BILL ANALYSIS Ó AB 674 Page A Date of Hearing: April 13, 2015 ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE Anthony Rendon, Chair AB 674 Mullin - As Amended April 6, 2015 SUBJECT: Electricity: distributed generation SUMMARY: AB 674 establishes a definition of a "clean distributed energy resource," and exempts those customers who use a clean distributed energy resource from nonbypassable charges for electricity generated on site. Specifically, this bill: a)Creates a definition for a "clean distributed energy resource" that: 1) Produces carbon dioxide (CO2) emissions less than the emissions of CO2 from a marginal generating unit dispatched to meet the demand on the electric grid that is avoided by the electricity generated by the clean distributed energy resource, including accounting for waste heat recovery where applicable and savings on transmission and distribution losses. 2) Is sized to meet the electrical demand of, or use the available waste heat of the customer that will be served by the generating facility. AB 674 Page B 3) Has an oxide of nitrogen (NOx) emissions rate, including credit for waste heat recovery, when applicable, that is less than or equal to 0.07 pounds per megawatthour, or a lower NOx emissions rate that the State Air Resources Board determines reflects the best performance achieved in practice by existing electrical generation technologies. 4) Uses an eligible renewable energy resource as defined by the Renewable Portfolio Standard. 5) Is sized no larger than 20 megawatts (MW). b)Requires the California Energy Commission (CEC) is to make the determination of CO2 emissions for clean distributed energy resources by January 1, 2016. c) Requires the California Public Utilities Commission (CPUC) to order electrical corporations to modify rate plans for those customers who use clean distributed energy resources so that: 1) Nonbypassable charges are based on actual metered consumption of electricity delivered to the customer through the electrical corporation's transmission or distribution system. All other charges are to be assessed at the same rate as other customers who do not use clean distributed energy resources. 2) Initial reservation capacity based on a minimum of 12 months of the clean distributed energy resource generation technology's historical operation, the number, AB 674 Page C size, and outage diversity of the clean distributed energy resource, and the annual average reduction of customer load that could occur during an outage. 3) Electrical corporations are allowed to: i. Adjust customer standby demand charges after an initial 12-month period to reflect the customer's actual standby demand, averaged over the previous 12 months. ii. Modify the reservation capacity once every 12 months to reflect the customer's actual average annual reservation capacity based on the same criteria used to establish the initial reservation capacity. 4) Calculation of actual average annual reservation capacity excludes the customer's electrical demand served by the electrical corporation within 24 hours following an outage of the clean distributed energy resource resulting from any event on the electrical corporation's transmission or distribution grid that is outside of the customer's control that requires the customer to reduce onsite generation. d)Requires the CEC to provide a report to the Legislature on the impacts of these provisions, including the impacts on avoided transmission and distribution costs, avoided energy losses, wholesale electricity market prices, electricity costs to ratepayers, air quality, emissions of greenhouse gases, job creation, energy reliability, and the extent to which the incentives contribute to achieving the state's distributed generation and combined heat and power goals. AB 674 Page D EXISTING LAW: 1)Defines cogeneration as the sequential use of energy for the production of electrical and useful thermal energy, and specifies that at least 5 percent of the facility's total annual energy output shall be in the form of useful thermal energy and where useful thermal energy follows power production, the useful annual power output plus one-half the useful annual thermal energy output equals not less than 42.5 percent of any natural gas and oil energy input. (Public Utilities Code 216.6) 2)Provides that the cost of the competition transition charge exemptions granted to members of the combined class of customers, other than residential and small commercial customers, shall be recovered only from those customers. (Public Utilities Code 330) 5)Requires the CPUC to separate distribution cost recovery, taking into account actual costs and benefits of distributed energy resources, proportional to each class resulting in tariff modifications granted to members of each customer class may be recovered only from that class. (Public Utilities Code 353.13) 6)Authorizes allocation of costs for procurement contracts entered into to meet local capacity needs and resource adequacy. (Public Utilities Code 365.1) 7)Provides that each retail end-use customer should bear a fair share of power purchase costs by the Department of Water Resources, as well as power purchase contract obligations AB 674 Page E incurred as of January 1, 2003, and to prevent any shifting of recoverable costs between customers. (Public Utilities Code 366.1(d)(1) 8)Established nonbypassable costs to be paid by all ratepayers: Requires that the cost of divesting generation related assets, nuclear settlements, and power purchase contracts that were part of rates approved by the Public Utilities Commission as of December 20, 1995, are to be recovered from all customers on a nonbypassable basis, amortized over a reasonable period of time. (Public Utilities Code 367) 9)Provides authorization for cost recovery through rates for specified expenditures by electrical corporations prior to 1998. (Public Utilities Code 368) 10)Provides that nonbypassable charges will be applied to each customer based on the amount of electricity purchased by the customer from an electrical corporation or alternate supplier of electricity, subject to changes in usage. (Public Utilities Code 371(a) 11)Defines "change in usage" to generally mean changes occurring in the normal course of business resulting from changes in business cycles, termination of operations, departure from the utility service territory, weather, reduced production, modifications to production equipment or operations, changes in production or manufacturing processes. (Public Utilities Code 371(b) 12)Exempts fuel cell facilities and replacement of existing cogeneration facilities from nonbypassable charges by including them within the definition of change in usage. (Public Utilities Code 371(b) 13)Exempts specified cogeneration facilities placed in service or committed to construction prior to December 20, 1995, from specified nonbypassable charges. (Public Utilities Code 374) AB 674 Page F 14)Provides the following exemptions from nonbypassable charges and provides that the costs of these exemptions be borne by all ratepayers in the affected service area: a) 110 megawatts of cogeneration serving irrigation districts served by electrical corporations with specific allocations to Merced Irrigation District and Castle Air Force Base. b) Irrigation districts, joint power authorities, and publicly owned utility districts that were owned prior to December 20, 1995. c) A federal power marketing agency that existed as of January 1, 1996, or its successor, from nonbypassable charges. d) A portion of the load at the University of California campus in Yolo County not served by power from a federal marketing agency, provided that the power is used for the facility load and not directly or indirectly for sale. (Public Utilities Code 374) 1)Requires the PUC to approve distributed generation resource plans filed by electrical corporations no later than July 1, 2015. (Public Utilities Code 769) 2)Provides authorization for cost recovery to accommodate implementation of direct access (Public Utilities Code 376) 3)Provides incentives for self-generation, including, cogeneration technologies that meet specified performance and emission requirements. (Public Utilities Code 379.6) 4)Specifies that "advanced electrical distribution generation technologies" meet emission standards adopted by the State Air Resources Control Board (ARB), produce de minimis emissions of sulfur oxides and nitrogen oxides, meet greenhouse gas emission performance standards, have a minimum efficiency of 45%, and is sized to meet onsite demand, uses renewable or nonrenewable fuel. (Public Utilities Code 379.8(a) AB 674 Page G 5)Provides that advanced electrical distribution technologies qualify to pay the same rate for gas as that is no higher than the rate paid for gas used in an electric plant located in the same service area of an electric corporation and allows for treatment of these technologies as cogeneration. (Public Utilities Code 379.8 (b)) 6)Provides that the CPUC must establish rates using cost allocation principles that fairly and reasonably assign to different customer classes the costs of providing service to those customer classes, consistent with the policies of affordability and conservation. (Public Utilities Code 739.6) 7)Provides that the surcharge assessed for natural gas used to generate electricity by a nonutility facility must be the same as the surcharge assessed for gas used to generate electricity by the electric utility for that quantity of gas used to generate electricity. Prohibits surcharges for electricity for the sale of electricity from a cogeneration or nonutility facility to an entity for resale to a retail customer. (Public Utilities Code 6352) FISCAL EFFECT: Unknown. COMMENTS: 1)Author's Statement. "California is a leader in clean energy policy, with ambitious goals to improve air quality, efficiency, reliability, and the economy. Clean onsite distributed generation of electricity ("DG") is valuable as an alternative to traditional centralized power plants. With California's energy demand expected to double by 2050, deployment of distributed generation technologies is an AB 674 Page H important piece of meeting the State's energy, climate, and public health goals." "Unfortunately, customers who choose to invest their own capital to install clean DG technologies must pay a number of utility-imposed fees on the electricity they generate and consume onsite. These charges are equivalent to accessing an additional 75 to 100% sales tax on clean DG equipment. The fees make the installation of clean DG prohibitively expensive and economically infeasible for residential, commercial, and industrial customers in California." "This bill would require customers with clean onsite generation technologies to pay all applicable utility imposed fees based only on electricity purchased from the grid. They will continue to pay standby charges for transmission, distribution, and grid maintenance, and they will continue to pay commodity costs for the electricity they use. This policy will enable more customers to invest their own capital to purchase clean, onsite electricity generation technologies that improve air quality, reduce energy costs for all ratepayers, improve energy reliability, and reduce California's reliance on centralized, fossil-fueled power plants." 2)Legislative ratemaking. AB 674 would require the CPUC to order electric corporations to modify rate plans so that users of these technologies would be exempted from contributing, through rates, for costs that the Legislature has previously AB 674 Page I required all ratepayers to pay. These charges are used to support low income electric customers and to support energy efficiency; renewable energy; self-generation; as well as research, development and demonstration programs. In addition, these charges are used to pay for costs associated with the electricity crisis in the early 2000s. Providing exemptions for a variety of good purposes has led to many debates in the Legislature about cost-shifting and whether one group of customer is or is not paying their fair share of the cost of maintaining a safe, reliable, and affordable electricity system. Similarly, it is unclear the extent to which the exemptions proposed in AB 674 will increase bills for other customers. Current law limits cost recovery within a class of customers, in this case, most likely commercial customers. Within commercial customers are small and large business, schools, and municipal government. It is unclear whether those increases will create financial hardships for those customers. The author may wish to amend the bill to require that, before authorizing changes to rate plans for customers who use clean distributed energy resources, the PUC shall make a finding that the impact will not create a shift in costs to other customers of an electrical corporation that are not offset by a commensurate benefit to those other customers. AB 674 Page J 3)Isn't the CPUC already doing this? AB 327, enacted in 2013, requires electrical corporations by July 1, 2015, to submit to the CPUC a distribution resources plan proposal to identify optimal locations for the deployment of distributed resources. The statute requires the CPUC to review each distribution resources plan proposal submitted by an electrical corporation and approve, or modify and approve, a distribution resources plan for the corporation. The bill requires that any electrical corporation spending on distribution infrastructure necessary to accomplish the distribution resources plan be proposed and considered as part of the next general rate case for the corporation. It is unclear why this new distributed generation program is needed or how it would work with the distributed generation plans that the CPUC will ultimately approve. In addition, the CPUC authorized a pilot program exempting bottoming-cycle combined heat and power (CHP) from nonbypassable charges in October 14.<1> The CPUC's decision granting this program did not make a determination on whether or not CHP can be characterized as energy efficiency. The pilot program could be expanded by the CPUC pending the outcome of the pilot. 4)Reliability of Clean Distributed Energy Resources. The author opines that existing and new technologies could become more prevalent should AB 674 become law. According to the findings and declarations, "clean onsite generation of electricity yields multiple benefits, including increased electrical --------------------------- <1> http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M129/K228/12 9228024.pdf AB 674 Page K reliability and efficiency, reduced emissions of greenhouse gases and oxides of nitrogen (NOx), and electrical grid resiliency." California currently provides incentives for these and similar technologies, primarily through the Self-Generation Incentive Program (SGIP). SGIP was established in 2000 and continues to provide incentives as a result of statutory extensions. SGIP was recently extended by the Legislature with some modifications to address concerns over performance, emissions, and achieving ratepayer benefits. As a result of recent evaluations of the SGIP program, a number of deficiencies in the reliability of self-generation have been revealed. For example, a CPUC investigation<2> on combined heat and power (CHP) performance in 2010 found that CHP projects experienced increased time spent not operating, reductions in output when operating, and decreases in electrical efficiency and thermal heat recovery over time. The investigation further found that unexpected levels of maintenance and economic complexity have dampened participant satisfaction. It is unclear whether the current reliability of SGIP projects are the same, better, or worse than what was reported in 2010. The 2012 SGIP evaluation report could not find operational information on 26% of the projects and another 22% of the projects either were decommissioned or offline. -------------------------- <2> SGIP Incentive Program, Combined Heat and Power Performance Investigati" http://www.cpuc.ca.gov/NR/rdonlyres/594FEE2F-B37A-4F9D-B04A-B38A4 DFBF689/0/SGIP_CHP_Performance_Investigation_FINAL_2010_04_01.pdf , April 2010 AB 674 Page L In addition, it is important to understand that the economics of operating a self-generation facility using natural gas. The difference between the cost of a purchased kilowatt-hour (kWh) of electricity and the cost of natural gas to generate a kWh is known as spark spread. With a high spark spread, system owners may lower their overall costs by buying natural gas to run their systems. When spark spread is low, owners may decide to curtail operation of the system and instead purchase electricity from the utility to meet electrical demands and natural gas to meet on-site thermal energy needs. While this is understandable and smart from a business perspective, the operator's decision not to operate based on spark spread may cause increased load on the electric grid when gas prices are higher and thereby increase energy costs for ratepayers who are not participating in the program. The author may wish to specify a minimum reliability requirement to ensure that the benefits to the electricity system are realized and require performance reporting to the CPUC verify that facilities are providing benefits consistent with the statute. 5)Location. As written, AB 674 would provide exemptions for projects located where vendors and customers want them, which is not necessarily where they could provide ratepayer benefits, i.e., where there is high peak demand coincident with the project's ability to reduce the sites need for electricity from the grid, relieve transmission congestion, or other ratepayer benefits. The author may wish to specify that the PUC shall establish requirements that the clean distributed energy resources be located in areas where there are benefits to the transmission and distribution system. 6)Definition of Clean Distributed Energy Resource. In other AB 674 Page M code sections distributed energy resources have similar definitions which may be "cleaner" than the definition of the clean resource proposed in AB 674. For example, Public Utilities Code 379.8 defines "advanced electrical distribution technology" as one that produces de minimis emissions of sulfur oxides and nitrogen oxides. AB 674 defines clean distributed energy resources as having "oxide of nitrogen (NOx) emissions rate, including credit for waste heat recovery, when applicable, that is less than or equal to 0.07 pounds per megawatthour, or a lower NOx emissions rate that the State Air Resources Board determines reflects the best performance achieved in practice by existing electrical generation technologies." AB 674 does not specify a limit of sulfur oxide emissions. Similarly, the limitation on GHG emissions is different from what is specified in Section 379.6 of the Public Resources Code for the self-generation incentive program (SGIP). SGIP statute limits the GHG emission factor to a level that is determined by the CPUC, in consultation with ARB that will result in GHG emission reductions. Conversely, AB 674 specifies that allowed GHG emissions are less than the emissions of CO2 from a marginal generating unit dispatched to meet the demand on the electric grid that is avoided by the electricity generated by the clean distributed energy resource. It is not clear why there is a need to have inconsistent definitions of distributed energy resources in the statute. AB 674 Page N It is also not clear what technologies would be considered clean in these definitions. The author may wish to consider an amendment which specifies a definition of clean distributed energy resources that is cleaner than other definitions of distributed energy resource that are already in statute with respect to GHG emissions, nitrous oxide emissions, and sulfur oxide emissions. 7)Additional amendments. AB 674 includes new language in proposed 354 (c) (1)(I) which states, "The extent to which the incentives provided pursuant to this section contribute to achieving the state's distributed generation and combined heat and power goals." Currently, there is no statutory requirement for the state to meet distributed generation and combined heat and power goals. Measures have been introduced to implement goals made in the Governor's 2015 Inaugural address, which included goals for increased use of distributed energy resources to meet California climate goals. AB 674 Page O The author may wish to consider striking this paragraph. AB 674 uses the phrase "reservation capacity" in Sections 354(b) (2)(A), (B), (C). The author may wish to consider changing this to "reserve capacity" to reflect typical nomenclature in rate plans. 8)Prior Legislation. 2013: AB 327 (Perea) requires electrical corporations to submit plans for deploying distributed energy resources and for the PUC to approve those plans. Chaptered. 2013: AB 427 (Mullin) would exempt bottoming cycle combined heat and power from DLCs. Failed in Assembly Utilities and Commerce Committee. AB 674 Page P 2014: AB 365 (Mullin) proposed finding and declarations related to clean onsite generation and nonbypassable charges. Failed in the Senate. 2014: AB 2441 (Mullin) would create a pilot program to exempt up to 500 MW of "clean on-site generation" (as defined) from departing load charges. Failed in the Senate. 2014: AB 2649 (Mullin) would specify that departing load charges applied to military facilities would be calculated based on generation delivered through the meter to the military facility. Failed in the Senate. 9)Suggested Amendments. 354. (a) As used in this section, "clean distributed energy resource" means a facility that is located on the customer's premises and generates electricity, or electricity and useful heat, where the electricity generated is used for a purpose described in paragraph (1) or (2) of subdivision (b) of Section 218, and that meets either of the following requirements: AB 674 Page Q (1) It meets all of the following criteria: (A)Produces emission of carbon dioxide (CO2) at a rate per megawatthour, accounting for waste heat recovery, where applicable, and savings on transmission and distribution losses, that is less than the emissions of CO2 from the marginal generating unit dispatched to meet the demand on the electrical grid that is avoided by the electricity generated by the clean distributed energy resource, as determined by the Energy Commission as of January 30, 2016.Produces greenhouse gas emission that are less than that which is determined by the commission pursuant to Section 379.6(b)(2). (B)Has an oxide of nitrogen (NOx) emissions rate, including credit for waste heat recovery, when applicable, that is less than or equal to 0.07 pounds per megawatthour, or a lower NOx emissions rate that the State Air Resources Board determines reflects the best performance achieved in practice by existing electrical generation technologies pursuant to Section 41514.9 of the Health and Safety Code.Produces nitrous oxide and sulfur dioxide emissions that are less than allowed for advanced distributed energy resources as specified in Section 379.8. (C) Has a nameplate rated generation capacity of 20 megawatts or less. (D) Is sized to meet the electrical demand of, or use the available waste heat of, the customer that will be served by the generating facility. (2) It is an "eligible renewable energy resource" pursuant to the California Renewables Portfolio Standard Program (Article 16 (commencing with Section 399.11)), has a nameplate rated AB 674 Page R generation capacity of 20 megawatts or less, is sized to meet the electrical demand of the customer that will be served by the generating facility, and will not otherwise be addressed in the commission's implementation of Section 769 or 2827.1. (b) To the extent authorized by federal law, by July 1, 2016, the commission shall require each electrical corporation to do the following for customers served by clean distributed energy resources installed after January 1, 2016 the commission analyzes rate impacts and make a finding that the impact will not create a shift in costs to other customers of an electrical corporation that are not offset by a commensurate benefit to those other customers, specifies a minimum reliability requirement to ensure that benefits to the electricity system are realized, and specifies optimal location requirements: (1) Collect all applicable nonbypassable charges fixed, implemented, administered, or imposed by the commission based only on the actual metered consumption of electricity delivered to the customer through the electrical corporation's transmission or distribution system. All charges shall be at the same rate per kilowatthour as paid by other customers that do not employ a clean distributed energy resource under the electrical corporation's applicable rate schedule. (2) (A) Calculate areservationreserve capacity for standby service, if applicable, based on the capacity needed by an electrical corporation to serve a customer's electrical demand during an outage of the clean distributed energy resource providing electric service for that customer. (B) Initialreservationreserve capacity shall be established by the customer for a minimum of 12 months based on the clean distributed energy resource generation technology's historical AB 674 Page S operation, the number, size, and outage diversity of the clean distributed energy resource, and the annual average reduction of customer load that could occur during an outage. (C) If after the initial 12-month period, the electrical corporation reasonably determines that thereservationreserve capacity does not reflect the customer's actual standby demand averaged over the previous 12 months, the electrical corporation shall modify thereservationreserve capacity once every 12 months to reflect the customer's actual average annualreservationreserve capacity based on the same criteria used to establish the initialreservationreserve capacity. Calculation of actual average annualreservationreserve capacity shall exclude the customer's electrical demand served by the electrical corporation within 24 hours following an outage of the clean distributed energy resource resulting from any event on the electrical corporation's transmission or distribution grid that is outside of the customer's control that requires the customer to reduce onsite generation. (c) The commission shall specify a minimum reliability requirement to ensure that the benefits to the electricity system are realized and require performance reporting by customers to verify that facilities are providing benefits consistent with the statute. (d) (1) By July 1, 2021, the Energy Commission, in consultation with the commission, shall report on the impacts of this section to the Legislature and the relevant policy committees of the Legislature in regard to all of the following: (A) Avoided transmission and distribution costs. AB 674 Page T (B) Avoided energy losses. (C) Wholesale electricity market prices. (D) Electricity costs to ratepayers. (E) Air quality. (F) Emissions of greenhouse gases. (G) Job creation. (H) Energy reliability.(I) The extent to which the incentives provided pursuant to this section contribute to achieving the state's distributed generation and combined heat and power goals.(2) The report to be submitted to the Legislature pursuant to this subdivision shall be submitted in compliance with Section 9795 of the Government Code. (3) The requirement for submitting a report pursuant to this subdivision is inoperative on July 1, 2025, pursuant to Section 10231.5 of the Government Code. 10)Support and Opposition. According to supporters, AB 674 "removes utility-imposed fees charged to customers of clean distributed generation for energy generated and consumed on-site, and instead requires AB 674 Page U them to pay all applicable fees based only on electricity purchased from a utility through the grid." The California Manufacturers and Technology Association supports AB 674 if amended to provide include customers who installed clean distributed energy resources prior to January 1, 2016. According to the Office of Ratepayer advocates, AB 674, "?would unfairly burden other utility customers with paying for the resulting revenue shortfall. It would also set a precedent for other customers groups to seek similar exemptions to nonbypassable charges." PG&E opposes AB 674 because it increases rates for some customers for the benefit of others and raise concerns about the definition of clean generation. SDG&E opposes AB 674 on the basis that this is legislative mandates on rate design and restrict the CPUC from setting rates and would allow power that is not as clean as utility-provided electricity to qualify for the exemption. SCE raises a similar concern that the type of generation that would receive an exemption from charges would not be as clean as utility-provided electricity. REGISTERED SUPPORT / OPPOSITION: Support AB 674 Page V Bloom Energy California Large Energy Consumers Association California Manufacturers & Technology Association (if amended) Capstone Turbine Corporation Caterpillar Inc. Doosan Corporation DE Solutions, Inc. EtaGen Inc. Peterson CAT Qualcomm TechNet Western Energy Systems Opposition AB 674 Page W California Coalition of Utility Employees (CCUE) California State Association of Electrical Workers Office of Ratepayer Advocates Pacific Gas & Electric San Diego Gas & Electric Southern California Edison Analysis Prepared by:Sue Kateley / U. & C. / (916) 319-2083