Apr 2017

PACE

PACEI’ve just begun exploring a financing tool called Property-Assessed Clean Energy (or PACE), which can fund both commercial and residential conservation and renewable energy upgrades. PACE not only makes it possible for people to do things like change their wasteful old infrastructure or add rooftop solar, but more important, makes them immediately cash-positive. This is great news for folks who may have been interested in making changes they knew would pay for themselves in time, but hesitated when they thought about shelling out cash today and then waiting 5 or 6 years for that benefit. With a well-designed project, they can save more than they spend in year one!

PACE allows businesses to do efficiency upgrades there may not have been funds for in expense or capital accounts. Many companies (and even more non-profits) have been deferring maintenance for years due to budget reasons; leaving them stuck with old, inefficient lighting, insulation, or HVAC systems. PACE can allow them to make overdue upgrades, unlocking HUGE savings that will continue even after those savings have finished paying for the improvements. And PACE projects are typically designed to begin making positive contributions to cash flow immediately.

PACE also eliminates sticker-shock for homeowners who’ve dreamed of reducing their dependence on the power grid by putting solar panels on the roof or a windmill in the pasture. Projects can be done with no money down and designed so the annual cost of the system is less than the money they save on their utility bill. And if they move, the PACE deal stays with the house, just like the solar panels. A study done last year showed that PACE houses increased in value faster than comparable homes and sold for higher prices than comps in their real estate markets.

Over the next week or so, I’m going to sit down with some PACE experts as well as a local company that just completed a PACE project last fall. I’ll report on what I learn, so stay tuned.

The local grid, utilities and DERs

I’ve written before about my local electrical cooperative’s approach to solar energy. Today I got the coop’s annual report in the mail and the announcement for their annual meeting in a couple of weeks. Since I’m nominally a stakeholder (although technically a cooperative, Beltrami Electric is a member of Touchstone Energy, a Virginia-based federation of about 750 local energy utilities that in some ways seems more like a corporation than like a coop—but that’s a story for another day), I’ll probably attend. The annual report includes an advertisement for their “Northern Solar” project, which is coming soon. It consists of an 80-kW DC community solar array. You can “buy” the output of the 180 450 kWh/yr panels in amounts ranging from half a panel to your total annual usage. Or you can subscribe to receive your power from the array when it is completed, and pay an extra fee of about 5¢ per kilowatt hour each month to get solar electricity.

NSol

While I guess it’s a good first step, I have a couple of issues with the plan. First, is the utility actually going to sell only the array’s actual production? How many customers can the array accommodate? Will the utility turn away customers willing to pay a higher price (50% higher than the regular rate) for their electricity, given there will be absolutely no way for the customer to tell what “flavor” of electricity is actually being delivered to them? What’s the fallback plan if the utility has X number of subscribers but it’s cloudy all month and not a lot of power is produced? Who gets the solar power in that scenario, and who gets dropped down to the standard (but lower-cost) electricity? Or if solar output is jus a fraction of what’s expected in a given month, do all customers just end up buying more “regular” power at the lower rate?

This scheme is so full of potential problems I’m surprised the utility prefers it to net metering household rooftop solar. The coop’s objection to net metering a couple of years ago was that if some customers used rooftop solar panels or windmills to lower their metered usage, it would transfer the “fixed costs” of the system to the rest of the users. According to the utility’s Energy Services and Facilities Manager,

historically electrical service has been sold based on the volume of electricity one uses, most do not understand that much of the cost is actually for the operation and capital expense of the delivery, transmission and generation systems, which must be constructed to meet the consumers combined peak usage period. The actual variable expense to produce a given volume of kWh over a period of time is a small portion of the total cost, basically it is fuel cost. 



This seems like an accounting issue to me. What he’s basically saying is that the price of a kilowatt hour of electricity is based on two things, the (fuel) cost of the energy and the cost of the infrastructure needed to get it to you—but they lump those two costs into one and don’t want to consider them separately. Seems to me it would be pretty simple to figure out the cost of the infrastructure and charge everybody connected to the grid an equal portion, and then bill customers for the actual energy they use. That way, even somebody who was producing 100% or more of their monthly needs could still be billed an access charge that covered their “share” of the infrastructure as long as they chose to stay attached to the grid. That seems like it would be fair to everybody. And not impossible to do—according to the annual report, 70% of the coop’s operating revenue was spent on “Cost of Power” and 8.1% on “Maintenance and Operations.”

In order to try to understand this from the utility’s point of view (and understand what might motivate them to embrace change), I read a white paper today, published by Tesla subsidiary SolarCity’s Grid Engineering division, called “A Pathway to the Distributed Grid.” The paper said that estimates for the investment needed to modernize the U.S. grid between 2010 and 2030 exceed $1.5 trillion. SolarCity’s pitch is that distributed energy resources (DERs) are essential to creating a 21st century grid—not just because customers want them, but because they’ll make the system more robust and resilient, and a lot less expensive.

netbenefit

Using data from Pacific Gas and Electric’s (PG&E) 2017 General Rate Case filing and standard economic models from the California Public Utilities Commission, the paper produced a benefit-cost analysis that estimated net societal benefits to California of more than $1.4 billion by 2020 from implementing the DERs (basically rooftop solar with batteries and smart inverters) projected to be deployed between 2016 and 2020. While California’s savings was admittedly higher due to the high cost of kilowatt hours there, the study suggests savings could be achieved anywhere by implementing DERs.

The benefits came in two flavors: direct savings from power generated by the DERs, and reduced or avoided costs from lower transmission requirements on the system. Higher usage, especially at peak-load periods, increases the marginal cost of power by using higher-cost generation or buying power on the market. And higher usage drives infrastructure investment and wears out equipment faster (transformers and transmission lines operating near the top of or above their specs are less efficient and wear out years sooner). The study concluded that “DERs reduce the net load at individual customer premises. A portfolio of optimized DERs dispersed across a distribution circuit in turn reduces the net load for all equipment along that distribution circuit. Distribution equipment, such as substation transformers, operating at reduced loading will benefit from increased equipment life and higher operational efficiency.”

wheel

The problem, the paper suggests, is that a series of perverse incentives encourages utilities to avoid DERs. A perverse incentive occurs when a decision-maker is rewarded for taking an action that is not in the customer’s interest (or oftentimes even her own) because of economic rules designed long ago to meet conditions that no longer apply. Specifically, most electric utilities are regulated under a “cost plus” pricing model, which “compensates utilities with an authorized rate of return [in the form of the rates they are allowed to charge] on prudent capital investments made to provide electricity services.” The fact that rooftop solar, batteries, and smart inverters are not owned by the utility is the problem, because the regulatory model gives utilities a “fundamental incentive…to build more utility-owned infrastructure in order to profit more” by boosting their rates. This incentive “conflicts with the public interest as the grid becomes more customer-centric and distributed.” Utilities expand their infrastructure investments because that allows them to charge more—California’s rate base has doubled in the last decade while consumption of electricity has been flat.

CAconsumption

So you can hardly blame the utilities from fighting DERs. They think DERs are going to have a negative effect on load levels during sunlight hours and then add nothing during peak usage hours in the evening. But even if they could be convinced that battery storage and smart inverters offered a legitimate value-add, they are still incented against DERs based on outdated regulations. The challenge is to convince utilities and their regulators to move to a new paradigm where they are well-compensated for doing what society actually needs them to do. That’s not unlike the idea I mentioned earlier, of splitting the cost of energy into an infrastructure part and a power-generation part. Tomorrow I’ll read the coop’s financial statement in the annual report more closely and in a couple of weeks I’ll attend the annual meeting; maybe something will occur to me.

Alternative Energy and Politics

I’m becoming very interested in solar energy lately. To put that more accurately, now that I’ve completed my dissertation I’m taking some time to focus on a subject that has always interested me. I’m following Elon Musk’s example (when asked how he had learned enough about rocket science to start Space X, Musk said “I read a lot of books”) and reading a lot about the science of solar energy today and the ways it is being implemented in the US. The science, it turns out, is pretty straightforward. The complications are in the economics, because they have a whole lot more to do with subsidies, tax rebates, utility company policies and the like than they do with straightforward issues like cost and output.

Being a historian, one of the ways I’m looking into solar energy is historically. There hasn’t really been a whole lot written about the recent history of renewable energy in America (so maybe that’s a project for me). I ran across a recent article published by the Australian National University in a volume called Following the Sun. The article begins:

A popular aphorism holds that politics is not the business of changing things, but of keeping things the same. In the history of solar energy research, politics has never been far from the heart of the matter and, with it, have been the opposing tensions of progress and stasis – changing things versus keeping things the same. (“Solar energy in changing times,” p. 69)

This got me thinking about Elon Musk’s other company, Tesla. In addition to simply executing their plan with excellence, the genius of Tesla was clearly that they made all-electric cars sexy. I remember shaking my head years ago when the company announced they would make the Roadster first, beginning in 2008. Tesla sold 2,450 Roadsters between 2008 and 2012 at prices beginning at $109,000. The Model S began shipping in 2012, when Tesla produced 2,650 of them. It won Motor Trend’s Car of the Year Award in 2013 and Tesla has shipped over 150,000 of them to date at prices beginning at $71,500. Later this year, Tesla promises to begin shipping the $35,000 Model 3 this fall. The company is planning to build 500,000 units annually, and already has over 400,000 reservations secured with $1,000 deposits. Musk hopes to produce models even less expensive than the Model 3, announcing in April 2016 that “With fourth generation and smaller cars…we’ll ultimately be in a position where everyone can afford the car.” This is like Henry Ford’s vision for the Model T, so perhaps it’s appropriate that yesterday Tesla’s market capitalization passed that of the Ford Motor Company.

Not only has Tesla positioned itself as the first American auto maker to seriously challenge the big three EVER, but the popularity of its all-electric cars has created enough excitement in the industry that most manufacturers have rushed to offer their own (for example, VW e-Golf, the Chevy Spark and Bolt, the Fiat 500e, Ford Focus Electric, Nissan Leaf, and BMW i3) as well as an even wider range of “extended range” plug-in hybrid cars that sport electric drives as well as small gas engines. The point of all this, I think, is that although hybrid and all-electric cars qualify for generous tax rebates, that’s just icing on the cake. People want these cars because they rock.


cars


I haven’t seen the documentary “Who Killed the Electric Car” yet (it’s in my Netflix DVD queue), but I wouldn’t be at all surprised to find out that the story revolved way too much around government policy and industry lobbying to prevent the government from mandating cars like the GM EV-1 (California’s Air Resources Board had ruled in the early 1990s that all car companies selling in the state would need to make 2% of its fleet emission-free by 1998). Makes me wonder about the history of solar energy—was solar too wrapped up in the whole turn-down-the-thermostat-and-put-on-a-sweater, Jimmy Carter image of both defeatism and government intervention?

I have two thoughts about this: first, that it might make a good thesis for a historical study. Second, if that’s the case, what would it take to move solar from a Jimmy Carter place to an Elon Musk place? That’s what I’ll be thinking about, as I continue to study the subject (incidentally, I’m not at all convinced that Musk’s other company, Solar City, has cracked that code. But I’ll be looking closely at it to see).