Siemens Energy Finance Week – Cambridge, MA
Francis O’Sullivan
February 15th, 2017
The Changing Utility Landscape – Complex
Realities and their Diverse Drivers
The new energy landscape – How wind and solar have joined energy’s big table
2
3
The past decade has borne witness to tremendous growth in wind and solar
generation capacity across the US – Together, wind and solar now account for
nearly 60% of all new annual capacity additions
0
50
100
150
200
2009 2015
Solar
Wind
Hydro
US hydro, wind and solar installed capacity
GW
Source: National Renewable Energy Laboratory, Lawrence Berkeley National Laboratory, Solar Energy Industry Association
0
15000
30000
45000
60000
75000
Other
Illinois
Iowa
California
Texas
2014 Cumulative capacity by state
MW
0
4000
8000
12000
16000
20000
Other
North Carolina
New Jersey
Arizona
California
Solar PV
Wind
71 GW of
new
capacity
4
Solar PV generation capacity has experienced secular growth across all scales
of deployment – Utility-scale facilities dominate capacity additions but residential
units are driving overall installations
0
2000
4000
6000
8000
10000
12000
14000
2008 2009 2010 2011 2012 2013 2014 2015 2016E
Utility
Commercial
Residential
Annual PV capacity additions by system type
MWDC
0
5000
10000
15000
20000
25000
30000
2016E
Other
Maryland
Texas
New York
Utah
Nevada
Massachusetts
North Carolina
Arizona
California
Cumulative PV capacity by state (2016)
MWAC
In the US, more than 60% of all PV capacity is in
the form of utility-scale units
Source: MIT Analysis, National Renewable Energy Laboratory, Lawrence Berkeley National Laboratory, Solar Energy Industry Association, European Photovoltaic Industry Association
5
The rapid adoption of residential solar points to the rise of a more proactive
energy consumer – There are now more than 1M solar PV installations in the US
and more than 900k are residential scale
Cumulative residential-scale PV installations in the United States
Source: MIT Analysis, National Renewable Energy Laboratory, Lawrence Berkeley National Laboratory, Solar Energy Industry Association
0
200,000
400,000
600,000
800,000
1,000,000
0.00%
0.25%
0.50%
0.75%
1.00%
1.25%
1.50%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Number of Systems % of households
Residential PV systems
Single-family detached houses
Though only 1.3% of all US households have PV, in some markets
levels are much higher: HI 25%, CA 7%, AZ 5%
The US surpassed
1M residential PV
installations in Q2
2016
6
Though overall US solar capacity is still modest relative to the overall
system, in some states solar now plays a meaningful role in overall
generation – Led by CA, four states now generate more than 6% of their total
electricity from solar
0
2
4
6
8
10
12
14
CA HI VT NV MA AZ NJ NM NC US
Solar generation as a percentage of total net generation
Percent (Oct 2015 to Sep 2016)
Source: MIT Analysis, National Renewable Energy Laboratory, US Department of Energy
> 6% of net generation
from solar
2.5-6% of net generation
from solar
1.2%
11.7%
7.5%
6.7% 6.3%
4.8% 4.4%
2.8% 2.8% 2.6%
7
The rise of residential PV has been driven by a few innovators focused on the
selling of solar as a value product – The combination of “value pricing” and
financial innovation is at the heart of the residential business model
Source: US Department of Energy, Corporate filings, SEIA
67 90
120 149 139
168 203 221
20
37
49
50 46
66
61 59
24
35
34
37 37
42
56 68
138
117
125
174 226
222
242
243
0
100
200
300
400
500
600
Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15
Quarterly US residential PV installations by installer
MW
Others
Scale is key to the success
of the residential solar PV
business model
8
Solar PV’s evolving competitiveness
Over the past five years the competitiveness of utility-scale PV in the US has
improved dramatically with PPA prices falling by 70% or more – PV contracts
are now being signed for $40/MWh or less
9
Utility-scale solar PPA prices evolution since 2006
$/MWh
Sources: Bloomberg NEF, “U.S. PPA Market Outlook.” 07/08/15. GTM/SEIA, “US SMI Q1 2015.”
NV Power signed a
utility-scale solar
PPA in August ‘16
for $34/MWh
During H1 of 2016, the merchant value of solar generation in CA fell to less
than $20/MWh as it swamped the daytime market – Solar support policies are
driving this dynamic, which is now also materially impacting gas assets
10 Source: Bloomberg New Energy Finance
Merchant value of CA solar versus associated PPA prices and levelized cost
$/MWh
Pricing against the benchmark – How Value Pricing has driven the rise of the
rooftop solar sector
11
12
The residential solar business differs appreciably from the utility-scale model
and has involved cost decoupling – “Value Pricing” is a more prominent feature
in the residential solar market
Utility-scale PV – ~5MW and above Residential-scale PV – up to 10kW
- Utilities driving market by need to meet RPS
targets
- Strong competition among developers to
secure PPAs
- Pricing strongly linked to underlying cost
base
PV Pricing Mechanisms
- Emerging awareness and demand among
homeowners
- Installers developing innovative business
models reducing upfront costs to owners
- “Value Pricing” linking solar prices to local
utility rates
Source: MIT Analysis
The residential lease or PPA is not structured to reflect underlying system
costs, but to offer value relative to utility supplied power – Naturally, the
residential PV model is sensitive to local utility tariff levels and their structure
13
Range of future utility
prices: PU, t
Power Price
¢/kWh
Years 0 1 2 3… …N
Predefined future PV lease
or PPA price: PPV, t
PU, 0
PPV, 0
Source: MIT Analysis, United States Department of Energy, Company filings
Portfolio Average
Metrics:
- Generation: 1,391
kWh/kW
- PPA Price: $0.13/kWh
- PPA Escalator: 2.2%
“We believe that our primary competitors are traditional utilities that supply energy
to our potential customers” – SolarCity 10k
14
Data available for the residential market highlights how effective the “third
party owned” model is at Value Pricing – Though expensive it does help
eliminate barriers like high capital cost and the need for tax appetite
Source: California Solar Initiative and other state reporting systems
Average system price by major state market and ownership type
$/Wp
$0
$2
$4
$6
$8
$10
$12
2009 2010 2011 2012 2013 2014 2015
AZ
CA, Host-owned
CA, 3rd-party
MA, Host-owned
MA, 3rd-party
MD
NY, Host-owned
NY, 3rd-party
Even with falling system cost prices in markets like
MA have barely moved since 2012
Of course, the ability to sell higher priced systems is advantageous for the
residential business model – Higher priced contracts provide higher cost-basis
for ITC purposes and this helps release cash for growth
15
- The cost method is the most straightforward and is based on the assumption that an informed
purchaser will pay no more for a system than the cost of replacing it.
- The market method relies on data from recent sales of comparable systems.
- The income method estimates FMV based on the cash flows generated by the system.
Allowable methods for establishing the solar ITC cost basis:
How the ITC cost basis is established based on the “income method”
Source: MIT Team Analysis
In many contemporary US residential solar markets, allowing the ITC cost
basis to be established via the “income method” amplifies the subsidy by
50% or more – In highly competitive markets this amplification would be
eliminated
16
UnsubsidizedCost
Lease PV Subsidy PV Total IncomePV
Lease PV Subsidy PV Total IncomePV
Subsidies:
ITC: $0.98/W
MACRS: $0.26/W
$4.24/W
Cost Method Income Method
$3.00/W
Subsidies:
ITC: $1.45/W
MACRS: $0.39/W
$3.00/W
$4.84/W
$3.25/W
Source: MIT Team Analysis
17
Distributed energy resources – Their technical benefits and the dynamics that
drive customer adoption
18
DER adoption and its capacity to add value across the system is ultimately
linked to its economics at various scales – The realities of economies of
scale are well illustrated by the variation in contemporary PV costs
48
98
229
0
50
100
150
200
250
300
350
30 MW Utility-scale 1.5 MW Community 1 MW C&I Rooftop 5 kW ResidentialRooftop
Premium on utility-scale
Utility-scale
LCOEs of NY solar PV installations of various scales given 2015 system pricing
$/MWh
Source: MIT Analysis
Then why distributed? – Distributed energy resources can deliver a broad suite of
benefits to the power system, some site specific and some system wide. Locational
values may add sufficient value to justify distributed opportunity cost
19
Locational Non-locational
Power system benefits - Network capacity
- Constraint mitigation
- Loss reduction
- Voltage control
- Power quality
- Reliability and resiliency
- Energy
- Firm capacity
- Operating reserves
- Price suppression
- Price hedging
Other public benefits - Land use
- Employment
- Emissions mitigation
- Energy security
Source: MIT Analysis
20
Capturing the locational benefits that DER deployment can deliver requires a
bespoke quantification and assessment relative to the distribution
opportunity cost
Distributed Opportunity
Cost
Locational Benefits Locational Benefits
Bounds Distributed Opportunity
Cost Bounds
To
tal co
st d
iffe
rence r
ela
tive
to
hig
h
vo
lta
ge
($
)
Unit scale (e.g. MW)
LV MV HV
Net p
rese
nt v
alu
e o
f loca
tion
al b
en
efits
($)
To
tal co
st d
iffe
rence r
ela
tive
to
hig
h
vo
lta
ge
($)
Unit scale (e.g. MW)
Net p
rese
nt v
alu
e o
f loca
tion
al b
en
efits
($)
LV MV HV
Negative benefit-cost
gap
Positive
benefit-
cost gap
Locational benefits << distributed opportunity
cost
Locational benefits > distributed opportunity
cost in certain deployment
Source: MIT Analysis
Congested region
Thoughtful deployment of DERs to optimize distribution network performance
can yield significant locational value for DERs – However, optimized DER
deployment requires price signals to reflect this potential value
29 Source: MIT Analysis
Solar PV
HVAC Controls
Flat, volumetric tariffs Cost-reflective tariffs
Cost-reflective tariffs are central to aligning consumer DER adoption
behavior with system needs – With cost-reflective tariffs in place a more
optimized DER investment patter should emerge
30 Source: MIT Analysis
23
A New York case study highlights just how varied the value associated with
DER deployment can be and how sensitive this value is to economies of
scale
-5
0
5
10
15
20
25
-5
0
5
10
15
20
25
SD of Zonal Congestion Zonal Average Congestion
Zonal Average Congestion
Std. Dev. Of Zonal Congestion
Zonal average congestion across NYISO zones
$/MWh
Consider Long Island vs.
Mohawk Valley
Source: MIT Analysis
The path forward – Getting the incentives for an optimized system right
24
25
Net metering subsidizes residential PV more than utility-scale PV at the
expense of other customers – This has already produced conflict
Wholesale
energy price
Retail price
including
network
costs
Utility Customers
A B C
Network cost paid by customer per kWh
Energy cost paid by customer per kWh
System before A installs solar
…N
Wholesale
energy price
Higher retail price
with cost shifted
Utility Customers
A B C
Network cost paid to customer A per kWh
Energy cost paid to net-metered customer per kWh
System after A becomes a net solar seller
…N
Net-metered rate
paid to Customer A
Additional network cost paid by customers without solar
Utility Rate
$/kWh
Utility Rate
$/kWh
- When A sells power, she gets the retail price, while utility-
scale sellers get the wholesale price, often much lower
- When A stops covering any network costs, the retail rate
must go up so the other customers cover those costs –
plus the network cost paid to A!
26
However, the simple elimination of net metering or its replacement with some
energy-only approach will not solve the issue – The only mechanism for
efficiently integrating DERs is the adoption of cost-reflective tariffs
Time varying energy cost paid to customer per kWh
System A becomes a net solar seller
Additional network cost paid by customers without solar
Wholesale
energy price
Higher retail price
with cost shifted
Utility Customers
A B C …N
Time varying energy
price paid to
Customer A
Utility Rate
$/kWh
Energy cost paid by customer per kWh
27
Utilities now face competition on new fronts – Tariffs and electricity service
prices must reflect the real cost of these services and the value delivered by
utilities
1. Unbundle network (“delivery”) charges
from energy (“generation”) charges
and other “public purpose” charges
like taxes, conservation programs,
and renewable energy support
28
We need time and location-specific energy charges – Value of energy
consumption and production varies by time and location, and the energy
component of electricity tariffs must reflect this real value
2. Energy charges: hourly wholesale locational marginal prices (time
and location-varying), adjusted to reflect losses in distribution network
(approximations initially, metered eventually as AMI rolls out)
Could eventually give way to distribution-level locational marginal prices that
include local congestions in distribution networks
0
50
100
150
200
250
300
350
400
1 25 49 73 97 121 145 169 193 217 241 265 289 313
Long Island Hourly Locational Marginal Prices – Jan 1-14, 2015
$/MWh
29
We need cost-reflective network charges – Volumetric network charges do
not reflect true cost drivers in electricity networks or value of network
reinforcements
3. Network charges:
Peak-coincident network usage
charge to reflect long-run
marginal cost of network
expansion (and value of
network capacity deferral); and
Fixed charge to recover sunk
network costs (goal: minimize
distortions in marginal
incentives).
30
Public purpose charges, taxes, etc. distort competition and confuse value
signals in electricity markets
4. Other public purposes charges must be recovered in minimally distortive
manner to enable fair competition between utilities and other service
providers
0%10%20%30%40%50%60%70%80%90%
100%
Belgium
France
Germ
any
Italy
Netherlands
Spain
UK
California-Sce
Connecticut
Maine
Massachussets
New
Jersey
New
York
Texas
Canada -Ontario
Australia
Brasil
% o
f ele
ctri
city
bill
Taxes
Other costs
Networks
Wholesale
Other charges
31
Some concluding thoughts
- Wind and utility-scale solar PV are now at or very near the competitive frontier for new generation
investment in many US markets
- The continuing rapid growth in zero-marginal cost generation (particularly solar PV) will place further
downward pressure on wholesale power prices over the medium term
- DER innovation has yielded a set of technologies that provide new options for optimizing the grid, both in
terms of technical performance and cost effectiveness
- The economic and technical benefits that DERs offer only arise in operational circumstances that are
specific to the conditions of local and regional grid
- The rise of consumer-level DER adoption, and particularly that of smaller-scale solar PV systems has
come about through a combination of technology cost reductions and very generous deployment support
policies that often fail to appropriately reflect the cost-benefit balance of such technologies
- The business models that have driven rooftop solar adoption rely heavily on “value pricing,” and are
exquisitely sensitive to tariff structures, the ability to maximize cash yield from investment tax credits, and
the availability of counterparties interested in cash-yielding asset-backed security products
- The efficient realization of the benefits that DERs offer requires that tariffs are structured in a
disaggregated manner that accurately reflect the costs
- Cost reflective tariffs will enable the efficient realization of the broad set of benefits that DERs offer in a
manner that reduces conflict between traditional utilities and new energy service providers.