1 Filename, Version Fair Rate Setting for a Renewable Future Renewable Cities Forum, Vancouver BC, May 2015

 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 Basic Principles of Electric Rate Setting 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 paymentEconomy of collectionFeasibility SimplicityCertaintyUnderstandability 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 – 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)

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 Volumetric Regulatory, CAP, etc. Taxes No demand charge No standby charges No minimum bill Most costs are recovered through volumetric charges

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: Net excess generation may roll over month by month, be credited at wholesale rate, or surrendered to the utility Home consumes 800 kWh – Rooftop PV system produces 500kWh Customer pays for the difference: 300 kWh

Challenges of Net Metering 15 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 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?

21 Filename, Version Residential Value of Solar Tariff Renewable Cities Forum, Vancouver BC, May 2015

Serving Austin Since th 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 Austin Energy At-A-Glance 22

Austin Energy serves 4% of Texas residents, yet accounts for 30% of Texas’ solar capacity How’d we get here? Austin – the Solar Capital of Texas? 23

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 Municipal commitment to renewable energy 24

10 year rebate history: $43M for 3,477 residential projects to date $21M for 191 commercial projects committed to date Among lowest installed costs in the country Pioneered Value of Solar, promoting conservation and improving equity among customers 40% of Texas’ distributed solar is in AE territory! Developed strong local solar market, with 40+ solar companies AE Solar Highlights 25

2020: Austin Energy Resource, Generation & Climate Protection Plan 200 MW solar goal adopted from 2007 Climate Protection Plan October 2013: Council Resolution 53 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 Increased local solar goal to 200 MW by 2020, with at least 100 MW “customer-controlled” (behind-the-meter) Local Solar Goals 26 *MW-ac installed & In Progress as of 12/1/14

Austin’s Solar Goal: 950 MW by  Including 750 MW utility scale, 200 MW local (at least 100 MW customer-sited) Includes systems installed and in process. Data as of Oct 1, 2014 Currently Installed or Planned: 205 MW-ac Remaining: 745 MW-ac

Customer-Sited Solar 2004 to 2014 (MW-ac) 28

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 What is Value of Solar (VoS)?

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 Residential Solar Tariff Approach

Understanding the Residential Solar Bill 31 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.

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

33 Value of Solar Assessessment Components Value ComponentBasis Guaranteed Fuel ValueAvoided 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 ValueAvoided costs associated with natural gas plant operations and maintenance by meeting peak load through renewable sources. Generation Capacity Value Avoided capital costs of generation by meeting peak load through renewable sources, inferred from ERCOT market price data. Transmission and Distribution Capacity Value Avoided transmission costs resulting from the reduction in the peak load by renewable sources. Environmental Compliance Value Avoided cost to comply with environmental regulations and local policy objectives

VoS & Natural Gas 34 Actual Residential Expenditure 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,

VoS addresses several challenges of Net Metering Recovers fixed costs Improves equity – Between solar customers – Between solar and non-solar customers Better reflects value of local generation Promotes efficiency & conservation 4 under NEM