CPUC CSI Workshop

CPUC CSI Stakeholder WorkshopSan Francisco, CAFebruary 15, 2012

Energy and Environmental Economics, Inc.

E3 has operated at the nexus of energy, environment, and economics since it was founded in 1989.

The firm advises utilities, regulators, government agencies, power producers, energy technology companies, and investors on a wide range of critical issues in the electricity and natural gas industries.

Offices in San Francisco, CA and Vancouver, B.C.

25 professional staff in economics, engineering & policy

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About E3

E3’s expertise in 8 key practice areas has placed us at the center of energy planning, policy and markets in California and the West.

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Emerging Technology Strategy

Energy Markets and Financial Analysis

Transmission Planning and Pricing

Energy and Climate Policy

Cost of Service and Rate Design

International Electricity Policy and Planning

Energy Efficiency and Distributed Resources

Resource Planning and Procurement

E3 Support of CSI

Self-Generation Incentive Program (2007)

CPUC DG Cost-effectiveness Protocols (2009)

Net energy metering cost-effectiveness study (2009)

• Detailed bill calculations and load research data to isolate the difference between bill savings and wholesale value across all of the customer classes

Overall CSI Cost-effectiveness (2010)

• Evaluation of trajectory of standard cost tests including the Total Resource Cost, Program Administrator Cost test, and Ratepayer Impact Measure.

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Agenda for Today

Problem Statement

Overview of Straw Man Proposal

Self-assessment of Strengths and Weaknesses

Detailed Considerations

Discussion

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Original Problem Statement

Problem Statement

• It is difficult to make the cost reporting of total installed cost ($/watt) meaningful to a broad audience

Proposed Solution

• Translate the reported costs ($/watt) into levelized cost of energy (LCOE) ($/kWh) that is more broadly understood

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Evaluating the reported cost data reveals a more foundational problem in standardizing reported cost figures

for 3rd party owned and leased systems.

However,

Why is this a problem?

The existing ‘loose’ definition of reported costs is a proxy based on estimated fair market value

• makes analysis using the data suspect, and

• creates an artificial competitive landscape

By reporting a proxy of the cost to consumers the CPUC cannot really pursue its consumer protection responsibilities

By reporting the upfront cost only, the data cannot capture arguably the biggest innovation in the CSI program which is the financing models and 3rd party ownership

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Straw Man Solution

Step 1: Create a standardized reporting metric for 3rd party and leased systems that is conducive to calculating LCOE, the NPV of customer payments

• Update powerclerk and reporting vehicles for 3rd parties

Step 2: Calculate the estimated LCOE resulting from systems using the NPV and standard assumptions

• Could be either included in the CA Solar Statistics or developed through a ‘study’ that was released with regular CSI reports

Repeat Step 1 and 2 to provide an approach to calculate comparable NPV $ and LCOE for self-financed systems

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High level Proposed Approach

Instead of the fair market value proxy, report the net present value (NPV) of customer payments for 3rd party systems

• This value would populate a separate field in PowerClerk

• Stipulate the discount rate and other assumptions used

To calculate LCOE, use standard LCOE formulation on the reported NPV with some stipulated assumptions

• Customer-owned systems will be more difficult than 3rd party systems in this exercise

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Example: Calculating the NPV & LCOE

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InputsNominal Discount Rate 7.56%Inflation 2%Real Discount Rate 5.45%Year 1 Capacity Factor (CEC AC) 24%Degradation Factor 1%Capacity (CEC AC) 1.00

Customer Payment kWhNominal NPV $4,516 21,021

Real NPV 24,185

Year Customer Payment Annual kWh1 $400 2,102 2 $400 2,076 3 $400 2,050 4 $400 2,025 5 $400 1,999 6 $400 1,974 7 $400 1,950 8 $400 1,925 9 $400 1,901

10 $400 1,877 11 $400 1,854 12 $400 1,831 13 $400 1,808 14 $400 1,785 15 $400 1,763 16 $400 1,741 17 $400 1,719 18 $400 1,698 19 $400 1,676 20 $1,000 1,655

OutputsNPV $/kW 4,516$ Nominal LCOE Year 1 $/kWh 0.2148$ Real LCOE Year 1 $/kWh 0.1867$

Key Input Assumptions for NPV

Proposal for input assumptions

• Use the average utility after-tax weighted average cost of capital for the discount rate in the NPV

• Current value is 7.56%

• Use standardized degradation factor

• For example 1% per year

• Calculate the full stream customer payments to the end of the available , and then assume customer exercises buy-out option

• Puts everyone on same basis with system ownership at the end

• No assumptions about early buy-out

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Comparison to Customer-owned

How do we make customer-owned systems comparable?

• Using standardized finanical pro-forma tool calculate ratios of NPV $ to upfront cost

• Use same assumptions on degradation and system life to calculate LCOE

• Assume inverter replacement and O&M costs

Self Financing Models

• Assume self-financed residential is 100% home equity loan

• Assume self-financed commercial is financed with some debt and some equity, and is a taxable entity

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Residential Home Equity Example

EPBB Incentive

1.25% PV Degradation

20-year System Lifetime

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-8000

-6000

-4000

-2000

0

2000

4000

0 2 4 6 8 10 12 14 16 18 20

Cost

($)

Year

Cash flow for residential system (CSI tier 8)

30 $/kW-yr O&M Cost

10-year Inverter Lifetime

0.357 $/W Inverter Replacement Cost

100% Debt Financing through home equity Loan

5.50% Debt Interest Rate

Commercial Self-Financed Example

PBI Incentive

1.25% PV Degradation

20-year System Lifetime

25 $/kW-yr O&M Cost

10-year Inverter Lifetime

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-15000

-10000

-5000

0

5000

10000

15000

20000

25000

0 2 4 6 8 10 12 14 16 18 20

Cost

($)

Year

Cash flow for commercial system (CSI tier 8)

0.357 $/W Inverter Replacement Cost

Financing

• 60% Equity Financing (40% Debt)

• 7.67% Debt Interest Rate

• 10.72% Cost of Equity

5-year MACRS

Converting Upfront Cost to NPV$

Ratios to Estimate NPV $ from Installed Cost

Example for Step 1 in Estimating LCOE for Self-financed systems without 3rd Party Ownership

• Installed Cost = $8/W, 1kW, Residential Tier 10

• $8/W * 0.59 = NPV $ 4.72/W

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Residential Home EquityCSI Tier NPV / Installed Cost

2 0.463 0.474 0.495 0.516 0.547 0.568 0.589 0.58

10 0.59

Commercial Self-FinancedCSI Tier NPV / Installed Cost

2 0.163 0.204 0.255 0.286 0.327 0.378 0.409 0.41

10 0.41

Calculating the LCOE for Self-financed

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kWhNominal NPV 21,021

Real NPV 24,185

Year Annual kWh1 2,102 2 2,076 3 2,050 4 2,025 5 1,999 6 1,974 7 1,950 8 1,925 9 1,901

10 1,877 11 1,854 12 1,831 13 1,808 14 1,785 15 1,763 16 1,741 17 1,719 18 1,698 19 1,676 20 1,655

OutputsNPV $/kW 4,720$ Nominal LCOE Year 1 $/kWh 0.2245$ Real LCOE Year 1 $/kWh 0.1952$

InputsNominal Discount Rate 7.56%Inflation 2%Real Discount Rate 5.45%Year 1 Capacity Factor (CEC AC) 24%Degradation Factor 1%Capacity (CEC AC) 1.00

Discussion

General reaction

• Usefulness of the NPV metric to the CPUC, developers

• Level of difficulty in calculating and reporting NPV vs. the Fair Market Value in the CSI incentive

Details: assumptions that have to be stipulated

• Process to report estimated capacity factor

• 3rd party systems;

• Discount rate, degradation, PV life, buyout / contract terms

• Self-financed systems

• Financing structure, rates, terms to calculate NPV$

• Use same discount rate, degradation, and PV life

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Thank you

Contact:

Snuller Price, Partnersnuller@ethree.com

Michael King, Senior Consultantmike@ethree.com

Energy and Environmental Economics, Inc.101 Montgomery Street, San Francisco, CA 94104(415) 391 – 5100