1. Copyright © 2014 Clean Power Research, L.L.C Prepared by Clean Power Research May 7, 2014 Prepared for Arizona Corporation Commission Cost Causation and Benefits Allocation in DG

2. Clean Power Research DG cost/benefit and fleet modeling studies UtilitiesEnergy AgenciesRenewables Organizations We Energies Nevada Power Austin Energy SDG&E (USD) Duke Energy Carolinas CEPCI Utility X NYSERDA CPUC MN Dept. of Commerce MSEIA Solar San Antonio IREC (APS) Utah Clean Energy Organization Z 2

3. DGValuator evolution ProjectNew methods and features 2012 NYSERDA/CPUC Built DGValuator from prior study methods Public sources for hourly loads and economic data Mid-Atlantic SEIA Market price reduction methodology 2013 Solar San Antonio Reserve capacity SDG&E (USD) Fleet profiles Separate T&D loss calculations Utility X Future year generation investments Gas transport costs New final results chart Organization Z Support for any DG production profile (e.g., export power) Utah Clean Energy IRP generation data Austin Energy Nodal pricing 2014 Minnesota Capacity/heat rate linkage Representative fleet modeling Simplified ELCC method 3 TM

4. DG costs and benefits (1 of 2) 4 Cost/Benefit Component Basis Cost/benefit accrues to: Status Avoided Fuel CostFuel costs (vertically integrated) or market costs (portion attributable to fuel) UtilityWell established Avoided Plant O&M Cost O&M costs (vertically integrated) or market costs (portion attributed to O&M) UtilityWell established Avoided Generation Capacity Cost Capital cost of generation to meet peak load UtilityWell established, some variations in ELCC methods and treatment of future year investments Avoided Reserve Capacity Cost Capital cost of generation to meet planning margins and ensure reliability UtilityTechnically established, legal limbo (FERC) Avoided Transmission Capacity Cost Capital cost of transmissionUtilityMethodology established, cost data elusive Avoided Distribution Capacity Cost Capital cost of distribution capacityUtilityTechnically established, cost data and methods fairly well established Integration CostCost to regulate gridUtilityTechnically established, methods established, studies scarce

5. DG costs and benefits (2 of 2) 5 Cost/Benefit Component Basis Cost/benefit accrues to: Status Fuel Price VolatilityCost of future price uncertainty (natural gas, etc.) RatepayersTechnically established, methodology established, not universal agreement in applicability Distribution Engineering Cost (and Voltage Control) Engineering and equipment to ensure distribution rules compliance and reliability UtilityVery site specific, difficult to capture costs, few relevant studies, voltage control standards in development Avoided Environmental Compliance Cost Cost to meet utility RPS obligationsUtilityWell established Avoided Environmental Cost Cost of carbon and other pollutantsSocietyWell established technical methods, little consensus on cost data to use (e.g., EPA?) or applicability

6. Load match and loss savings Minnesota Dept. of Commerce, 2014 6 Gross Value× Load Match Factor × (1 + Loss Savings Factor ) = Distributed PV Value ($/kWh) (%) ($/kWh) Avoided Fuel CostGV1 LSF-Energy V1 Avoided Plant O&M - FixedGV2 ELCC LSF-Energy V2 Avoided Plant O&M - VariableGV3 LSF-Energy V3 Avoided Gen Capacity CostGV4 ELCC LSF-ELCC V4 Avoided Reserve Capacity CostGV5 ELCC LSF-ELCC V5 Avoided Trans. Capacity CostGV6 ELCC LSF-ELCC V6 Avoided Dist. Capacity CostGV7 PLR LSF-PLR V7 Avoided Environmental CostGV8 LSF-Energy V8 Avoided Voltage Control Cost Solar Integration Cost Value of Solar

7. Quiz! 1.Solar power reduces the fuel expense of: a.Natural gas b.Coal c.Nuclear d.All of the above 2.Customers pay the fuel expenses for: a.Natural gas b.Coal c.Nuclear d.All of the above 7 Right!

8. DG costs and benefits are evaluated on a marginal basis (not average basis) 8 Marginal cost analysis Avoided fuelDisplaced fuel on the margin each hour DG resource profileThe marginal resource, e.g., a 1 MW increment of DG installed today Avoided lossesMarginal losses Avoided generation capacityFuture capital investments Avoided transmission capacityFuture capital investments

9. Deciding DG study period Example: Generation capacity 9 20142018 Planned CCGT Does DG avoid generation capacity costs if installed here? Planned CT How about this cost? 2034

10. Cost study Framework recommendations 10 RecommendationRationale Adopt long-term study period (life of DG) Include all costs PPA-like Define a marginal resource under evaluation (e.g., all behind-the-meter PV to be installed in current year) Resources do not morph in future years with additions Perform marginal (rather than average) analysis (costs, losses). Value of PV displacement Capacity value (ELCC) based on current penetration. Future studies use penetration in future years

11. Ben Norris Sr. Consultant Clean Power Research ben@cleanpower.com