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CPUC CSI Workshop

CPUC CSI Workshop. CPUC CSI Stakeholder Workshop San Francisco, CA February 15, 2012. Energy and Environmental Economics, Inc. E3 has operated at the nexus of energy, environment, and economics since it was founded in 1989.

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CPUC CSI Workshop

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  1. CPUC CSI Workshop CPUC CSI Stakeholder Workshop San Francisco, CA February 15, 2012

  2. 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

  3. 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. Emerging Technology Strategy Energy Markets and Financial Analysis Transmission Planning and Pricing Resource Planning and Procurement Energy and Climate Policy Energy Efficiency and Distributed Resources Cost of Service and Rate Design International Electricity Policy and Planning

  4. 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.

  5. Agenda for Today • Problem Statement • Overview of Straw Man Proposal • Self-assessment of Strengths and Weaknesses • Detailed Considerations • Discussion

  6. 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 However, Evaluating the reported cost data reveals a more foundational problem in standardizing reported cost figures for 3rd party owned and leased systems.

  7. 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

  8. 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

  9. 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

  10. Example: Calculating the NPV & LCOE

  11. 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

  12. 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

  13. Residential Home Equity Example • EPBB Incentive • 1.25% PV Degradation • 20-year System Lifetime • 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

  14. Commercial Self-Financed Example • PBI Incentive • 1.25% PV Degradation • 20-year System Lifetime • 25 $/kW-yrO&M Cost • 10-year Inverter Lifetime • 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

  15. 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

  16. Calculating the LCOE for Self-financed

  17. 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

  18. Thank you Contact: Snuller Price, Partner snuller@ethree.com Michael King, Senior Consultant mike@ethree.com Energy and Environmental Economics, Inc. 101 Montgomery Street, San Francisco, CA 94104 (415) 391 – 5100

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