37 th Annual PURC Conference. John D. Wilson, Research Director February 2010

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1 37 th Annual PURC Conference John D. Wilson, Research Director February

2 Public utilities government control over rates to protect public as consumers 20 th Century universal service goal met Gradually, interests of customers more at odds with each other 2

3 21 st Century technological opportunities for public to be producers of energy resources Florida has some success with accessing distributed (public produced) resources Other states and nations are using these resources much more effectively New public utility paradigm 3

4 Manage and balance: Customer bills (Rates and avoiding waste) Risk of rate spikes Job creation Use of in-state energy resources Ensure system reliability 4

5 State Residential Electric Rate (c/kwh) Investor-Owned Utility Efficiency Impacts Energy Savings as a Percent of Sales 15 Florida Electric Rate Iowa Efficiency Impact 10% 10 Iowa Electric Rate 5% 5 Florida Efficiency Impact Forecast 0% Source: Analysis of data from Iowa Utilities Board, Florida Public Service Commission, and the US Energy Information Administration. 5

6 NPV System Cost (20004$ millions) $26,500 $26,000 Slower pace for Conservation programs $25,500 $25,000 $24,500 $24,000 $23,500 Faster pace, more investment in conservation and renewable resources Market mix of resources (Utility cost test) $35,000 $36,000 $37,000 $38,000 $39,000 $40,000 $41,000 $42,000 NPV System Risk (2000$ millions) Source: The Fifth Northwest Electric Power and Conservation Plan, 2005 Plan Recommendation # 1: Develop resources now that can reduce cost and risk to the region 700 average megawatts of conservation, megawatts of demand response, Secure cost-effective cogeneration and renewable energy projects Develop cost-effective generating resources when needed

7 Jobs Renewable Energy Generation (GWh) 75,000 Jobs in Florida: 20% by 2020 Renewable Energy Standard 50,000 40,000 50,000 Other RE Jobs State Renewable Energy Target 30,000 25,000 Solar Jobs 20,000 Biopower Jobs 10, Source: SACE analysis of Florida PSC Proposed Renewable Energy Standard (2009) using data from Navigant Consulting, Inc. and University of Florida/IFAS. 7

8 Achievable Renewable Energy Potential 20% 0% Favorable Mid-Favorable Unfavorable PSC Draft Rule Source: Based on data published by Navigant Consulting, Inc. and using Florida PSC data. 8

9 Renewable and other variable energy generation cannot be stored, and impact system planning and operations because: Plant output fluctuates on all time scales, and The magnitude and timing of variable generation output is less predictable than for conventional generation. Source: North American Electric Reliability Corporation, Accommodating High Levels of Variable Generation (April 2009). 9

10 ROE drives investment choices Trust drives investment choices Rate structure drives investment choices Finances for renewable energy But... Leadership and organizational culture in utilities also matter 10

11 The Averch-Johnson effect: A firm has an incentive to acquire additional capital if the allowable rate of return exceeds the cost of capital. If a utility can raise capital at a cost rate of 9 percent, but is allowed to earn close to 11 percent returns on all invested capital, it can deliver gains to its present investors by adding capacity... even though the present investors supply none of the new capital... Source: Kihm, Steve, When Revenue Decoupling Will Work... And When It Won t, The Electricity Journal (October 2009). 11

12 Good trust professionalism and predictability Bad trust cronyism and how we ve always done it 12

13 Change in Earnings ($) Source: Cappers et al., Financial Analysis of Incentive Mechanisms to Promote Energy Efficiency: Case Study of a Prototypical Southwest Utility, LBNL-1598E (March 2009). Change in ROE (%) 13

14 Change in Earnings ($) Source: Cappers et al., Financial Analysis of Incentive Mechanisms to Promote Energy Efficiency: Case Study of a Prototypical Southwest Utility, LBNL-1598E (March 2009). Change in ROE (%) 14

15 Rate Increase (cents per kwh) Customer Bill Savings ($ billions) Represents about 3-6% savings Source: Cappers et al., Financial Analysis of Incentive Mechanisms to Promote Energy Efficiency: Case Study of a Prototypical Southwest Utility, LBNL-1598E (March 2009). 15

16 Renewable Electricity Standard Regulated target for renewable energy purchase Market sets additional cost of renewable energy Utility can affect success through contract requirements (schedule, interconnection, etc.) Feed-in Tariff Regulated price of renewable energy purchase Market determines amount of renewable energy purchased Utility can affect success through contract requirements (schedule, interconnection, etc.) Clean Energy Standard Offer Contract (CESOP) is a variant 16

17 Lack of information, awareness Lack of capital Utility financial regulation disincentive to utility support Utility planning policy energy efficiency not equal to supply resources Efficiency programs not up to date Transaction costs Split-incentive or Principal-Agent problem National Action Plan for Energy Efficiency (July 2006) 17

18 Florida Climate Action Team Policies: Share of Potential Emission Reductions Renewable energy in electric sector 36% Energy efficiency in electric and natural gas sectors 24% Lower emission generation in electric sector (CHP, nuclear, & coal) 5% Policies within Florida PSC jurisdiction 65% Policies outside Florida PSC jurisdiction 35% Also, consider: Electric or plug-in hybrid electric vehicles Sustainability of biopower fuels (affects environment, system reliability) Water use by power plants (affected by temperature, sea level, drought) Source: Florida Climate Action Team, Florida s Energy and Climate Change Action Plan (2008). 18