In a proposal sure to please some and roil others, senior regulatory expert Gordon Kaiser proposes that Ontario implement a Distributed Energy Resources Tariff like that in California, to clarify the terms and rates that would apply when customers start using locally generated supply in greater numbers.
Guest Editorial
Can local generation reduce Ontario electricity costs? The case for a distributed energy resources tariff
By Gordon Kaiser, Energy Arbitration Chambers
Ontario has high electricity costs. Those costs will continue to increase. There may be a solution in CHP (Combined heat and power), technology that allows a customer to generate their own electricity. We can call this “local generation.” It can be offered by a regulated utility or a non-regulated competitor.
CHP technology has been developed by world-class companies. The price is falling and will continue to drop. Unlike wind and solar generation which are driven by high cost FIT contracts, this technology is driven by natural gas which, thanks to shale resources, will continue for a long time.
There are no technology barriers but there are serious regulatory challenges. However, once we establish a clear objective, the regulatory challenges can be addressed. These questions were recently addressed in California in the SoCalGas case. This decision offers useful insights for Ontario.
The objective is to increase the supply of local generation to the marketplace. The reason? It will reduce electricity costs. Local generation does not have significant transmission or distribution cost. The best response to high electricity prices may be a DERS (Distributed Energy Resources) Tariff.
What is a DERS Tariff?
What is the DERS tariff? Why would we want one? A DERS tariff allows a utility to offer CHP service as a tariffed offering to a specific customer. California determined as a matter of policy that the expansion of CHP technology was an important strategy to reduce electricity costs. The technology existed but it was not being deployed in markets below 20 MW. California believed that customers in that market segment did not always have the necessary capital and technical expertise to install the facilities.
To address this problem the State turned to the utilities and the regulator. The California Commission created a DERS tariff which allowed SoCalGas to provide the CHP service at a tariffed rate. The decision allowed the utility to include the investment in rate base and earn a rate of return. Utilities like that. And their investors like that. With such arrangements, utilities are able to attract a class of investors that treat the investment in utility equity like a long term bond. That is the reason why Ottawa Hydro and Horizon Utilities were recently penalized by rating agencies for engaging in competitive activities .
As an example, Toronto Hydro today has extensive CHP facilities. At last count there were 18 facilities producing 60MW. But none of those are owned by the utility. They are owned by customers. The reason for that arguably is that the investment does not fit the risk profile of Toronto Hydro investors.
The California Tariff
On August 8, 2014, SoCalGas filed an application with the California Commission for approval of a tariff service to provide its customers with distributed energy resources services. The decision on October 26, 2015 granted SoCalGas’ DERS Tariff application with certain modifications. The decision found that “with the modifications to the terms and conditions, including the cost-based pricing methodology, enhanced mitigation measures, and reporting and accounting requirements, the DERS Tariff is in the public interest because it meets untapped demand in underserved markets for smaller customers who would benefit from CHP, offers additional choices to customers, and supports innovative business partnerships.”
SoCalGas was authorized to offer the DERS Tariff for a 10-year period commencing on the date the decision was issued. The Commission also ruled that shareholders and customers were ultimately responsible for any costs associated with the program, and ratepayers should not subsidize any direct or indirect program costs. The decision concludes that it is in the public’s interest to authorize the DERS Tariff subject to the reporting, cost tracking, and marketing restrictions adopted in the decision.
The California Commission was quick to point out that the supply of CHP service should remain a competitive activity even though utility was allowed to provide the service at a regulated rate. To many this would seem to be unthinkable. In Ontario we often assume that the only protection against unfair competition by monopoly utilities is to require the utility to provide service in competitive markets through a separate affiliate.
The California Commission concluded that an affiliate was not necessary. In fact SoCal Gas wanted a market-based rate. The Commission refused and held that the rate will be regulated on a cost-of-service basis like any other utility service. They did that to ensure that there would be no predatory pricing. The Commission went further stating that the company in providing the service must identify the costs and revenues associated with each project.
Additional protections were included in the tariff. There are restrictions that prevent tying the CHP service to any monopoly service as well as restrictions on advertising and the use of web sites. The goal was a level playing field. There was also a sunset clause. The tariff expired at the end of a 10 year term at which time the Commission would re-examine the service. The tariff service was also limited to a particular portion of the market that the Commission concluded was the unserved market. That was the market below 20 MW.
Reductions in Infrastructure Costs
In Ontario there is an additional reason why this type of tariff may be important. No one questions the value of CHP service. The Ontario IESO has recently spent large sums of money supporting the expansion of CHP facilities in the name of conservation . Utilities support that exercise because it helps utilities meet their conservation goals. Utilities also recognise that CHP reduces grid demand and the cost of investing in new infrastructure. And both the IESO and the utilities know that will reduce the need for rate increases.
The goal is to reduce electricity costs. This comes in two forms. First CHP is here whether we like it or not. There is nothing that prevents a customer installing that facility behind the meter. And we know what impact that will have on utilities rates. The utility will lose load and in a world where the utility has fixed costs a reduced load means an application for a rate increase.
However if we allow the utility to invest in rate base, the customer not only achieves the economies of CHP earlier but the utility obtains a new revenue stream. Both parties win. With CHP, customers can reduce their electricity costs while utilities can obtain revenue stream and reduce investment in infrastructure. Load is growing for many electricity distributors. Local generation reduces the demand on the distribution system and the need for new infrastructure investment.
Increased Customer Access
There is no mystery why utilities welcome the opportunity to place CHP investment in rate base. They are guaranteed a regulated rate of return. To be fair to the California Commission, the DERS tariff is more restrictive than most tariffs. The cost of each project must be reported and examined by the Commission. If there are excess costs above the allowed return those are for the account of the shareholder not the ratepayer.
A tariffed service also offers advantages to the customer. This is particularly case for smaller customers in the market below 20 MW. These are the customers that the Commission found did not have adequate resources in terms of capital or expertise to deploy a CHP investment on their own. For those customers a tariffed service offers important protections. For example the pricing formulas established by the Commission limited cost increases over the term of the contract. There is also a standard form contract approved by the Commission with a number protections smaller customers would not ordinarily obtain.
In short a tariffed offering makes it much easier for smaller customers to access the service. Negotiating these types of technical contracts with substantial Investments would be challenge to many customers without the guidance and protection that a tariff offering provides. And if they run into problems they can always ask the Commission to intervene.
The Separate Subsidiary Myth
For many years regulators have struggled with the protections necessary when a regulated monopoly utility strays into a competitive field. Over the years most regulators have come to the conclusion that regulated utilities engage in competitive activities must do so through a separate affiliate. Rationale is as follows...First the regulators want to ensure the competition is not harmed which is to say that regulated monopolies do not cross subsidize the competitive activities. At the same time regulators want to ensure that the ratepayers are protected from cost flowing from the competitive side of the market to the ratepayer. The Separate utility or “ affiliate” is essentially an accounting construct. Separate subsidies mean separate financial accounts would ensure that the regulator can exercise the necessary scrutiny to protect against predatory pricing on the one hand and ratepayers subsidizing competitive activities on the other.
In fact the concept of separate subsidiaries a blunt instrument for the reasons outlined above. In Commission in SoCalGas recognized the problem. The solution according to the California commission was to require separate accounting not on corporate basis but on a project basis. The solution had an attraction in this context because the CHP projects were significant projects. Arguably the commission had even greater oversight on a project basis. Ratepayers are protected and so are the competitors in the competitive markets. The concept worth exploring.
Can the California Tariff be Improved?
An Ontario DERS tariff could expand beyond the California tariff. First the Ontario tariff should apply to both gas and electric LDCs. Second it should also apply to storage.
There is no reason to limit the DER tariff to gas LDCs. In fact it can be argued that the electric LDC may be the most effective vehicle to bring this this new technology to the market. They are in the market with capital, customer service facilities, service crews and a brand. Also the electric LDC can easily manage the necessary interconnection. More importantly it is the electric LDC that needs the protection from stranded assets.
Allowing electricity distributors into this market will raise another issue - equal access to the wires for all competitors. The California tariff describes the location of the equipment as being “on or near” the customer’s premise. But wider communities of interest will develop. They will want access to LDC wires. This is not a new issue. In Ontario regulators have set rates for pole access for both cable companies and wireless carriers.
The reason to include storage is that energy storage, like CHP can be used either behind or in front of the meter. It can provide important benefits such as shifting energy from peak to off peak and reducing peak charges. Behind the meter (BTM) storage is growing at a rapid rate. In the United States it accounted for12 MWh in 2014, 71 MWh in 2015 and likely twice that amount in 2016. Large companies like JC Penney, Cargill Inc. and Solar City are making huge investments. There is no reason to exclude a technology that allows CHP facilities to operate more efficiently and produce lower-cost electricity for customers.
From Garbage to Gold
BTM Storage is a critical element of any new DERS tariff. Ontario is the poster child. The cost of moving from high carbon generation like coal to lower carbon generation from renewables brings new challenges. Contracts without price adjustments exacerbate those costs. That’s what happened in Ontario. At this point we can do little about the contracts but we can give customers the flexibility to make wiser purchasing decisions.
The generation of electricity by renewables places special challenges on the system. Wind blows at night when you don’t need power. That means you need to get it off the system .That means you dump valuable power at very low prices or pay customers in other jurisdictions to take it away. When you pay people to take stuff away that’s usually called garbage. But here it is not really garbage, it is just a function of variable use in electricity markets.
There is a lot of cheap energy in Ontario that we do not use. In the 12-month period ending November 30, the Hourly Ontario Energy Price was zero or lower in 23 percent of the hours. Fortunately BTM Storage (behind the meter storage) can be used to store unused generation rather than dumping it. Call it free electricity - something most Ontario consumers would welcome. This technology may offer consumers, both large and small, with real costs savings.
Next Steps
We know high cost electricity is a problem in Ontario. Let’s also assume for a minute that there is a solution at least in part. And that solution is lower cost local generation and storage. How do we promote its introduction? The days of governments mandating technologies are over. We learned that lesson from The Green Energy Act.
In the case of a DERS tariff however, independent actors are making commercial judgments. First and foremost is the utility. If the utility can’t sell the service, the utility, not ratepayers will be on the hook.
In Ontario there is a regulatory mechanism that can offer useful analysis. It’s called a generic hearing. Two recent examples come to mind. The first was the Natural Gas Storage proceeding in 2006 and more recently the Natural Gas Expansion case decided last month. The first was brought on the Board’s own motion. The second was the result of a government direction. How it starts does not matter.
The result in both cases was a very careful analysis of a complex policy issue and a clear decision that allowed the industry to move forward to the benefit of both consumers and industry participants. Both proceedings involved a clear definition of issues and scope with broad participation. A generic hearing on local generation and storage and the regulatory barriers it may facing could be promising.
Conclusion
Local generation and storage technology will come to the Ontario market with or without help from the regulator. Much of it is behind the meter. But regulatory guidance will allow important cost saving technology to develop faster and more efficiently. It is best to develop the necessary rules on a generic basis. Ad hoc decisions rarely provide the Board with the broad representation necessary in important policy decisions.