Decoupling & Demand Side Management in Colorado

Utility revenue decoupling is often seen as an enabling policy supporting “demand side management” (DSM) programs.  DSM is a catch-all term for the things you can do behind the meter that reduce the amount of energy (kWh) a utility needs to produce or the amount of capacity (kW) it needs to have available.  DSM includes investments improving the energy efficiency of buildings and their heating and cooling systems, lighting, and appliances.  It can also include “demand response” (DR) which is a dispatchable decline in energy consumption — like the ability of a utility to ask every Walmart in New England to turn down their lights or air conditioning at the same time on a moment’s notice — in order to avoid needing to build seldom used peaking power plants.

For reasons that will be obvious if you’ve read our previous posts on revenue decoupling, getting utilities to invest in these kinds of measures can be challenging, so long as their revenues are directly tied to the amount of electricity they sell.  Revenue decoupling can fix that problem.  However, reducing customer demand for energy on a larger scale, especially during times of peak demand, can seriously detract from the utility’s ability to deploy capital (on which they earn a return) for the construction of additional generating capacity.  That conflict of interests is harder to address.

But it’s worth working on, because as we’ll see below, DSM is cheap and very low risk — it’s great for rate payers, and it’s great for the economy as a whole.  It can reduce our economic sensitivity to volatile fuel prices, and often shifts investment away from low-value environmentally damaging commodities like natural gas and coal, toward skilled labor and high performance building systems and industrial components.

The rest of this post is based on the testimony that Clean Energy Action prepared for Xcel Energy’s 14AL-0660E rate case proceeding, before revenue decoupling was split off.  Much of it applies specifically to Xcel in Colorado.  However, the overall issues addressed are applicable in many traditional regulated, vertically integrated monopoly utility settings.

Why can’t we scale up DSM?

There are several barriers to Xcel profitably and cost-effectively scaling up their current DSM programs.  Removing these impediments is necessary if DSM is to realize its full potential for reducing GHG emissions from Colorado’s electricity sector.  Revenue decoupling can address some, but not all of them.

  1. There are the lost revenues from energy saved, which impacts the utility’s fixed cost recovery.  If the incentive payment that they earn by meeting DSM targets is too small to compensate for those lost revenues, then the net financial impact of investing in DSM is still negative — i.e. the utility will see investing in DSM as a losing proposition.  Xcel currently gets a “disincentive offset” to make up for lost revenues, but they say that this doesn’t entirely offset their lost revenues.
  2. Even if the performance incentive is big enough to make DSM an attractive investment, the PUC currently caps the incentive at $30M per year (including the $5M “disincentive offset”), meaning that even if there’s a larger pool of cost-effective energy efficiency measures to invest in, the utility has no reason to go above and beyond and save more energy once they’ve maxed out the incentive.
  3. If this cap were removed, the utility would still have a finite approved DSM budget.  With an unlimited performance incentive and a finite DSM budget, the utility would have an incentive to buy as much efficiency as possible, within their approved budget, which would encourage cost-effectiveness, but wouldn’t necessarily mean all the available cost-effective DSM was being acquired.
  4. Given that the utility has an annual obligation under the current DSM legislation to save a particular amount of energy (400 GWh), they have an incentive to “bank” some opportunities, and save them for later, lest they make it more difficult for themselves to satisfy their regulatory mandate in later years by buying all the easy stuff up front.
  5. It is of course the possible that beyond a certain point there simply aren’t any more scalable, cost-effective efficiency investments to be made.
  6. Finally and most seriously, declining electricity demand would pose a threat to the “used and useful” status of existing generation assets and to the utility’s future capital investment program, which is how they make basically all of their money right now.

Revenue decoupling can play an important role in overcoming some, but not all, of these limitations.  With decoupling in place, we’d expect that the utility would be willing and able to earn the entire $30M performance incentive (which they have yet to do in any year) so long as it didn’t make regulatory compliance in future years more challenging by prematurely exhausting some of the easy DSM opportunities.

Continue reading Decoupling & Demand Side Management in Colorado

A Decoupling Update

So, it’s been quite a while since our last long policy post, focusing on utility revenue decoupling in connection with Xcel’s current rate case (14AL-0660E) before the Colorado PUC.  That’s because we’ve been busy actually intervening in the case!

A Climate Intervention

We filed our motion to intervene in early August.  As you might already know, in order to be granted leave to intervene, you have to demonstrate that your interests aren’t already adequately represented by the other parties in the case.  Incredibly, CEA’s main interest — ensuring that Colorado’s electricity system is consistent with stabilizing the Earth’s climate — was not explicitly mentioned by any of the other parties!

In our petition we highlighted our mission:

…to educate the public and support a shift in public policy toward a zero carbon economy.  CEA brings a unique perspective on the economics of utility regulation and business models related to mitigating the large and growing risks associated with anthropogenic climate change.  In addition, CEA has an interest in transitioning away from fuel-based electric generation in order to mitigate the purely economic risk associated with inherently unpredictable future fuel costs.

…and we were granted intervention.  So far as we know, this is the first time that concern over climate change has been used as the primary interest justifying intervention at the PUC in Colorado.  In and of itself, this is a win.

A Long and Winding Road

Throughout the late summer, we spent many hours poring over the thousands of pages of direct testimony.  Especially Xcel’s decoupling proposal, but also (with the help of some awesome interns), the details of the company’s as-of-yet undepreciated generation facilities — trying to figure out how much the system might be worth, and so how much it might cost to just buy it out and shut it down (were we, as a society, so inclined).

Early on in the process, the PUC asked all the parties to submit briefs explaining why we thought it was appropriate to consider decoupling in the rate case, whether it represented a collateral attack on decisions that had already been made in the DSM strategic issues docket, and how it would interact with the existing DSM programs.  We pulled together a response, as did the other intervening parties, and kept working on our answer testimony — a much longer response to Xcel’s overall proposal.  The general consensus among the parties that filed briefs, including CEA, SWEEP, WRA, and The Alliance for Solar Choice (TASC, a solar industry group representing big installers like Solar City) was that decoupling was not an attempt to roll back previous PUC decisions related to DSM — and that addressing it in a rate case was appropriate.  Only the Colorado Healthcare Electric Coordinating Council (CHECC, a coalition of large healthcare facilities and energy consumers) told the PUC that decoupling ought to be considered an attack on previous DSM policies.

The PUC staff unfortunately came back with a reply brief that disagreed and suggested, among other things, that maybe it would be better if we just went with a straight fixed/variable rate design to address utility fixed cost recovery.  Never mind the fact that this kind of rate would destroy most of the incentives customers have to use energy efficiently.

And then we waited.

With baited breath each Wednesday morning we tuned in to the Commissioners’ Weekly Meeting, streaming live over the interwebs from the Windowless Room in Denver.  We watched regardless of whether anything related to our dear little 14AL-0660E was on their agenda.  Just in case they tried to sneak it by.  Weeks passed.  And then a month.  The deadline for submitting our answer testimony approached.

Finally on October 29th, six weeks after submitting our brief, the commissioners finally brought up the issue of decoupling at their weekly meeting and in a couple of minutes, indicated that they’d be severing it from the proceeding, with little explanation as to why.  However, because there were no details, and the order isn’t official until it’s issued in writing… we continued working on our answer testimony.  The final order came out on November 5th, and prohibited submission of testimony related to decoupling.  Answer testimony was due on November 7th.

Where to From Here?

Xcel might come back to the PUC with another decoupling proposal before the next Electric Resource Plan (in fall of 2015) .  Or they might not.  This means that a good chunk of the work that we’ve been doing since this summer will have to come to light in a different way.  So for the next few posts, we’re going to explore some of the issues that came up in the preparation of our answer testimony, including:

  • Decoupling and Distributed Energy:
    How would decoupling interact with distributed energy resources like rooftop solar?  What are the implications for utilities as the costs of those resources continue their precipitous decline?
  • Decoupling and Demand Side Management:
    How would revenue decoupling interact with demand side management programs in general — both utility and privately or locally funded — and what particular issues with Xcel’s DSM programs could decoupling address?  What issues can’t it help address?
  • Can Revenue Decoupling Scale?
    Why doesn’t revenue decoupling as a policy really scale up to the point of  taking existing generation facilities offline, or preventing new facilities from being built?
  • Decoupling as a First Step:
    Even if it can’t scale, why might decoupling still serve as a useful starting point for the decarbonization process? Can it give us a little bit of breathing room while we start the real negotiation? Or is it just another layer of financial protection for utilities who want to delay change as long as possible?
  • Realism and Equity in Carbon Budgets for Colorado:
    What is the true scope of the decarbonization challenge, in the context of the carbon budgets recently published by the IPCC in their Fifth Assessment Report (AR5), but localized to Colorado so we can actually wrap our heads around it.  Why is this conversation so hard?

Learn more about utility revenue decoupling on our resource page…

Featured image of binders (full of PUC filings…) courtesy of  Christian Schnettelker on Flickr. Used under a Creative Commons Attribution License.

Utilities Decoupling to Cover Their… Assets

Last month, Xcel Energy subsidiary Public Service Company of Colorado (PSCo) filed a rate case at the Colorado Public Utilities Commission (Docket: 14AL-0660E).  A lot of the case — the part that’s gotten most of the press — is about PSCo recovering the costs of retiring and retrofitting coal plants as agreed to under the Clean Air Clean Jobs Act (CACJA) of 2010.  However, there’s a piece of the case that could have much wider implications.  Way down deep in the last piece of direct testimony, PSCo witness Scott B. Brockett:

…provides support and recommendations regarding the initiation of a decoupling mechanism for residential and small commercial customers.

This recommendation has captivated all of us here at CEA because it could open the door to Xcel adopting a radically different business model, and becoming much more of an energy services utility (PDF), fit for the 21st century.

To explain why, we’re going to have to delve a ways into the weeds of the energy wonkosphere.

Continue reading Utilities Decoupling to Cover Their… Assets

Minneapolis eyes way to push utilities to be greener

Minneapolis is Xcel’s home town, and a much bigger market than Boulder. The city is now talking about allowing their franchise agreement to lapse, in order to pursue more aggressive renewable energy policies than state law will allow if they’re served by the monopoly utility.  The article gives a nod to Boulder’s votes over the last two years to explore the alternatives to franchise agreements, including the formation of a municipal utility.  It’s great to see another much larger city looking at its options, and as far as pushing the overall utility business model to change, it’s great to see this happening within Xcel’s service territory.  There’s a threshold out there somewhere, beyond which the current arrangement is no longer stable, and even the utility will start begging for something different.  The faster we can get there, the better.

Arizona Public Service Diversifies Generation Sources | Renewable Energy Project Finance

Arizona has decided to include externalized costs like water use and pollution in their utility resource planning process, with the predictable result that they’ve selected a resource portfolio heavy on renewables and energy efficiency, and light on coal.  Hopefully other states will follow their lead!

A Power Company President Ties His Future to Green Energy

Yale Environment 360 has an interview with the CEO of NRG Energy, a fossil fuel based, nationwide independent power producer (IPP) that sells their 22GW of generation into the wholesale market.  He’s bullish on solar PV, much less so on wind.  No mention of solar thermal.  He believes storage will be vehicle batteries.  Net metering policies and pricing will be key to broad adoption.  Given the lack of forecast energy demand increase, he sees different sources of energy (esp. coal, gas, solar, wind) having to compete for market share for the first time.  It’s important to note that as an IPP his position and incentives are much different from those of regulated utilities like Xcel, who certainly do not want to “keep [their] rates to [their] consumers down and get these electrons onto its grid at a very cheap price”.  And I think regulated utilities still make up a large majority of electrical generation in the US.

Debating Municipalization with Plan Boulder County

http://www.flickr.com/photos/zaneselvans/6072265623/

Ringmaster John Tayer (center) introduces the municipalization contenders.  From left to right: Bellemare and Miller (against), Weaver and Regelson (for).

Plan Boulder County put on a well structured, and well attended debate of the utility municipalization question Monday night.  The forum pitted Ken Regelson and Sam Weaver from Renewables YES! against David Miller, representing the Boulder Smart Energy Coalition (which recently sent out a glossy Fear, Uncertainty and Doubt leaflet to many Boulder residents) and Bob Bellemare of UtiliPoint International — a consultant hired by Xcel Energy.

First each side got to make a 10 minute introductory statement or presentation, followed by a series of pre-submitted questions, posed by the moderator.  Finally, written questions from the audience were vetted by someone from Plan Boulder and passed on.

Ken and Sam’s intro attempted to get across the basic results of the citizens modeling effort their organization has put together.  Among them:

  1. We can achieve rate parity with Xcel while reducing CO2 emissions by 67%, using natural gas and a 40% renewables mix, if we assume startup costs of $250M to $400M.
  2. Coal and renewables simply can’t play well together on the same grid.  The renewables get curtailed because coal fired power takes a long time to turn on and off.
  3. Xcel’s business model, based on large existing investments in coal, can at most accommodate a 15% reduction in CO2 emissions.

David Miller was supportive of meeting our Climate Action Plan goals, but seemed unsure whether going after the emissions due to power generation was the best strategy, suggesting we might instead focus on demand side management, energy efficiency, and the use of RECs.  As with the flyer circulated by his organization, most of the points he made focused on cultivating uncertainty.  He was apparently choosing to ignore, or unwilling to accept the conclusions of the City’s consultants and the citizen modeling effort.  Two points he made which I thought did warrant real concern:

  1. About 75% of Boulder’s energy consumption is commercial/industrial, and that constituency isn’t directly represented in the voting public.
  2. It is important that we not let the municipal utility’s revenues get entangled with the City’s general funding, as it sets up all kinds of poor incentives for the organization, and leads to an opaque city revenue scheme.

All in all Miller seemed earnest, but less informed than he ought to have been.  Maybe that’s not his fault — based on the Plan Boulder flyer, it looks like Craig Eicher, Xcel’s community affairs manager for Boulder, was supposed to be sitting in his seat.

Bob Bellemare on the other hand seemed like a more practiced, more active disinformer, mostly trying to seed doubt in the minds of listeners.  Among his recurring points:

  1. Hardly anybody ever succeeds in this process.  Maybe one city every decade nationwide.
  2. Once you vote in November to begin, it will be very difficult to actually stop the process, regardless of what “off ramps” you’ve supposedly put in place.  The only way it ever seems to happen is by voting in a new city council.
  3. Your cost estimates are wildly wrong.  It will be much more expensive, and take much longer than you think.  You will probably lose money.
  4. There’s no reason to think that your local monopoly (the municipal utility) will be any less monopolistic than Xcel.

The point about stopping the process often requiring the voting in of a new council seemed like a thinly veiled political threat.

Often the debate became one side asserting some number, and the other simply claiming it was wrong.  Stranded costs, separation costs, fuel costs, interest rates, etc.  At some point Bellemare claimed that Xcel was going to be shutting down half its coal plants, which got shocked and appalled looks from both Ken and Sam.  Half?  Really?  Their counter claim was that generation was dropping from 2400MW to 2000MW of coal (a 1/6 reduction, not 1/2).  When quantitative issues become he-said, she-said, all you can do is get someone to go look at the calculations or data.  In this sense, I think the proponents of municipalization have a big advantage.  Their models are all public.  They’re willing to have you examine their assumptions and check their work.  Xcel on the other hand has been very cagy with their data, and are unwilling to give detailed background on where their estimates are coming from (it took months just to get the city’s power consumption profile… and only happened after we’d gotten similar data from Ft. Collins).  All you get the end result and a “Trust Us…” which unsurprisingly makes municipalization look like a lousy deal.

Some of the audience questions were actually quite good.  Somebody requested that each debater disclose how much they were being paid (if anything) to participate, and by whom.  Weaver and Regelson (and the Plan Boulder moderator) are volunteering their time without pay.  Miller received a few hundred dollars from the Boulder Smart Energy Coalition.  Bellemare is a paid consultant working for Xcel and “[his] financial arrangements are not a matter of public information.”

At some point near the end of the debate, it became clear that the proponents of municipalization were winning pretty unambiguously in terms of both information and eloquence, and they became a bit more aggressive.  Miller claimed that obviously our rates would have to go up in a less carbon intensive scenario, as renewables are simply more expensive — just look at all the renewables assessments on our bills.  Weaver took almost violent objection to this point, noting that wind is already the same price as coal, we just can’t take advantage of it with the coal fired grid we’ve got today because of the baseload/curtailment issue.  He further noted that while solar is more expensive today, it’s dropped 40-50% in cost over the last 5 years to around $5.15 per installed watt, and if/when it gets to $2.75, it will be cheaper than grid power.  At which point, he envisions an explosion of distributed generation, “behind the meter” i.e. outside of Xcel’s control, which he believes will prove disruptive to Xcel’s business model.  It came off as being somewhere between a warning and a threat.

The final question, which came directly from the moderator, was on the larger consequences of the decisions being made, both for other communities watching the process, and for the future Boulder 10, 20 or even 50 years on.  The proponents of municipalization clearly felt that we are attempting to set an example for others, of creating a scalable, replicable, financially and climatically responsible power system.  One which a few decades hence they also expect Boulder ratepayers to be thankful for, due to much lower exposure to high and volatile fossil fuel prices.

Miller held out hope that we would find a “third way” to achieve our goals, also setting an example for other communities, though he didn’t lay out in any detail what such a third way would look like, and how it could work from within the confines of the Xcel energy system.

Bellemare felt that regardless of the outcome of the election it would have little effect more broadly.  Every franchise agreement is different, state regulations are different, what you learn in one place doesn’t really transfer well to others.  (Nobody’s watching.  What you’re doing doesn’t really matter.)  Should the ballot measure succeed, he expected 5 years of wrangling to get the utility set up, and another 5 years before we really figured out how to run it.  Twenty or fifty years on?  Well, who knows…  If the ballot measure fails, he expects Xcel and Boulder to keep on working together as they have for years, continuing to build one of the nation’s best energy efficiency programs.

This inspired a pretty loud response from Ken… who noted that yes, we do have one of the best efficiency and renewables programs in the nation for an investor owned utility, but several municipal utilities do far better, Austin, TX and Sacramento, CA were mentioned as examples.

Based on their overall performance, it seemed pretty clear to me that the proponents of municipalization can win if they’re given a fair forum.  It’s less clear to me how they will fare in the decidedly unfair landscape of full page newspaper ads, push polling, semi-anonymous glossy mailers, radio sound bites and yard signs.  In those fora, money talks much louder than good information, and Xcel has a lot more money at their disposal than we do.  We need to change that.

Boulder’s Energy Future Is Bright

Light Pollution by phidauex on flickr

Last night I went to a presentation by the Renewables Yes technical and financial modeling team.  They’ve put up a bunch of information about their modeling efforts on the web site.  I’ve organized nine short videos of a previous iteration of the presentation into a single 90 minute playlist here if you want to see it yourself.  It’s definitely worth watching if you use electricity in Boulder!  This post is my attempt to digest and rephrase their conclusions.

Continue reading Boulder’s Energy Future Is Bright