Renewable Energy: What to expect

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.