This week could prove critical in determining Boulder’s energy future, and CEA needs your support.
Xcel Energy has launched a bid to stop Boulder’s 7-year effort toward municipalization in its tracks. One April 17th, the Boulder City Council considers two proposals from Xcel designed to dissuade us from our quest to control our own energy destiny.
Two days later, on April 19th, the Public Utilities Commission is holding an equally critical hearing on a motion to dismiss Boulder’s municipalization case outright.
We need your help to keep municipalization alive!
This is a critical moment for the future of independent municipal utilities in Colorado, so we ask not just Boulder residents but all Coloradans to step up to the plate.
Email the PUC at dora_PUC_complaints@state.co.us with your support for Boulder’s constitutional right to form a municipal utility. A few things to mention:
Communities should have a right to determine their energy future and should not be constrained by Xcel’s thinking and corporate constraints
Under the law of Colorado, Boulder has a constitutional right to form a municipal utility, and it is up to the Commission to protect that right, and make sure it means more than words in a statute book
At this defining moment in the history of our planet, we need more options than a profit-driven monopoly that remains dependent on fossil fuels for more than 70% of its power generation.
We also ask our supporters to contact the City Council at firstname.lastname@example.org and tell them to stay the course! We encourage you to remind them that:
Boulder Energy Future has worked for seven years to build a realistic, reasonable alternative to continued partnership with Xcel.
Boulder voters have weighed in on this issue not once but several times. In ballot measures in 2011, 2013, and 2014 Boulder’s residents asserted their demand to control their own energy future.
The two deals proposed by Xcel are both unacceptable, and do not reflect the best interests or desires of the rate-payers of Boulder.
Most importantly, there is a Stay the Course Rally outside the Municipal Building at 1777 Broadway, Boulder CO 80302 from 5:00-6:00 pm before the City Council hearing on Monday April 17th. Please come and show your support for Boulder’s Energy Future and the municipalization effort. Wear green and bring signs or posters. A couple ideas for signs and poster slogans:
“STAY THE COURSE!”
“Just Say NO (To Xcel)!”
“Don’t Give Away Our Energy Future!”
Finally, we ask all of our supporters to be polite and respectful when communicating with the PUC and the City Council. We cannot overstate the importance of addressing our officials in a way that is clear and concise, and also gracious and polite.
Thank you for your support. Together we will make a difference!
The effort to decarbonize Colorado’s largest electricity supplier, Xcel Energy, advanced in Denver last month as Coloradans lined up to speak at the Colorado Public Utilities Commission hearing on Xcel’s 2016 Electric Resource Plan. Members of CEA led Coloradans from all walks of life in voicing their concerns about Colorado’s electricity future.
The hearing room at the Public Utilities Commission was overflowing as the people of Colorado addressed the three PUC Commissioners. They expressed a host of concerns about Xcel’s plan, and asked for more focus on the abundance of cost-effective renewable energy available in Colorado, in accordance with Colorado’s laws and regulations.
Consider climate change and the urgency of reducing carbon emissions
Increase the reliance on renewable energy in order to reduce both emissions and costs
Accelerate the adoption of storage technologies to support the integration of higher levels of renewable energy
Begin contingency planning in the event of future coal bankruptcies and potential coal supply constraints
Allow new, cleaner resources to replace energy generation from older, dirtier, more expensive fossil fuel resources
Citizen witnesses also discussed the need to analyze the choices between renewable energy (with no future fuel costs) and fossil fuel resources (with billions of dollars of future fuel costs) using lower discount rates. A lower discount rate will show increased savings from cost-effective renewable energy because future fuel costs won’t be so heavily discounted.
More details on Xcel’s Electric Resource Plan and the key issues, including the importance of the choice of discount rate, are available in the public comment filing made by Clean Energy Action Board member Leslie Glustrom.
CEA is grateful that the new appointees to the Colorado PUC , Chairperson Jeff Ackerman and Commissioner Wendy Moser, along with Commissioner Frances Koncilja, are dedicated to hearing from the public and that the public is well enough informed to provide useful and compelling testimony!
You can also check out Christi Turner’s comprehensive article in Boulder Weekly and learn more about this important step froward in the fight for cheaper, cleaner power.
Utility revenue decoupling is often seen as an enabling policy supporting “demand side management” (DSM) programs. DSM is a catch-all term for the things you can do behind the meter that reduce the amount of energy (kWh) a utility needs to produce or the amount of capacity (kW) it needs to have available. DSM includes investments improving the energy efficiency of buildings and their heating and cooling systems, lighting, and appliances. It can also include “demand response” (DR) which is a dispatchable decline in energy consumption — like the ability of a utility to ask every Walmart in New England to turn down their lights or air conditioning at the same time on a moment’s notice — in order to avoid needing to build seldom used peaking power plants.
For reasons that will be obvious if you’ve read our previous posts on revenue decoupling, getting utilities to invest in these kinds of measures can be challenging, so long as their revenues are directly tied to the amount of electricity they sell. Revenue decoupling can fix that problem. However, reducing customer demand for energy on a larger scale, especially during times of peak demand, can seriously detract from the utility’s ability to deploy capital (on which they earn a return) for the construction of additional generating capacity. That conflict of interests is harder to address.
But it’s worth working on, because as we’ll see below, DSM is cheap and very low risk — it’s great for rate payers, and it’s great for the economy as a whole. It can reduce our economic sensitivity to volatile fuel prices, and often shifts investment away from low-value environmentally damaging commodities like natural gas and coal, toward skilled labor and high performance building systems and industrial components.
The rest of this post is based on the testimony that Clean Energy Action prepared for Xcel Energy’s 14AL-0660E rate case proceeding, before revenue decoupling was split off. Much of it applies specifically to Xcel in Colorado. However, the overall issues addressed are applicable in many traditional regulated, vertically integrated monopoly utility settings.
Why can’t we scale up DSM?
There are several barriers to Xcel profitably and cost-effectively scaling up their current DSM programs. Removing these impediments is necessary if DSM is to realize its full potential for reducing GHG emissions from Colorado’s electricity sector. Revenue decoupling can address some, but not all of them.
There are the lost revenues from energy saved, which impacts the utility’s fixed cost recovery. If the incentive payment that they earn by meeting DSM targets is too small to compensate for those lost revenues, then the net financial impact of investing in DSM is still negative — i.e. the utility will see investing in DSM as a losing proposition. Xcel currently gets a “disincentive offset” to make up for lost revenues, but they say that this doesn’t entirely offset their lost revenues.
Even if the performance incentive is big enough to make DSM an attractive investment, the PUC currently caps the incentive at $30M per year (including the $5M “disincentive offset”), meaning that even if there’s a larger pool of cost-effective energy efficiency measures to invest in, the utility has no reason to go above and beyond and save more energy once they’ve maxed out the incentive.
If this cap were removed, the utility would still have a finite approved DSM budget. With an unlimited performance incentive and a finite DSM budget, the utility would have an incentive to buy as much efficiency as possible, within their approved budget, which would encourage cost-effectiveness, but wouldn’t necessarily mean all the available cost-effective DSM was being acquired.
Given that the utility has an annual obligation under the current DSM legislation to save a particular amount of energy (400 GWh), they have an incentive to “bank” some opportunities, and save them for later, lest they make it more difficult for themselves to satisfy their regulatory mandate in later years by buying all the easy stuff up front.
It is of course the possible that beyond a certain point there simply aren’t any more scalable, cost-effective efficiency investments to be made.
Finally and most seriously, declining electricity demand would pose a threat to the “used and useful” status of existing generation assets and to the utility’s future capital investment program, which is how they make basically all of their money right now.
Revenue decoupling can play an important role in overcoming some, but not all, of these limitations. With decoupling in place, we’d expect that the utility would be willing and able to earn the entire $30M performance incentive (which they have yet to do in any year) so long as it didn’t make regulatory compliance in future years more challenging by prematurely exhausting some of the easy DSM opportunities.
One of the main reasons utilities fight distributed generation like rooftop solar is that it erodes demand for their centrally generated electricity. Reduced demand is annoying for any business, but it’s especially bad for traditional monopoly utilities. It’s especially bad because much — even most — of the cost of producing a kWh of electricity doesn’t go away if you don’t produce that kWh of electricity. These so-called “fixed” or “non-production” costs come from multi-decade financial commitments to big pieces of infrastructure — the power plants, transmission lines, and distribution systems.
So when you put solar panels on your roof and reduce the amount of electricity you need to buy from the utility, there’s a little bit of fuel that doesn’t get burned, and a little bit of money saved on the utility side (but as we’ve pointed out before, they don’t actually benefit from that cost savings), but a lot of the money that the utility spent to be able to provide you with electricity if you needed it is already spent. This is problematic because most electricity rates are designed to recover utility costs in proportion to the amount of electricity you buy (this type of rate is known as a “volumetric rate”). So utilities have an incentive (known as the throughput incentive) to ensure that their electricity sales increase, or at the very least don’t decline.
If lots of people start buying much less electricity, this reduces utility spending on things like fuel, but it doesn’t have any effect (in the short term) on the fixed or non-production costs. To stay solvent, the utilities then go back to their regulators and say “Hey, we’re not getting enough revenue to cover our costs. Give us a rate hike!” and if the regulators agree, allowing the utilities to recover the same fixed costs from fewer overall kWh of electricity sold, this just makes it even more financially sensible for people to put solar panels on their roof, to avoid buying the more expensive electricity. (And in our fantasy world, one could also imagine savvy regulators taking measures to decrease fixed costs, by forcing early retirement of risky, uneconomic fossil generation…)
This is the essence of the Utility Death Spiral that’s gotten so much attention over the last year or two (including a speakeasy we hosted), and which Dave Roberts did a great job of exploring in his Utilities for Dummies series over at Grist. From the Utility’s point of view the Death Spiral can be short-circuited with revenue decoupling… up to a point. With decoupling, they don’t have to go to regulators and ask for a rate hike — they can recover the fixed costs in a formulaic way, and so decoupled utilities are able to invest in energy efficiency without worrying about lost revenues. They’re also likely to be less opposed to modest amounts of distributed generation.
In fact, it’s hard to imagine a climate-aware utility of the future that isn’t decoupled. We need to get away from utilities treating electricity (and energy more generally) as a commodity, with profits tied to the quantity of product they sell. Instead, we need to move toward treating energy as a service — Amory Lovins’ famous hot showers and cold beer — with an incentive to provide high quality service using the least possible amount of underlying energy.
Decoupling is a Good Thing™
However, if you care about climate, then you always have to ask not just Is this a good thing? but Is this good enough? It’s an old cliché that “better is the enemy of good enough,” — i.e. spending time and money and effort on improvement beyond what’s good enough can be wasteful. But in the context of climate, we have the opposite problem. Moving things in the right direction can still mean abject failure. Plenty of things that are better than the status quo — like decoupling utility revenues, or burning natural gas instead of coal — come nowhere close to being good enough to keep us from seeing more than 2°C of warming.
To have a chance of stabilizing the climate, the utility business model can’t just be tinkered with. It needs to be radically transformed. The good news is that radical transformation is probably on the table whether the utilities want to talk about it or not. Our task is to make it happen as quickly and smoothly as possible.
Utility Death Spiral: Not Just for the Paranoid
Until very recently anybody afraid of the death spiral dynamic might have seemed a little paranoid. DG was still pretty expensive, and often dependent on utility rebate programs, tax credits, and other incentives that were often controlled by regulators and utilities. As the price of distributed solar has fallen, rebates have dwindled to nothing, and new financing mechanisms and business models have emerged. Utilities and regulators have lost some of their ability to moderate deployment, and they’re poised to lose much more.
Mosaic has created a peer-to-peer lending platform that lets individuals invest in diversified portfolios of smaller distributed solar projects, earning around a 5% return on their investments. They’ve done about $10M worth of financing this way. Now they’re getting into solar loans with backing from a large international re-insurer, adding another $100M in capital.
Sungage just raised $100M in funding from a large northeastern US credit union to use as a revolving solar loan fund.
SolarCity has started issuing solar bonds with a similar yield directly to the public on a much larger scale. They’ve raised more than $100M so far, without going through the traditional finance industry.
Big time sprawling suburban home builder Lennar is now installing rooftop PV systems by default in some markets, including around Denver. They’re offering home buyers a power purchase agreement (PPA) in which they get a 20% discount off of retail electricity rates for 20 years.
From the consumer’s point of view what this means is that in an increasing number of markets, rooftop solar can now be had at a discount to utility power, with no up front costs. This is new and different and scary for utilities, because it means rooftop solar can go big. Fast. Additionally, Elon Musk (who heads both electric car maker Tesla Motors and SolarCity…) is investing $5 billion (with a B) in a massive lithium ion battery factory in Nevada, hoping to drive costs down through economies of scale.
Suddenly, a good chunk of the traditional utility customer base starts to look a little sketchy.
In Colorado (and elsewhere) these dynamics have brought us to a regulatory stalemate. For once the status quo — net metering — favors distributed renewable electricity. It’s the policy that Big Solar has bet the farm on. But if we try and use it to scale up cheap rooftop PV dramatically, it may destabilize the utilities.
Straight net metering also won’t result in a particularly optimal deployment of distributed energy resources, because all it accounts for is energy production, and there are many more subtle qualities that are important to a well functioning electricity grid. If we can integrate those other qualities — temporal, geographic, environmental, price stabilization, etc. — into our electricity pricing we’ll get a much better overall outcome. As the Rocky Mountain Institute has put it: the debate over net metering misses the point.
Be that as it may, right now there are two 800lb gorillas (or maybe, an 800lb gorilla and a 300lb gorilla) locked in mortal combat — the utilities on one side and Big Solar on the other. One side is trying to get rid of net metering altogether, and the other is willing to fight to the death to preserve it. When people bring up other ways of valuing distributed renewable energy like Minnesota’s proposed Value of Solar or Feed in Tariffs they tend to either be ignored or attacked, sometimes by both sides of the fight! For example, The Alliance for Solar Choice wasted no time in setting up a campaign to stop what they glibly re-termed Feed in Taxes and Value of Solar Taxes as soon as Minnesota made it clear they were considering Value of Solar seriously.
Headed for Strange Country
As with so many aspects of climate and energy policy, change here is inevitable. Regardless of which side prevails in the fight over net metering, as the cost of distributed solar and energy storage continue to decline, we are headed for strange territory.
If the utilities prevail and repeal net metering, they’ll probably slow the spread of distributed generation, since customers would only be able to benefit economically from satisfying their electricity demand on-site in real time, rather than banking electricity production annually. But in the longer term, given ongoing PV system cost declines and the potential for cost-effective electricity storage, the utilities will still face a decline in electricity demand regardless of whether a policy like NEM remains in place. At one extreme we could end up in a situation (well described by RMI), where defection from the grid is economically sensible for a significant number of people.
On the other hand if Big Solar prevails then we get to the same place, maybe a little quicker, since they’re already operating with a net metering based business model at significant scale. If the Feds don’t renew the Investment Tax Credit in 2016 that will push the economics out a little, but there’s little reason to think the overall price trend is going to reverse. Ever.
Does that sound ridiculous? Then note that PV in 2014 is already 59% cheaper than NREL predicted it would be back in 2010, and Deutsche Bank is forecasting that solar will reach grid parity nationwide by the end of 2016. On the wholesale side the New York Times reports that without subsidies wind on the high plains has come in as low as ¢3.7/kWh (the same as just the production costs of Xcel’s Colorado fossil fleet in 2013).
Some folks think widespread grid defection sounds like utopian energy independence. In practice it would be far less equitable, more expensive, and operationally much less robust than a well designed network that integrates a lot of distributed energy. It’s also physically impossible in cities, which consume most of our electricity, because no matter how cheap solar and storage become, cities use more energy within their boundaries than is available from renewable sources in those same boundaries. This is despite the fact that cities have much lower per capita energy use than rural and suburban places of comparable wealth. Cities are great for the climate, but they will always need to import energy, and that means we will still need transmission and distribution systems.
Um, okay. But, decoupling?
In the near term, revenue decoupling would insulate Xcel against the sales they’re going to lose to rooftop solar and other distributed energy. Rather than seeing revenues decline as more electricity sales are displaced, they’d be empowered to adjust rates in a formulaic way to compensate for the losses, and ensure that the fixed costs of the grid continue to be paid for (along with their profits). In theory, this ought to remove or at least reduce their opposition to net metering.
In the long term, if grid defection becomes attractive, additional fixed-cost recovery mechanisms like revenue decoupling aren’t going to be much help to the utility.
Our task is to open up the discussion about creating an intelligent grid with electricity prices that reflect the more subtle attributes of distributed generation. Revenue decoupling is one potential avenue into that discussion — at least the early part of it. How so?
In the short term, the utilities are fighting for the status quo, minus net metering, and they seem to be losing. If the only two positions available are the status quo with vs. without net metering, the choice for renewable energy and climate advocates is clear — we have to side with Big Solar. But if utilities were actually up for creating a different — and much more scalable — renewable energy policy, then the decision of who to work with becomes more challenging.
With revenue decoupling in place, utilities like Xcel could have more room to consider policies that support distributed generation, without seeing them as an axiomatic threat to their revenues. But to do so, they’d have to be willing to talk about unwinding their existing investments in fossil generation — otherwise, no renewable or distributed generation policy can scale up far enough to be “good enough” for the climate. That vital discussion about unwinding fossil plants is not yet happening out in the open. At least, not in the US. We’ll take a much closer look at it in a post very soon!
So, it’s been quite a while since our last long policy post, focusing on utility revenue decoupling in connection with Xcel’s current rate case (14AL-0660E) before the Colorado PUC. That’s because we’ve been busy actually intervening in the case!
A Climate Intervention
We filed our motion to intervene in early August. As you might already know, in order to be granted leave to intervene, you have to demonstrate that your interests aren’t already adequately represented by the other parties in the case. Incredibly, CEA’s main interest — ensuring that Colorado’s electricity system is consistent with stabilizing the Earth’s climate — was not explicitly mentioned by any of the other parties!
In our petition we highlighted our mission:
…to educate the public and support a shift in public policy toward a zero carbon economy. CEA brings a unique perspective on the economics of utility regulation and business models related to mitigating the large and growing risks associated with anthropogenic climate change. In addition, CEA has an interest in transitioning away from fuel-based electric generation in order to mitigate the purely economic risk associated with inherently unpredictable future fuel costs.
…and we were granted intervention. So far as we know, this is the first time that concern over climate change has been used as the primary interest justifying intervention at the PUC in Colorado. In and of itself, this is a win.
A Long and Winding Road
Throughout the late summer, we spent many hours poring over the thousands of pages of direct testimony. Especially Xcel’s decoupling proposal, but also (with the help of some awesome interns), the details of the company’s as-of-yet undepreciated generation facilities — trying to figure out how much the system might be worth, and so how much it might cost to just buy it out and shut it down (were we, as a society, so inclined).
Early on in the process, the PUC asked all the parties to submit briefs explaining why we thought it was appropriate to consider decoupling in the rate case, whether it represented a collateral attack on decisions that had already been made in the DSM strategic issues docket, and how it would interact with the existing DSM programs. We pulled together a response, as did the other intervening parties, and kept working on our answer testimony — a much longer response to Xcel’s overall proposal. The general consensus among the parties that filed briefs, including CEA, SWEEP, WRA, and The Alliance for Solar Choice (TASC, a solar industry group representing big installers like Solar City) was that decoupling was not an attempt to roll back previous PUC decisions related to DSM — and that addressing it in a rate case was appropriate. Only the Colorado Healthcare Electric Coordinating Council (CHECC, a coalition of large healthcare facilities and energy consumers) told the PUC that decoupling ought to be considered an attack on previous DSM policies.
The PUC staff unfortunately came back with a reply brief that disagreed and suggested, among other things, that maybe it would be better if we just went with a straight fixed/variable rate design to address utility fixed cost recovery. Never mind the fact that this kind of rate would destroy most of the incentives customers have to use energy efficiently.
And then we waited.
With baited breath each Wednesday morning we tuned in to the Commissioners’ Weekly Meeting, streaming live over the interwebs from the Windowless Room in Denver. We watched regardless of whether anything related to our dear little 14AL-0660E was on their agenda. Just in case they tried to sneak it by. Weeks passed. And then a month. The deadline for submitting our answer testimony approached.
Finally on October 29th, six weeks after submitting our brief, the commissioners finally brought up the issue of decoupling at their weekly meeting and in a couple of minutes, indicated that they’d be severing it from the proceeding, with little explanation as to why. However, because there were no details, and the order isn’t official until it’s issued in writing… we continued working on our answer testimony. The final order came out on November 5th, and prohibited submission of testimony related to decoupling. Answer testimony was due on November 7th.
Where to From Here?
Xcel might come back to the PUC with another decoupling proposal before the next Electric Resource Plan (in fall of 2015) . Or they might not. This means that a good chunk of the work that we’ve been doing since this summer will have to come to light in a different way. So for the next few posts, we’re going to explore some of the issues that came up in the preparation of our answer testimony, including:
Decoupling and Distributed Energy: How would decoupling interact with distributed energy resources like rooftop solar? What are the implications for utilities as the costs of those resources continue their precipitous decline?
Decoupling and Demand Side Management: How would revenue decoupling interact with demand side management programs in general — both utility and privately or locally funded — and what particular issues with Xcel’s DSM programs could decoupling address? What issues can’t it help address?
Can Revenue Decoupling Scale?
Why doesn’t revenue decoupling as a policy really scale up to the point of taking existing generation facilities offline, or preventing new facilities from being built?
Decoupling as a First Step:
Even if it can’t scale, why might decoupling still serve as a useful starting point for the decarbonization process? Can it give us a little bit of breathing room while we start the real negotiation? Or is it just another layer of financial protection for utilities who want to delay change as long as possible?
Realism and Equity in Carbon Budgets for Colorado:
What is the true scope of the decarbonization challenge, in the context of the carbon budgets recently published by the IPCC in their Fifth Assessment Report (AR5), but localized to Colorado so we can actually wrap our heads around it. Why is this conversation so hard?