Green Opportunities in California

1. Green Opportunities in California Ren Orans Managing Partner, E3

3. Regulatory Case Public State Government Buzz Buzz Buzz Buzz Buzz Change in Regulatory Drivers Public Utilities Commission Investor Owned Utilities

5. Legislators are also busy…

6. …Creating the perfect storm? Or new opportunities for utilities? • Bringing CA CO2 levels back to 1990, • while adding 9,000MW of generation, • without building nuclear, • while retrofitting 20,000MW of capacity to remove once-through cooling • With renewed interest in renewable energy and direct access

7. Agenda • Utility business opportunities • Large-scale regional projects • Grid modernization • Customer service opportunities • Intra-governmental wheeling • How does it fit?

8. Utility Business Opportunities Large-scale regional projects Grid modernization Customer service options

9. Green Solutions Coming… • Large-scale Clean Power Gen and Transmission • Utility-owned renewable generation • Transmission system investment • Smart Distribution Systems • Advanced Metering Infrastructure • Distribution Automation • Coordinated Distributed Energy Resources, including storage • Retail Service Options from Utility • Plug-in Hybrid Electric Vehicles (PHEV) • Photovoltaics • Energy Efficiency • Energy Storage, Home Back-up • Demand Response / Load Shifting

10. Capturing Value Streams as Utility • Ratebase Growth – provides value as long as the investment is allowed • Sales Growth – provides value between rate cases if (a) no decoupling mechanism, and (b) retail rate is above marginal cost • DSM Incentives • Performance-based ratemaking • CO2 Reductions – the mechanisms to implement CO2 caps is not yet defined in California, but any benefits of selling CO2 credits will likely flow back to ratepayers • Improved Reliability – there are small PBR incentives, but these are generally symmetrical and can result in penalties as well • Customer Satisfaction – there are small PBR incentives, but these are generally symmetrical and can result in penalties as well • Economic Energy Transfers – decreased consumer costs due to importing low-cost energy are difficult to capture directly, may provide more ‘room’ under existing rate levels Direct Profit Indirect Profit

11. California Shareholder Incentives Proposed Decision on Energy Efficiency $500 million cap of reward / penalty over three years Represents a change in net earnings of about 8%, much larger than prior PBR mechanisms

12. Regional projects • New large scale transmission projects to meet RPS • California Examples • Tehachapi wind power development • Palo Verde - Devers II transmission • SDG&E ‘Sunrise’ transmission • California-BC Renewable Partnership • Value Streams • Ratebase growth, improved reliability, economic transfers, CO2 reductions The electric utilities are willing and capable of building, maintaining, and operating a new wave of clean energy infrastructure that can reduce CO2 emissions and improve reliability

13. Grid modernization projects • New Information Technology; Metering, Automation • California Examples • Advanced metering infrastructure • Title 24 Programmable-Communicating Thermostat • Value Streams • Ratebase growth, improved reliability, customer satisfaction In the future, a technology backbone to coordinate distribution system operations can bring greater value out of dispatchable distributed generation, storage, and demand response.

14. Advanced Metering Infrastructure • Proposed Functionality • Data Functions • Interval consumption • Tamper and diagnostic alarms • Remote Firmware updates • Net metering • Two way communications • Online customer access • Operational Functions • Remote account activation and shut-off • Outage and return to service verification • Theft and tamper detection • Voltage alerts • Future Implementation • Demand response • CPP, dynamic rates • Communicate with home area network and individual devices • Real-time price negotiation • Distribution Automation • AMI Deployment Authorizations in California by the CPUC • PG&E • $2,200 million • 9 million meters • SDG&E • $719 million • 2.4 million meters • SCE, Pre-deployment • $63 million • Predeployment

15. Net Savings from Transportation Sector Emissions Reduction Measures Source: Zack Subin, PhD Candidate Energy and Resources Group, UC Berkeley

16. Customer-service options • Offer set of products and services • CA examples • PG&E ClimateSmart CO2 neutral rate option • Value streams • Sales growth, ratebase growth, financing of equipment, CO2 reductions, customer satisfaction A menu of green options can be packaged and delivered turn-key to customers with financing, low prices, complementary retail rates, with PUC approval.

17. Service Options for ‘Green’ Customers • Typical customer profile • Priorities: Help The Environment, Flexibility, Convenience • Middle and Higher Income, Technology Early Adopter • Menu of Customer Choices • Reinforce the message through on-bill reporting of environmental achievements such as displaced CO2 emissions Program Cost Treatment • Level of incentives, cross-subsidy issues, funding mechanisms have largely been determined at the CPUC • New retail options can be cost-based without subsidy

18. Example Option Descriptions

19. Bill Comparison – Old vs. New Existing PG&E Service Green Household ‘Makeover’ Approximately $20,000 financed, ~$1,100 equity return per year per customer

20. Intra-Governmental Wheeling of Electricity Docket No. 2007-0176

21. Relevant and Embedded Issues • Technical Feasibility - Interconnection • Impact on System Reliability • What Load – One Order away from DA • Governmental Entity as Utility • POLR responsibilities - Coming and going rules • Departing Load charges/exit fees • RA, RPS and PPP responsibilities • Tariff Design • Financial impact on utilities – credit rating Source: Alcantar & Khal, LLP

22. Evaluating the End Game • Given these issues and parties, where do the Companies want to be? • Potential Alliances • Political/Legislative Efforts • Proceed Methodically • Narrow Scope of Proceeding • Pilot Project • Demonstrate Infeasible and Threat to Reliability Source: Alcantar & Khal, LLP

23. Two Choices • Delay Approach—Argument: Wheeling is expensive and hard to do on small island • Maintain Reliability • Live to fight another day, but that day may come too soon • Facilitate “Virtual Access” as low cost alternative to “Direct Access” • Maintains Reliability • Keeps customers whole • Low cost implementation for utility • Long term solution for Hawaii if utility can continue to develop and integrate renewable energy resources into grid?

24. Possible Approach • Use Case as an Opportunity • Promote Renewable Energy Development • Promote Energy Choices for Customers • How to Implement? • Virtual Access: a low-cost way to implement intra-governmental wheeling • potentially benefits participants and holds all other customers harmless.

25. Direct Access with OATT • Rates are unbundled to reflect the separate costs of Transmission Distribution and Ancillary Services. [G + AS+ T + D]. • Customers electing to purchase directly from suppliers are billed AS + T + D from utility and they sign bilateral contracts directly with third party suppliers for G. • Utilities must run their systems to keep the lights on and charge customers for all necessary ancillary services.

26. The Market Structure:Easy in Theory G G G Wholesale Market Competitive Generation market Spot Energy T&D Rate Retail Market Tweeners Spot Energy Enron HECO AES Risk Premium Customers Fixed Charge for Wires Service Charge

27. UDC#2 UDC#3 Utility Utility Utility Non-Utility Retailer #1 Retailer #2 Retailer #3 Retailer #2 CFD Direct Access But in Reality!The California Model G G G G G Contracts for Difference Supply Aggregator #1 Bid-in Generation Direct Access Bilateral Contracts POWER EXCHANGE Spot Market Scheduling Coordinator #1 INDEPENDENT SYSTEM OPERATOR UDC #1 Non-Utility Retailer #1 CFD C C C C C C C C C C C C

28. Generator Meter Multipliers Initial Preferred Schedules (Energy) Participant Meter Data Ancillary Bids Aggregate Meter Data Final Energy Schedules Cash Payments and Receipts Adjustment Bids Supplemental Bids Usage Charges (Zonal Prices) Ancillary Service Reservation Schedules Real-Time Settlements (ISO Charge Types) Credit Info Credit Info Admin File MCPs A/R Updates Trading Scheduling Settlements Billing A/R and G/L Metering MCPs Quantities Day-Ahead Preliminary Settlements Statements Day-Ahead Invoices Real-Time Preliminary Settlement Statements Statements Aggregate Meter Data Cash Payments and Receipts Real-Time Invoices Generator Meter Multipliers Adjustment Bids Final Schedules Real-Time Final Settlement Statements Ancillary Bids Day-Ahead Final Settlement Statements MCPs Initial Preferred Schedules (Energy) Supplemental Bids Participant Meter Data • Notes: • An Initial Preferred Schedule (ISP) may be for a generator, load, intertie, or an inter-SC trade. • An ancillary bid may be for operating reserve, spinning reserve, regulation, or replacement. Portfolio Bids Traded Quantities

29. Virtual Access • Agencies are allowed to sign bilateral contracts with third party suppliers and receive bill credits • Bill Credits = Benchmark Price - Contract Price • Bills are reduced if contracts < Benchmark • HECO continues to procure and integrate all resources; however, customer can add their specific resource to utility resources.

30. Case Strategy • In workshops, describe what it would take to implement real direct access just to take care of intra-governmental wheeling • Offer alternative of virtual access as low cost way to accomplish same goals • Work on settlement and joint filing, with ability of third parties to let HECO implement virtual access and see it works

31. Further Information Ren Orans, Managing Partner San Francisco (415) 391-5100 ren@ethree.com