Avoided Cost Pricing for Power Purchases from Customers Written by Tom Jaster, QBA colleague and associate BACKGROUND INFORMATION Currently, there are a few customers who produce some or all power needs from their own solar panels. At certain times, these same customer’s solar panels produce electricity in excess of the customer’s own needs. Except for transactional costs, the solar panel customer’s incremental cost to deliver power back into GRID is minimal. Such sales can be a win‐win for customers with solar panels and the utility company. The key question is what is an equitable purchase price? In the case of traditional utilities that sell power at prices regulated by the state utility commission, the regulator will require that the utility chose the least cost power option. Power purchases are a viable option. The price of purchased power should at least be equal to or less than the avoided cost to produce, avoided purchases from third parties, or the value of the power if resold to a third party. For purposes of definition, this is referred to as “avoided costs”. In a deregulated environment, a retail provider sells directly to the consumer and either produces its own power or purchases market priced power from third parties. It also pays a distribution company a regulated rate to compensate for the costs associated with delivery of the power. Purchase power compensation for customer produced solar power becomes part of the retail provider’s package to the customer. If the customer does not like the price paid for the solar panel excess production, the customer can chose another provider. While the pricing for the solar power is effectively market based, the retail provider needs to be able to accurately measure its “avoided costs”. While easy to define in concept, the determination of avoided costs can be complex since it relies upon matching customer records at the time of sales with power pool or economic dispatch market records as well.Recently, I have associated myself with QBA LLC at qbacorp.com. QBA LLC is a management consulting and services firm that provides substantive (quantitative) answers to commonly asked business questions by employing the strongest technologies and algorithms in business today. QBA sifts through large database structures and elicits business value and management insight. When combined with my years of utility financial and strategic experience, we are well qualified to assist you with this initiative. Since power market situations and available data will vary by company, we would like the opportunity to visit with you to discuss in more detail how we can assist you in this process. In order to illustrate the process, there is a regulatory filing example for both a traditional utility and distribution only utility. QBA . 350 North Ervay ‐ Suite 1603 ‐ Dallas, TX 75201 . www.qbacorp.com AVOIDED COST PURCHASE PRICING TRADITIONAL UTILITY Background Information (Example for illustrative purposes only) Our Company produces, purchases and delivers power to ultimate customers. Currently, there are few customers that provide some of their power needs with roof top solar panels. At certain times, the solar panels can produce power in excess of the needs of the customer. Although the amounts of solar power sales back into are small, expectations are that they will become significant in the future.. As with any other outside supplier of power, the price paid for this power should at least be equal to or less than the incremental cost to produce or purchase in the power markets. The value of the power is dependent upon the time of day and the time of year. Power delivered during peak summer hours when units on the GRID are down is much more valuable than power delivered during the middle of April. When this power is priced correctly, it our belief that such transactions are beneficial to both the selling customer and the rest of our customers. In this regard, we are requesting that an avoided cost mechanism be employed to price the power and that the cost of this power be included in the fuel factor. Addressing interest of all customers In developing the pricing methodology and its implementation, we employed the services of Jaster/QBA. Following is summary of the steps taken to implementing the procedure. 1. The first step is identify customers with applications that sell their excess power back to the GRID (most likely solar panels) 2. Next, it is determined when these sales are transacted and measured. In our case, electric meters provide hourly data. 3. The third step is to match the timing of these transactions with power production / economic dispatch records to determine an avoided power cost. 4. After deducting a transaction cost, the net benefit is subtracted from the customer’s monthly bill 5. All of these transactions are aggregated into a purchase power account 6. The purchase power account is included in the fuel factor. QBA . 350 North Ervay ‐ Suite 1603 ‐ Dallas, TX 75201 . www.qbacorp.com AVOIDED COST PURCHASE PRICING DISTRIBUTION UTILITY (Example for illustrative purposes only) Background Information Our Company delivers power to 3.5 million customers on the behalf of five retail providers at a regulated rate. Hence, the retail providers are our customers. These retail providers have situations in which some customers may produce power in excess of their needs and wish to sell it back to the retail provider. A good example is roof top solar panels. In order for the excess customer power purchases to be attractive to the retail provider, the price paid for this power should be less than the incremental cost to purchase the electricity in the power markets. The value of the power is dependent upon the time of day and the time of year. Power delivered during peak summer hours when units on the GRID are down is much more valuable than power delivered during the middle of April. Since our Company supports clean energy and wishes to serve the needs of our customers (retail providers), we propose to provide a service to our retail provider customers that enables them to make an informed decision on the correct purchase price. Such a service should encourage a reduction in the amounts of fossil generation and a corresponding reduction in co2. Addressing interest of all customers In developing the pricing methodology and its implementation, we employed the services of QBA. Following is a summary of the steps taken to implementing the procedure. 1. We selected a test period for the twelve month period ended December 31, 2015. We identified 100,000 customers with applications that sell their excess power back to the GRID (most likely solar panels) to five retail providers. Note that our electronic meters provide hourly data. 2. Each retail provider receives aggregate and individual customer data on customers with reversed metering. In addition to assisting in determining the value of the power delivered at specific times of the day, the retail provider could use information to better understand the characteristics of such customers. 3. It becomes the responsibility of the retail provider to determine the value of the excess power to them and to reflect the value in the customer bill. 4. We studied the incremental costs to deliver this information to the retail provider and we are proposing an additional charge to the retail provider for the incremental costs of our services plus 10%. Both the incremental costs and the revenues would be considered in setting future delivery related charges. QBA . 350 North Ervay ‐ Suite 1603 ‐ Dallas, TX 75201 . www.qbacorp.com 3 WHY DO SOMETHING NOW? Traditional full service utility: When combined with the fixed monthly delivery charge, the transaction with the solar power customer and other customers becomes more equitable. If the company already has electronic meter reading, it utilizes the data created. If the company does not have electronic meter reading, it helps justify this expenditure which becomes additional rate base. Delivery Company: While the advantages are basically the same as traditional full service utility, the ability to shift cost to another cost center with a potential markup adds a new source of future revenue. In theory, any margins and reallocations of costs will eventually go back to the customer when overall rates are reset. The use of this service could substantially increase in the future as roof top solar becomes more popular and retail providers are required by the market place to add such services. Because of reverse regulatory lag, increased revenues should produce higher earnings. QBA . 350 North Ervay ‐ Suite 1603 ‐ Dallas, TX 75201 . www.qbacorp.com