DG Valuation ─ Lessons from the APS Distributed Energy and Net Metering Technical Conference

1. DG Valuation ─ Lessons from the APS Distributed Energy and Net Metering Technical Conference Value and Cost of Distributed GenerationACC Staff Workshop #1 – May 7, 2014Docket No. E-00000J-14-0023 Bob DavisPrincipal and Executive ConsultantnFront Consulting LLC

2. APS Distributed Energy and Net Metering Technical Conference Conference Overview

3. APS Distributed Energy and Net Metering Technical Conference ACCdecision 73636 ordered that “APS shall conduct a multi-session technical conference to evaluate the costs and benefits of Distributed Renewable Energy and Net Metering” • Six workshops and forums held February 21, 2013 through May 28, 2013 • Over 180 registered stakeholders and presenters included representatives from local and national solar industries, environmental groups, consumer groups, regulatory interests, and electric utilities • Presentations provided by content experts enlisted by the stakeholders, APS and the conference Facilitator • Cost-benefit matrix developed summarizing stakeholder perspectives on costs and benefits of DE • Facilitator’s Report issued July 8, 2013

4. APS Distributed Energy and Net Metering Technical Conference • Major topics covered: • DE and net metering activities and regulatory trends throughout the U.S. • Concepts of electric utility retail ratemaking • Review of APS rates and potential cost shifting caused by solar DE • Electric utility avoided cost concepts and APS planning for solar DE • Solar DE evaluation models and approaches • Stakeholder studies of costs and benefits of net metering and DE costs and benefits for APS • SAICupdate of the 2009 R. W. Beck Study of DE value

5. DE Cost and Benefit CategoriesStakeholder Agreement Stakeholders, including APS, reached agreement on categories of costs and benefits that should be considered when evaluating DE • Avoided utility costs (benefits): • Fuel and purchased power • Variable operations and maintenance • Environmental compliance • Avoided generation capacity investment • Fixed operation and maintenance costs for avoided generation capacity • Electric system losses • Avoided transmission and distribution investments • Incurred utility costs: • Utility integration costs • Program administration costs

6. DE Cost and Benefit CategoriesStakeholder Disagreement Stakeholders could not agree that the following should be included when computing utility benefits of DE • Fuel hedging • Market price mitigation • Cost of ancillary services • Value of ancillary services provided by DE • RES avoided costs • Non-compliance environmental impacts • Decommissioning costs • Ratepayer cross-subsidization • Utility systems costs • Grid security • Marginal value of reduced water consumption • Health effects • Economic development and jobs • Civic engagement / conservation awareness • Energy subsidies • Technology synergies • Ratepayer / consumer interest

7. DE Costs and Benefits – Methodologies Stakeholders generally did not reach agreement on methodologies for computing costs and benefits (even when agreeing on categories) • Computation of avoided generation capital and fixed O&M costs • Generic or avoided planned facilities • Incremental capacity reduction or size of avoided facilities • Timing (current year or date of avoided facilities) • Computation of transmission and distribution avoided facilities/costs • Average embedded costs/rates or avoided planned facilities • Size and timing (similar to generation avoided costs) • System-wide assessment or analysis of specific circuits

8. DE Costs and Benefits – Methodologies (cont.) Stakeholders generally did not reach agreement on methodologies for computing costs and benefits (even when agreeing on categories) • Avoided energy costs (simulated dispatch or market price) • Electric system losses (average or marginal losses) • Integration costs / ancillary services: • Incremental operating costs to respond to intermittent solar DE production • Value of voltage control from solar DE • Treatment of avoided costs in current APS rates: • APS rates set through embedded not marginal cost treatment • Life-cycle benefits produced by DE installations are not permitted in rate setting

9. DG Valuation Technical Considerations

10. Comparison of Value of Solar DE Presented at APS DE/NEM Technical Conference

11. Comparison of Value of Solar DE (cont.)Differences in Assumptions and Methodology

12. Technical Modeling Issues • Effective Load Carrying Capability (ELCC) is expected to decline with additional DE/DG installations • ELCC is specific to the DE/DG technology being added • Capacity reserves should be added only if ELCC approach does not already encompass impact on reserves • Avoided energy cost can be less than the average operating cost of CT and CC resources • Other lower-cost resources can contribute to a utility’s marginal costs (e.g., coal generation, purchased power) • Marginal operating costs of generating units are less than average operating costs • Significant DE/DG implementations can introduce inefficiencies in utility operations

13. Technical Modeling Issues (cont.) • Avoided transmission and distribution costs require detailed study • Specific expansion/upgrade projects should be considered (do projects exist that can be deferred or avoided) • T&Dfacility costs should be segregated costs that can be avoided (e.g., wires) and those that cannot (e.g., metering) • ELCC or Peak Load Reduction (PLR) for T&D should be evaluated by feeder or line • System reliability and security must be considered (the impact of DE/DG intermittency at a feeder level should be evaluated) • Voltage control and other distributed grid benefits of DE/DG should be investigated

14. Coincidence of Solar DE Shapewith Utility Loads

15. Dependable Capacity Diminisheswith Increasing Solar DE Penetration

16. Dependable Capacity Diminisheswith Increasing Solar DE Penetration

17. Dependable Capacity Diminisheswith Increasing Solar DE Penetration

18. Dependable Capacity Diminisheswith Increasing Solar DE Penetration

19. Dependable Capacity Diminisheswith Increasing Solar DE Penetration

20. Dependable Capacity Diminisheswith Increasing Solar DE Penetration

21. Dependable Capacity Diminisheswith Increasing Solar DE Penetration

22. Dependable Capacity Diminisheswith Increasing Solar DE Penetration

23. ELCC Decreases with Increasing Solar DE Penetration Expected Penetration in 2025

24. Rate Design Considerations • One size does not fit all • Costs and benefits of DE/DG will vary by technology and application • Rate design, whether NEM or “value of” tariffs, need to accommodate different DE/DG technologies • DE/DG impacts some areas of utility operations and costs more than others • Rates (or offsets) should be matched to the value received from DE/DG • Fixed and variable costs avoided through DE/DG are more readily assigned through energy and demand rates • Unbundled rates permit more direct assignment of DE/DG benefits • Incremental impacts of DE/DG may need to be considered • Future DE/DG installations may reduce utility fixed costs less than installations made today (due to lower ELCC) • Rate design will need to consider whether to treat DE/DG customers on an average or incremental basis