Power Sector Transformation. Initial Considerations on Utility Compensation. August 15, 2017

Transcription

1 Pwer Sectr Transfrmatin Initial Cnsideratins n Utility Cmpensatin August 15, 2017 Intrductin This dcument presents initial cnsideratins n the rle f the electric utility and the way that it earns cmpensatin. Refrm t the utility cmpensatin framewrk and the brader business ecsystem in which the utility perates the utility business mdel shuld be based n a clear visin fr the future rle f the electric utility. In Rhde Island, electric utilities will need t develp significant capabilities ver the cming years and decades t help all Rhde Islanders manage a transitin t a cleaner, less centralized, mre infrmatin laden, and resilient energy system. Electric utilities will need t augment the significant capabilities they have develped ver the last 100 years in designing and deplying infrastructure. The new capabilities required will include management f infrmatin, bth frm their distributin systems and their custmers, and integratin f infrmatin with infrastructure. There are many ptential cmmercial arrangements that may evlve in cming years t realize an infrmatin-based intelligent electrical infrastructure that enables a range f resurces and engages custmers and third-party service prviders in new ways. Market and technlgy develpments will need t cntinue t evlve t srt the cmmercial arrangements that will be mst successful. Fr nw, regulatry refrm can address the capabilities the utilities will need t develp t engage custmers and third parties. In particular, refrm f the utility cmpensatin framewrk shuld include: First, tday s utility cmpensatin framewrk creates a bias fr ne-way, capital-intensive slutins t fix identified cnstraints in the distributin system. The traditinal regulatry mdel fr electric utilities, in which the electric utility earns a return based largely n the cumulative value f the prudent infrastructure it has deplyed, yields a system in which a significant prtin f deplyed infrastructure is used fr a small fractin f the year. Secnd, the electric utility will, in the future, need t perfrm functins beynd its traditinal rle, in particular related t the cllectin and analysis f infrmatin frm its wn distributin system and frm its custmers. The electric system f the twenty-first century will depend n peratin f data netwrks t allw the utility t gain visibility and cntrl f the electric system. Hwever, tday s utility cmpensatin framewrk des nt fully encurage the utility t develp the rganizatinal structures and capabilities needed t undertake many f the infrmatin-riented functins that it will be called upn t perfrm. Many f the functins assciated with peratin f a data netwrk are utside f the electric utility s traditinal area f peratins and include strategically imprtant, but nt capital intensive, sftware and service cmpnents.

2 Third, the electric system f the twenty-first century will be asked t deply a range f new technlgy systems that pse a significant risk f technlgy bslescence fr the current business mdel in which capital expenditures are usually recvered based n a simple prudency test. Furth, as the Public Utilities Cmmissin has nted in its review f the 2017 Energy Efficiency Annual Plan, develpment f islated incentive mechanisms in Rhde Island may create a future risk f verlapping and uncnnected perfrmance incentive mechanisms. T address these prblems, this dcument prpses three refrms t the utility cmpensatin framewrk in Rhde Island. These include: A muti-year rate plan A suite f perfrmance incentive mechanisms A descriptin f ptential innvative partnership mdels fr the utility Cntext: The Current Utility Business Mdel The current utility business mdel in Rhde Island is based n a cmpensatin framewrk f cst-fservice ratemaking with a ne-year frward test year and revenue decupling. This framewrk creates several financial incentives that tend t encurage deplyment f capital intensive slutins, as ppsed t distributed energy resurces, and may inhibit develpment f a lng-term technlgy strategy. The prblematic aspects f the current business mdel include: 1. Rate case frequency. The ability t submit a rate case whenever the utility chses can erde the utility s incentive t imprve perfrmance and cntain csts. Utilities have little incentive t reduce r ptimize perating csts r capital csts, if they can recver all csts with frequent rate cases. DERs are ne way that utilities can reduce perating and capital csts, thus frequent rate cases might diminish a utility s incentive t implement DERs. 2. Incentive t build rate base. Utilities have an incentive t increase their rate base, because this will lead t a higher allwed return n equity. Utilities can increase rate base by making capital investments in cnventinal distributin technlgies. This creates a disincentive t prmting DERs, which typically d nt require capital investments and can pstpne r avid capital investments that d build rate base. 3. Reluctance t invest in innvative technlgies. Utilities are reluctant t invest in new, untried, r innvative technlgies, because f risks assciated with pst-investment prudence reviews. This might hinder a utility s incentive t invest in certain DERs r technlgies that supprt them, such as advanced metering infrastructure, data cllectin and management systems, and cmmunicatin systems. One cnsequence f the existing incentive paradigm is an electric grid built t meet peak demand. Chart 1 presents the peak hurly demand fr the last ten years fr Rhde Island displayed as a single chrnlgical year. The chart highlights the seasnal summer peak and als the few hurs which drive verall system peak fr which the electrical grid must build capacity. Page 2

3 Demand in Megawatts Chart Hurs (One Year) f Rhde Island's Hurly Peak Demand Ordered Chrnlgically The same data appears in Chart 2 rganized by the number f hurs in which each peak is reached. The left side f the chart shws that a very few number f hurs drive the system s capacity requirement. Chart Hurs (One Year) f Rhde Island's Peak Demand Ordered by Scale f Demand ,760 Hurs per Year In recgnitin f the ptential fr distributed energy resurces t prvide less capital intensive grid slutins, Rhde Island has implemented a series f perfrmance incentive mechanisms (PIMs) fcused n particular perfrmance areas. Table 1 presents the PIMs that currently apply t Natinal Grid. Many f these incentives are defined in statute. Page 3

4 Table1. Existing Perfrmance Incentive Mechanisms Metric Purpse Frmula Target Incentive Service Quality SAIDI SAIFI Custmer Satisfactin Call-In Center Indicate reliability in terms f duratin f utages Indicate reliability in terms f frequency f utages Indicate satisfactin regarding many services System average interruptin duratin index System average interruptin frequency index Based n custmer survey Indicate respnse time 20 secnd call respnse Renewables and Distributed Energy Resurces Electric EE Gas EE SRP Lng-Term Cntracts DG Standard Cntracts RE Grwth: DG Facilities RE Grwth: SlarWise Prmte efficiency use f electric EE funds Prmte efficiency use f gas EE funds Prmte efficient utcme f NWA initiative Prmte lng-term renewable cntracts Prmte standard cntracts fr renewables Prmte DG Prmte SlarWise 5% f prgram budget, depending upn energy and capacity savings 5% f prgram budget, depending upn gas savings 5%-9% f prgram budget, depending upn energy & capacity savings 2.75% f actual payment made thrugh PPA 2.75% f actual payment made thrugh PPA 1.75% f the annual value f all incentives issued t DG. 1.75% f the annual value f all incentives issued thrugh SlarWise n n penalty penalty penalty penalty Table 2 presents a preliminary analysis f the scale and scpe f these existing perfrmance incentives. The incentives, which are designed t accrue t sharehlders, incent the utility t undertake activities that are beneficial fr ratepayers. Althugh these incentives are designed as a percentage f the cst, the mst cmparable measure is t value the incentive as a share f the utility s return n investment. Fr this cmparisn, 100 basis pints is 1% return n investment). Table 2 indicates that current incentives ttal rughly 44 basis pints, ut f a ttal f the ver 900 basis pints that represent the utility s authrized rate f return. Page 4

5 Table 2. Cmparisn f Existing Incentive Mechanisms fr 2017 Prgram Sharehlder Incentives Prgram Csts (2017$) (basis (% f net (% f net (2017$) (% f cst) pints) incme) bens) EE - Electricity 88,511,000 4,425, % % 3.6% EE - Gas 27,751,000 1,387, % 8 1.4% 5.4% SRP 400,300 20, % 0 0.0% -31.8% Lng-Term Cntracts 72,275,022 1,987, % % --- DG Standard Cntracts 7,063, , % 1 0.2% --- RE Grwth DG Facilities 1,821,337 31, % 0 0.0% --- RE Grwth SlarWise % Ttal 197,822,013 8,046, % % In respnse t the cntext f the current utility business mdel a cst f service regulatry framewrk with sme additinal perfrmance incentive mechanisms, existing regulatry tls prvide significant ptential t refrm the incentive structure f the distributin utility. Multi-Year Rate Plans Multi-year rate plans (MRPs) are a ratemaking cnstruct designed t strengthen utility financial incentives t perate efficiently, make sund investments in capital and nn-capital expenditures, and ultimately pass reduced csts n t custmers. Tw f the key elements that distinguish MRPs frm traditinal cst-f-service ratemaking are (a) a rate case mratrium that prevents the utility frm having frequent rate cases; and (b) an attritin relief mechanism (ARM) that allws fr utility rates (r revenues) t increase between rate cases. 1 There are many imprtant elements f an MRPs, and the chice f hw each element is designed will have a large impact n the success and the efficacy f the MRP. The key elements t cnsider fr the purpse f creating a straw prpsal are utlined belw. Rate case mratrium. Hw lng shuld the rate case mratrium last? A relatively lng mratrium will prvide greater incentive fr the utility t reduce csts and imprve efficiencies. Hwever, a relatively lng mratrium creates greater risks fr custmers and the utility, as well as greater risks that the utility path with deviate frm regulatry gals and directins Attritin relief mechanism. This is a key element f any MRP, as it will dictate the amunt f revenues that a utility will be able t recver between rate cases. There are three types f ARMs: Index-based, which allws fr grwth in revenues based n a pre-determined index. A frequently used index is inflatin minus prductivity (RPI-X). A simpler index is the revenue-per-custmer apprach, where utility revenues are allwed t increase at the same rate as the number f custmers. 1 Fr a very useful descriptin and discussin f MRPs, see Lwry et. al., State Perfrmance-Based Regulatin Using Multiyear Rate Plans fr U.S. Electric Utilities, Grid Mdernizatin Labratry Cnsrtium, July Page 5

6 Frecast-based, which allws fr grwth in revenues t track a frecast f future utility expenditures. Ideally, the frecast wuld be based n sund distributin system planning practices, and wuld be infrmed by and supprted by meaningful stakehlder input. Hybrid f index- and frecast-based. Bth appraches can be used fr the same MRP. Fr example, revenues fr nn-capital expenditures can be adjusted with an index-based apprach, while revenues fr capital expenditures can be adjusted with a frecast-based apprach. Cst trackers. Sme csts that require different regulatry treatment can be recvered utside f the ARM. A cst tracker allws the utility t recver these csts cntempraneusly n a dllarfr-dllar basis. Examples f such csts in Rhde Island include the cst f the energy efficiency prgrams and the renewable energy grwth prgrams. Earnings sharing mechanism. These can be used t mderate any effects f utility ver-earning r under-earning as a result f the MRP. They typically invlve (a) a deadband arund the allwed ROE where n sharing ccurs, and (b) sme prfit/lss sharing between custmers and the utility utside this deadband. PIMs t prevent degradatin f services. PIMs are frequently applied t ensure that utility perfrmance (e.g., reliability, custmer service) des nt degrade as a result f prductivity pressure created by the MRP. PIMs t achieve specific gals and shift utility incentives. PIMs can als be applied t (a) identify areas f perfrmance f interest t regulatrs; (b) mnitr thse areas f perfrmance with metrics; (c) set clear targets fr thse areas f perfrmance; and (d) prvide financial incentive fr thse areas f perfrmance. One example f an existing PIM is the energy efficiency sharehlder incentive mechanism in place in RI. Adjust allwed ROE cnsidering ptential revenues frm PIMs. In rder t reduce the existing incentive t increase rate base, a utility s allwed ROE culd be reduced cmmensurately with the utility s ability t increase revenues frm PIMs, particularly PIMs t achieve specific regulatry gals. Perfrmance Incentive Mechanisms Perfrmance Incentive Mechanisms are intended t achieve tw bjectives: (a) t prevent the degradatin f custmer services, in light f the increased pressure n the utility t reduce csts; and (b) t encurage the utility t achieve specific bjectives in specific perfrmance areas. Mst PIMs in place in the US tday nly prvide financial incentives fr a small number f perfrmance areas, and therefre have a small impact n the utility s verall financial perfrmance. In rder t have a meaningful impact n a utility s incentive t build rate base, it may be necessary t establish significant, crdinated financial incentives in bth the MRP and the PIMs. If the financial rewards available frm PIMs are large enugh, they can replace the revenues that wuld therwise be prvided t the utility frm its return n rate base. Reducing the allwed return n equity can therefre reduce a utility s incentive t increase its rate base. If the Cmpany were t exceed its PIM targets, then it wuld see relatively higher prfits, and vice versa. Page 6

7 The first step in defining brad metrics, targets and incentives is t identify and articulate regulatry plicy gals. Based n stakehlder discussin in Dcket 4600 fllwing gals are relevant fr Rhde Island: Reduce electricity csts and bills. There are several types f csts t reduce. Reduce energy csts. This can be achieved by (a) reducing RI demand during ISO- NE energy market high-cst hurs, (b) shifting demand frm ISO-NE energy market high-cst t lw-cst hurs, and (c) reducing cnsumptin in general. Reduce generatin capacity csts. This can be achieved by reducing RI demand during ISO-NE capacity market mnthly peaks. Reducing transmissin capacity csts. This can be achieved by (a) reducing RI demand during ISO Transmissin mnthly peak hurs, and (b) reducing electricity cnsumptin in general. Reduce distributin capacity csts. This can be achieved by (a) reducing peak demands n thse circuits that are stressed r likely t be stressed, (b) lcating DG n circuits that are nt stressed r likely t be stressed, and (c) reducing electricity cnsumptin in general. Reduce the cst f cmpliance with envirnmental regulatins. This can be achieved by prmting DERs, especially thse that reduce energy cnsumptin r increase clean distributed generatin. Prmte clean, distributed energy resurces (DERs). This can be achieved by prmting energy efficiency resurces, demand respnse, distributed generatin, strage technlgies, electric vehicles, and mre. Prmte custmer engagement. This can be achieved by prmting DERs in general, but als thrugh custmer educatin and marketing, prvisin f custmer data, and prmtin f thirdparty vendrs. Prmte innvatin and adptin f new technlgies. This can be achieved thrugh custmer engagement, prmtin f third-party vendrs, prvisin f custmer data. Prmte pwer sectr transfrmatin. This can be achieved by prmting DERs, custmer engagement, new technlgies, and third-party engagement. Based n the gals utlined abve, Rhde Island shuld create new PIMs fr the fllwing perfrmance areas: system efficiency distributed energy resurces; and netwrk supprt services Metrics alne (withut targets r financial incentives) are an effective lw-cst, lw-risk way t guide utility perfrmance by indicating pririty perfrmance areas. They can als be used t mnitr perfrmance ver time and indicate whether certain perfrmance areas warrant targets and financial incentives in future versins f a perfrmance based framewrk. Tables 4-6 prvide a list f the metrics that may be apprpriate fr Rhde Island, divided up by system perfrmance, distributed energy resurces, and netwrk supprt services. Sme f these metrics are Page 7

8 based n infrmatin that Natinal Grid already cllects fr ther purpses. Other metrics will require the cllectin f new data; data that is needed anyway fr distributin system planning r prmting pwer sectr transfrmatin. Table 4. System Efficiency Metrics Metric Purpse Frmula Transmissin peak demand Distributin peak demand Substatin peak demand DG-friendly substatins Distributin lad factr Custmer lad factr Time-varying rates CO2 intensity Indicate the extent t which peak demand affects transmissin csts Indicate the magnitude f distributin peak demand Indicate the extent t which specific substatins are stressed Indicate the prtin f substatins that are capable f readily installing DG facilities Indicate the prtin f distributin sales that ccur in peak hurs Indicate custmer demand relative t energy Indicate penetratin f time-varying rates Indicate intensity f CO2 emissins frm custmers Rhde Island s mnthly cntributin t the ISO cincident peak Mnthly peak distributin demand, by sectrs Percent f capacity utilized n targeted substatins, during distributin mnthly peaks Rati f substatins that can accept DG withut upgrades t all substatins Rati f retail sales during peak hurs t retail sales in all hurs Rati f distributin sales during peak hurs t distributin sales in all hurs, by custmer sectr Percent f custmers n time-varying rates, by custmer sectr CO2 emissins per custmer, by sectr Page 8

9 Table 5. Distributed Energy Resurce Metrics Metric Purpse Frmula Percent f custmers served, annual & cumulative Energy efficiency Demand respnse Distributed generatin Electricity strage Electric vehicles Indicate participatin, savings, and cst effectiveness f EE prgrams Indicate participatin, savings, and cst effectiveness f DR prgrams Indicate penetratin and type f DG installatins Indicate penetratin f strage technlgies, and ability t help mitigate peaks Indicate penetratin f EVs, and ability t help mitigate peaks Energy savings, annual and lifecycle Capacity savings, annual and lifecycle Prgram csts per energy saved ($/MWh) Percent f custmers served, annual Capacity savings, annual and cumulative Prgram csts per capacity saved ($/kw) Percent f custmers with DG, annual & cum. DG installed capacity DG capacity by type (PV, CHP, small wind, etc.) Percent f custmers with strage, annual & cum. Strage installed capacity Percent f custmers with strage technlgies enrlled in demand respnse prgrams Percent f custmers with EVs, annual & cum Percent custmers with EVs enrlled in DR prgrams Page 9

10 Table 6. Netwrk Supprt Services Metrics Metric Purpse Frmula Advanced metering capabilities Intercnnectin supprt Custmer access t custmer infrmatin Third-party access t custmer infrmatin Third-party access t distributin infrmatin Distributin System Planning Custmer Engagement Indicate penetratin f advanced metering functinality Indicate perfrmance f DG installatin and DG study Indicate custmers' ability t access their usage infrmatin Indicate third-parties access t custmer usage infrmatin Indicate third-parties access t distributin system inf Indicate the ability f distributin planning t prvide netwrk supprt Indicate the relative success f the utility in creating mechanisms t cnnect custmers with third party vendrs and services. Percentage f custmers with AMF, by sectr Percentage f energy served thrugh AMF, by sectr Average days fr custmer intercnnectin Percent difference between study cst estimate and final cst t DG develper Percent f custmers able t access daily usage data, by sectr Percent f custmers able t access hurly r subhurly usage data, by sectr Percent f custmers able t prvide data t thirdparties Percent f custmers wh have authrized thirdparties t access data Targets fr prviding heat maps and ther relevant system data Accuracy and accessibility f heat maps and data prtal functinalities. Custmer engagement survey, which measures survey scres frm custmers wh make purchases n specific platfrms that als prmte third party vendrs, r a transactinal cnversin rate that measures the frequency at which unique custmer visits n specific platfrms results in a purchase Page 10

11 Partnership Mdels and Capabilities fr the Transitin t an Infrmatin-Based Utility There are at least fur areas in which the electric utility may seek t leverage the perfrmance incentive mechanisms described here and, in cmbinatin with existing capabilities, develp new initiatives t advance intelligent infrastructure. We utline in the bradest pssible terms these areas and ptential cmmercial arrangements t slicit stakehlder feedback and t allw market parties t innvate. Even beynd these individual areas fr innvatin partnership, utilities shuld be cgnizant f hw different technlgies and partners cnnect with each ther. The best partnerships will result in interperable tls and platfrms which empwer each ther. 1) Utilizatin f shared cmmunicatins infrastructure: A cmmunicatins infrastructure is essential t many f the functinalities identified in the Grid Cnnectivity and Functinality wrk stream, including advanced meter infrastructure and time f use rates. T realize a shared cmmunicatins netwrk amng varius infrastructure prviders we can envisin three ptential cmmercial arrangements: the use f public next generatin cnnectivity fr the electrical system in which the electric utility purchases a bulk amunt f bandwidth and electricity ratepayers act as a kind f anchr tenant Ownership f a cmmunicatins infrastructure by the electric utility with sales t ther bulk infrastructure custmers in which electric ratepayers fund the cmmunicatins netwrk and have csts reduced Participatin by the utility in a special purpse vehicle with private vendrs as a layer t supprt multiple infrastructure applicatins 2) Advanced Meters Natinal Grid has identified wnership f the meter as an imprtant peratinal requirement fr reliability. Hwever, wnership and cntrl are nt barriers t allwing ne r mre third parties t perate the meter as a platfrm fr data-based services. The license t perate such a platfrm culd becme a surce f revenue fr Natinal Grid. 3) Electric vehicle charging statins Electric vehicle charging statins represent an pprtunity fr the utility t earn revenue frm a number f nn-vlumetric services, including: subscriptin fee services, installatin services, charging statin cverage maps stemming frm distributin system services 4) Data Analytics Page 11

12 The distinctin between data and infrmatin represents an imprtant cmmercial pprtunity fr the utility and third parties t prvide bth public access t basic data and cmmercial access t infrmatin as the digested and imprved prduct fr market use. The emergent data and infrmatin prtal culd becme a surce f revenue fr Natinal Grid which culd be used t ffset ther expenses fr the benefit f ratepayers. Distributed energy resurces develpers wuld have access t sme data withut charge and might subscribe t have access t ther infrmatin if they chse t find it f value. Questins fr Discussin and Additinal Stakehlder Cmment 1) Please prvide any recmmendatins related t the cmpnents f the multiyear rate plan described n page 6 f this dcument. 2) Please prvide any recmmendatin regarding the metrics utlined in Tables 4, 5 and 6 t ensure they are cmprehensive and specific. In particular, please prvide any recmmendatins related t develpment f the metric frmulas. 3) If there is an area that wuld benefit frm a metric nt included here please prvide any recmmendatins fr it. 4) Amng the three brad grups f metrics, System Efficiency, Distributed Energy Resurces and Netwrk Supprt Services, please prvide recmmendatin f hw much weight shuld be allcated t each brad categry, perhaps in terms f percentage f a ttal perfrmance incentive allcatin budget. 5) Please prvide any recmmendatins fr hw yu think the metrics shuld be structured, r nested, within the brad categries. 6) Please prvide any recmmendatins related t any f the Innvatin Partner Mdels described n page 11 f this dcument. Cmments may be submitted at any time, hwever we request that we receive cmments by Friday by September 8 th. All cmments will be made public. Page 12