BILL ANALYSIS Ó AB 2234 Page 1 Date of Hearing: April 16, 2012 ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE Steven Bradford, Chair AB 2234 (Hill) - As Amended: February 24, 2012 SUBJECT : Electricity net energy metering. SUMMARY : This bill raises the maximum size of renewable energy projects eligible for net metering for public agency utility customers. Specifically, this bill : 1)Raises the current project cap for net metering from 1 Megawatt (MW) to 5 MW for new and existing renewable energy projects. 2)Limits the 5 MW maximum project size cap for projects located on premises that are owned, leased, or rented by a public agency. 3)Specifies that a public agency is the state, any agency, board, commission, council, department, or other entity of state government, the California Community Colleges, and each district, campus, branch, and function thereof, the California State University, and each campus, branch, and function thereof, the University of California, and each campus, branch, and function thereof, any county, any city, any city and county, any regional agency, any district or special district, any school district, and each campus, branch, and function thereof, and any other political subdivision or corporation of the state. 4)Applies to projects located within the service areas of investor owned utilities and publicly owned utilities, except Los Angeles Department of Water and Power (LADWP). EXISTING LAW 1)Requires nearly every utility in California to provide a net metering rate to customers connecting renewable energy projects to utility service equipment until the total renewable capacity equals no more than 5% of each utilities' aggregated peak electricity demand. 2)Requires payment for excess electricity generation to be AB 2234 Page 2 credited to the customer's utility account at the retail rate of electricity based on the customer's applicable tariff. 3)Exempts net metered utility customer from paying most of otherwise nonbypassable utility service charges. 4)Requires nearly every utility in California to provide a connection to the electricity grid within 30 business days. FISCAL EFFECT : Unknown COMMENTS : 1)According to the author, "The goal of this bill is to save taxpayer dollars during these difficult budget times through reduced utility bills. Public agencies that have already taken advantage of Net Energy Metering (NEM) are likely to save $2.5 billion in taxpayer dollars over the 30 year life of the solar installation. AB 2234 will apply to new and existing renewable energy installations and will lead to even greater savings for taxpayers." 2)Backgroun d. Under net-metering, the electric utility is required to "buy back" all electricity generated by a customer-owned generator that is not consumed by the customer on-site. The price is set by the applicable retail rate under the customer's existing contract. When the customer generates electricity, he/she uses most of it for his or her own facility. At the end of each 12-month NEM period, the electric corporation calculates the amount of electricity distributed to the grid by the customer and reduces the customer's annual bill by the amount of electricity generated by the customer. If the customer consumes more electricity than their facility generates the utility calculates a bill based on the net consumption of utility delivered kilowatthours. This NEM statute allows the credit at the customer's retail price - a price that is much higher than the generation costs because the retail price includes non-generation charges, including but not limited to transmission and distribution service, the California Rates for Energy (CARE) subsidy, public good charges, and service charges for billing and customer service (Note that transmission and distribution service charges include, among other things funding for the AB 2234 Page 3 California Public Utilities Commission (PUC) and California Independent System Operator (CAISO), and utility return on investment). If the customer-generator is being paid the retail price, the non-generation costs are shifted to the utilities' other ratepayers. There is another NEM statute for Fuel Cell projects that provides a similar credit based on the generation only rate. The Fuel Cell NEM customers using this statute pay their service charges and there is no cost shift to other ratepayers). Some commercial customers, but not all, will pay demand charges, irrespective of the NEM credits. The demand charges may be assessed during periods when the renewable project is operating, thereby offsetting these charges. For systems owned by third-party developers, customers will also pay for on-site generation of the renewable electricity. The rate that the customer pays is set by the developer. This rate can range, initially, from 10 cents per kilowatthour to more than 20 cents per kilowatthour. In addition, it is typical for the developer to escalate the rate to be paid by 3% to 5% annually over the term of the contract. This is commonly referred to by developers as 'monetizing net metering.' By calculating the customer's utility bill NEM credits and charging the customer for the solar generation in a manner that results in an initial 10% to 20% discount off of the customer's pre-NEM electricity bill the developer can charge customers for the value of NEM. Leased systems are similarly priced, except that the payment is typically in the form of a flat monthly fee over the term of the contract. The Lease contract may or may not include an annual payment escalation. The contract may or may not allow purchase of the solar facility at the end of the contract. The contract may or may not specify the purchase price for the solar facility. These contracts are based on today's electricity rates and rate structures and it is not clear how economic assumptions used to enter into the contract will be impacted by utility rates and rate design changes over the life of the contract. Developers cannot guarantee that rates or rate structures over the next 20 years will be the same as they are when the contract was signed. One developer claims "the PPA (power purchase agreement) provides long-term certainty against a volatile utility market and rising energy bills, which is critical as energy prices can rise by as much as 10 to 20% in a given year." The PUC reported to this committee in March AB 2234 Page 4 2012 that IOU electricity rates have roughly tracked inflation since 2003. According to the National Renewable Energy Laboratory of the Department of Energy the third-party contracts may or may not result in a net billing reduction to the utility customer. It is also typical for the developer to take ownership of the environmental attributes, such as Renewable Energy Certificate (RECs) or Greenhouse Gas Compliance (GHG) credits. The value of the RECs and GHG credits can be sold by the developer. It is also typical for the developer to retain all in-state incentives (such as the utility rebate programs, federal tax credits, and federal depreciation). The state property tax exclusion also applies to these projects, although site owners may be required to pay property taxes if the project is resold a second time after the developer's initial sale of the project to investors. The developer may also establish credit requirements for subsequent owners of the premises and may sell the project without restriction to investors, which may present a problem if a project is placed on premises that are leased by the state. For projects that are owned and operated by the facility, the value of NEM would be retained by the site owner and the project will have different economics. The site owner would also retain ownership of the environmental attributes. In addition to this subsidy by non-NEM customers, non-NEM customers also pay for the cost of utility safety inspections and any electricity distribution upgrades that may be necessary to ensure safety and reliability because of the total generation added to the distribution system. For wholesale generation contracts, the PUC has established standard terms and conditions and reviews and approves the contract. 3)The expected cost-shift to other ratepayers is not quantified . The most recent study by the PUC, published in 2010, estimated that "PV generation on NEM tariffs (386 megawatts (MW) installed through 2008) will result in a net present value cost to ratepayers of approximately $230 million over the next AB 2234 Page 5 20 years." Since then, the total MWs interconnected has more than tripled and electricity rates have changed. The PUC study did not estimate cost difference between different classes of customers, i.e., commercial and residential customers. No similar study of cost shifting has been done for Publicly Owned Utilities (POUs). But it is important to recognize that the NEM statute applies to every POU except LADWP. According to the General Manager of Plumas Sierra Rural Electric Cooperative (PSREC), "Our entire load is an average of 25 MW. If PSREC allowed a 5 MW net metered project, the cooperative would not be able to collect the fixed costs of the utility, forcing either a massive rate increase in our low income region or bankruptcy of the cooperative. Furthermore, we have nearly reached our 5% maximum capacity cap; therefore a project of this size could not be net metered, irrespective of this bill." Plumas Sierra serves a state prison facility where one of the state-facility 5 MW projects is proposed. If the project moves forward, the state will be required to pay monthly electric service charges to the co-op to avoid adversely impacting the utility. The state will also pay the solar developer for the electricity produced by the project. It is not clear if any bill savings will accrue to the state because the terms and conditions of these contracts are not typically made publicly available. 4)What about the overall maximum capacity cap ? The current statute established a cap on the maximum total capacity of NEM generation the utilities are required to interconnect. The purpose of this cap is to limit the amount of subsidy that non-NEM customers are expected to pay for the benefits of on-site renewable generation. The cap is currently set at 5% of the utility's aggregated peak demand. If the maximum per project size cap is raised to 5 MW it is more than likely that the overall maximum total capacity cap will be reached sooner and the growth of the industry would be jeopardized by uncertainty about whether utilities will continue to offer NEM to their customers. The PUC is currently considering revising the method that has been used to calculate the cap. Solar industry organizations have asked that the method to calculate the cap be revised to AB 2234 Page 6 allow more capacity to be installed under the current cap. Their proposal would more than double the subsidy. In 2009 the Legislature approved AB 510 Skinner, Chapter 6, Statues of 2010, which raised the maximum NEM cap to 5% so that all of the projects authorized by SB 1 Murray, Chapter 132, Statutes of 2006, to receive ratepayer-funded incentives can also receive NEM. The author may wish to clarify that the NEM cap shall be calculated in the following manner to ensure that the NEM subsidy does not increase beyond its current levels and that all electric utilities are calculating the cap consistently by using the peak demand reported in the utility's Form 1 filing with the Federal Energy Regulatory Commission (FERC) and the sum of the individual NEM customer capacity is based on the CEC-AC rating. (Both of these values are generally accepted by utility and renewable energy industries and are publicly available.) 5)Are NEM kilowatthours worth more than non-NEM kilowatthours if both are generated from the same renewable fuel source? The PUC has implemented several programs to support projects in the size of 1MW to 20 MW. These programs are reporting cost of generation no higher than 8 cents per kilowatthour and the developers are responsible for interconnection costs. And if the ratepayers can get renewable generation for 8 cents per kilowatthour it isn't clear why ratepayers should pay more than that through another program. It is not clear why these large projects cannot use other existing programs available to large renewable project developers, including but not limited to: annual Renewable Portfolio Standards (RPS) solicitations, the Renewable Auction Mechanism, the Feed in Tariffs, the utility Photovoltaic-specific procurement programs offered by Southern California Edison and Pacific Gas & Electric. 6)Is a NEM-kilowatt hour worth more because of other benefits ? One argument for higher pricing relates to the location of the project offsetting transmission and distribution costs. While this certainly may be true in some locations in California, it is not something that can be universally true everywhere in California. According to the PUC's preliminary assessment of distributed photovoltaic (PV) generation, "changes in PV output that are faster than the adjustment time of utility equipment available to control voltage may still cause some voltage problems. Controlling distribution voltage on circuits AB 2234 Page 7 with a high penetration of PV is an area of significant ongoing research." The current NEM interconnection agreement does not require studies to ensure reliability if the project is 1 MW or less. If the NEM cap is raised to 5 MW the author may wish to consider adding a requirement for an interconnection study to ensure that the project does not create reliability problems for other customers of the utility . 7)Can the electrons flow out from one project and provide electricity to another customer? NEM projects are equipped with bi-directional meters that count the flow of kilowatthours to and from a utility customer. With respect to where electricity that flows 'back to the grid,' there is no way to know where that electricity was discharged. It cannot be said with certainty that the power flowed to the neighbor because one cannot say whether the neighbor was drawing any power at the moment the electricity became available. In any case, the transformers and substations are not bi-directional so any electricity that flows onto the grid from a customer-generator will be limited to a confined area. For facilities, like schools that are closed on weekends, substantial amounts of electricity could flow to the local distribution grid. On weekends, electricity demand is typically substantially lower than on weekdays, so that extra electricity may have little or no value to the neighbors. In any case, more data is needed to support claims that the excess electrons are delivered to neighbors or any other utility customer. Importantly, because utilities are obliged to provide electricity 24/7/365, they cannot count on the electricity from NEM projects because the NEM projects cannot schedule when the excess electricity will be available for other utility customers. The IOUs must purchase electricity in amounts and types required by the PUC from wholesale generators and must pay for electricity from NEM customers. All of which must be charged to the ratepayers. Similarly, POUs contract for power as directed by their Governing Boards. 8)Quantifying the tax savings. While there may be some savings attributable to the utility bill reductions, the actual net savings are highly dependent on the structure of the AB 2234 Page 8 acquisition, specifically lease versus owned systems. But associated with those bill reductions are also potential tax revenue losses, particularly if these projects are located in any of the more than 140 cities that assess Utility User Taxes. According to the State Controller these taxes are paid to the City General Fund. This tax is based on the customer utility bill. Because the effect of NEM is to reduce the customer utility bill, cities would not receive revenues they may have otherwise been entitled to. The effect of the state and local tax savings and losses due to NEM has not been quantified. 9)Getting to a sustaining renewable market. Developers argue that the uncertainty over the NEM cap adversely impacts the growth of the market for solar (also true for other types of renewable generation). They argue that the 1 MW size limit is a barrier to developing larger NEM projects that will create jobs in California. Reforming NEM or addressing other barriers to developing a sustaining market in a manner that does not create an unreasonable burden on utility customers is needed. 10)The author might wish to consider the following amendments: a) Specify that net metered customer must pay volumetric service charges, interconnection inspections, distribution upgrades, and local utility user taxes as applicable. b) Require the PUC to establish a cap on the amount customers should be required to pay for electricity generated from a privately owned project; cap the rate at which payments for electricity generated can increase to no more than the rate increases allowed by the PUC; review the terms and conditions of the privately owned contracts as is currently done by the PUC for wholesale generation contracts. c) Clarify that the NEM cap shall be calculated in the following manner to ensure that the NEM subsidy does not increase beyond its current levels and that all electric utilities are calculating the cap consistently by using the peak demand reported in the utility's Form 1 filing with the Federal Energy Regulatory Commission (FERC) and the sum of the individual NEM customer capacity is based on the CEC-AC rating AB 2234 Page 9 REGISTERED SUPPORT / OPPOSITION : Support Coalition for Adequate School Housing Environment California Environment California Environmental Defense Rancho California Water District Rancho California Water District (RCWD/District) School Energy Coalition School Energy Coalition (SEC) Solar Energy Industries Association (SEIA) SolarCity Solaria Solaria SunEdison Sunrun United States Air Force United States Army United States Coast Guard United States Navy Vote Solar Opposition Bear Valley Electric Service (BVES) (unless amended) California Association of Small Multi-jurisdictional Utilities (CASMU) (unless amended) California Municiple Utilities Association (CMUA) California Pacific Electric Company, LLC (CalPeco) (unless amended) California State Association of Electrical Workers (CSAEW) Coalition of California Utility Employees (CCUE) Pacific Gas and Electric (PG&E) Pacific Power (unless amended) San Diego Gas & Electric (SDG&E) Southern California Edison (SCE) Analysis Prepared by : Susan Kateley / U. & C. / (916) 319-2083 AB 2234 Page 10