Archive for Electric Regulation

The Elasticity of Electricity Demand

In an attempt to rebut economist Ed Dolan’s support of a carbon tax, I came across a RAND Study done for the Sacramento Municipal Utility District, which estimasted the short term elasticity of residential electricity demand at -0.2 and the long run elasticity of demand a -0.32.

This is a very inelastic market ( |elasticity| << 1 ), and so supports my argument that regulation is likely to be the most economically efficient approach to reducing residential electricity use.

Dolan compiled some numbers that put long run elasticity of gasoline demand at around 0.5, which also implies that regulation has a role to play in reducing gas usage, although it’s high enough that carbon taxes are also likely to be somewhat effective; a combination seems the best approach to me.

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New York’s Energy Highway: Public Comment until July 31

In his 2012 State of the State address, Governor Andrew M. Cuomo put forward an initiative to upgrade and modernize New York State’s electric power system.  The goal is to systematically plan new electricity generation and transmission in the state with all the relevant government agencies and private developers at the table.

The first stage of the proposal was a request for information about proposed generation and transmission from developers, utilities, and interest groups.  These responses are in, and are shown on these maps:

NY Energy Highway Transmission

Ny Energy Highway Generation Map

The Energy Highway taskforce will be taking comments from the public on these proposals until July 31, and issue an action plan based on all the information received sometime this fall.

More information is available at the NY Energy Highway website.

You can submit comments here.

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Other Objections to PACE Programs

Micheal Giberson over at Knowledge Problem bounced off my article on why PACE financing would be unlikely to damage the mortgage market to mention several of his own worries about how such programs are implemented.

He and I are in agreement that there’s little wrong with PACE programs in principle, but they raise some thorny issues in practice. Here are a few of his worries. Micheal says:

If PACE is just a way for homeowners to scrape up subsidies – i.e. to improve their properties and make their neighbors’ pay for it – then I’m against it.

I agree, but with a caveat: one justification for subsidies for energy efficiency is that energy efficiency has positive externalities, and creates societal benefits. To the extent that energy efficiency subsidies are societal payments for societal benefits, there is no problem with using PACE to scoop up as many as possible. In fact, it should be encouraged.

Here are some of the societal benefits of energy efficiency:

1. Lower energy consumption reduced the need to build and upgrade energy infrastructure, a cost which is borne by all.
2. Lower greenhouse gas emissions.
3. Predictable energy bills reduce bankruptcies and foreclosures, lessening the need for social services and raising property prices.
4. Less money spent on energy assistance programs.
5. Local jobs from the economic multiplier when money is not spent on fossil fuels imported from outside the region.
6. Reduction in local air pollution from local power plants.
7. Lower water use in electricity generation.
8. Lower energy prices because of reduced energy demand.
9. More total jobs because energy efficiency improvements tend to be more labor-intensive than capital-intensive energy production.

Micheal goes on to say:

If my local government was proposing such a program, I’d worry that mismanagement would lead to future obligations for non-participating taxpayers. What is the mechanism that ensures civil servants will be effective loan officers? Will they get bonuses for doing good work or just be paid the same salary and promoted on schedule whether or not the loans they approved achieve intended results?

I agree with Micheal on this one, but this all depends on the particular implementation, although I just finished reading Micheal Lewis’s excellent book The Big Short: Inside the Doomsday Machine
on the Wall Street’s role in the subprime mortgage meltdown, and so I’m compelled to point out that civil servants would be hard pressed to do a worse job extending loans to unqualified buyers than any of dozens of mortgage lenders from 2005 to 2008.

And finally:

Maybe the more interesting question is how and why the retail energy and home mortgage marketplaces became so bollixed up that a municipal-government-sponsored home-improvement-lending tax authority work-around is seen as a promising way to help consumers make sensible energy-related improvements to their homes.

Now that’s a great question. If you want to know why the mortgage market is so messed up, I highly recommend The Big Short, a book that makes highly technical subjects easy to understand. I can say that because I had to learn exactly how CDS’s on CDO’s work in order to pass my Chartered Financial Analyst exams, and I wish this book had been around back then… it would have made the task much simpler.

As for why the energy market is bollixed up, I think it has to do with lack of just about everything that improves market efficiency. The consumer energy market has limited price transparency, a lack of price information and real-time pricing, a single monopoly supplier, a lack of knowledge on the part of the consumer, regulated prices, a cost-plus pricing model for most suppliers, and subsidies for the purchase of energy for many classes of customers. With all this going against it, it’s no surprise at all that the market is so dysfunctional that civil servants as loan officers starts to sound like a good idea.

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Can the Poor Afford a Community Solar Garden Subscription?

Yesterday, I wrote about Community Solar Gardens (CSGs) and their uses from an investment perspective. One of the goals of CSG legislation is to allow people without access to large amounts of credit the opportunity to invest in solar. Yet there is a clause in the bill that places the size of the smallest allowable CSG subscription at 1kW. A typical home system is usually between 2kW and 10kW, so a 1kW system does not seem unreasonable if the intent is to simulate a home system. However, if the intent is to allow people of all economic means to participate, the 1kW minimum may be onerous.

According to Rick Coen, Director of Engineering at Colorado solar installer Bella Energy, a 1 kW solar garden subscription would probably cost about $2,500 after current Colorado incentives and federal tax credits. Colorado incentives have been dropping quickly recently, as have solar panel prices, so this cost could either rise or fall, depending on which falls faster. Nevertheless, $2,500 seems like more money than most typical low income earners are likely to have at one time, so the minimum subscription may present a barrier.

A bill that was designed to allow low income earners to participate would either remove the 1 kW minimum, or provide for some type of monthly payment plan.

Financing

The Community Solar Gardens bill (HB1342) does allow the developer of the CSG to provide financing to subscribers, but for someone with low income, such loans would likely need to be secured against the subscription itself in order to achieve a low interest rate. If the income from the subscription came close to covering the payments on the loan, a CSG developer could package together a CSG subscription and a loan so that a 1 kW subscription could be bought on a monthly payment plan.

In sunny Colorado, solar farms often have capacity factors as high as 20%. At that capacity factor, typical monthly production for a 1kW nameplate system would be 146 kWh, which is worth about $14.60 a month at typical Colorado residential rates of 10 cents per kWh. Using a mortgage calculator, I found that the income from the subscription would be enough to pay off a $1,400 ten-year loan at 5%, an $1,800 fifteen-year loan at 5%, or a $2,200 20 year loan at 5%. That means that with $300 down, a low income subscriber could pledge the income from the CSG subscription for 20 years, and would eventually be able to use the income from it after the loan was paid off 20 years later. Solar panels can last for well over 20 years, so the subscription could still be worth something at that time.

A more likely option would be for the subscriber to make the initial $300 down payment on the 20 year plan, followed by smaller amounts each month to accelerate the debt repayment, and end up owning the subscription outright sooner.

Despite the potentially daunting $2,500 initial cost of a 1kW subscription, it looks as if developer financing could bring this down to a manageable initial payment. All of this assumes that incentives for solar do not fall faster than the price of solar installations, and that currently low interest rates stay low. On the other hand, if electric rates rise, the income from a CSG subscription might be enough to cover the entire subscription.

Truly Affordable Solar

While financing can in principle allow the low income earners to purchase a Community Solar Garden subscription, it remains to be seen if there will be enough demand for an asset that has no tangible value for twenty years among people without much cash to spare. I doubt that the demand will be sufficient to entice a CSG developer to offer such a complex financing arrangement. A much simpler way to make CSG subscriptions affordable would be to allow subscriptions smaller than 1 kW.

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Community Solar Gardens

A new bill being considered in the Colorado legislature would create "Solar Gardens." Solar Gardens allow people to participate financially in owning part of a solar array even if they do not have a suitable site on their own property. My reading of the proposed legislation is that subscriptions in a Solar Garden would be financial securities, and fall under securities laws. That’s probably a good thing.

Solar for Everyone

Solar panels are elitist: They cost a lot of money, and only homeowners with good solar access can usefully install them. This means that renters and people who can’t come up with at least $5,000 to $10,000 worth of cash or credit can’t own them. That’s the problem Colorado House Bill 10-1342 (HB1342): Community Solar Gardens aims to correct.

HB1342 defines a Community Solar Garden(CSG) as "A solar electric generation facility with a nameplate rating of two megawatts or less… where the beneficial use of the electricity generated by the facility belongs to the subscribers to the community solar garden." A subscriber is a "retail customer of a qualifying retail utility who owns a subscription and who has identified one or more physical locations to which to which the subscription shall be attributed" withing the same county or municipality as the CSG. The bill allows subscribers to change the premises to which a subscription is attributed, and also to sell them to other qualifying subscribers, something which is necessary in case a subscriber were to move out of the county or the utility’s territory.

It’s a worthy idea, although local solar installers are concerned that the superior economics of large installations will eat into their market share, by easing the requirements in House Bill 10-1001 for customer-sited generation. People who own perfectly good sites for rooftop solar may instead choose to buy a CSG subscription because of the convenience and potentially lower price. I think fears that residential customers who are good candidates for rooftop solar might instead subscribe to CSGs are overblown. Although the economics may be better, buying solar in Colorado is not yet a great investment because of the cost an return involved. Instead, I believe people are investing in solar because it gives them satisfaction to think that they are using green energy, and because they want to show off their environmental bling to their neighbors. I know that some people are more interested in the bling aspects of solar panels than the economic aspects, because otherwise there would not be a market for fake panels in Japan, although I don’t know of anyone who knowingly bought fake solar panels in the US.

On the other hand, there is currently a multiplier in the bill which would allow 2 kW of CSG subscriptions to substitute for 3 kW of rooftop solar that I think needs to be fixed to avoid undermining the residential set-aside of Colorado’s renewable energy standard as envisioned in HB 1001.

Energy Sprawl

My greatest concern with the bill is not that it will cause a move towards large installations, but that it will lead to more ground-mounted installations taking up open space, contributing to Energy Sprawl. No matter what you think about the economics of photvoltaics, one advantage that they have over almost every other type of electricity generation (both fossil and renewable) is that they can be placed on otherwise unused rooftops and other structures, giving a use to otherwise wasted space. Only energy efficiency and conservation have less physical impact on the environment than rooftop solar. Some people have told me that their air conditioner ran less after they put solar on their roof.

Any law which makes solar more likely to be ground-mounted than rooftop is a step in the wrong direction. I think the bill should be amended to prohibit CSGs from being ground-mounted, effectively limiting them to large rooftops and other structures such as awnings for parking lots. This would also have the effect of doing something to limit the practical size of CSGs to available rooftops, which would probably make the solar installers a bit happier.

The Secondary Market for Community Solar Garden Subscriptions

Provisions for a secondary market for CSG subscriptions are included in the bill, since a subscriber moving out of the county in which their CSG is located will not be able to benefit from their subscription. The secondary market and and other security-like characteristics of subscriptions may make them a useful financial tool for small investors. Most importantly, a CSG subscription is (as intended) an excellent hedge against rising electricity prices.

The only real reason to hold a CSG subscription for the long term is as a hedge against rising electricity prices because, like all utility-subsidized solar installations in Colorado, the utility ends up owning the Renewable Energy Credits (RECs), which are defined as all the “environmental attributes of the electricity.” Although most people with solar panels don’t understand this, the fact that they cannot legally claim the RECs means that they are using electricity that is just as dirty as any other Coloradan, with the exception of direct purchasers of RECs or Carbon Offsets, such as Windsource or Colorado Carbon Fund subscribers.

Although the secondary market for CSG subscriptions is likely to be very illiquid, it will probably become a good direct indicator of local expectations for utility rates. CSGs will not be much use to speculators, however, because there are restrictions in the bill which limit the investment to only 120% of estimated electricity usage at the designated physical location of the subscription. Nevertheless, experienced local market professionals with an understanding of market psychology may be able to make small profits trading subscriptions, since the illiquid and unprofessional nature of the market will likely make prices extremely volatile and subject to strong behavioral biases. When electricity rates are rising, subscription prices will likely overshoot their true value as potential subscribers overestimate future increases, and prices will likely undershoot if falling natural gas prices lead to falling interest in CSG subscriptions.

Allowing investors into the subscription market would probably create a more liquid and stable market for subscriptions, but such an outcome is unlikely because of the general public distaste for speculators. It’s also impractical because of the fact that payments to subscribers are at the retail electricity rate, which is considerably higher than the owners of commercial solar farms are allowed, and hence are effectively subsidized by all utility customers, over and above the direct subsidies given to encourage solar in Colorado.

CSG subscriptions have other aspects that will be familiar to investors. The law allows for the CSG to finance the purchase of a subscription (buying on margin.) It also allows the payments for electricity production to either go to offset the subscriber’s electricity bill, or to go to the CSG sponsor. In the latter case, I could see a small subscriber buying a small subscription, and enrolling in the equivalent of a Dividend Reinvestment Plan (DRIP): rather than cash payments, the electricity generation would be used to increase the size of the CSG subscription over time, until the subscriber decided to start taking cash payments. A CSG with a large number of subscribers enrolled in DRIP-like plans might add a new solar module to the farm every month, in order to keep up with the growing subscriber base.

CSG subscriptions could become a valuable financial planning tool for retirees and others on fixed incomes. Because a CSG subscription rises in value with utility rates, an owner would be better able to budget for the utility bill, no matter how wildly electricity prices gyrate. As subscription prices fall with the falling cost of photovoltaics, I can see the purchase of a CSG subscription becoming standard financial advice for retirees.

CSG Subscriptions as Securities

Although professional investors and speculators will have at most a limited role in the trading of subscriptions, CSG subscriptions may legally be securities. The legal definition of a "Security" is an investment in an enterprise with the expectation of profit from the efforts of other people. If I’m right and the draft law is not changed, CSG subscriptions will fall under Colorado securities regulations. (Because CSG subscriptions cannot be sold outside the state, they are clearly matter for Colorado security regulators.)

For small CSGs set up by community organizations, this is unlikely to have a tremendous impact, because securities laws include a number of exemptions for sales to a small number of related individuals. (Note that this is not intended as legal advice! I am not qualified to give legal advice, and even a small CSG should need to consult with someone familiar with the relevant laws.) For large CSGs with many subscribers, securities law may actually require the delivery of a prospectus and fall under a variety of other rules about communications that apply to the CSG developer and its representatives. In general, this is probably a good thing, since it provides a strong legal framework under which regulators will be able to sanction unscrupulous CSR developers who might be tempted to cold-call unsophisticated utility customers and over-promise the benefits of a small subscription in a Solar Garden.

Conclusion

The intent of Community Solar Gardens is a good one, because it allows many more people the opportunity to hedge their electricity price risk. The people in most need of such a price hedge, those living on small fixed incomes, generally do not have both the home ownership and credit that installing a solar system requires. So I’m glad to see Colorado pioneering this concept, and it will be very interesting to see how CSGs and the market for their subscriptions evolve when the final bill passes. With luck, and a few people emailing Claire Levy, the bill’s sponsor, that final bill will have been amended to exclude ground-mounted Community Solar Gardens, and help preserve Colorado open space.

I also hope that some among the majority of my readers who are not in Colorado will suggest your own legislators consider local variations of this idea.

Tom Konrad PhD CFA

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ARRA Symposium notes, March 10 2009

I’ll be referencing these notes in an article to be published on AltEnergyStocks.com as What the ARRA Means for Clean Energy: One State’s Example on March 15th.

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Off topic: How Do the Candidates Stack up on Clean Energy?

A trip down to the local national party offices to participate in a press conference asking the presidential candidates to pledge their support for clean energy legislation got me thinking about the candidates… I wasn’t sure which candidate has the best clean energy platfom. So I spent a day reading thorough thier platforms, and came to a surprising (to me answer).2008 Election

You can read how I think the candidates’ platforms compare on clean energy here.

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Matt Baker appointed to Colorado Public Utilites Commission

I had just written an articles for the Colorado Renewable Energy Society’s e-newsletter CRES Clips about goings on at the Colorado Public Utilites Comission (PUC), when a piece of big piece of PUC related news came out:

Governor Ritter appointed the current Executive Director of Environment Colorado to fill a recently vacated seat on the PUC.

Why should every advocate in Colorado care? Because it’s great to have another sympathetic ear!

What follows is the article I wrote for CRES Clips, to give readers unfamiliar with the PUC an idea of why I think this is so important:

The Colorado Public Utilities Commission: Where Energy Policy is Implemented

 2007 was a banner year for the

Colorado

lawmakers when it comes to energy policy, and with all the successes.  While it would be tempting for clean energy advocates to declare victory and go home, getting good laws passed is only the beginning. When it comes to implementing laws that pertain to investor-owned utilities, the responsibility falls on the Colorado Public Utilities Commission (PUC) to interpret the legislation and ensure that our state’s public utilities comply with that interpretation.  Here, “public utilities” means Xcel and Aquila , since rural electric cooperatives and municipal utilities are generally exempt from PUC regulation.

 The PUC accomplishes its business in a series of “dockets” in which various “interveners” submit testimony (and respond to other interveners’ testimony) for the PUC to consider.  Individuals can become interveners, but it is time consuming and requires
knowledge of PUC procedure.  Public interest groups with an attorney can also intervene, with various expert witnesses submitting testimony on behalf of that group.

 CRES is not currently intervening in any dockets, although several members of the Policy Committee (including myself) are involved in one way or another.  Given those inherent conflicts of interest, CRES is not currently endorsing any particular intervening group. 

 What follows is a quick summary of some of the most important dockets before the PUC this year, and the groups who support Renewable Energy and Energy Efficiency who are intervening, and whom you can support or contact for more information about their activities. Also, it is possible that the PUC will combine some of these dockets. 

07A-447E Xcel Resource Plan.  These dockets will determine the mix of new generation and energy efficiency resources with which Xcel plans to meet our anticipated electricity needs in the coming years.  Anticipated/ current interveners: EEBC, IEA, RUC, SWEEP, WRA.

07A-420E—Xcel
DSM Plan
in which the PUC will review Xcel’s proposals for electricity DSM policy including energy savings and DSM budget goals, DSM program cost recovery, and incentive to the utility for implementing effective DSM programs. This docket was initiated in response to DSM legislation enacted last year, HB 07-1037.

07A-462E—Xcel
Renewable Energy Plan
in which the PUC will review Xcel’s plans for complying with the recently doubled Renewable Energy Standard.  Interveners: CoSEIA, WRA.

07M-446E—Xcel
Plan on Transmission
.  Transmission is essential to bringing the power from renewable energy sources to population centers.  This docket will determine much of when and where transmission is upgraded or built, and so will have a long term impact on what Renewables can be developed. Current Interveners: IEA, WRA.

07R-371G—Gas
DSM Rules.
This docket will determine the key policies governing gas utility energy efficiency programs, including energy savings goals and how utilities will be compensated and rewarded for reductions in natural gas usage.  Current Interveners: EEBC, RUC, SWEEP.

 

Key
to Renewable Energy and Energy Efficiency Advocacy Groups intervening at
the Public Utilities Commission (alphabetical.)

Note:
CRES has not reviewed the testimony of any of these parties, and their
opinions are their own.  Their
information is included because they are known to be aligned with CRES’s
mission of promoting Renewable Energy and Energy Efficiency in

Colorado

.

Abbr.

Name

Contact

Description/
website

CoSEIA

Colorado

Solar Energy Industries Association

Lynn Hirshman, Executive Director

lynn at coseia dot org

 

www.coseia.org

Trade association for the Solar industries in

Colorado

.

EEBC

Energy Efficiency Business Coalition of

Colorado

Paul Kriescher, President

PaulK at lightlytreading dot com

 

Industry Association of Energy Efficiency Businesses,
dedicated to promoting Energy Efficiency in

Colorado

IEA

Interwest Energy

Alliance

Craig Cox, Executive Director

cox at interwest dot org

 

www.interwest.org 
Group of RE businesses and advocacy groups promoting RE project
development in the West.

 

RUC

Ratepayers United

Colorado

Gina Hardin, Attorney

ginahardin at msn dot com

 

www.ratepayersunited.org

Nonprofit advocating for responsible and accountable
energy at the PUC.

SWEEP

Southwest Energy Efficiency Project

Howard Geller, Executive Director

hgeller at swenergy dot
org

 

www.swenergy.org

Promotes Energy Efficiency in Southwestern States

WRA

Western Resource Advocates

John Nielsen, Energy Project Director jnielsen at westernresources dot org  


 

www.westernresourceadvocates.org

Nonprofit dedicated to protecting and restoring the
natural resources of the states of the interior west.

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War, Regulation, Finance, and Renewable Energy

So far this month, I’ve been thinking a lot about regulation of the electric sector, in large part because I’ve been getting ready for the next Resource Planning Docket at the Colorado Public Utilities commission, and have been participating in the various actions and negotiations the lead up to it.

On September 2, I speculated about the effects of a war with Iran on Alternative Energy Stocks

On September 9, I looked at why coming up with a good net metering law for distribute generation is so difficult, and made my recommendations.

And on September 12, I looked at the implications of structured finance for Concentrating Solar Power.

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How to Sell Energy Efficiency

In my Alt Energy Stocks column this week, I take a look at what business needs to do to sell energy efficiency to the consumer. I look at the examples of the Prius’s sucess, despite only marginally imporved economics over non-hybrid vehicles, the CFL’s slow path to acceptance, and difficulties in selling geothermal heat pumps. I conclude that the economics of an energy efficiency measure have very little to do about how well it sells. To find out what does, you can read more here.

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Modern Portfolio Theory and Electricity Generation Planning

I mentioned on Saturday that I had gotten some ideas which I planned to use in testimony before the Colorado Public Utilities Commission Least Cost Plan.

Yesterday, I ran my ideas by my friend Morey Wolfson, who is currently serving as head of the utilities program at the Govenor’s Energy Office. Like many members of the local energy advocacy community, Morey was recently tapped by Governor Ritter to help jumpstart Colorado’s New Energy Economy.

I hit the jackpot by talking to Morey, because he turned me on to the work of Shimon Awerbuch, who has been thinking along these lines for years. I’ve just read the first couple pages of his working paper Applying Portfolio Theory to EU Electricity Planning and Policy Making and I’m confident that he’s done a lot of the hard work for me. Here’s one great quote:

    Least Cost procedures are roughly analogous to trying to identify yesterday’s single best performing stock and investing in it exclusively for the next 30 years. Clearly, modern finance theory offers better tools.

Dick Kelley, are you listening? I have a hunch Ron Binz will be….

So what’s the big deal?

I almost forgot to say why this is such a big deal: According to Awerbuch and me, renewable energy and energy efficiency projects deserve a lower discount rate than conventional generation when projects are being evaluated, due to the fact that their costs have low (or even negative, in the case of solar) correlation with electricity prices in general. To use the stock valuation metaphor again, renewable resources are like low and negative beta stocks: the benefits in reduced risk to your portfolio justify paying a higher price for the same level of earnings or dividends.

What this means when evaluating utility projects is that the typically relatively high up-front costs of renewable energy resources do not have to be justified solely by their lower operating costs, but it gives a methodology for taking into account the benefits of reduced risk. This is something that renewable energy advocates have been arguing for a long time. The relatively new part is this gives us a way to quantify those benefits, and utility commissions are very fond of numbers to back up thier decisions.

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