BILL ANALYSIS Ó 1 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE ALEX PADILLA, CHAIR AB 2165 - Hill Hearing Date: June 11, 2012 A As Amended: May 7, 2012 FISCAL B 2 1 6 5 DESCRIPTION Current law requires the state's investor-owned utilities (IOUs), publicly owned utilities (POUs) (except the Los Angeles Department of Water and Power), and other entities offering retail electric service, to credit all electricity generated by a customer-owned renewable electric generation facility against the customer's usage of electricity sold by the utility, on a kilowatt hour basis (kWh), a procedure known as "net energy metering" (NEM). Participation by all utilities is capped at five percent of each utility's aggregate peak electricity demand and the size of individual renewable electric generation facilities is limited to those that will offset all or part of the customer's own electrical requirements to a maximum of one megawatt (MW). This program also exempts the customer from paying transmission and distribution costs. This is commonly referred to as full retail NEM. Current law requires the state's IOUs to credit all electricity generated by customer-owned fuel cells against the customer's usage of electricity sold by the utility, on a kWh basis, a procedure known as fuel cell NEM. The customer credit is based only on the electricity generated and does not include non-generation costs such as transmission, distribution, and public purpose charges. Eligible fuel cells can be powered by renewable or fossil-fuel, are sized MW or less, and must at least meet the emissions standards of combined heat and power systems. Current law requires large IOUs (Pacific Gas & Electric & Southern California Edison) to offer the fuel cell NEM to its fuel cell customer generators until the cumulative capacity of all installed fuel cells reaches 45 MWs within each service territory. Smaller IOUs (SDG&E and others) are subject to a cap of 22.5 MWs within each service territory. All interconnections are subject to a statewide cap of 112.5 MWs. This bill eliminates the utility-territory and statewide MW caps and instead requires all IOUs, regardless of size, to offer the fuel cell NEM tariff to customers until the IOU has interconnected fuel cells with generation equal to one percent of the IOU's aggregate customer peak demand. The California Public Utilities Commission (CPUC) would be allowed to expand the cap beyond 1% at any time. BACKGROUND What is a Fuel Cell? - A fuel cell is an electrochemical device that combines hydrogen and oxygen to produce electricity, with water and heat as its by-product. As long as fuel is supplied, the fuel cell will continue to generate power. Since the conversion of the fuel to energy takes place via an electrochemical process, not combustion, the process is clean, quiet and highly efficient - two to three times more efficient than fuel burning. The Issues of Net Metering - Utility customers that generate power from a renewable facility are eligible for full retail NEM under which the electricity purchases of the customer are netted against the electricity generated by the customer's own renewable electric facility. When the sun is shining or the wind is blowing, for example, the generated electricity spins the meter backward, making it financially equivalent to using less electricity for the customer with the same effect as the electric utility paying the customer the full retail price for the electricity. When the sun stops shining and the wind stops blowing, the customer draws electricity from the grid and their meter spins forward using the credit on the meter. In theory, depending on weather patterns, system size and customer behavior, the customer will have a zero energy bill at the end of a 12-month cycle. Although all renewable resources sized up to one MW which offset a customer's load are eligible for full retail NEM, most of the facilities are solar photovoltaic (PV). Fuel cells are eligible for full retail NEM if biogas is used to generate the power. If a fuel cell is powered by natural gas it is eligible for a more limited NEM program which credits the customer only for the value of the kilowatt hours at the time the electricity is generated. Under this program or tariff, the customer pays for transmission and distribution costs as well as public purpose programs. The impacts of net energy metering have raised significant concerns, such as: At what point does net metering stop looking like energy efficiency and start looking like a competitor who sells higher priced electricity than could be found elsewhere? Will other customers have to pay for these higher rates and is that fair? If net metering is adopted by a significant percentage of customers in the future, how will the utility continue to cover fixed costs as revenues decline? Is the utility providing a storage service with the electric grid, for which the costs aren't being compensated? Can renewable energy be acquired elsewhere at lower costs than through net metering? At the same time, net energy metering can potentially provide utility, social and generator benefits, such as: Reduction of air emissions (social) Lower costs of energy during some peak time periods (utility) Some peak capacity benefits (utility) Avoiding transmission and distribution losses (utility) Avoiding the need for batteries (generator) Getting paid more for renewable electricity than wholesale rates (generator) These issues continue to be discussed but there are few definitive answers and many opinions. NEM Cost Shift - In March, 2010 the CPUC issued a report which analyzed the cost of full retail NEM to non-NEM ratepayers. At that point, based on 386 megawatts of installed rooftop solar, the cost to non-NEM ratepayers was estimated at $20 million per year. Installed rooftop solar is now over 1,200 MW so that cost has now at least tripled. Although the total net cost of the NEM at that point was less than one-tenth of one percent of total utility revenue average net cost, the more telling cost that was reported was that full retail NEM amounted to a cost-shift of $0.12 per (kWh) to non-NEM ratepayers. The CPUC has initiated a new study to examine the costs and benefits of full retail NEM and the impacts of the program for nonparticipating customers. The study will examine the costs and benefits by utility, customer class, and income group and to consider possible revisions to NEM and evaluate alternatives. COMMENTS 1. Author's Purpose . California's fuel cell NEM program has attracted new, innovative technologies to develop their industry in the state. California-based fuel cell companies are counting on fuel cell NEM to encourage customers to adopt fuel cells and thereby expand in-state manufacturing. Raising the cap will help customers finance the purchase of these technologies. 2. Cost-Shifting ? The program in this bill is intended to avoid cost-shifting to other customers by only crediting the fuel cell NEM customer for the time of delivery value of the excess generation associated with the fuel cell, not transmission, distribution and public purpose program charges. However, the CPUC reports that "raising the NEM cap for non-renewable fuel cells may significantly increase costs" to non-participating ratepayers. The CPUC further reports that its "cost-effectiveness study of the full-retail NEM program in March 2010, found that the net cost to ratepayers in 2008 (for all NEM systems interconnected as of 2008) was $20 million/year. The installation of fuel cells under the generation-only NEM tariff may represent a lower marginal cost to ratepayers than the full-retail NEM program - since bill credits at the generation-only rate do not include the cost for use of the transmission and distribution system, the costs for public purpose programs, and other bundled costs, whereas bill credits under full-retail NEM include all bundled costs. However, even at the generation-only rate, interconnection costs and the administrative expenses of implementing NEM are subsidized by ratepayers under both NEM tariffs." Consequently, "this bill would likely substantially raise the NEM cap for non-renewable fuel cells, which could significantly raise the total costs incurred by non-NEM ratepayers." In March 2012, the CPUC issued a request for proposals for an update to the 2010 NEM Cost-Benefit Study. The CPUC reports that "the findings of this study will better inform the appropriate cap for fuel cells participating under Ýthe fuel cell NEM] by: a) Incorporating a significant amount of new data; b) Studying the impacts of new technologies eligible under NEM?; and c) Including the ratepayer impacts from NEM fuel cells that receive generation-only credit. With the initiation of that study, the CPUC has acted to suspend full retail NEM on January 1, 2015 pending revisions to the program in response to the study. To ensure that these impacts are also considered for the fuel cell NEM, and to ensure consistent policy review of NEM for all technologies and fuel sources, the committee may wish to consider adding a sunset clause to this bill to coincide with the full retail NEM program for January 1, 2015 so that the reviews of both programs are accomplished simultaneously and ensure that there is full awareness of the economic impacts of any policy choices on all classes of ratepayers. In the alternative, the committee could amend the bill to forgo a sunset and remove all caps to the fuel cell NEM conditioned on the requirement that the costs of the tariff do not affect non-fuel cell NEM customers, thus ensuring, that the fuel cell customer pays all other costs associated with its load on the grid. 3. What is Aggregate Peak Demand ? The phrase has been used for 14 years and has had no definition by the CPUC but was left to the utilities. Aggregate peak demand is the basis for the calculation of the full retail NEM for renewable facilities and has been incorporated in this bill in lieu of an installed capacity cap. Recently the CPUC decided to define the phrase "aggregate peak demand" which resulted in a significant and controversial expansion of the full retail NEM program. The action was contrary to legislative history. Even parties to the proceeding which argued for the new math and expansion of the full retail NEM cap admitted that the calculation was not technically possible until the full installation of Smart Meters which will not be accomplished in the largest IOU territories until the end of this year at the earliest. In its comments on this bill, the CPUC urges the use of an installed megawatt program cap instead of a percent of peak demand. The current statutory cap is 112.5 megawatts. The CPUC opines that PG&E will be the first IOU to hit its portion of the cap (45 MWs) and "likely will not do so for another 2-3 years." The remaining utilities have very low fuel cell penetration levels and plenty of room for growth within the current cap. The affected industries argue that they anticipate a 30% annual growth rate in the coming years necessitating an expansion of the cap particularly in the PG&E service territory. To avoid controversy in the future associated with the definition of peak aggregate demand, the committee may wish to consider utilizing an installed capacity cap of 200 MW based on the ratio of the utility's peak demand compared to the total statewide peak demand. This cap would provide the capacity necessary to sustain the program through the January 1, 2015 sunset recommended above in the previous comment. It should be noted that to date, according to industry representatives, the installed capacity of renewable and non-renewable capacity is at 40 MWs statewide. 4. Baseload Generation & NEM . The unique characteristic of wind and solar, which are the primary beneficiaries of the full retail NEM tariff, is the intermittency of the electrical generation. Other renewables such as biomass and biogas digesters can run to coincide with the customer's electrical load. In doing so, the customer is able to avoid using the electrical grid and incurring transmission and distribution costs while running the generator. Consequently, the need for full retail NEM is not the same as it is for solar and wind. However, the author and supporters of this bill argue that although fuel cells do provide baseload generation, the facilities are not dispatchable and lack ramping capability. Consequently, they run the generation full-time and when the load of the facility drops, such as in the night, the surplus electricity goes back to the grid. The fuel cell NEM program allows that generation to accumulate to the customer's credit to that the customer can utility that credit during business hours when the fuel cell is offsetting load but the customer is also pulling generation from the grid. 5. Disparate Treatment . The mandates of this program only apply to the IOUs. There are no comparable requirements on POUs which may create barriers to growth of the industry and use of the technologies in very significant portions of the state since the POUs serve as much as 23% of the electric load in California. ASSEMBLY VOTES Assembly Floor (52-18) Assembly Appropriations Committee (11-5) Assembly Utilities and Commerce Committee (10-1) POSITIONS Sponsor: Author Support: Bloom Energy California Hydrogen Business Council California Public Utilities Commission, if amended Clean Power Campaign, if amended ClearEdge Power Environmental Defense Fund Fuel Cell Hydrogen and Energy Association FuelCell Energy, Inc. National Fuel Cell Research Center Silicon Valley Leadership Group TechNet United Technologies Corporation Oppose: Division of Ratepayer Advocates, unless amended San Diego Gas & Electric Company Southern California Edison Kellie Smith AB 2165 Analysis Hearing Date: June 11, 2012