Nearly
two months ago, Georgia Power announced plans to triple its solar power
purchases, emphasizing the chance to stimulate innovation and research in an
area that is promising for the sunny state of Georgia. When I saw their
announcement, I was halfway through the first classes of my MBA program, and
was developing an understanding of what it means to be a corporation; how each
of your decisions must in some way create value for your shareholders. I
wondered how an investor-owned utility could sell the economics of investing in
distributed renewable energy resources.
These
renewable energy resources can have significant impacts. If the renewable
generation is coupled to energy storage and can be dispatched during critical
peak loads, then vertically integrated utilities can save on generation
capacity costs and may be able to avoid building new generation. T&D
capacity savings may also be available for both vertically integrated utilities
and T&D wires companies operating in deregulated markets. Renewable
generation is a variable energy source and is difficult to dispatch unless
coupled to energy storage or additional spinning reserves. Storage
technologies such as battery energy storage are improving, but total costs for
renewable distributed generation and storage can exceed alternatives such as
natural gas generation.
Renewable
generation does provide societal benefits by reducing greenhouse gases and our
consumption of fossil fuels, the latter lowering our carbon
footprint. But, renewable distributed generation will lower utility
revenue for those utilities with rates coupled to kWHs delivered. If
utility capacity costs are not lowered enough to offset the reduction in revenue
from lower energy delivered, the traditional business case does not work.
Utility
investments are driven by rate structure and regulatory status. Renewable
generation investments that are based on de-coupled rates, cost recovery that
factors in societal benefits, or regulatory compliance with mandated renewable
portfolio standards will be more likely to move forward. To get a better
view of the potential business case for renewable DG, it is helpful to segment
utilities based on rate structure and regulatory status as shown in the chart
below.
|
|
Regulatory
Status
|
|
|
Vertically Integrated
|
Deregulated Market
|
Rate
Structure
|
Decoupled
|
Constraints:
No penalty for reduced kWH sales,
DG can offset both generation and T&D capacity costs
|
Constraints:
No penalty for reduced kWH sales, DG offsets only T&D capacity costs
|
Coupled
|
Constraints:
Reduced kWH delivered yields reduced profits, but DG can offset both
generation and T&D capacity costs
|
Constraints: Reduced kWH delivered yields reduced profits and DG can
only offset T&D capacity costs
|
Effect of regulatory status and rate structure on utility
investment decisions
*Utilities in deregulated markets are typically T&D
wires companies with regulated rates.
*Blue shading reflects a positive or neutral business case
for DG; red reflects a negative business case
The
driver for decoupled rates is utilities can maintain profitability even with
decreased sales of electricity. Decoupling is generally tied to energy
efficiency programs which have investment costs that permanently reduce
consumption. In a market where utility profits are coupled to rates based
on electricity usage (reflected in the two lower quadrants), a reduction in
energy delivered reduces revenue (and profits) that cannot be recovered through
the rates. Even in markets where decoupling has been implemented,
if the state’s utilities are deregulated (reflected in the upper right
quadrant), there is separation between the generation market which sees reduced
demand and the T&D wires company making the renewable distributed
generation investment. It is in vertically integrated markets where
decoupling is allowed that a utility has the best opportunity to construct a
positive business case for investing in distributed generation.
The
two images below show the state of deregulation and decoupling in the United
States.
Regulatory status of each state
Decoupling status of each state
With
the combined effects of vertically integrated utilities and decoupling of
rates, we can see that utilities operating in just 11 states (Washington,
Idaho, Montana, Wyoming, Colorado, Utah, Minnesota, Wisconsin, Tennessee, North
Carolina, and Hawaii) would theoretically have the best opportunity to
construct a positive business case for investment in renewable DG. Why is
it, then, that we have become fairly accustomed to utility announcements of
renewable power purchase initiatives? Having looked at the ‘carrot’ of
increased profitability, we have to look at the ‘stick’ of financial penalties
that might sway our utility’s business case. The most common penalty
comes in the form of a renewable portfolio standard (RPS), which regulates the
percentage of a utility’s generation capacity that must come from renewable
energy. State-level RPS requirements are shown below.
Renewable portfolio standards (RPS)
by state
Converging
the data from the three maps produces seven states that provide the best
opportunities for distributed renewable generation investment (vertically
integrated utilities with decoupled rates) in states implementing a renewable
portfolio standard: Washington, Montana, Colorado, Minnesota, Wisconsin, North
Carolina, and Hawaii.
Georgia
is not one of these seven states so further digging is needed to understand
Georgia Power’s business case for renewable distributed generation. The
utility is attempting to avoid the legalization of power purchase agreements
(PPAs), which would allow independent companies to build DG resources on a
customer’s site and sell the customer power generated by those resources,
effectively bypassing the utility’s relationship with the customer.
While Georgia Power’s business case might not be as straight forward as its RPS
influenced counterparts, its investment is still balanced by a monetized
penalty, in this case, avoided PPAs.
In
the coming years, we should look for advancement in distributed energy storage
which will be a key catalyst for investment in distributed renewable
generation. Additionally, market and rate structures that allow the
utility making an investment in renewable distributed generation to maintain
its profitability will see growth in renewable deployments.
