Transcript Document

Innovations in Utility Business Models and
Regulation
CAMPUT 2015 Energy Regulation Course
June 23, 2015
Kingston, Ontario
© 2015 Concentric Energy Advisors, Inc. All rights reserved.
Discussion Topics
1. Why are regulators interested in changing the utility business model and regulatory
framework?
2. How might the role of the distribution utility change?
3. What changes in regulation and ratemaking are being contemplated?
4. What are non-utility stakeholders looking to gain?
5. What is the potential impact for utilities in terms of fixed cost recovery, earnings, and
growth opportunities?
6. Will customers and “society” be better off?
7. Examples
• New York’s Reforming the Energy Vison (“REV”)
• Ofgem’s Low Carbon Networks
• US Utility Investments in Gas Supply
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Electricity Industry Change Drivers
Technology & Innovation
Concern for the
Environment
Wholesale Markets
Policy-Maker Leadership
Customers
CapEx > Sales
• Declining costs and improved efficiency of emerging energy
technologies
• IT/IS: ability to manage “big data”
• Ability to monitor and control flows on distribution networks
• Active engagement of stakeholders in energy development with
NIMBY now redefined to imply “not on my planet”
• Willingness of policy makers (and some customers) to pay more for
green
• Frustration with FERC electricity capacity market outcomes
• Competition among certain states to be “first” in the United
States, inspired by RIIO
• Diminishing tolerance for outages
• Desire to lower energy costs
• Increased responsiveness to new products and services
• 4-6% CapEx growth (much of it non-revenue producing) vs. 1%
sales growth
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New York’s REV Policy Objectives and Value Proposition
Policy
Objectives
Energy Bill
Components
Improve
System
Efficiency
Supply
Fuel and
Resource
Diversity
System
Reliability and
Resiliency
Reduce
Carbon
Emissions
Distribution
Market
Clean
Engage &
Empower
Customers
Create
Markets for
Distribution
P&S
Customers
•
•
Lower wholesale prices in the NYISO by flattening
customer loads through DERs and Time-Varying Rates
Reduce the amount of electricity purchased from the
NYISO and replace peak capacity plants with DERs
• Invest in Smart Grid technologies: smart meters,
distribution automation, and network communications
• Invite third-party proposals to address network constraints
(“non-wires alternatives”)
• Create real-time markets for third parties and customers
to sell services to the “Distributed System Platform” and
generate fee-based revenues for new DSP services
• Replace carbon-emitting fuels with solar power, energy
efficiency, large scale renewable resources and clean DERs
• Promote widespread deployment of cost-effective DG
and other DERs
• Encourage third-parties to sell innovative products and
services to customers
• Reduce customer energy expenditures
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Breadth of REV Issues to be Resolved
DSP
Platform
Promote
Innovation
New Regulatory
& Business Models
REV
Outcomes
Services &
Pricing
Regulation &
Ratemaking
New
Infrastructure
DER & Large
Renewable
Ownership
Substantial T&D
Investment Required
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The array of REV obligations,
processes and working groups is placing incredible
demands on the Commission and all stakeholders
REV Proceeding
(Utility Obligations)
REV Proceeding
(Stakeholder Groups)
REV Proceeding
(Staff-Led Initiatives)
Other Related
Proceedings
REV Track 1
Technology
Platform
Affiliate Codes of
Conduct
Net Metering
REV Track 2
Market Design
Energy Efficiency
Community Choice
Aggregation
Non-Wires
Alternatives
Tariffs
Benefit Cost
Analysis
Clean Energy Fund
Demonstration
Projects
Contracts
Consumer
Protection
NY Sun
Large Scale
Renewables
Dispute
Resolution
Energy Affordability
Microgrids
Interconnection
DG Emissions
Rules
Digital
Marketplace
Energy Billing
Low & Moderate
Income
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Dual-Track Regulatory Process (Track 1)
Track 1 is focused on development of the Distributed System Platform (“DSP”) model. The
Order on Track 1 was issued on February 26 th but most details are being worked out
through stakeholder collaborative processes.
Track 1:
Distributed System Platform
⦁
The utility will be the DSP provider and serve three roles:
1. Market operations
2. Grid operations
3. Integrated system planning
⦁
Utility ownership of DG is restricted to markets unlikely to be
served by competitive suppliers
⦁
Utilities were required to propose “non-wires alternatives” by
May 1
⦁
Utilities must propose demonstration projects to test new
business models by July 1
⦁
Several working groups have been established to focus on
technical details related to the development of a benefit-cost
framework for REV, the integration of DERs in Grid planning and
operating decisions, the establishment of markets for DER and
the development of supporting information systems
⦁
Utilities to file DSP implementation plans by January 15, 2016
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Utilities will serve
as the DSP
providers,
coordinating
customer
activities, and
supporting
competitive
energy service
providers that
offer valueenhancing
services.
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Dual-Track Regulatory Process (Track 2)
Track 2 will evaluate regulatory changes and ratemaking issues that must be considered
in order to establish a new cost recovery and revenue framework for the electric utilities.
A Staff Straw Proposal this summer will invite comments with an order later this year.
Track 2:
Regulatory Framework & Ratemaking Issues
Outcomes-Based
Ratemaking
Long-Term Rate
Plans
Rate
Design
• Performance
metrics
• “Optimal” CapEx
plans and cost
recovery
• Address net
metering and
fixed cost
recovery issues
• Targets
• Incentive/ penalty
mechanisms
• Equity returns
• May have RIIO
attributes
• Reflecting
externalities in
rates
• Pricing innovative
services
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The utilities (and
Wall Street) are
interested in how
these three
elements will
work together to
provide
compensatory
returns on equity
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Stakeholder Perspectives
Solar Industry
Energy Efficiency Providers
• It may not be necessary to invest a lot in
the distribution network – greater clarity
regarding locations where solar has the
greatest value will help direct installations
to where they are needed. Compensation
should reflect this value and any other
sources of value, including carbon
•
Third-Party P&S Providers
• Representatives of this customer group are
concerned that they will not benefit from
REV, and are more likely to be harmed by
REV particularly if a greater proportion of
fixed costs are recovered through customer
charges
•
Protect new markets by keeping utilities
out of any potentially profitable
businesses
•
Utilities should be required to provide
third-party providers with customer and
system information at low (or no) cost
Industrial Customers
• Worried about rates
Low-Income Customers
Technology Vendors
• Interested in selling equipment and
information services to utilities
Environmental Advocates
•
Concerned about the substitution of
market solutions for utility-sponsored EE
programs
Pay for carbon as a price signal that will
help replace dirty gas peakers with
energy efficiency and solar power
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Impact on Electric Distribution Utilities
Responsibilities and
Accountability
• Potential for separation of
the DSP function or future
transfer to a third party
• Confined to serving
markets that are not
attractive to competitive
suppliers
• Potential erosion of the
relationship with
customers
Fixed Cost Recovery
Earnings and Growth
• Increased attention to
fixed cost recovery is
likely to lead to improved
rate designs featuring
demand charges and/or
higher customer charges
• There is no clear path to
earnings growth,
particularly if political
pressures result in a
desire to limit distribution
rates (and rate base
investments) rather than
focusing more holistically
on total energy bills
• Cost-shifting and
subsidies will be exposed
in the new framework
• Potential for earnings if
focus shifts from cost
recovery to value of
services provided by the
utility
• Accountable for outcomes
not entirely within utility
control
• Limited opportunity to
own DERs
• Utilities may be on the
hook if distribution
system reliability suffers
as a result of reliance on
third-party solutions
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The Ultimate Question: Will Customers Benefit?
Continued reliability &
enhanced network
resiliency
Changes to distribution network planning and
operations must not result in a policy-induced
deterioration of reliability
Lower total energy
bills
There may be a timing gap between investments
(and costs) to implement REV and energy bill
savings
Affordable electricity
service for residential
customers
Creative solutions will likely be required to
achieve broad public support for REV
Acknowledged value
for an improved
environment
It is likely that “clean” will be more expensive,
either through compensation for carbon or some
other means
Direct or indirect
benefits from new
products and services
New products and services will require that thirdparty providers show up and remain committed
to the market – even though they lack the
“obligation to serve”
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Case Study: Low Carbon London
Sponsor
UK Power Networks
Program
Funding
Ofgem’s Low Carbon Networks (LCN) Fund (precursor to the NIA and NIC programs )
allows up to £500m to support projects sponsored by the Distribution Network Operators to
try new technology, operating and commercial arrangements, and an annual
competition for up to £64 million to help fund a small number of flagship projects.
Target
The highest concentration of electricity demand and CO2 emissions in Great Britain, and
the most demanding carbon reduction targets (60% of 1990 levels by 2025) for London.
Project Funding
4 year innovation project co-funded by LCN £21.7 million and £6.6 million from UK Power
Networks and 3rd party project partners
Approach
The project brought together some of the best low carbon skills and capabilities available
in forming the overall project team drawn from both UK Power Networks and project
partners.
Results
•
•
•
•
•
•
•
Potential
Impacts
The project sponsors estimate £9.5bn of gross benefits for GB, of which £1.0-2.0bn
expected to accrue to DNOs from their making use of flexible demand and the remaining
£7.5 - £8.5bn to the electricity system more broadly as a result of avoided carbon
emissions and carbon penalties.
Dynamic time of use tariff trial
Wind-integration trials with both residential and I&C customers
Active smart management of EV charging to effect peak load shedding
Implementation of project learning directly into UK Power Networks ED1 business plan
Creation of largest contiguous smart meter dataset in GB
Largest household energy use and appliance survey for over 30 years
Pioneering work on distribution system state estimation
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Case Study:
Utility Investment in Long-Term Gas Supply
NorthWestern
Northwest
Natural
Questar
Duke
Xcel
Black
Hills
Southern
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FPL
Concentric Energy Advisors, Inc.
Utilities Investing in Long-term Gas Supply
Year of
Investment
Ownership
Investment
($MM)
Operating
NorthWestern
FP&L
NW Natural
Questar
Public Gas Partners
Centrica
2010, 2012 and
Field Ownership
2013
2014
Well-specific
2011
Field Interest
2008 and 2013 Field Ownership
2005
2010 and 2011
Announced
Estimated
Portion of
Supply
Utility
Location
Reserves
Location
$
101
84
38%
MT
MT
$
$
$
191
250
212
140
100
118
2.7% (Peak)
10%
N/A
FL
OR
CO
Field Ownership $
350
20 Bcf / Year
< 20%
FL, AL, GA,
TN, PA, MA,
TX and ME
OK
WY
WY
FL, LA, GA, MT,
ND, WY, NB, CO,
NM, TX, OK, AL
and CA
N/A
N/A
Field Ownership
N/A
Black Hills
FP&L
Reserves
Acquired
(Bcf)
$
560
Duke
Southern
Xcel
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IA, NE, KS, CO
and WY
FL
FL, SC, NC OH
and KY
GA, AL and
MI
MN, WS, MI,
ND, SK, CO,
TX and NM
Case Study:
Rationale for Utility Investment in Gas Supply
• Gas and electric utilities are incorporating upstream resources into rate base to serve as a
physical and financial hedging tool
• Addresses greater reliance on natural gas as a fuel of choice
• Longer-term financial hedging vehicles are available, but come with credit and collateral
obligations
• Producers are cash-constrained and more willing to engage with creditworthy utilities
• Regulators in several states have approved upstream investments on a cost-of-service basis
where customer benefits are evident
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Concentric Energy Advisors, Inc.
Concentric Energy Advisors
James M. Coyne, Senior Vice President, is an industry
He testifies on matters pertaining to the cost of capital,
expert who provides financial, regulatory, strategic, and
capital structure, business risk, alternative ratemaking
litigation support services to clients in the power and gas
mechanisms and regulatory policy. Prior to Concentric, Mr.
utilities industries. Drawing upon his industry and
Coyne worked in senior consulting positions focused on
regulatory expertise, he regularly advises utilities, public
North American utilities industries, in corporate planning
agencies and investors on business strategies, investment
for an integrated energy company, and in regulatory and
evaluations, cross-border trade, rate and regulatory policy,
policy positions in Maine and Massachusetts. Mr. Coyne
capital cost determinations, valuations, fuels and power
holds a B.S. in Business from Georgetown University with
markets. He is a frequent speaker and author of numerous
honors and an M.S. in Resource Economics from the
articles on the energy industry and regularly provides
University of New Hampshire.
expert testimony before federal, state and provincial
jurisdictions in the U.S. and Canada.
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Concentric Energy Advisors, Inc.
Concentric Energy Advisors
•
Concentric is a management consulting and financial
advisory firm focused on the North American energy
industry.
•
We offer a broad range of advisory and support
services, and our expertise spans all aspects of the
natural gas, power, and oil markets.
•
Our workforce is comprised of energy industry
experts who have held positions with utility
companies, state and federal regulatory agencies,
energy marketers, and global energy companies.
Our services span five major
practice areas
Transaction & Financial
Advisory
Energy Market Analysis
Regulatory Policy, Support
and Ratemaking
Management
and Operations
Litigation Support
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Concentric Energy Advisors, Inc.