connections can be approximated using the depreciation schedules that PG&E applies to determine its capital-related revenue requirements. The CPUC has used the RCNLD method to set the value for the sale of PG&E assets to municipal utilities.

The CPUC agreed with this approach which essentially is a compromise between the RECC and NCO method. The RCNLD acknowledges the fundamental points of both methods–that existing customer connections represent an opportunity value for customers but those connections do not have the same value as new ones.

Why are we punishing customers for doing the right thing?

The saying goes “No good deed goes unpunished.” The California Public Utilities Commission seems to have taken that motto to heart recently, and stands ready to penalize yet another group of customers who answered the clarion call to help solve the state’s problems by radically altering the rules for solar rooftops. Here’s three case studies of recent CPUC actions that undermine incentives for customers to act in the future in response to state initiatives: (1) farmers who invested in response to price incentives, (2) communities that pursued renewables more assertively, and (3) customers who installed solar panels.

Agriculture: Farmers have responded to past time of use (TOU) rate incentives more consistently and enthusiastically than any other customer class. Instead of being rewarded for their consistency, their peak price periods shifted from the afternoon to the early evening. Growers face much more difficulty in avoiding pumping during that latter period.

Since TOU rates were introduced to agricultural customers in the late 1970s, growers have made significant operational changes in response to TOU differentials between peak and off-peak energy prices to minimize their on-peak consumption. These include significant investments in irrigation equipment, storage and conveyance infrastructure and labor deployment rescheduling. The results of these expenditures are illustrated in the figure below, which shows how agricultural loads compare with system-wide load on a peak summer weekday in 2015, contrasting hourly loads to the load at the coincident peak hour. Both the smaller and larger agricultural accounts perform better than a range of representative rate schedules. Most notably agriculture’s aggregate load shape on a summer weekday is inverted relative to system peak, i.e., the highest agricultural loads occur during the lowest system load periods, in contrast with other rate classes.

All other rate schedules shown in the graphic hit their annual peak on the same peak day within the then-applicable peak hours of noon to 6 p.m. In contrast, agriculture electricity demand is less than 80% of its annual peak during those high-load hours, with its daily peak falling outside the peak period. Agriculture’s avoidance of peak hours occurred during the summer agricultural growing season, which coincided with peak system demand—just as the Commission asked customers to do. The Commission could not ask for a better aggregate response to system needs; in contrast to the profiles for all of the other customer groups, agriculture has significantly contributed to shifting the peak to a lower cost evening period.

The significant changes in the peak period price timing and differential that the CPUC adopted increases uncertainty over whether large investments in high water-use efficiency microdrip systems – which typically cost $2,000 per acre–will be financially viable. Microdrip systems have been adopted widely by growers over the last several years—one recent study of tomato irrigation rates in Fresno County could not find any significant quantity of other types of irrigation systems. Such systems can be subject to blockages and leaks that are only detectable at start up in daylight. Growers were able to start overnight irrigation at 6 p.m. under the legacy TOU periods and avoid peak energy use. In addition, workers are able to end their day shortly after 6 p.m. and avoid nighttime accidents. Shifting that load out of the peak period will be much more difficult to do with the peak period ending after sunset.

Contrary to strong Commission direction to incent customers to avoid peak power usage, the shift in TOU periods has served to penalize, and reverse, the great strides the agricultural class has made benefiting the utility system over the last four decades.

Community choice aggregators: CCAs were created, among other reasons, to develop more renewable or “green” power. The state achieved its 2020 target of 33% in large part because of the efforts of CCAs fostered through offerings of 50% and 100% green power to retail customers. CCAs also have offered a range of innovative programs that go beyond the offerings of PG&E, SCE and SDG&E.

Nevertheless, the difficulty of reaching clean energy goals is created by the current structure of the PCIA. The PCIA varies inversely with the market prices in the market–as market prices rise, the PCIA charged to CCAs and direct access (DA) customers decreases. For these customers, their overall retail rate is largely hedged against variation and risk through this inverse relationship.

The portfolios of the incumbent utilities are dominated by long-term contracts with renewables and capital-intensive utility-owned generation. For example, PG&E is paying a risk premium of nearly 2 cents per kilowatt-hour for its investment in these resources. These portfolios are largely impervious to market price swings now, but at a significant cost. The PCIA passes along this hedge through the PCIA to CCAs and DA customers which discourages those latter customers from making their own long term investments. (I wrote earlier about how this mechanism discouraged investment in new capacity for reliability purposes to provide resource adequacy.)

The legacy utilities are not in a position to acquire new renewables–they are forecasting falling loads and decreasing customers as CCAs grow. So the state cannot look to those utilities to meet California’s ambitious goals–it must incentivize CCAs with that task. The CCAs are already game, with many of them offering much more aggressive “green power” options to their customers than PG&E, SCE or SDG&E.

But CCAs place themselves at greater financial risk under the current rules if they sign more long-term contracts. If market prices fall, they must bear the risk of overpaying for both the legacy utility’s portfolio and their own.

Solar net energy metered customers: Distributed solar generation installed under California’s net energy metering (NEM/NEMA) programs has mitigated and even eliminated load and demand growth in areas with established customers. This benefit supports protecting the investments that have been made by existing NEM/NEMA customers. Similarly, NEM/NEMA customers can displace investment in distribution assets. That distribution planners are not considering this impact appropriately is not an excuse for failing to value this benefit. For example, PG&E’s sales fell by 5% from 2010 to 2018 and other utilities had similar declines. Peak loads in the CAISO balancing authority reach their highest point in 2006 and the peak in August 2020 was 6% below that level.

Much of that decrease appears to have been driven by the installation of rooftop solar. The figure above illustrates the trends in CAISO peak loads in the set of top lines and the relationship to added NEM/NEMA installations in the lower corner. It also shows the CEC’s forecast from its 2005 Integrated Energy Policy Report as the top line. Prior to 2006, the CAISO peak was growing at annual rate of 0.97%; after 2006, peak loads have declined at a 0.28% trend. Over the same period, solar NEM capacity grew by over 9,200 megawatts. The correlation factor or “R-squared” between the decline in peak load after 2006 and the incremental NEM additions is 0.93, with 1.0 being perfect correlation. Based on these calculations, NEM capacity has deferred 6,500 megawatts of capacity additions over this period. Comparing the “extreme” 2020 peak to the average conditions load forecast from 2005, the load reduction is over 11,500 megawatts. The obvious conclusion is that these investments by NEM customers have saved all ratepayers both reliability and energy costs while delivering zero-carbon energy.

The CPUC now has before it a rulemaking in which the utilities and some ratepayer advocates are proposing to not only radically reduce the compensation to new NEM/NEMA customers but also to change the terms of the agreements for existing ones.

One of the key principles of providing financial stability is setting prices and rates for long-lived assets such as solar panels and generation plants at the economic value when the investment decision was made to reflect the full value of the assets that would have been acquired otherwise.  If that new resource had not been built, either a ratebased generation asset would have been constructed by the utility at a cost that would have been recovered over a standard 30-year period or more likely, additional PPAs would have been signed. Additionally, the utilities’ investments and procurement costs are not subject to retroactive ratemaking under the rule prohibiting such ratemaking and Public Utilities Code Section 728, thus protecting shareholders from any risk of future changes in state or Commission policies.

Utility customers who similarly invest in generation should be afforded at least the same assurances as the utilities with respect to protection from future Commission decisions that may diminish the value of those investments. Moreover, customers do not have the additional assurances of achieving a certain net income so they already face higher risks than utility shareholders for their investments.

Generators are almost universally afforded the ability to recover capital investments based on prices set for multiple years, and often the economic life of their assets. Utilities are able to put investments in ratebase to be recovered at a fixed rate of return plus depreciation over several decades. Third-party generators are able to sign fixed price contracts for 10, 20, and even 40 years. Some merchant generators may choose to sell only into the short-term “hourly” market, but those plants are not committed to selling whenever the CAISO demands so. Generators are only required to do so when they sign a PPA with an assured payment toward investment recovery.

Ratepayers who make investments that benefit all ratepayers over the long term should be offered tariffs that provide a reasonable assurance of recovery of those investments, similar to the PPAs offered to generators. Ratepayers should be able to gain the same assurances as generators who sign long-term PPAs, or even utilities that ratebase their generation assets, that they will not be forced to bear all of the risk of investing of clean self-generation. These ratepayers should have some assurance over the 20-plus year expected life of their generation investment.

What to do about Diablo Canyon?

The debate over whether to close Diablo Canyon has resurfaced. The California Public Utilities Commission, which support from the Legislature, decided in 2018 to close Diablo by 2025 rather than proceed to relicensing. PG&E applied in 2016 to retire the plant rather than relicense due to the high costs that would make the energy uneconomic. (I advised the Joint CCAs in this proceeding.)

Now a new study from MIT and Stanford finds potential savings and emission reductions from continuing operation. (MIT in particular has been an advocate for greater use of nuclear power.) Others have written opinion articles on either side of the issue. I wrote the article below in the Davis Enterprise addressing this issue. (It was limited to 900 words so I couldn’t cover everything.)

IT’S OK TO CLOSE DIABLO CANYON NUCLEAR PLANT
A previous column (by John Mott-Smith) asked whether shutting down the Diablo Canyon nuclear plant is risky business if we don’t know what will replace the electricity it produces. John’s friend Richard McCann offered to answer his question. This is a guest column, written by Richard, a universally respected expert on energy, water and environmental economics.

John Mott-Smith asked several questions about the future of nuclear power and the upcoming closure of PG&E’s Diablo Canyon Power Plant in 2025. His main question is how are we going to produce enough reliable power for our economy’s shift to electricity for cars and heating. The answers are apparent, but they have been hidden for a variety of reasons.
I’ve worked on electricity and transportation issues for more than three decades. I began my career evaluating whether to close Sacramento Municipal Utility District’s Rancho Seco Nuclear Generating Station and recently assessed the cost to relicense and continue operations of Diablo after 2025.
Looking first at Diablo Canyon, the question turns almost entirely on economics and cost. When the San Onofre Nuclear Generating Station closed suddenly in 2012, greenhouse gas emissions rose statewide the next year, but then continued a steady downward trend. We will again have time to replace Diablo with renewables.
Some groups focus on the risk of radiation contamination, but that was not a consideration for Diablo’s closure. Instead, it was the cost of compliance with water quality regulations. The power plant currently uses ocean water for cooling. State regulations required changing to a less impactful method that would have cost several billion dollars to install and would have increased operating costs. PG&E’s application to retire the plant showed the costs going forward would be at least 10 to 12 cents per kilowatt-hour.
In contrast, solar and wind power can be purchased for 2 to 10 cents per kilowatt-hour depending on configuration and power transmission. Even if new power transmission costs 4 cents per kilowatt-hour and energy storage adds another 3 cents, solar and wind units cost about 3 cents, which totals at the low end of the cost for Diablo Canyon.
What’s even more exciting is the potential for “distributed” energy resources, where generation and power management occurs locally, even right on the customers’ premises rather than centrally at a power plant. Rooftop solar panels are just one example—we may be able to store renewable power practically for free in our cars and trucks.
Automobiles are parked 95% of the time, which means that an electric vehicle (EV) could store solar power at home or work during the day and for use at night. When we get to a vehicle fleet that is 100% EVs, we will have more than 30 times the power capacity that we need today. This means that any individual car likely will only have to use 10% of its battery capacity to power a house, leaving plenty for driving the next day.
With these opportunities, rooftop and community power projects cost 6 to 10 cents per kilowatt-hour compared with Diablo’s future costs of 10 to 12 cents.
Distributed resources add an important local protection as well. These resources can improve reliability and resilience in the face of increasing hazards created by climate change. Disruptions in the distribution wires are the cause of more than 95% of customer outages. With local generation, storage, and demand management, many of those outages can be avoided, and electricity generated in our own neighborhoods can power our houses during extreme events. The ad that ran during the Olympics for Ford’s F-150 Lightning pick-up illustrates this potential.
Opposition to this new paradigm comes mainly from those with strong economic interests in maintaining the status quo reliance on large centrally located generation. Those interests are the existing utilities, owners, and builders of those large plants plus the utility labor unions. Unfortunately, their policy choices to-date have led to extremely high rates and necessitate even higher rates in the future. PG&E is proposing to increase its rates by another third by 2024 and plans more down the line. PG&E’s past mistakes, including Diablo Canyon, are shown in the “PCIA” exit fee that [CCA] customers pay—it is currently 20% of the rate. Yolo County created VCEA to think and manage differently than PG&E.
There may be room for nuclear generation in the future, but the industry has a poor record. While the cost per kilowatt-hour has gone down for almost all technologies, even fossil-fueled combustion turbines, that is not true for nuclear energy. Several large engineering firms have gone bankrupt due to cost overruns. The global average cost has risen to over 10 cents per kilowatt-hour. Small modular reactors (SMR) may solve this problem, but we have been promised these are just around the corner for two decades now. No SMR is in operation yet.
Another problem is management of radioactive waste disposal and storage over the course of decades, or even millennia. Further, reactors fail on a periodic basis and the cleanup costs are enormous. The Fukuyama accident cost Japan $300 to $750 billion. No other energy technology presents such a degree of catastrophic failure. This liability needs to be addressed head on and not ignored or dismissed if the technology is to be pursued.

Comparing cost-effectiveness of undergrounding vs. microgrids to mitigate wildfire risk

Pacific Gas & Electric has proposed to underground 10,000 miles of distribution lines to reduce wildfire risk, at an estimated cost of $1.5 to $2 million per mile. Meanwhile PG&E has installed fast-trip circuit breakers in certain regions to mitigate fire risks from line shorts and breaks, but it has resulted in a vast increase in customer outages. CPUC President Batjer wrote in an October 25 letter to PG&E, “[s]ince PG&E initiated the Fast Trip setting practice on 11,500 miles of lines in High Fire Threat Districts in late July, it has caused over 500 unplanned power outages impacting over 560,000 customers.” She then ordered a series of compliance reports and steps. The question is whether undergrounding is the most cost-effective solution that can be implemented in a timely manner.

A viable alternative is microgrids, installed at either individual customers or community scale. The microgrids could be operated to island customers or communities during high risk periods or to provide backup when circuit breakers cut power. Customers could continue to be served outside of either those periods of risk or weather-caused outages.

Because microgrids would be installed solely for the purpose of displacing undergrounding, the relative costs should be compared without considering any other services such as energy delivered outside of periods of fire risk or outages or increased green power.

I previously analyzed this question, but this updated assessment uses new data and presents a threshold at which either undergrounding or microgrids is preferred depending on the range of relative costs.

We start with the estimates of undergrounding costs. Along with PG&E’s stated estimate, PG&E’s 2020 General Rate Case includes a settlement agreement with a cost of $4.8 million per mile. That leads to an estimate of $15 to $48 million. Adding in maintenance costs of about $400 million annually, this revenue requirement translates to a rate increase of 3.2 to 9.3 cents per kilowatt-hour.

For microgrid costs, the National Renewable Energy Laboratory published estimated ranges for both (1) commercial or community scale projects of 1 megawatt with 2.4 megawatt-hours of storage and (2) residential scale of 7 kilowatts with 20 kilowatt-hours of storage. For larger projects, NREL shows ranges of $2.07 to $2.13 million; we include an upper end estimate double of NREL’s top range. For residential; the range is $36,000 to $38,000.

Using this information, we can make comparisons based on the density of customers or energy use per mile of targeted distribution lines. In other words, we can determine if its more cost-effective to underground distribution lines or install microgrids based on how many customers or how much load is being served on a line.

As a benchmark, PG&E’s average system density per mile of distribution line is 50.6 customers and 166 kW (or 0.166 MW).

The table below shows the relative cost effectiveness for undergrounding compared to community/commercial microgrids. If the load density falls below the value shown, microgrids are more cost effective. Note that the average density across the PG&E service area is 0.166 MW which is below any of the thresholds. That indicates that such microgrids should be cost-effective in most rural areas.

The next table shows the relative cost effectiveness for individual residential microgrids, and again if the customer density falls below the threshold shown, then microgrids save more costs. The average density for service area is 51 customers per line-mile which reflects the concentration of population in the Bay Area. At the highest undergrounding costs, microgrids are almost universally favored. In rural areas where density falls below 30 customers per line-mile, microgrids are less costly at the lower undergrounding costs.

PG&E has installed two community-scale microgrids in remote locations so far, and reportedly considering 20 such projects. However, PG&E fell behind on those projects, prompting the CPUC to reopen its procurement process in its Emergency Reliability rulemaking. In addition, PG&E has relied heavily on natural gas generation for these.

PG&E simply may not have the capacity to construct either microgrids or install undergrounded lines in a timely manner solely through its organization. PG&E already is struggling to meet its targets for converting privately-owned mobilehome park utility systems to utility ownership. A likely better choice is to rely on local governments working in partnership with PG&E to identify the most vulnerable lines to construct and manage these microgrids. The residential microgrids would be operated remotely. The community microgrids could be run under several different models including either PG&E or municipal ownership.

The scale economy myth of electric utilities

Vibrant Clean Energy released a study showing that inclusion of large amounts of distributed energy resources (DERs) can lower the costs of achieving 100% renewable energy. Commentors here have criticized the study for several reasons, some with reference to the supposed economies of scale of the grid.

While economies of scale might hold for individual customers in the short run, the data I’ve been evaluating for the PG&E and SCE general rate cases aren’t necessarily consistent with that notion. I’ve already discussed here the analysis I conducted in both the CAISO and PJM systems that show marginal transmission costs that are twice the current transmission rates. The rapid rise in those rates over the last decade are consistent with this finding. If economies of scale did hold for the transmission network, those rates should be stable or falling.

On the distribution side, the added investment reported in those two utilities’ FERC Form 1 are not consistent with the marginal costs used in the GRC filings. For example the added investment reported in Form 1 for final service lines (transmission, services, meters or TSM) appears to be almost 10 times larger than what is implied by the marginal costs and new customers in the GRC filings. And again the average cost of distribution is rising while energy and peak loads have been flat across the CAISO area since 2006. The utilities have repeatedly asked for $2 billion each GRC for “growth” in distribution, but given the fact that load has been flat (and even declining in 2019 and 2020), that means there’s likely a significant amount of stranded distribution infrastructure. If that incremental investment is for replacement (which is not consistent with either their depreciation schedules or their assertions about the true life of their facilties and the replacement costs within their marginal cost estimates), then they are grossly underestimating the future replacement cost for facilities which means they are underestimating the true marginal costs.

I can see a future replacement liability right outside my window. The electric poles were installed by PG&E 60+ years ago and the poles are likely reaching the end of their lives. I can see the next step moving to undergrounding the lines at a cost of $15,000 to $25,000 per house based on the ongoing mobilehome conversion program and the typical Rule 20 undergrounding project. Deferring that cost is a valid DER value. We will have to replace many services over the next several decades. And that doesn’t address the higher voltage parts of the system.

We have a counterexample of a supposed monopoly in the cable/internet system. I have at least two competing options where I live. The cell phone network also turned out not to be a natural monopoly. In an area where the PG&E and Merced ID service territories overlap, there are parallel distribution systems. The claim of a “natural monopoly” more likely is a legal fiction that protects the incumbent utility and is simpler for local officials to manage when awarding franchises.

If the claim of natural monopolies in electricity were true, then the distribution rate components for SCE and PG&E should be much lower than for smaller munis such as Palo Alto or Alameda. But that’s not the case. The cost advantages for SMUD and Roseville are larger than can be simply explained by differences in cost of capital. The Division/Office of Ratepayer Advocates commissioned a study by Christensen Associates for PG&E’s 1999 GRC that showed that the optimal utility size was about 500,000 customers. (PG&E’s witness who was a professor at UC Berkeley inadvertently confirmed the results and Commissioner Richard Bilas, a Ph.D. economist, noted this in his proposed decision which was never adopted because it was short circuited by restructuring.) Given that finding, that means that the true marginal cost of a customer and associated infrastructure is higher than the average cost. The likely counterbalancing cause is an organizational diseconomy of scale that overwhelms the technological benefits of size.

Finally, generation no longer shows the economies of scale that dominated the industry. The modularity of combined cycle plants and the efficiency improvement of CTs started the industry down the rode toward the efficiency of “smallness.” Solar plants are similarly modular. The reason why additional solar generation appears so low cost is because much of that is from adding another set of panels to an existing plant while avoiding additional transmission interconnection costs (which is the lion’s share of the costs that create what economies of scale do exist.)

The VCE analysis looks a holistic long term analysis. It relies on long run marginal costs, not the short run MCs that will never converge on the LRMC due to the attributes of the electricity system as it is regulated. The study should be evaluated in that context.

Electric vehicles as the next smartphone

In 2006 a cell phone was portable phone that could send text messages. It was convenient but not transformative. No one seriously thought about dropping their landlines.

And then the iPhone arrived. Almost overnight consumers began to use it like their computer. They emailed, took pictures and sent them to their friends, then searched the web, then played complex games and watched videos. Social media exploded and multiple means of communicating and sharing proliferated. Landlines (and cable) started to disappear, and personal computer sales slowed. (And as a funny side effect, the younger generation seemed to quit talking on the phone.) The cell phone went from a means of one-on-one communication to a multi-faceted electronic tool that has become our pocket computer.

The U.S. population owning a smartphone has gone from 35% to 85% in the last decade. We could achieve similar penetration rates for electric vehicles (EVs) if we rethink and repackage how we market EVs to become our indispensable “energy management tool.” EVs can offer much more than conventional cars and we need to facilitate and market these advantages to sell them much faster.

EV pickups with spectacular features are about to be offered. These EVs may be a game changer for a different reason than what those focused on transportation policy think of–they offer households the opportunity for near complete energy independence. These pick ups have both enough storage capacity to power a house for several days and are designed to supply power to many other uses, not just driving. Combined with solar panels installed both at home and in business lots, the trucks can carry energy back and forth between locations. This has an added benefit of increasing reliability (local distribution outages are 15 times more likely than system levels ones) and resilience in the face of increasing extreme events.

This all can happen because cars are parked 90-95% of the time. That offers power source reliability in the same range as conventional generation, and the dispersion created by a portfolio of smaller sources further enhances that availability. Another important fact is that the total power capacity for autos on California’s road is over 2,000 gigawatts. Compared to California’s peak load of about 63 gigawatts, this is more than 30 times more capacity than we need. If we simply get to 20% penetration of EVs of which half have interconnective control abilities, we’ll have three times more capacity than we would need to meet our highest demands. There are other energy management issues, but solving them are feasible when we realize there will not be a real physical constraint.

Further, used EV batteries can be used as stationary storage, either in home or at renewable generation to mitigate transmission investments. EVs can transport energy between work and home from solar panels.

The difference between these EVs and the current models is akin to the difference between flip phones and smart phones. One is a single function device and the we use the latter to manage our lives. The marketing of EVs should shift course to emphasize these added benefits that are not possible with a conventional vehicle. The barriers are not technological, but only regulatory (from battery warranties and utility interconnection rules).

As part of this EV marketing focus, automakers should follow two strategies, both drawn from smart phones. The first is that EV pick ups should be leased as a means of keeping model features current. It facilitates rolling out industry standards quickly (like installing the latest Android update) and adding other yet-more attractive features. It also allows for more environmentally-friendly disposal of obsolete EVs. Materials can be more easily recycled and batteries no longer usable for driving (generally below 70% capacity) can be repurposed for stand-alone storage.

The second is to offer add on services. Smart phone companies have media streaming, data management and all sorts of other features beyond simple communication. Automakers can offer demand management to lower, or even eliminate, utility bills and appliance and space conditioning management placed onboard so a homeowner need not install a separate system that is not easily updated.

Part 2: A response to “Is Rooftop Solar Just Like Energy Efficiency?”

Severin Borenstein at the Energy Institute at Haas has written another blog post asserting that solar rooftop rates are inefficient and must changed radically. (I previously responded to an earlier post.) When looking at the efficiency of NEM rates, we need to look carefully at several elements of electricity market and the overall efficiency of utility ratemaking. We can see that we can come to a very different conclusion.

I filed testimony in the NEM 3.0 rulemaking last month where I calculated the incremental cost of transmission investment for new generation and the reduction in the CAISO peak load that looks to be attributable to solar rooftop.

  • Using FERC Form 1 and CEC powerplant data, I calculated that the incremental cost of transmission is $37/MWH. (And this is conservative due to a couple of assumptions I made.) Interestingly, I had done a similar calculation for AEP in the PJM interconnect and also came up with $37/MWH. This seems to be a robust value in the right neighborhood.
  • Load growth in California took a distinct change in trend in 2006 just as solar rooftop installations gained momentum. I found a 0.93 correlation between this change in trend and the amount of rooftop capacity installed. Using a simple trend, I calculated that the CAISO load decreased 6,000 MW with installation of 9,000 MW of rooftop solar. Looking at the 2005 CEC IEPR forecast, the peak reduction could be as large as 11,000 MW. CAISO also estimated in 2018 that rooftop solar displaced in $2.6 billion in transmission investment.

When we look at the utilities’ cost to acquire renewables and add in the cost of transmission, we see that the claim that grid-scale solar is so much cheaper than residential rooftop isn’t valid. The “green” market price benchmark used to set the PCIA shows that the average new RPS contract price in 2016 was still $92/MWH in 2016 and $74/MWH in 2017. These prices generally were for 30 year contracts, so the appropriate metric for comparing a NEM investment is against the vintage of RPS contracts signed in the year the rooftop project was installed. For 2016, adding in the transmission cost of $37/MWH, the comparable value is $129/MWH and in 2017, $111/MWH. In 2016, the average retail rates were $149/MWH for SCE, $183/MWH for PG&E and $205/MWH for SDG&E. (Note that PG&E’s rate had jumped $20/MWH in 2 years, while SCE’s had fallen $20/MWH.) In a “rough justice” way, the value of the displaced energy via rooftop solar was comparable to the retail rates which reflect the value of power to a customer, at least for NEM 1.0 and 2.0 customers. Rooftop solar was not “multiples” of grid scale solar.

These customers also took on investment risk. I calculated the payback period for a couple of customers around 2016 and found that a positive payback was dependent on utility rates rising at least 3% a year. This was not a foregone conclusion at the time because retail rates had actually be falling up to 2013 and new RPS contract prices were falling as well. No one was proposing to guarantee that these customers recover their investments if they made a mistake. That they are now instead benefiting is unwarranted hubris that ignores the flip side of the importance of investment risk–that investors who make a good efficient decision should reap the benefits. (We can discuss whether the magnitude of those benefits are fully warranted, but that’s a different one about distribution of income and wealth, not efficiency.)

Claiming that grid costs are fixed immutable amount simply isn’t a valid claim. SCE has been trying unsuccessfully to enact a “grid charge” with this claim since at least 2006. The intervening parties have successfully shown that grid costs in fact are responsive to reductions in demand. In addition, moving to a grid charge that creates a “ratchet effect” in revenue requirements where once a utility puts infrastructure in place, it faces no risk for poor investment decisions. On the other hand the utility can place its costs into ratebase and raise rates, which then raises the ratchet level on the fixed charge. One of the most important elements of a market economy that leads to efficient investment is that investors face the risk of not earning a return on an investment. That forces them to make prudent decisions. A “ratcheted” grid charge removes this risk even further for utilities. If we’re claiming that we are creating an “efficient” pricing policy, then we need to consider all sides of the equation.

The point that 50% of rooftop solar generation is used to offset internal use is important–while it may not be exactly like energy efficiency, it does have the most critical element of energy efficiency. That there are additional requirements to implement this is of second order importance, Otherwise we would think of demand response that uses dispatch controls as similarly distinct from EE. Those programs also require additional equipment and different rates. But in fact we sum those energy savings with LED bulbs and refrigerators.

An important element of the remaining 50% that is exported is that almost all of it is absorbed by neighboring houses and businesses on the same local circuit. Little of the power goes past the transformer at the top of the circuit. The primary voltage and transmission systems are largely unused. The excess capacity that remains on the system is now available for other customers to use. Whether investors should be able to recover their investment at the same annual rate in the face of excess capacity is an important question–in a competitive industry, the effective recovery rate would slow.

Finally, public purpose program (PPP) and wildfire mitigation costs are special cases that can be simply rolled up with other utility costs.

  • The majority of PPP charges are a form of a tax intended for income redistribution. That function is admirable, but it shows the standard problem of relying on a form of a sales tax to finance such programs. A sales tax discourages purchases which then reduces the revenues available for income transfers, which then forces an increase in the sales tax. It’s time to stop financing the CARE and FERA programs from utility rates.
  • Wildfire costs are created by a very specific subclass of customers who live in certain rural and wildlands-urban interface (WUI) areas. Those customers already received largely subsidized line extensions to install service and now we are unwilling to charge them the full cost of protecting their buildings. Once the state made the decision to socialize those costs instead, the costs became the responsibility of everyone, not just electricity customers. That means that these costs should be financed through taxes, not rates.

Again, if we are trying to make efficient policy, we need to look at the whole. It is is inefficient to finance these public costs through rates and it is incorrect to assert that there is an inefficient subsidy created if a set of customers are avoiding paying these rate components.

Part 1: A response to “Rooftop Solar Inequity”

Severin Borenstein at the Energy Institure at Haas has plunged into the politics of devising policies for rooftop solar systems. I respond to two of his blog posts in two parts here, with Part 1 today. I’ll start by posting a link to my earlier blog post that addresses many of the assertions here in detail. And I respond to to several other additional issues here.

First, the claims of rooftop solar subsidies has two fallacious premises. First, it double counts the stranded cost charge from poor portfolio procurement and management I reference above and discussed at greater length in my blog post. Take out that cost and the “subsidy” falls substantially. The second is that solar hasn’t displaced load growth. In reality utility loads and peak demand have been flat since 2006 and even declining over the last three years. Even the peak last August was 3,000 MW below the record in 2017 which in turn was only a few hundred MW above the 2006 peak. Rooftop solar has been a significant contributor to this decline. Displaced load means displaced distribution investment and gas fired generation (even though the IOUs have justified several billion in added investment by forecasted “growth” that didn’t materialized.) I have documented those phantom load growth forecasts in testimony at the CPUC since 2009. The cost of service studies supposedly showing these subsidies assume a static world in which nothing has changed with the introduction of rooftop solar. Of course nothing could be further from the truth.

Second TURN and Cal Advocates have all be pushing against decentralization of the grid for decades back to restructuring. Decentralization means that the forums at the CPUC become less important and their influence declines. They have all fought against CCAs for the same reason. They’ve been fighting solar rooftops almost since its inception as well. Yet they have failed to push for the incentives enacted in AB57 for the IOUs to manage their portfolios or to control the exorbitant contract terms and overabundance of early renewable contracts signed by the IOUs that is the primary reason for the exorbitant growth in rates.

Finally, there are many self citations to studies and others with the claim that the authors have no financial interest. E3 has significant financial interests in studies paid for by utilities, including the California IOUs. While they do many good studies, they also have produced studies with certain key shadings of assumptions that support IOUs’ positions. As for studies from the CPUC, commissioners frequently direct the expected outcome of these. The results from the Customer Choice Green Book in 2018 is a case in point. The CPUC knows where it’s political interests are and acts to satisfy those interests. (I have personally witnessed this first hand while being in the room.) Unfortunately many of the academic studies I see on these cost allocation issues don’t accurately reflect the various financial and regulatory arrangements and have misleading or incorrect findings. This happens simply because academics aren’t involved in the “dirty” process of ratemaking and can’t know these things from a distance. (The best academic studies are those done by those who worked in the bowels of those agencies and then went to academics.)

We are at a point where we can start seeing the additional benefits of decentralized energy resources. The most important may be the resilience to be gained by integrating DERs with EVs to ride out local distribution outages (which are 15 times more likely to occur than generation and transmission outages) once the utilities agree to enable this technology that already exists. Another may be the erosion of the political power wielded by large centralized corporate interests. (There was a recent paper showing how increasing market concentration has led to large wealth transfers to corporate shareholders since 1980.) And this debate has highlighted the elephant in the room–how utility shareholders have escaped cost responsibility for decades which has led to our expensive, wasteful system. We need to be asking this fundamental question–where is the shareholders’ skin in this game? “Obligation to serve” isn’t a blank check.