Decoupling limitations & Solutions: Decoupling Part 3

When would decoupling be “anti-consumer?”

If the future means selling less power, then less rate revenue means recovering past investments in coal power plants (now stranded assets) becomes impossible.  Investors will not earn their allowed returns.  Time to remove utility returns from the MONOPOLY board!  Decoupling solves this problem, and that’s exactly why some consumer advocate groups don’t like it.  Some claim the utilities made bad long term investments, so their investors should suffer the consequences of continuing to buy coal!  Maybe, but keep in mind, customers always bear the burden of the bad decisions made by the regulated monopoly.  Others rightly claim that decoupling alone only guarantees returns for the utilities and does nothing to lower rates for consumers.

Decoupling alone does not encourage utilities to value demand management over production.  It only makes them indifferent to energy efficiency or alternative energy sources like DG.  Decoupling alone merely protects the utility investors from loss.  In fact, decoupling alone might lead executives to care less about efficient operations, because the mechanism does nothing to encourage energy conservation.

According to the study on decoupling by the Institute for Energy Research, Maine’s failed decoupling policy resulted in small customers’ bill increase, while their consumption fell. New York tried a decoupling experiment in the 1980’s for eight utilities.  “Four [decoupled utilities] saw conservation related expenses rise 370 percent, but the four that did not [have decoupling] saw even higher increases.”

The fact is, in utilities without decoupling, rate payers bear the weight of all utility investment decisions, and raising rates to recover lost income from decreasing kWh use  will eventually backfire.  Because customers can not choose between competitors, the status quo utility world will continue to increase electricity rates even as consumption decreases.  At that point, residential storage plus solar becomes a very competitive alternative.

Even though decoupling allows utilities to recover revenue at the authorized rate, regardless to whether or not consumption increases or decreases, it also creates a “true-up” amount in future rates to account for actual kWh consumption.  Decoupling opens the doors to new opportunities for cooperation between power supplier and power user.  The utility could provide power users with services and equipment, like smart meters, that could allow for real-time tracking of costs that help utilities manage peak hours and consumers save money.  Cooperation with solar/storage customers can lead to grid stabilization and security.  Incentives like energy efficiency rebates will continue to reduce consumption and save all customers money.

When California added incentives to decoupling in 2007, “allowing them to split the savings with customers whenever energy use falls below state targets,”  the utility was motivated to sell less power.  The Atlantic quoted Peter A. Darbee, the chairman, CEO, and President of Pacific Gas & Electric who said, “all of a sudden you’ve unleashed the power of these huge organizations to work with you rather than against you.” By using less energy, rate payers win in the long run.  The “California Energy Commission calculated that the state’s efficiency efforts had preempted the need for 24 large-scale power plants and saved state consumers $56 billion.”  (The Atlantic, Oct. 2009) That’s billions in capital investment that does not need to be passed onto rate payers.

State policies must ensure utility financial incentives help rate payers become more cost effective, create opportunities for energy savings, and encourage distributed generation.  For example, California’s decoupling policy sets up revenue adjustment mechanisms for programs like efficiency, low income assistance, research and development, and renewable energy programs.

Should New Mexico pass an increase in the RPS to 50% by 2030, it should also include a healthy DG carve out.  Consider decoupling as the first step to leading the nation in renewable energy production, job creation, and energy exporting.  Since California’s RPS cannot be met within its borders, importing renewable energy from New Mexico, a state rich in land and sunshine, is definitely an opportunity on the table.

The grid landscape will change drastically in the next ten years.  Decoupling shifts the direction from obvious pitfalls to cooperation and solutions.  The question is, do we prefer a functioning electric service provider and a healthy growth of the renewable energy economy over the status quo?

Say yes to the decoupling mechanism.

If you want to support our efforts to introduce decoupling to New Mexico, please support us here.

 

Why decoupling? Smarter renewable tech ahead!

Why Decoupling?

The near future grid will be unrecognizable.  According to a recent report by GTM research, 9 out of 10 solar systems will be paired with storage by 2023.  Smarter tech ahead has a mean result of lower electric rates, decreased revenue, and the ability of customers to go “off line,” means utilities could soon be in a desperate state.  Without decoupling, we’ll see a world of mergers, hostile take overs, grid defection, and business crisis.

At least in New Mexico, PNM recognizes that investing in the lowest-cost of power supply (solar + storage) is their best option.  However, real competition will continue to come from distributed generation (DG), including residential, commercial, and community solar systems.  Soon renewable energy technology will enable large power users to rely on microgrids through the addition of solar plus storage systems.  Once the utility starts losing the large industrial users, they will inevitably raise rates for the remaining rate payers.

As the rate payer base decreases, the cost of utility generated electricity goes up, and alternative sources of energy become even more attractive.  “If utilities are going to live or die solely by how low they can drive the short-term commodity price of electricity, they will have every reason to resist investments to reduce pollution or to help customers save energy,” said Ralph Cavanaugh, director of the energy program of the Natural Resources Defense Council, an environmental group.  He said he feared that utilities, instead of stressing conservation, would just try to sell as much power as they could to increase their revenues and profits. (New York Times, Aug. 8, 1994) And so, the cycle begins, known as the utility death spiral, which ultimately results in difficulty for poorest rate payers, as those who can afford to disconnect from the grid will do so.

It’s time to recast the utility’s business mission and change it from power provider to electric services provider.  Besides, we all appreciate reliable electricity, right?  The mechanism to accomplish this is called decoupling.  Its an ok-ok-ok solution that is a case  currently before the PRC.  The current rate case would create a pilot program for a single rate class to try decoupling.

This isn’t a new mechanism.  New Mexico can look to other states for direction.  California initiated it in the 1980’s, then revised and reinstated it in the 2000’s.  Regions from around the country have found ways to make decoupling work for consumers, the utilities, and the environment.  It is a no risk initiative, because the alternative is bleak.

If you want to support our efforts to introduce decoupling in New Mexico, please support us here.

Go to part 3:  When would decoupling be “anti-consumer?”

Decoupling Series: What is a regulated territorial monopoly?

This is part one of a three part series on the past, present and future of utility regulation alongside the growing renewable energy industry.  REIA supports introducing a decoupling mechanism to PNM because it will change the way utilities do business in New Mexico.  If you’re interested specifics about the rate case, that information is here.

Status Quo Blues:  Regulated Territorial Monopolies

Utilities set up as regulated territorial monopolies for a couple of reasons.  As utilities began, they needed enormous initial investment, a barrier to entry requiring government intervention.  With high fixed costs, utilities also needed large numbers of customers to obtain a meaningful return on investment.  Because competition created crisscrossed electric wire madness, the government allowed monopolies to form.  Competition usually discovers the optimal way to produce services to maximize profit and efficiency, so a monopoly does not naturally work to a customer’s advantage.  As a result, monopolies have potential for abusive behavior.  This made government oversight and regulation necessary.

In New Mexico, the Public Regulatory Commission weighs the requests of the utility against the public interest for consistent and affordable access to electricity.  Currently, regulated monopoly utilities provide a given utility service on a “cost-plus” approach.  The regulators determine the price of electricity as the “cost” and guarantees a rate of return(profit) of to the utility capital investors (shareholders).  In the past, this has been a good investment that brings consistent returns.

Utility Business Model:

While fixed costs can be pre-determined for service, markets fluctuate and can only be estimated.  Unfortunately, this regulation method has historically rewarded higher capital spending by utilities because regulators allow almost all of the company’s durable assets into the “rate base,” where it can earn the allowed return (profit).  This has resulted in a large pool of profits that can afford big executive salaries.  Fortune Magazine summed it up nicely in the quote from Erroll Davis, the former CEO of Wisconsin Electric Power, “your new desk goes into the rate base.  This is the only industry I’ve ever seen where you can increase your profits by redecorating your office.” (Fortune, Nov. 13, 1995) As a result, utilities have a natural disincentive to cut costs, increase productivity, or eliminate waste.  Coal and gas systems require centralized generating stations with high operation costs, fluctuating fuel costs (usually on an upward trend), and long-term amortization that relies on a large base of rate payers to reimburse.  Up, up, and up!

But times have changed.  Given more efficient ways of generating electricity, even static estimates no longer make sense.  Because the utility is a regulated monopoly, is has no incentive to find better ways to provide utility service on its own.

This has given rise to legislation like the Renewable Portfolio Standard (RPS) that legislates the percentage of generation that must come from renewable energy.  In addition, independent producers, according to the New York Times, “have been responsible for 53 percent of the new generating capacity in the last four years.”  (New York Times, Aug. 8, 1994) The traditional utility business model is under attack from all sides, and has been for a while.

Today, renewable energy technologies and energy efficiency products trend down in price (rather than up) and involve smaller upfront capital investments followed by minimal operational expenses. This throws a wrench into the traditional economic model of a utility.  For example, renewable energy built by individuals (distributed generation—or DG) creates logistical complications and competition for utilities.  These renewable energy mini-power generation stations add uncertainty to the traditional grid, while also reducing rate revenue for the utility.

In New Mexico, for example, the anticipated growth in the customer base of 1% is negatively offset by a 1.5% increase in distributed generation (DG).  With this direct hit to the bottom line, utilities request cost recovery mechanisms from the regulators, like solar tariffs or changes to net metering to make up for this shortfall. (See the report: “Nevada gets it wrong, big time”)

Utilities see the writing on the wall.  Some create rate structures or fees that disincentivizes renewable energy.  Others create long term contracts with high energy users in order to keep them as customers.  All of these measures work in the short term, providing temporary solutions to a growing problem.  As renewable energy technology becomes ever more accessible to the mainstream market, however, the inevitability of increased adoption means these sorts of rate recovery protection attempts will fail, eventually.

If you want to support our efforts to introduce decoupling to New Mexico, please support us here.

Go to part 2:  Why decoupling?

 

Part 4- The solution, decoupling

decoupling
This is part 4 of REIA-NM’s ongoing NM Rate Case series.

 

There is a situation where solar and electric utilities can be friends.  A different revenue model, called decoupling, allows utilities to profit from the number of customers served instead of the amount of power they sell.  This removes solar and energy efficiency as a threat to revenue.  It also allows utilities to increase profit by increasing reliability, efficiency, and service.  A decoupling regulation allows the utility to recoup fixed costs and ideally, earn extra rewards for achieving environmental targets desired by their customers.  California, where decoupling began in 1981, uses 55% less energy that the national average, even though the population grew.  A growing population means more customers to serve for the utilities.  California leads the nation in solar installations as well, and the state installed just over half of all the solar in the country.  If the renewable energy industry works with the utilities to find a grid 2.0 solution, the solar industry would thrive, continue to provide good jobs, and our utility will happily create more clean energy in New Mexico.

Nevada Regulator, PUC, Gets It Wrong, Big Time.

utility deathspiral infographic PUC

Nevada Regulator (PUC) eliminates “retail rate” net metering for new and existing customers.  This is probably the most anti-solar regulation that we’ve seen so far.  In New Mexico, current solar customers enjoy net metering, which means the solar generates electricity and then turns the meter backwards in an equal 1 to 1 rate exchange.  A system sized offset to annual usage means the annual electricity used is around zero.   Taking away net metering means that solar customers pay more for their electricity than the amount they get paid to generate it from their solar investment.  In Nevada, the proposed change from 11.6 cents per kWh to 5.5 cents per kWh is a big hit.  To make matters worse, the PUC approved additional fixed charges, a number the regulators left up to the utility to determine.  According to Greentech Media, “Solar companies say the changes will lower net metering compensation to the point where rooftop solar no longer makes economic sense.”  Indeed, this is a disaster for customers who entered into 30 year lease agreements.  These customers will pay the solar company an agreed rate (which is less than their current monthly bill, but increases around 3% per year for 30 years) AND pay the utility company a solar access fee plus the difference between the retail rate and the new “wholesale” rate.  In fact, the two leading national solar lease providers, Solar City and Vivint Solar, announced that they will leave the state if this measure passes, taking approximately 6,000 jobs with them.

This seems, to us, to be a short term “solution” for a utility beleaguered by the influx of solar energy and decreased demand, as we covered here. With the advancement of battery storage technology, those with means will disconnect from the grid, leaving fewer connected rate payers (and higher rates).  It is what is known as the utility death spiral, a dangerous recursive loop which results in bankrupt utilities due to lower demand and stranded assets, like unused coal mines.  As we’ve seen in other sectors, regulations and monopolies rarely succeed in holding back disruptive technologies like renewable energy.  It’s time for vested interests in old technologies and business models to find a new way to work toward a clean economy and build local economies alongside the renewable energy industry. For more on this, check back tomorrow for our “Solutions” finale to the NM Rate Case Series.

NM rate case issues and overview part 3

arizona rate cases
This is part 3 of REIA-NM’s ongoing NM Rate Case series.
Currently, it seems a solution for the utility will be a fixed cost “fee.”  However, customers will have less incentive to use less energy, or invest in alternative energy.  Fixed fees only ensures the utilities can recoup their expenses and profit. It will not recoup the “costs” of rooftop solar or energy efficiency to the utility, it will just eliminate a projected long term problem that more and more solar customers present for utilities.  In what’s referred to as load defection, solar customers use less energy and pay lower power bills–so the financial forecasts for utilities looks grim.  In Arizona, for example, where utilities had an access fee imposed on solar customers and approved by their regulatory body, solar installations decreased by 96%. It devastated the industry, companies went out of business, workers lost their jobs, and the largest national solar company left the state.  Maintaining the status quo utility business model is bad for solar, utilities, and rate payers.
The Renewable Energy Industry contributes more jobs to the economy than any other sector.  Solar enjoys economies of scale and prices continue to fall.  Technological advancements in battery technology will soon make financial sense in our sunny state with 5.5 hours of sunlight per day.  Paired with solar energy, these systems can be disconnected from the power grid.  If the utilities punish solar customers instead of working with the solar community, something known as as “grid defection” could occur.  This worst case scenario means customers generate their own power and can cancel their electric utility service.  This will be bad for rate payers, because it will create instability in the grid, make electricity more expensive for grid-tied customers,  and ultimately put electric utility companies out of business.

NM rate case issues and overview part 2

PNM interconnections

This is part 2 of REIA-NM’s ongoing NM Rate Case series. Click here for part 1.

Last year’s NM rate case, submitted by the utilities in New Mexico, asked to impose an “access fee” for solar customers. REIA-NM and a number of other organizations, successfully argued against such a traditional solution to the problems arising in and stemming from their traditional business model which has failed to adapt to new technologies  The utilities claimed that solar customers should pay their fair share for the electricity they use at night, when the sun isn’t shining.  However, this “fee” doesn’t recoup any real expense to the utility.

 

In New Mexico, solar energy generated by customers makes up less than 1% of total generation.  In addition, many studies show that the benefits that solar customers add to the grid  outweigh the additional costs any night time generation may cost. It is an attempt to slow down the adoption of solar, a short term, but very painful solution for the industry.  REIA knows that solar customers make the capital investment to add solar power to the grid and not the ratepayer.  They share their electricity with the grid during sunlight hours and reduce the need for expensive “peaker” plants that mostly rely on diesel fuel.  In fact, the peak hours have changed due to solar. Solar is good for grid security, rate payers, and the environment in the long run. Legislative policies and approved regulations that allow utilities an alternate mechanism to earn revenue can solve the current access fee issue.

NM rate case issues and overview- part 1

public regulations commission

The current rate case conflict between the solar industry and the electric utilities, centers around utility regulation and the traditional business model of utility investing in fuel generation and transmission.  The utility then asks the regulating body (the PRC in New Mexico) to approve a rate case which consists of the costs plus a 10% profit.

Since the electric utility companies’ revenue is tied to retail sales (customer rates), anything that reduces that return, like increased efficiency or solar electric power, becomes a bottom line problem. When the legislature mandated the utilities add renewable energy to their portfolio, the utilities complied.  It has set up a conflict.  The PRC wants to keep rates low for consumers, the legislators want more renewable energy, and the utilities need to recover large investments in infrastructure and fuel costs.

Currently, rate increases are the only way to recover costs. If fuel costs keep going up, and the utilities keep building more plants, then everything runs according to plan.  But today, new technologies like solar and LED lights threaten this old model.  When customers invest in energy efficiency and solar energy, it results in cost savings for the customer, but reduces revenue for the utilities.  As a result, utilities see a bleak financial future and try to come up with fixes that will pass the PRC.  Unfortunately, these fixes can be bad for the industry, but the days when it could be drowned in the bathtub have passed.  In the end, we think solar and energy efficiency is hear to stay, so the electric utility has to find other ways to make up for their lost revenue by changing their business model.

*This is part 1 of a series on energy utilities, new technologies and the resulting problems caused by this conflict. We will be running this series through out the next few weeks. and suggesting possible solutions to this conflict. We welcome your input and ideas on the subject. Please comment below. Thank you

An Overview of the Photovoltaic Industry part 2

photovoltaic industry

Continued from “An Overview of the Photovoltaic Industry part 1″ Click here

Lean engineering principles focused much of these competitive market efforts of doing more, with less. Four examples come to mind:

  • Silicon wafer thicknesses (used within PV modules) are only 25% of what they were in the 1990’s.
  • A PV module now vs. 2008 (with the same physical dimensions) can produce 25% or more power.
  • PV module array mounting systems use significantly less aluminum than 10 years ago.
  • PV module mounts now feature integral bonding between metal components for safety.

Finally, at the end of 2016, the nationwide 30% federal income tax incentive will be reduced to only 10% for businesses and eliminated altogether for residential systems. This will immediately reduce the size of the possible customer base and will reduce the affordability of PV systems with the US. Many feel the industry should and will stand on its own, without 3rdparty incentives, but none the less, the market will “feel” a bump in the road that reflects the longer return on investments for these systems.

 

Many large national solar installation businesses have been set-up in states where electric power is not cheap and who have incentives programs of some type for PV.

Mass produced/ mass installed PV systems are being installed in many states.

  • These “kit type systems” function – but on what level?
  • Has any real skill been utilized to make the best possible system?
  • What is the best type of inverter to be utilized? – Different inverters have different strengths and weaknesses.
  • What is the best type of PV module to be used? – PV modules are not generic.
  • What type of mounting structure is optimal for a particular roof type? What additional dead load capacity exists for your existing roof? What structural anchors and WATERPROOFING methods are required for your type roof?
  • What roof areas should be utilized for module placement – that compliments a building’s solar access orientation?
  • Does the module mount physical placement account for ambient shade producing objects at different times of day or at different times of years, etc.? Or has the open exposed roof areas just had modules slapped on them.
  • Will the company that provided installation services still be around in two years or 5 years down the road?

Meanwhile traditional monopoly type public electric Utilities are experiencing competition for the first time for their own customer base, by their own customer base. They are now, albeit with some discomfort, aware that things are changing in their business model. In fact, many electric utilities have “seen the light” and are now in full scale efforts to bring all of the benefits of this clean, quiet, fuel-less, sustainable, low maintenance technology “behind their fence”.   In the past, residential customers received the benefits directly by fixing the costs of their electricity or some portion, while avoiding electric bills, and while receiving the benefits of any incentives. Utilities are recognizing that their regulated utility business model – that has been road they have travelled on for 70 years is changing direction, and as they do not have direct total control of the course of the changing business model, they must adapt – but to what?

#SaveSolarNM Needs You

Looking for a tax deductible donation to give to this holiday season? How about #SaveSolarNM, the campaign organized by REIA-NM, the Renewable Energy Industries Association of New Mexico? We are working to create jobs, build an industry, and promote clean renewable energy, while at the same time creating new power solutions for the health and future of all New Mexicans.

tax deductible donations #savesolarnm
What does that mean? It means that REIA-NM is finding solutions to make solar more available to more people, supporting the local renewable energy industry, and contributing to a cleaner, brighter future.
  • We engage in legislative action, lobbying for clean energy, and presenting bills to prolong the tax credits.
  • We engage utilities to find solutions so more customers can enjoy solar power.
  • We engage the public to inform them about issues that affect solar.
  • We track technological advancements in renewable energy.
  • Our members maintain ethical business practices.
But we can’t do it without you. This year, REIA and it’s coalition of organizations, all working to build and grow clean energy, will be finding ways to grow renewable energy in New Mexico, create more good jobs for New Mexicans, and take advantage of this state’s rich solar and wind resources.
Your tax deductible donations will make this happen. Help #SaveSolarNM today.
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