MEMORANDUM DATE: OCTOBER 4, 2006 APPROVAL OF ULTRA-CLEAN LOCAL DISTRIBUTED GENERATION INCENTIVE PROGRAM GUIDELINES

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1 MEMORANDUM TO: FROM: UTILITIES ADVISORY COMMISSION UTILITIES DEPARTMENT DATE: OCTOBER 4, 2006 TITLE: APPROVAL OF ULTRA-CLEAN LOCAL DISTRIBUTED GENERATION INCENTIVE PROGRAM GUIDELINES REQUEST Staff requests that the UAC recommend that City Council approve the program design guidelines for PLUG-In : Power from Local Ultra-clean Generation Incentive program. The program will establish incentives, rates, and rules for customer-sited small-scale distributed generation. BACKGROUND Council approved Palo Alto s Long-term Electric Acquisition Plan (LEAP) Objectives and Guidelines (Attachment A) in 2001 and 2002 (CMR:425:01 and CMR:398:02). The LEAP Objectives and Guidelines set long-term directions for staff in planning and managing the electric supply portfolio. The LEAP Implementation Tasks (Attachment B) were most recently updated in April 2006 (CMR:169:06), including Council approval to redirect the local generation feasibility study efforts to (a) development and implementation of a comprehensive plan to facilitate and implement clean high-efficiency distributed small-scale cogeneration, and (b) evaluation of power plant ownership opportunities outside of Palo Alto, but within or near the Greater Bay Area. This report addresses the first element. The Rocky Mountain Institute (RMI) was engaged in 2005 to assist CPAU in evaluating its longterm resource plans, which included a screening analysis conducted to estimate the potential for customer-sited cogeneration opportunities, and to contrast cogeneration with conventional generation and energy efficiency potential in an integrated framework. RMI presented its initial results to the UAC in November 2005 and the final results were provided as an attachment to a staff report to the UAC in March RMI identified up to 40 MW of technical potential, and identified five customers whose monthly gas and electric load patterns were consistent with facilities that may be able to support cost-effective CHPC. Two of the five have expressed interest in further exploring the opportunity, as it has potential to simultaneously reduce costs and achieve environmental corporate objectives for customers as well as for CPAU. The economic potential that could be cost-effective from this group is estimated to be 3-12 MW, and potentially up to 20 MW from all larger customers. Navigant Consulting independently evaluated the costs and trade-offs for customer-sited cogeneration and central station cogeneration and generation alternatives inside and outside of Palo Alto. Navigant s results Page 1 of 7

2 support the RMI studies and indicate that small-scale distributed cogeneration is a potentially attractive avenue to meet a portion of Palo Alto s energy needs. DISCUSSION Cogeneration is also known as combined heat and power (CHP). It is the practice of capturing the heat from a generator that is otherwise wasted, in the form of steam, hot water, or hot air, and applying it in some useful application, reducing the use of natural gas or other fuels that would otherwise have been used to provide the same heat. Doing so can achieve very high overall efficiency. Cooling can also be achieved using heat-driven chillers (absorption or adsorption chillers), reducing electric peak loads, and achieving even higher efficiencies. This practice is often referred to as combined heat, power and cooling (CHPC), or trigeneration. Cogeneration achieves the highest overall efficiency and lowest net greenhouse gas emission of any dispatchable power generation resource, achieves net cost savings, diversifies and reduces electric portfolio price risk, enhances customer and local reliability, reduces transmission and distribution system losses, and facilitates attaining City and customer environmental goals. It is small-scale enough to fit neatly into customer sites with negligible community impacts. Because of their environmental advantages, cogeneration facilities smaller than 50 MW that meet emission and noise criteria are explicitly granted a CEQA categorical exemption. Typical applicable system sizes for the largest Palo Alto customers are in the 3-10 MW range. California s investor-owned utilities have operated a Self-Generation Incentive Program (SGIP) since 2001, originally mandated by AB 970 (2000), which provides equipment rebates and special retail rates to customers of investor-owned electric or gas utilities. CPAU customers are not eligible, because both their electricity and gas are provided by the City. Notwithstanding this lack of eligibility under California law, a decision of the California Public Utilities Commission initially required wholesale gas customers such as the City to make contributions to Pacific Gas and Electric Company s SGIP program, effective July 1, The City successfully persuaded the CPUC to modify its decision in order to exempt wholesale gas customers from the contribution requirements of PG&E s SGIP program. Thus, PG&E is now required to refund approximately $90,000, including interest to the City. The City also avoids the obligation to make future SGIP contributions of several hundreds of thousands of dollars. The requirement to contribute, however, has not been completely extinguished; the CPUC s Order states that it does not bar the possibility that PG&E s wholesale customers may be allocated SGIP costs in a future Biennial Cost Allocation Proceeding. Implementation of the PLUG-In program could serve to render unnecessary any future CPUC initiative to impose once again on the City the obligation to make SGIP contributions. The PLUG-In program is intended to achieve City and State policy objectives in a manner similar to SGIP, building on the long stakeholder process used with SGIP and the lessons learned from its development and evolution. The City s program implementation will build on a simplified version of the SGIP, but as proposed would incorporate additional features that are not offered in SGIP. The fundamental guiding principles for the PLUG-In program and proposed implementation approach in support of those principles are: Page 2 of 7

3 1. Keep it Simple: Build on similar statewide programs; employ standard rates, rules and agreements. 2. Foster Community Acceptance: Address visual, noise, other community concerns; keep the public informed. 3. Cultivate Environmental Improvement: Require low net air emissions of pollutants and greenhouse gases; offer bonus incentives for green certification and renewable energy sources. 4. Achieve High Efficiency: Require stringent conversion efficiency standards; offer bonus incentives for Energy Star and ultra-high-efficiency; conduct energy audits to identify cost-effective demand-side efficiency measures. 5. Realize Cost Savings: Design rates to reflect full benefits and avoided costs, with shared savings to the participant and the other utility customers; apply commodity pricing and contracts policies in Rule and Regulation Mitigate Risk: Require adequate insurance, equipment warranty, and credit quality; limit size of overall program and maximum size of any single facility; pay incentives based on measured performance; design program to achieve resource diversity for the electric portfolio. 7. Enhance Reliability: Apply clear interconnection standards as defined in Rule and Regulation 27. Provide capacity, dispatch rights, and emergency power redirection capability. Added bonus for islanding capability (able to run in a blackout). Adhere to NCPA and CAISO scheduling protocols. 8. Ensure Security and Safety: Adhere to interconnection standards and City dispatch procedures; owner to provide access to City staff to verify compliance. 9. Clear and Timely Reporting: Customer to meet all regulatory reporting requirements. 10. Encourage New Technologies: Added bonus for very high efficiency, low emissions, peak reduction, pre-commercial technologies, environmental stewardship, or other beneficial innovation. The proposed basic guidelines to which PLUG-In detailed program design and implementation should adhere are as follows: 1. Technical: a. Eligible technologies include cogeneration, fuel cells, waste heat recovery, or renewable energy conversion. b. Eligible fuels include natural gas or renewable fuels as defined in Section 2805 of the Public Utilities Code. c. Cogeneration must meet and maintain FERC and State efficiency and thermal energy utilization criteria. d. All technologies must meet ultra-clean distributed generation efficiency and emissions requirements established by the California State Air Resources Board. e. Single system maximum size is 10 MW, and no larger than the greater of on-site peak electric load or on-site peak thermal load. f. Incremental water consumption from reclaimed or decontaminated groundwater. 2. Reliability a. Owner shall provide must-offer obligation to CPAU. The City reserves the right to instruct the generator to operate if it is off and available. Page 3 of 7

4 b. City has the right to redirect power in an emergency. c. Must comply with CPAU Rule and Regulation 27 Interconnection Standards. d. Ensure equipment availability and power generation performance acceptable to the City. 3. Financial: a. Ten-year program maximum is 20 MW or $5 million, whichever comes first. b. Incentives shall be competitive with other programs available in the State, with bonus incentives for high efficiency, low environmental impact, demonstration of innovative new technologies, islanding capability, and electric demand reduction. c. May be customer or third party owned. d. Power may be sold to CPAU or net metered and surplus power sold to CPAU, under the principle of full avoided cost with shared savings between CPAU and host. e. Over-the-fence transactions are not allowed (sale of energy to another CPAU retail customer). f. All rates and customer contracts shall adhere to Rule and Regulation 5 Contracts. 4. Procedural: a. Satisfy all City zoning and permitting and other applicable requirements. b. Owner must provide suitable access to the site, and comply with CPAU dispatch requirements for safety and reliability c. Must adhere to NCPA and CAISO power scheduling protocols. d. Must comply with all data reporting regulations required of power generators. e. Owner must maintain credit worthiness and insurance coverage during the term of the agreement. f. Equipment warranty of no less than 5 years. g. Contract length no more than 20 years. 5. Legal: All aspects of the PLUG-In program, including but not limited to, the program s policies, procedures, guidelines, contracts, and forms, will be reviewed and approved as to form by the City Attorney s Office. Fuel cells, waste heat recovery, and renewable resources can also achieve many of the desired benefits even without meeting the cogeneration definition, and are therefore also included in the list of eligible technologies. Solar energy is the only in-town renewable resource with significant technical potential to contribute to the electric supply needs in the near-term, and will continue to be supported in the City s solar programs separately from PLUG-In. Only generators using natural gas or renewable fuels other than solar are eligible. A renewable fuel is a non-fossil resource other than those defined as conventional in Section 2805 of the Public Utilities Code that can be characterized as one of the following: solar, wind, gas derived from biomass, digester gas, or landfill gas. Customer-sited projects utilizing wind or small hydroelectric resources are not likely in Palo Alto. As reported in the RMI study, small-scale cogeneration can achieve net greenhouse gas emissions 25-30% lower than combined cycle power plants, and about half the state average emissions per kwh, offering an effective means to lower greenhouse gas emissions associated with electricity while also being cost-competitive with conventional alternatives. Even when Page 4 of 7

5 using natural gas as a fuel, the reduced overall fossil fuel use due to reduced demand for power from the grid combined with the efficient use of thermal energy results in a net reduction. Using RMI s estimates of net carbon intensities of 0.35 short tons/mwh for large customer CCHP and 0.62 for purchased market power, a 5 MW generator operating 75% of the time would generate 33,000 MWh per year, with a resulting reduction in carbon dioxide of 9,000 tons per year, equal to the annual CO 2 emissions from 775 average U.S. households (Source: U.S. EPA). Staff recommends allowing and encouraging distributed cogeneration providers being able to sell all electric output or any surplus power in excess of the on-site load to CPAU as part of its diversified portfolio approach to electric supply. Inability to sell surplus power to the local utility has been identified by the California Energy Commission and highlighted in the California Integrated Energy Policy Report 2005 (page 77) as key means to expand the role of CHP in meeting California s power generation needs. These restrictions on surplus electric generation also limit the ability to maximize efficiency of cogeneration equipment. The 20 MW program limit corresponds to 14-17% of the City s expected annual energy demand, depending on the number of hours operating during the year. The current projected long-term electric supply in a normal hydro year consists of 50% large hydro and 30-33% eligible renewable resources, assuming that the remaining two landfill generators are completed and NCPA is successful in purchasing the additional 15 MW authorized by Council (CMR:296:06). Should the PLUG-In program become fully subscribed, it would bring supply nearly in balance with projected annual energy demand (which includes allowance for aggressive energy efficiency efforts keeping energy demand growth flat). To encourage ultra-clean energy technologies, staff recommends that applicable Palo Alto zoning and permitting codes be updated to include small-scale cogeneration facilities in the definition of resource conservation equipment in Section (86)c(i), which would exempt such equipment from the Floor-to-Area Ratio (FAR) limits. Only enclosed equipment would be subject to FAR, and staff recommends encouraging the use of enclosed equipment to reduce noise and visual impacts without penalty. Planning Department staff is working to address codes related to ultra-clean distributed generation in early to mid-2007 as part of the ongoing zoning ordinance update work. RESOURCE IMPACTS The recommended program budget funding for incentives of $5 million over ten years would be funded through electric rates as part of the commodity charge, and projects that qualify as renewable or as R&D demonstration projects would be partly funded by Public Benefits funds of up to $1 million out of the $5 million total. The incentives would be paid initially out of supply rate stabilization reserves, and recovered slowly by the City s portion of shared savings due to avoided transmission and market power purchase costs. Ongoing costs will be accounted for and reflected in the applicable electric and gas rates. The program is designed to achieve a modest rate reduction over the long run, but in the worst case that the program became fully subscribed but cost savings are not realized, the average $500,000 annual budget would translate to a rate impact of approximately 0.05 cents per kwh, or about one-half of one percent. All projected costs, savings and revenues of the program will be incorporated into future budgets, starting with fiscal year 07/08. Page 5 of 7

6 POLICY IMPLICATIONS This recommendation is consistent with LEAP Implementation Task #6: Clean Distributed Generation: Develop a long-term cogeneration implementation plan to capitalize on environmentally friendly and cost-effective high-efficiency combined heat, power and cooling (CHPC) opportunities at large customer sites that are compatible with the Comprehensive Plan. Assist motivated large customers in evaluating technical and economic feasibility of CHPC combined with energy efficiency, and in implementing cost-effective and environmentally sound prospects. Establish standardized distributed generation interconnection standards and procedures that leverage the groundwork of California Public Utilities Commission Rule 21, and update retail electric and gas rates for smallscale clean distributed generation. Continue to monitor technology costs and opportunities for smaller renewable technologies, cogeneration and other low-impact generation that can be located within Palo Alto. In addition to LEAP Implementation Task #6, the PLUG-IN program also supports Tasks #1 (Climate Action Plan), #7 (Natural Gas-Fired Generation), #8 (Greater Bay Area Contracts), #9 (Portfolio Management), and #10 (Risk Management). The plan is also in accordance with the Utilities Strategic Plan, Energy Risk Management Policies, the City s Sustainability Policy, the Green Government Pledge, and Comprehensive Plan Goal N-9 and Policy N-44 and N-47. The program supports the California Publicly Owned Electric Utilities Principles Addressing Greenhouse Gas Reduction Goals endorsed by Council (CMR:315:06). In addition, Section 372 of California Public Utilities Code, it is the policy of the state to encourage and support the development of cogeneration as an efficient, environmentally beneficial, competitive energy resource that will enhance the reliability of local generation supply, and promote local business growth, and to encourage the continued development, installation, and interconnection of clean and efficient self-generation and cogeneration resources, to improve system reliability for consumers by retaining existing generation and encouraging new generation to connect to the electric grid, and to increase self-sufficiency of consumers of electricity through the deployment of self-generation and cogeneration. The proposed program fulfills the requirements Public Utilities Code Section , that a local publicly owned utility review its rates, tariffs, and rules to identify barriers to and determine the appropriate balance of costs and benefits of distributed energy resources in order to facilitate the installation of these resources in the interests of their customer-owners and the state. The program also supports the U.S. Energy Policy Act of 2005 requirements that electric utilities deploy a mix of electric generation technologies with different fuel sources (PURPA Standard 12), and develop and implement a 10-year plan to increase the efficiency of its fossil fuel generation (PURPA Standard 13). Page 6 of 7

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8 Attachment A Attachment A: Council Approved Electric Supply Objectives and Guidelines The City Council approved four Primary Portfolio Planning Objectives on November 13, 2001 (CMR:425:01) Objective 1: Objective 2: Objective 3: Objective 4: Ensure low and stable electric supply rates for customers. Provide superior financial performance to customers and the City by maintaining a supply portfolio cost advantage compared to market cost and the retail supply rate advantage compared to PG&E. Enhance supply reliability to meet City and customer needs by pursuing opportunities including transmission system upgrades and local generation. Balance environment, local reliability, rates and cost impacts when considering renewable resource and energy efficiency investments. The City Council approved seven LEAP Guidelines on October 21, 2002 (CMR:398:02). Guideline 1: Electric Portfolio Dependence on Western While maintaining the flexibility to adopt favorable custom products offered by Western, manage a supply portfolio independent of Western beyond the Base Resource Contract. Guideline 2: Hydro Risk Management Manage hydro production risk by: A. Planning for an average hydro year on a long-term basis; B. Diversifying to renewable and/or fossil generation technologies; and C. Maintaining adequate supply rate stabilization reserve. Guideline 3: Market Risk Management Manage market risk by adopting a portfolio strategy for electric supply procurement by: A. Diversifying energy purchases across commitment date, start-date, duration, suppliers, pricing terms and fuel sources; B. Targeting additional thermal plant ownership/investment commitment at ~25 MW but in no event more than 50 MW; C. Maintaining a prudent exposure to changing market prices by: 1. Procuring resources at fixed price for at most 90% of expected load for 2 or more years out, assuming average hydro conditions; and 2. Procuring resources at fixed price for at most 75% of expected load for 5 or more years out, assuming average hydro conditions; and D. Avoiding contract-based fixed price energy purchases (except for contracts for renewable resources) for durations greater than 10 years. A-1

9 Attachment A Guideline 4: Reliable and Cost Effective Transmission Services Ensure the reliability of supply at fair and reasonable transmission cost by: A. Supporting, through political and technical advocacy and/or direct investment, the upgrading of Bay Area transmission to improve reliability and relieve congestion; B. Participating in transmission market design to ensure that market design results in workable competitive markets and equitable cost allocation; C. Pursuing the option of forming and/or joining a Public Power Transmission Control Area to increase control over transmission operations and related costs; and D. Ensuring PG&E honors the Stanislaus Commitments by providing to us firmtransmission rights or equivalent. Guideline 5: Guideline 6: Guideline 7: Local Generation Monitor the potential of local generation options to meet customer needs, improve local reliability, minimize congestion and wheeling charges, and stabilize/reduce costs. Renewable Portfolio Investments The City shall continue to offer a renewable resource-based retail rate for all customers who want to voluntarily select an increased content of renewable energy. In addition to the voluntary program, the City shall invest in new renewable resources to meet the City s sustainability goals while ensuring that the retail rate impact does not exceed 0.5 /kwh on average. Pursue a target level of new renewable purchases of 10% of the expected portfolio load by 2008 and move to a 20% target by 2015, contingent on economic viability. The contracts for investment in renewable resources are not to exceed 30 years in term. Electric Energy Efficiency Investments Offer quality Public Benefits programs, utilizing funds collected through the 2.85% Public Benefits charge embedded in electric retail rates, to meet the resource efficiency needs of customers. Additional funding for cost-effective programs will be recommended as appropriate. Pursue these investments by: A. Providing expertise, education and incentives to support cost-effective customer efficiency improvements; B. Demonstrating renewable and/or alternative generation technologies and new efficiency alternatives; and C. Providing rate assistance and efficiency programs to low-income customers. A-2

10 2006 LEAP Implementation Plan Attachment B Attachment B: 2006 LEAP Implementation Tasks 1. Climate Action: Promote environmental stewardship by completing the California Climate Action Registry process for reporting and certifying greenhouse gas emissions, developing a Climate Action Plan for utilities, and supporting City efforts to address climate change and other environmental issues. 2. Public Benefits: Continue implementation of electric public benefits programs, which is funded by collecting a fee equal to 2.85% of the electric retail rate. These funds are partially used to demonstrate renewable resources or alternative technologies and to assist customers in pursuing efficiency improvements. Coordinate Public Benefits program enhancements with efficiency portfolio plan development (Task #3) 3. Efficiency Portfolio: Enhance the existing efficiency programs by developing a long-term integrated resource efficiency portfolio plan that recognizes cost-effective energy efficiency and load management as priority resources in the loading order for energy resources. Design efficiency programs to account for the combined benefits of electric, gas, and water efficiency savings (e.g. a horizontal clothes washer saves electricity, water and gas). Leverage joint efforts with other public power providers via NCPA s efficiency initiatives and Public Benefits Committee. Enhance system efficiency through generation efficiency improvements and electric distribution system enhancements to lower system losses. As appropriate, additional funding for cost-effective efficiency programs will be recommended to complement and enhance the existing Public Benefits programs. Develop retail rate options that provide price signals to customers that encourage efficiency. 4. Renewable Portfolio: Acquire renewable energy resources to meet LEAP Guideline 6. Strive to meet 2015 goals by Work closely with suppliers to meet their contract obligations and to ensure that projects under construction are completed in a timely manner. Participate in NCPA Green Pool joint procurement initiative to meet remaining needs. 5. PaloAltoGreen: Continue implementation of the Palo Alto Green program, a green pricing product available on a volunteer basis to customers who wish to purchase a greater fraction of green resources. Where feasible, secure eligible renewable energy supplies to meet both the renewable portfolio investments and the needs of the Palo Alto Green program. Evaluate potential strategies to meet the solar portion of PaloAltoGreen with local solar resources. 6. Clean Distributed Generation: Develop a long-term cogeneration implementation plan to capitalize on environmentally friendly and cost-effective high-efficiency combined heat, power and cooling (CHPC) opportunities at large customer sites that are compatible with the Comprehensive Plan. Assist motivated large customers in evaluating technical and economic feasibility of CHPC combined with energy efficiency, and in implementing costeffective and environmentally sound prospects. Establish standardized distributed generation interconnection standards and procedures that leverage the groundwork of California Public Utilities Commission Rule 21, and update retail and wholesale electric and gas rates for small-scale clean distributed generation. Continue to monitor technology costs and opportunities for smaller renewable technologies, cogeneration and other low-impact generation that can be located within Palo Alto. B-1

11 2006 LEAP Implementation Plan Attachment B 7. Natural Gas-Fired Generation: Redirect the local generation feasibility study CIP to focus on clean small-scale distributed generation (Task #6) and power plant opportunities outside of Palo Alto. Given regulatory uncertainty related to local capacity rules and uncertainty of control area constraints, evaluate joint efforts toward power plant ownership opportunities within and near the Greater Bay Area (consistent with levels listed in LEAP Guideline #3B (25-50 MW). 8. Greater Bay Area Contracts: In parallel with Task #7, pursue firm energy and capacity supply contracts within the Greater Bay Area on either medium or long-term basis. Conduct a Request for Proposals to solicit firm energy and capacity offers from all sources within the Greater Bay Area, including renewables, cogeneration and conventional generation. 9. Portfolio Management: Continue to diversify energy purchases to meet load. Continue to develop and maintain expertise and analytic tools, models and other efforts to evaluate scenarios, new resource opportunities, and impact of uncertainties on portfolio position and performance. 10. Risk Management: Develop improved transparent and streamlined Back Office process (contract administration and settlements). Clarify surplus power wholesale sales procedures to ensure transparency and the appropriateness of surplus energy commodity sales transactions that are necessary to meet varying loads with varying and dispatchable electric supplies. Maintain adequate reserves by recognizing the degree of uncertainty the City faces in the future and periodically review and recommend appropriate level of financial reserves. 11. Local Interconnection: Evaluate transmission system upgrades to reduce cost and enhance reliability. Investigate transmission connection voltage increase from 115 to 230 kv, and the potential for a redundant transmission connection to west side. 12. Legislation and Regulation: Monitor and participate in regulatory and legislative initiatives related to transmission market design and pursue alternatives to increase reliability at a reasonable cost. Continue to advocate transmission upgrades in to the Bay Area to increase reliability. Establish a policy to address mandatory resource adequacy requirements. B-2