What are the implications of the Public Utilities Commission of Ohio’s recent PowerForward report?

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In 2018, the Public Utilities Commission of Ohio (PUCO), the state’s regulatory entity for electric utilities, commenced a multi-month research initiative entitled “PowerForward: A Roadmap to Ohio’s Electricity Future.” The intent of the PowerForward project was to review the status of Ohio’s electricity distribution grid and gather feedback on innovative technologies and policies from informed stakeholders. Consequently, PowerForward aimed to develop a “roadmap” to propel the state and its grid infrastructure toward modernization efforts and a better consumer experience. The report was released on August 29, 2018, after a series of topic-specific presentations by experts from March to July (i.e., “A Glimpse of the Future,” “Exploring Technologies,” and “Ratemaking and Regulation”) in the state’s capital of Columbus.

Ultimately, the PUCO heard from more than 100 speakers throughout this process, from a wide variety of perspectives (e.g., policymakers, electric utilities, engineers, industry, academia, environmental groups, and many others). Given the changing electricity generation mix (i.e., coal plants being decommissioned and more natural gas and renewables coming online), as well as new technologies and data demands on the consumer side, the report aimed to better discern the future of Ohio’s grid to meet the needs of businesses and residents alike. Historically, Ohio has not formally done much in the way of studying grid modernization issues, and, nationwide, grid modernization efforts have usually focused solely on updating aging infrastructure. Yet, considering the ever-changing nature of consumer demands, coupled with technological advancements, the time was ripe for the PUCO to cultivate a blueprint for the advanced grid which will encompass more electric vehicles (EVs), distributed generation, microgrids, and storage efforts.

Beyond the interesting case study of transparency and collaborative planning that the PowerForward process provided, the report itself did provide a solid overview of Ohio’s electricity grid, and how modernization and upgrade efforts were needed to provide flexibility and security in light of advancements in technology. Increasingly, consumers are adopting programmable thermostats, smart phone apps, and even their own onsite electricity generation, all of which necessitate enhanced two-way grid interaction. The report itself discussed the logistical components of an open platform and modernized grid, such as its architecture, storage, EVs, distribution system markets, ratemaking, and cost recovery and design. These Ohio-specific considerations were also intended to coordinate the four major investor-owned electric utilities in the state on approaches and electric security planning for the future, all of which have already filed grid modernization riders in PUCO dockets.

However, the report was intentionally brief, which inherently excluded other core considerations of interest, such as the pending gubernatorial election and impacts of the state legislature in guiding the direction of future energy policy for Ohio. This remains an incredibly important issue, given the power of the state legislature and the governor’s office in energy policy matters. This has been most prevalent in Ohio with regard to the renewable portfolio standard (RPS) dispute, where the goals and applicable technologies have been greatly deliberated over the past five years, even resulting in a two-year RPS freeze for additional study from 2014-2016. The PowerForward report only mentions Ohio’s RPS briefly as part of a rate design discussion, and, taken as a whole, seems to neglect state policy (e.g., net metering) and political considerations. This is an interesting oversight given the current, heated gubernatorial race between Republican Mike DeWine and Democrat Richard Cordray. As increased renewable energy, distributed generation and related efforts have a key interrelationship with the advancement of the integrated grid network, a deeper dive into the potential changes (or lack thereof) with state policy mechanisms seems like an unfortunate omission.

Nevertheless, a core topic that is discussed in the PowerForward report is energy storage, albeit in a broad stroke capacity. Energy storage has been shown both in academic literature and in practice to provide operational benefits to the electricity distribution system, especially with declining battery costs. Ohio ought to seize such technologies as a critical market accelerant to this transformation, particularly in terms of EV charging stations and virtual power plants in smart cities. Moreover, the PUCO should leverage the recent Federal Energy Regulatory Commission (FERC) energy storage rules adopted earlier this year to develop adequate state policies. The current challenge for the entire storage industry has been the lack of a reliable and scalable business plan with stable revenue sources. However, energy storage now has a federal regulatory backstop to be paid for their services. As a more tangible action step moving forward from PowerForward, Ohio should start to devise an effective payment plan for energy storage as a matter of state regulation. There is a need to clearly establish a steady revenue stream that would attract capital and support the cleantech industry within Ohio, as well as advance research and development on energy storage from the state’s utilities and institutions of higher education.

Further, storage ought to be supported to enhance grid reliability, particularly for intermittent renewables, given the decline in coal-based generation and the uncertain future for nuclear energy. Several pilot programs should be initiated to deploy modular nuclear capacity in Ohio within the next decade, principally to support energy parks, data centers, military installations and new load growth. Storage and renewables are co-dependent and could be co-located. The increasing deployment of renewables on the grid, on both sides of the meter, accelerates the need for more storage, while more availability of storage on the grid makes renewables, combined heat and power (CHP) systems, fuel cells, and demand management more attractive for future integrated resource planning.

Increased energy storage should also be integrated with EV charging and EV planning, as PowerForward does not drive this point home. This is a new and attractive growth market in the automotive sector in which Ohio remains a laggard state. One out of every seven jobs in the state has a direct or indirect linkage to the automotive industry, and therefore Ohio ought to protect this comparative advantage by adapting to new technologies entering this industry’s market. The prospect of energy storage also enhances the competitive nature of Ohio, especially as a deregulated electricity state, and wholesale electricity markets. Advanced storage would also offer protection from the declining reliance on coal-based generation and is a market ordering device for independent power producer (IPP) owned plants already struggling with flat electricity prices.

The importance of smart rate design needs additional attention, both in and beyond the report. This framework is vital for price setting for electricity services, and more is needed to encourage consumers to respond to price signals for behavior modifications. Moreover, regulatory reform for microgrids and the upgrading of current franchises would be a welcome change. Microgrids, in addition to renewables and clean technology, have also suffered from Ohio’s historic policy decisions. Moving forward, the uniqueness of community choice aggregation (CCA) laws offers a leadership opportunity for the state to allow more democracy and flexibility in rate structures, as well as the deployment or procurement of renewable energy sources. These unique electric service providers are key players in meeting shifting consumer demands for renewables, for instance, which have an obvious relationship to PowerForward-related issues such as consumer choice, electricity cost considerations, and grid modernization efforts; yet CCAs, enabled by the state’s market restructuring, are not mentioned as a key player in the report. Aggregation policies need to be advanced and harmonized with generation and PowerForward initiatives to create a stronger Ohio market grounded in customer service.

The State of Ohio is already a member of the PJM Interconnection market structure, which requires regional participation and strategies that will impact access and prices. The PowerForward report briefly mentions PJM as a key partner in this grid modernization discussion, but their operational and energy market planning efforts could be better utilized, as exemplified in their 2014 Renewable Integration Study with General Electric International. As more additions for generation occur behind the electric meter and increasing deployment of distributed generation appears requiring T&D modernization, the possibility of transformation increases. Ohio needs to dive deeper in the topics noted in the report and be a leader in supporting their citizenry, industries, cleantech sector, and manufacturers.

Through the themes of energy storage, EVs, rate design, and renewable energy integration, among others, PowerForward outlines the key issues Ohio needs to consider moving forward. It is apparent that Ohio is lagging behind other U.S. states with regard to these transformative electric power issues, such as smart grid, energy storage, microgrids, distribution energy platforms, performance-based ratemaking and transactive energy, cost recovery, rate design and rate base reform, and future electric modernization investments. One of the most interesting takeaways from the PowerForward report is the recommended next steps. Among suggesting additional planning assessments and grid investments by Ohio’s utilities, PowerForward pushes for the creation of collaborative workgroups (e.g., the Data and the Modern Grid Workgroup) to more narrowly focus on each of the important topics brought forth. However, many studies, and other states in a practical sense, have already investigated these issues ad nauseam. While focus on the desirability of local utility management of their distribution platform and the surrounding grid is interesting, more studies and taskforces seem unnecessary to postpone in Ohio, by years, the confrontation of known major market changes.

Instead, pilot demonstration projects utilizing various technologies, increased technical assistance to communities, customers, and end-users, and the use of PowerForward to foster economic development and a more modern Ohio grid is a strong strategy to progress in a shorter timeframe. Market forces, competition, environmental degradation, advanced manufacturing, workforce training and education, and international and domestic companies will not wait much longer for Ohio, which is the 7th largest energy user in the U.S., to speak with confidence and a sense of direction to move these grid modernization efforts into the 21st century. Additional taskforces and collaborative workgroups can be an integral part of these efforts, but more applied and actionable steps could truly help propel Ohio beyond the status quo and stimulate investment in the cleantech industry, smart cities, and EVs and autonomous vehicles, all of which will positively impact the state’s ability to attract international, human, and financial capital for the future.

To be specific, the best integrated outcome looking beyond PowerForward would leverage Ohio’s gas, renewables, storage, and EV strategies. Ohio has indigenous natural gas resources which will be part of the energy mix for decades, largely contingent upon at what price levels the markets will clear. Certainly, in the future, combustion turbine peakers, Public Utility Regulatory Policies Act (PURPA) qualifying facilities, IPPs, and coal-fired generation are likely to decline as they are replaced with grid and supply strategies of the 21st century. This transition is already beginning to happen, with more distributed renewables coming online and electric utility investments, such as American Electric Power’s 900-MW renewables initiative. In fact, it is this very juxtaposition that provides an opportunity for energy advancement by repurposing former plant sites to new technologies of the future, especially since the necessary grid infrastructure is already nearby. Utilities ought to be encouraged by financial mechanisms for investing in distributed grid infrastructure and the expansion of smart grid and energy storage technologies. Relatedly, building codes, and building energy management initiatives, would better address where a majority of electricity is used today.

Certainly, these are ambitious thoughts and tasks emerging from the PowerForward research project and resulting report, but such strategies are necessary if Ohio wants to remain competitive with its peer states with regard to capital and economic development from an energy lens. Grid modernization efforts are commencing in nearly every state across the U.S., including various strategies such as developing new business models, rate reform, etc., but Ohio needs to understand its unique attributes, barriers, and opportunities to move forward in a strategic and intelligent manner. Properly addressing these issues with applied steps, perhaps led by the state’s electric utilities, can truly prepare the state for energy storage, demand response, smart grid technologies, and beyond, and this diversity and transformation is forthcoming in the short term, if not already happening. Given the fact that energy-related institutions and processes are not static, Ohio needs to act now on the momentum built by the PUCO and the PowerForward buzz and enact pilot programs to accelerate a more secure and advanced energy future that is more resilient, responsive to customer demands, sustainable, and less disruptive, to enhance everyone’s well-being.

Blog by Michael J. Zimmer, Executive in Residence and Senior Fellow, Ohio University Voinovich School of Leadership and Public Affairs & Russ College of Engineering and Technology, and Gilbert Michaud, Assistant Professor of Practice, Ohio University Voinovich School of Leadership and Public Affairs. Edited by Elissa E. Welch, Project Manager, Ohio University Voinovich School. October 2018.

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Energy Storage Outlook for Ohio

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New research coming out of the University of Minnesota’s Energy Transition Lab indicates that standalone energy storage can now compete with and potentially displace new gas combustion turbines installed to meet peak demand—and be cost-effective after 2022.[1] Competitive forces and declining costs confirm this outcome in research conducted by consulting firm GTM Research/Wood Mackenzie. The analysis conducted by the Energy Transition Lab on the Minnesota power sector is predicated on calculations that require consideration of the environmental benefits associated with energy storage. In a comparison of energy storage and solar energy mix against a simple-cycle, natural gas peaking plant, researchers found that both the economic and environmental benefits prevail with energy storage because of factors such as the federal investment tax credit and the reductions in air pollutants (e.g., NOX, SOX, and greenhouse gas emissions). The report also indicates the need for updating modeling tools used by utilities and regulators for resource planning. Innovative cost-recovery mechanisms for new energy storage investments should be considered as well as supporting private investments in the future. We have seen this recently with stacking revenues adopted in California as an incentive to recognize both the supply and benefits of storage, thereby offering multiple revenue streams. If weighed in Ohio, this would build on the automotive, fuel cell and battery storage sectors already active in the state for stationary and mobile sources.

In many instances, Independent System Operator (ISO) and Regional Transmission Organization (RTO) rules for storage integration have been under scrutiny because the grid operators’ current structure limits many energy storage resources from participating in wholesale power markets. Over the next ten years, the U.S. requires more than 20,000 MW of additional peaking capacity to be added to the grid according to GTM Research/Wood Mackenzie. Almost 13,000 MW alone of storage is anticipated to come online in 2023-2027. Grid barriers and limitations were a critical finding of the recent notice of proposed rulemaking on energy storage and distributed energy resources by the Federal Energy Regulatory Commission in late 2016 (Docket Nos. RM 16-23; AD-16-20-000; www.ferc.gov). The lack of appropriate terms and conditions that foster the cost savings and benefits of energy storage is a national problem which the rulemaking seeks to address. Moreover, ISOs and RTOs must consider energy storage as a capacity and grid resource and include energy storage in increasing market roles. The benefits of such inclusion are increased customer service through delivery stability, improved integration of distributed and renewable energy resources, ongoing cost reductions for the customer, and long-term and strategic performance enhancements that benefit all parties and stakeholders on the grid. FERC is expected to finalize these rules in 2018.

As these findings relate to the State of Ohio, significant value and economic outcomes may exist here for energy storage. This is fostered by an increase in forecasted renewables above 2.2% of the state’s electric supply and increased needs for new electric capacity from plant life retirements of older nuclear and coal-fired plants rendered uneconomical by increased natural gas supplies from the Utica Shale. The findings also support the desirability of incentives and rate design to increase the market penetration of energy storage in Ohio. Growing opportunities for energy storage has the added benefits of bolstering renewable energy integration into the fuel profile and modernizing the transmission and distribution (T&D) grid statewide: both goals of the PowerForward initiative led by the Public Utilities Commission of Ohio (PUCO).

Therefore, greater development of energy storage in Ohio will require thoughtful leadership by the ISOs and RTOs working with the PUCO through this visioning process. Related factors to monitor in Ohio by PUCO, the utilities, and affected stakeholders include:

  • Load differentials which may exist between on peak and off-peak wholesale energy prices
  • Lack of strong and enforceable federal state and local policies to address greenhouse gas emissions for the future
  • Declining wholesale capacity prices and uncertainties regarding the ability of utilities to claim capacity credits for energy storage investments in resources
  • Frequency of fossil generation on the margin which diminishes the environmental benefits of grid-supported storage in the future
  • Low prices and small-market sizes for ancillary services (i.e., frequency regulation) at this time
  • Lack of retail rate options and incentives to support smart deployment of energy storage technologies in Ohio
  • Different capital cost structures for traditional capacity resources versus energy storage, with different performance guarantees and operating protocols
  • Increased desirability of promoting more effective integration of distributed and renewable energy resources

Ohio hosts a need for increased customer services and also many companies that are part of the supply chain for the national energy storage sector in the future. However, most of the manufacturing capacity for energy storage is occurring west of the Mississippi. Appropriate and effective incentives in Ohio would promote the long-term development of an energy storage manufacturing sector and supply chain hub in-state. The PowerForward proceedings are an important platform for consideration of these vital opportunities supporting industry leadership on storage. The next PowerForward sessions are scheduled for March 2018, and we continue to look forward to advising critical stakeholders on these opportunities for Ohio ahead. See https://www.puco.ohio.gov/industry-information/industry-topics/powerforward for additional information.

Blog by Michael J. Zimmer, Executive in Residence and Senior Fellow, Ohio University Voinovich School of Leadership and Public Affairs & Russ College of Engineering and Technology. Edited by Elissa Welch, Project Manager, Ohio University Voinovich School. March 2018.

[1] “Modernizing Minnesota’s Grid: An Economic Analysis of Energy Storage Opportunities.” University of Minnesota’s Energy Transition Lab. 2017. www.energytransition.umn.edu.

Community Solar in Ohio

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Community solar refers to solar energy projects with multiple owners, often living in geographic proximity to a project, who share the costs and benefits of investment in this shared resource. Often referred to as ‘shared solar gardens,’ community solar has been an emerging energy development across the U.S. in recent years, stimulated in part by an increasing number of states passing community or virtual net metering policies. This shared approach overcomes the significant barriers to physically owning a solar photovoltaic (PV) generating system such as site shading, roof orientation, zoning laws, roof/system size, lack of property ownership, etc. Beyond the high up-front costs to finance a solar PV system, such barriers are central impediments to more widespread PV deployment. Since 2013, 10 states have adopted community solar enabling legislation, half of which were passed in 2015 alone. Colorado has been a national leader in community solar, while the District of Columbia (2013) and Maryland (2015) have received praise for their more newly-implemented programs from the Interstate Renewable Energy Council’s Shared Renewables Scorecard. Nevertheless, Ohio is not yet one of the states to implement formal community solar enabling policies.

The community solar issue has stimulated numerous debates both across the country and in Ohio. Electric utilities, especially for-profit, investor-owned utilities (IOUs), have been at the forefront of these debates, noting decreased company revenues due to the increase of disparate, privately-owned energy generators feeding into their grid. They have also cited the difficulty for the grid to accommodate such non-dispatchable resources since community solar is usually deployed on the distribution grid rather than as a central power source (i.e., grid operators cannot reliably control its quantity and timing).

However, with a range of models, and increased accessibility and affordability, supporters argue that community solar is actually more economically efficient than traditional rooftop solar PV. They claim that aggregating consumers on larger projects to achieve economies of scale should also appeal to utilities, as community solar projects can be sited near substations or distribution feeders and reduce interconnection challenges.

The State of Ohio has been unsuccessful in passing formal community/virtual net metering laws or similar enabling legislation to incent the development of community solar through special purpose entities (a model in which individuals develop/join a business enterprise, and assume the associated legal and financial responsibilities to develop a shared solar project). However, some utility-based community solar programs have emerged, such as the 100 kilowatt OurSolar project in Delaware, Ohio. In essence, utility-sponsored community solar programs refer to when an electric utility owns and operates a project that is open to voluntary ratepayer participation. Some electric cooperatives, such as Consolidated Electric Cooperative for the OurSolar project, have been proactive to implement community solar programs for their ratepayers. However, Ohio’s IOUs, despite various announcements and commitments to deploy more solar and other renewables as part of their future generation portfolios, have largely ignored community solar as a market option. Instead, they have chosen large-scale solar PV projects as a fuel price hedge in their generation portfolios.

Localities or local/regional programs can also implement financial incentives and other solar PV deployment strategies, such as municipal property tax exemptions or abatements for residents or businesses who invest in solar energy. Independent of formal federal or state policies to encourage community solar, some localities and local/regional nonprofits have been promoting the expansion of community solar in Ohio. For instance, Ohio Solar United Neighborhoods (OH SUN) has developed several cooperative programs throughout the state, including ones in Appalachian Ohio (Athens area), Cuyahoga County, Dayton, Delaware County, Huntington area, Lorain County, the Mid-Ohio Valley, and Worthington. Even though these co-ops are not developing off-site shared arrays or gardens, they still meet community solar’s broadest definition by offering collective economies of scale in installation costs and the bulk purchasing of materials. These programs have helped accelerate solar PV growth in Ohio, particularly by overcoming market barriers such as high up-front costs and overall complexity of solar purchasing decisions.

UpGrade Ohio, a nonprofit in the Appalachian region, was recently awarded funding through the U.S. Department of Energy’s Solar in Your Community Challenge to initiate community solar in their region. Coined ‘Solar ACCESS,’ this project will employ a unique solar finance model that allows off-site investors to purchase shares in community solar arrays in the region. The first array, slated to be 704 kilowatts, will be cited on the Federal Hocking Secondary School in Stewart, Ohio. Though no formal state policy guides this process, the Solar ACCESS project still meets the common definitional requirements of community solar by providing power and financial benefits to multiple community members, allowing folks to participate in the solar energy economy without having to install a system on their own property.

It is through these types of local programs that Ohio can gain momentum in the development of community solar. The most far-reaching definitional bounds encompass models such as community group purchasing, on-site shared solar (e.g., PV on a multi-unit building), or community-driven financial models (e.g., ‘Solarize’ programs or solar co-ops). However, off-site community solar, such as through UpGrade Ohio’s new program, perhaps offers the largest benefit by opening market access to nearly anyone, typically within an electric utility’s service territory. These types of programs achieve two key factors that most analysts argue define ‘true’ community solar: 1) for solar PV projects to include community members and positively impact local economies; and 2) for solar PV projects to aid in the transition toward community energy independence.

Ohio’s community solar market may also develop through utility-based models such as the OurSolar project. The state specifically has electric utilities that may be willing to explore and implement such programs, such as AEP Ohio and several of its rural electric cooperatives. In fact, a large percentage of the community solar projects across the U.S. are run by electric cooperatives or municipal electric utilities. Seemingly, these types of utilities will play a major role in the expansion of community solar in the immediate future, especially considering how cooperatives have access to supplemental fundraising and are unique in how they retain economic benefits for their member-owners. Moreover, because cooperatives mostly service rural areas, their land resources are ideal for large solar PV installations.

Community solar run by IOUs may be a path forward for Ohio, but this model still faces several uncertainties in Public Utilities Commission of Ohio (PUCO) and legislative discussions. These IOUs will be able to leverage benefits even further once grid modernization (i.e., PUCO’s PowerForward initiative) fosters better systems and an increased awareness of the benefits of distributed generation.

Formal enabling legislation such as community net metering may never pass in Ohio without a sizeable shift in the energy policy landscape, but grassroots leadership via small cooperative and local programs may stimulate a new community solar narrative for the state. In the interim, state stakeholder groups should be formed to study community solar strategies for Ohio, including utility billing arrangement options, facility size caps, how to include low-income populations, consumer protections, and a suite of other related issues.

CE3 Blog by Dr. Gilbert Michaud, Adjunct Assistant Professor & Cluster Analyst, Ohio University Voinovich School of Leadership and Public Affairs. Edited by Elissa E. Welch, CE3 Project Manager, Ohio University. August 2017.

Microgrid Financing Options to Facilitate Future Growth

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Michael J. Zimmer, executive in residence and senior fellow at Ohio University, was recently an invited speaker at The 4th Microgrid Global Innovation Forum held May 16-17, 2017 at George Washington University in Washington, D.C. Mr. Zimmer addressed issues and innovations on evolving microgrid financing options primarily in the U.S. With other experts on his panel, “Evolving Microgrid Financing Options,” he contributed to the deeper understanding of structures to secure microgrid financing and the changing infrastructure and policies affecting microgrids. Mr. Zimmer also serves as Washington Counsel for the Microgrid Institute since its founding in 2012, and advises its newly-created Microgrid Finance Group formed in 2016. Mr. Zimmer has guest lectured on microgrids in various classes at Ohio University, in local meetings sponsored by Upgrade Ohio, and in various national fora. In the following blog, Mr. Zimmer draws from and builds upon his recent forum remarks last month.

Microgrids represent one of the fastest-growing technologies in the electric utility industry today offering multiple benefits to the state, the utilities and the customers they serve. North America hosts the largest deployment of microgrids, closely followed by Asia and Europe. The key growth driver for the future will be in the commercial and industrial arenas that will grow to represent 30% of global markets. Commercial and industrial projects are primarily driven by cost and economic benefits of solar, combined heat power, energy storage and their interface especially for hospitals, data centers, military, universities, schools and healthcare facilities. Ohio has just started to examine these questions as part of it grid modernization proceedings launched in April 2017 by the Public Utilities Commission of Ohio (PUCO).

Noting that soft costs are 50% of the development costs for microgrids, there is an increasing quest to standardize the microgrid as service model including use of more sophisticated control systems, DC power flows, better storage technologies, and closer integration with advanced metering. For many decades, the transmission and distribution (T&D) sectors were solely served by the electric utilities. Now the question is arising as to who will modernize the T&D sectors in the future? Many  stakeholders, including energy service companies, equipment vendors, the five major technology and information management companies, foreign vendors and international utilities, startups, entrepreneurial companies and telecom companies, along with the electric utilities, are seeking to serve this $400 billion per year electricity sales and services market in the U.S. Electric power is one of the most capital intensive sectors in the national  economy today scheduled to spend up to $2 trillion by 2030 to modernize the aging U.S. electric system.

The microgrid derives its value from its interwoven complexity. This is exactly what makes quantifying its value so difficult and also makes the issues of capital access and financing more challenging. Government funding typically covers only a portion of the microgrid’s costs. For the remainder, microgrids tend to rely on variations of financing models that originated in other related industries. These include such tools as direct ownership, utility rate base treatment, vendor financing, energy service contracts, power purchase agreements, leasing, debt and bond financing, green and infrastructure banks and other clean tech energy model and tools in the state marketplace. As microgrids move from the pilot or demonstration phase to fuller commercial deployment, the quest arises for more financial models and disciplined structures to support financing ahead. Right now in the United States, that there are five major viable financing models:

  1. Special microgrid investment funds;
  2. Vendor financing;
  3. Energy service companies;
  4. Utility financing (in rate base or through unregulated special entities); and,
  5. Warehouse financing.

The best way to analyze microgrid financing is from the vantage point of risk management strategies. Key areas of opportunity to differentiate and create success for microgrid project financing include:

  • A capacity maintenance agreement with regular service for the project;
  • A minimum amount of capacity guaranteed from the microgrid system to ensure a minimum bill or baseline to support project financing;
  • A solid warranty from an investment-grade vendor ideally for 1-3 years;
  • An insurance policy covering certain extraordinary costs, performance and/or the efficacy of the system designed for the microgrid;
  • A battery disposal strategy of e-wastes associated with decommissioning batteries from the project as energy storage increasingly is part of a project; and,
  • Aggregation to create scale, diversify risk and support a more attractive regulatory outcome to diminish regulatory risks for the project.

Diving deeper into warehouse financing and performance—a form of integrated development finance for portfolios of sound, developed microgrid projects—is important for flexible financing at commercially-reasonable terms and interest rates to support project development and success. Warehouse financing should be coupled with smart incentives such as clean funding mechanisms (in the 21 states that offer that special funding), green banks or under the Smart Cities movement in the United States. Finally, technical assistance with small grants for technical services and predevelopment costs are desirable to support the warehouse financing strategy.

Warehouse financing builds a project pipeline that can access the capital markets more efficiently through securitization. Short-term development and aggregation of loans occurs that facilitate secondary market participation and lower the capital costs for projects. This financing could also be coupled with credit enhancement techniques to reduce risks and round out the capital stack for a microgrid project coming from foundation program-related investments (PRI’s), donor management funds or clean technology funds at the state level. These credit enhancements could take the form of guarantees, subordinated debt, loan loss and debt service reserves, or interest rate buy downs to diminish risks and attract private capital and lending.

Warehouse financing is already being used in the U.S. for energy efficiency, PACE loans, solar project development and also recently energy storage loans. Such loans often range from 10-20 years and carry interest rates of 5-6%, plus closing costs. The state repackages smaller loans to reach a certain value of closed loans at certain aggregated levels to create scale. These packaged loans are then securitized through the secondary capital markets and the loans are leveraged with ratios ranging from 4-8 times the original values reported by various sources in Connecticut and New York. Pennsylvania also participates in its energy financing strategy in a multistate warehouse for energy efficiency loans called “Warehouse for Energy Efficiency Loans,” or “WHEEL.” This program is administered by AFC First Financial and is used by states seeking access for clean energy lending and financing. WHEEL works through the National Association of State Energy Officials (NASEO), the Pennsylvania Treasury, Renewable Funding, and Citigroup Global Markets, to package these smaller loans that are sold to bond investors. Proceeds from sales after aggregated and bonds are issued, go to recapitalize original state funds. Strict lending criteria are followed and high minimum credit scores are sought for risk management. Contractors are trained in intake and origination to ensure quality control over such programs.

For microgrids to succeed in their financing goals, their financing strategies must be built from known successes, existing capital market frameworks and often states with Green Bank or Resiliency lending programs. Success in financing balances:

  • Leveraging existing contractor networks;
  • Consulting with the financial community for project development;
  • Identifying sustainable funding sources with long-term viability; and,
  • Engaging utility partners, ensuring knowledge of available rebates and including on-bill financing mechanisms with state utilities.

When thoughtfully conducted, less taxpayer or ratepayer dollars are utilized and these programs facilitate use of public-private partnerships—“P3” structures and mechanisms in the 36 states with P3 framework legislation.

Financing support must be demanded by vendors, project developers and microgrid leaders. The industry itself will not just happen as a matter of state policy or through utilities without a market-based demand from its customer base.

Related research from a National Institute of Building Sciences (NIBS) task force augments this discussion by looking at resiliency-based mortgage financing for residential and commercial/industrial applications. Resiliency suffers from a lack of commonly-defined terms, similar to the lack of standardization in defining a microgrid, and even P3s. For a microgrid project financed with resiliency considerations in the cash flow and income aspects, determinations will still need to be made about the quantity, additionality and nature of ancillary benefits from the project. These must be guided by the industry and will be based also upon state public service commission determinations. To secure resiliency benefits and additional cash flow, the microgrid must offer:

  • A determination of hazard/risk expressed in probabilistic terms over underwriting scenarios over one or more time periods;
  • Resilience offered by the microgrid, measured against a potential disaster event based on the level of risk and potential added improvement in resilience associated with the microgrid investment;
  • Evaluation of the dollar amount of losses avoided based on the micorgrid project’s resilience to a calculated hazard risk should be developed by the sponsor over the life of the loan and also on an annualized basis;
  • Value and/or net operating income should be reevaluated based on avoided losses created by enhanced resilience from the microgrid; and,
  • Negotiation of loan terms to reflect additional value from building the microgrid and the income streams associated with the project. The lead in both isolation of those streams and calculation methodology should come from the developers and the industry itself working closely with its vendors. Additional revenue streams would facilitate consideration of larger project loans, the inclusion of development phase, down payment reductions for private lenders or interest rate reductions in return.

Despite differences across international and domestic U.S. markets, access to market-based financing will facilitate the rapid growth of the microgrid industry in the coming decade. Some in the electric industry see microgrids as the next market iteration of solar, which has grown 800% in the period from 2010-2015. Solar expanded another 119% in 2016 alone. Financing is the primary growth factor and will serve as an essential catalyst for future growth of microgrids with energy storage.

CE3 Blog by Michael J. Zimmer, Executive in Residence and Senior Fellow, Ohio University Voinovich School of Leadership and Public Affairs & Russ College of Engineering and Technology. Edited by Elissa Welch, CE3 Project Manager, Ohio University. June 2017.

 

Key Policy Objectives for a Smarter Grid in Ohio

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Today’s electricity markets were developed in the preceding decades using prices set by the marginal cost of generation. These markets are not determined by physical laws, but by human constructs and economic principles. As such, we need to question established orthodoxies and design more effective market alternatives by embracing the proactive, innovative nature of programs like the Public Utilities Commission of Ohio’s (PUCO) PowerForward initiative. Market principles have a continuing role to play in these alternative regimes through large-scale procurement of competitive output from renewable energy plants, as well as through energy efficiency, demand-side management, and energy storage. The PJM Interconnection, Ohio’s regional transmission organization, has shown national leadership in this direction, but we need to ensure proper and accurate price signals—that provide the ability to finance and access capital—are part of the alternative delivery package.

A new market model is needed because the current system is flawed. Our current system does not guarantee sufficient price signals to maintain the high availability and capacity required for reliable electric service that we historically have been provided in PJM. It also does not achieve the deep levels of decarbonization required to sustain existing operations, nor maintain competitive market positions in public health, safety and welfare in Ohio. The default position has been the utility rate base choice, but that must change for the state to compete, attract business and foreign investment, maintain its talent base, and participate in the industries of the future.

New market frameworks are central to support projected customer demands and changes from advances in manufacturing, internet technologies, transportation, sales, etc. New markets with stronger and more accurate carbon price signals will incentivize clean energy investment rather than continuing subsidies that promote polluting historical fuels and dated equipment. New market models will also require spending to enhance and digitalize electricity networks to manage localized, multidirectional power flows and ensure resilient, reliable and stable electricity supplies. Electric utilities have generally ignored this opportunity for over a decade. Thus, transmission and distribution (T&D) modernization in Ohio will require increased investment by third parties, better capital access, and joint ventures and alliances with electric utilities to complete the necessary market reforms. While some utilities are selectively adapting operations, regulators must also increase the pace of modernization and provide more room for pilots and demonstration projects that foster third-party innovation.

Escalating shadow costs such as the cost of coal externalities, nuclear plant decommissioning, water and other public health impacts, are not calculated for continued fossil fuel use.  Other shadow costs that remain unaddressed in Ohio’s policy discussions include renewables intensity, coal health impacts (air emissions and waste toxics), methane releases, energy-water uses, and nuclear O&M and decommissioning expenses. Moreover, costs of providing system backup power storage are not reflected in the wind and solar levelized cost of energy or in their ultimate market price. There is no free ride ahead and not accounting for shadow costs does the system and the consumer a disservice.

Energy policies are increasingly geared towards expanding renewable energy as an end in itself. Yet the research literature indicates a low-carbon grid with a manageable level of costs will require the blending of nuclear, natural gas with carbon capture, combined heat and power (CHP), or other zero-carbon on-demand sources integrated with more energy storage. Redesigning markets solely to facilitate a very large uptake of renewable energy for its own sake will increasingly become economically challenging and requires more balance to succeed. These efforts could be strengthened by coupling them with goals in carbon reduction, resiliency, system modernization and maintenance of reliability. A stronger system benefits the state’s citizenry and the customers served by its utilities.

The term “smart grid” itself refers to a range of electric grid modernization efforts over the past several years. End-users and vendors seem to focus strongly on issues related to customer choice while electric utilities highlight increased reliability and resilience based upon new transmission investments. The development of a smart grid was established as a national energy policy more than a decade ago by the U.S. Congress in Title XIII of the Energy Independence and Security Act of 2007. State smart grid initiatives must utilize this federal framework that establishes several key criteria:

Increased use of digital information and control technology

  • Dynamic optimization of grid operations and resources with “cyber security”
  • Deployment and integration of distributed generation, including renewables
  • Demand response, demand-side resources, and energy efficiency deployment
  • Deployment of smarter technologies for metering, communications and distribution automation based on two-way interactions through technologies
  • Integration of smart appliances with consumer devices
  • Use and integration of advanced electricity storage, peak shaving technologies including plug-in electric hybrid vehicles and thermal storage air-conditioning
  • Timely information and control options to consumers
  • Standards for communication, interoperability of appliances and equipment connected to the electricity grid, and
  • Identification and reduction of unreasonable and unnecessary barriers to the adoption of smart grid technologies, practices and services.

The federal mandate to the states is clear, but has often been ignored over the past decade. Clearly, Congress has demanded an electric grid future that is more resilient, secure, efficient and reliable to foster new and desirable services through technologies. The corresponding state guidance should focus on removing barriers and impediments to fully achieve these Congressional goals. Any contrary state actions, or inactions, may risk preemption under existing law. Subsequent guidance on standardization has been developed from Engineering Laboratory at the Department of Commerce’s National Institute of Standards and Technology (NIST). NIST seeks a solid framework and roadmap for smart grid interoperability standards and additional R&D support. The Federal Energy Regulatory Commission (FERC) has also provided guidance on such issues as interconnection policies, integration of renewables, demand-side management and energy storage. States ignoring this clear-cut guidance to date operate at continuing peril and are not necessarily regulating in the public interest consistent with existing federal law.

The State of New York has attempted to offer leadership by allowing utilities to earn returns for their shareholders by advancing clean energy solutions rather than only by investing increased capital in the expansion of the greatest T&D capacity. This renders the utility more neutral and a more competitive and balanced player in the marketplace to improve the energy and financial efficiency of the state energy grid. By using more transparent price signals in retail energy markets, utilities will be able to deploy more renewable generation, demand-side management and energy-efficiency projects where they can address grid congestion in high-use areas. All users will benefit as the utility shifts to providing customers with the electric services and characteristics they seek to achieve instead of superimposing what regulators and utilities think they should want. The ratepayers will no longer be merely price takers, but increasingly drive the markets and quality of service through customer choice. Similar regulatory programs are being pursued in Hawaii, California, Massachusetts, Maryland, Texas and Connecticut. New reviews are being launched in Colorado and Illinois.

Ohio also needs an increased focus on measures to prevent blackouts, clear rules on cyber security and improved smart power grids. The role of providers and innovation is indispensable for enabling active consumers and providing them with a new slate of high technology options and increased levels of customer service. This will open up the market to move beyond the inherent limitations of a utility monopoly and the regulatory protections of those monopoly franchises set for markets in the 1930s. Already, generation has been deregulated, stranded costs have been paid, and non-bypassable charges should be deemed anticompetitive. Similar deregulated results have been achieved for independent third-party services by unregulated entities, distribution is increasingly facing deregulation because of the advent of technology choice, and the only vestige of continual need for monopoly services appears at the transmission level within the state.

In conclusion, this market transformation will be alleged to foster a death spiral and reduce profitability. However, such scare tactics are often advanced as a foil to maintain the status quo. Increased choices, diversification and fuel supply focused on the long-term goals of decarbonization offer an opportunity for new business services based on energy solutions: energy storage, electric vehicles and service, energy customer services, steam capture and waste heat service, demand-side management, on-bill cost recovery, new loan financing, water services, enhanced broadband,  and more centralized energy management of customer services, equipment and energy controls. Rural solutions will require flexibility to accommodate differences and scale from their urban counterparts.

With such a transformation, communities will be empowered to more closely manage their energy needs, provide better customer service for their citizens, and move to more benign energy choices. Demonstrative pilot program can show the opportunities of the future for enhanced quality of life.  Consumption and profits will rise based upon better suites of service choices and smarter operations in an increasingly digitalized world. Energy can become the tool driving urban and rural economic development for all customers.

The competitive future of Ohio, its manufacturing base in the clean tech industry, robust supply chain, retention of its STEM student talents, and human resource attraction hang in the balance for better future energy jobs. A 19th-century fuel orientation will not satisfy the market requirements of the 21st century. Only a smarter grid which fosters the new industry sectors for product design and energy solutions grounded in sustainability will secure our competitive advantage in energy.

CE3 Blog by Michael J. Zimmer, Executive in Residence, Ohio University Voinovich School of Leadership and Public Affairs & Russ College of Engineering and Technology. Edited by Elissa Welch, CE3 Project Manager, Ohio University. May 2017.

The Future of Energy Policy in 2017

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The economics worldview grounded in supply and demand for shale development is tempered by the salient question: Can we keep the current global financial system operating as we reach limits that are economic, geopolitical and price-driven in nature? This is a central question that the Trump Administration will face come January 20, 2017.

Also on the table:

  • Can the price of oil and other commodities be kept high enough?
  • Can the price of renewables provided by solar and wind trend low enough to replace or supplement the fossil fuel status quo?
  • Can we still keep the return on investment high enough to attract capital?
  • Can workers earn adequate wages to support higher energy prices and still buy necessary goods?
  • Will rising interest rates constrain debt access?
  • How will increasing inflation impact purchasing power and reconstruction of economic demand?

Often critical linkages are missed. Unless markets and companies remove barriers and offer near-term substitutes that replace energy products that are cheaper than currently available—without requiring a huge transition in machinery or infrastructure—the country is at risk for deep financial problems. Unbridled markets without socioeconomic balance or conscious and sustainable capitalism creatively destroy jobs via such innovations, increase debt burdens, and stretch the consumer’s ability to pay. This may also be part of the U.S. economic inequality and productivity decline in the past decade.

Global affluence seems to slow growth in OECD countries. Demographics and regulation fuel a lack of productivity (and increase costs) as more complexity with costs are shifted to the citizenry. Workers have less time to be productive in their jobs as shown since 2000. Monopoly and oligarchy concentrations in many U.S. industries foster suboptimal outcomes and inefficient rent transfers. These are reflected in predatory consumer pricing and price responses that exacerbate inflation and stranglehold economic principles.

Affluence can only be maintained with cheap energy—and it will likely not be from oil due to escalating production costs. And it will likely not be from coal because of environmental costs and other externalities. Nuclear is vulnerable to cost overruns of monumental risk and cost exposure. But time has shown that a strategy of cheap energy is short lived, and not based on values that endure.

Energy affluence can only be achieved with permanent value by efficiency, waste heat recovery, combined heat and power, demand-side management, building design efficiency, and/or increased supply diversity with renewables coexisting with nuclear. The role of natural gas will be to shape demand with an immediate supply of fuel for electricity. Government policy in the long-term is better served to cover the initial cost hurdles to facilitate the required energy transition.

Technology including energy storage, materials science, electrochemistry and IT solutions will optimize the end game and make a difference.

New business models and access to capital will be required to support this transition. This can only occur with regulatory reform and modernization that fuels market access to innovation and creative solutions that advance markets beyond the limits of the entrenched status quo.

The business opportunity is too great to not foster an all-of-the-above portfolio energy strategy that promotes innovation, technology, efficiency, and the value-added information delivered by it. These energy products and services have national value and export value that are not limited to the fuels themselves.

Otherwise, we will be stuck with 19th-century fuels, used in 20th-century infrastructure, wondering why we cannot compete and meet the escalating global challenges of the 21st century.

CE3 Blog by Michael J. Zimmer, Executive in Residence, Ohio University Russ College of Engineering and Voinovich School of Leadership and Public Affairs. Edited by Elissa E. Welch, CE3 Project Manager, Ohio University. January 2017.

The Clean Power Plan’s Legal Path

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Background

The Clean Power Plan (CPP) issued by the U.S. EPA in August 2015 represents a hallmark in regulatory and judicial actions.  However, on February 9, 2016, the U.S. Supreme Court stayed implementation of the CPP by a 5-4 vote pending judicial review at the lower court level.  This decision in no way reflects a decision on EPA’s rule itself.  Rather, the Supreme Court ruling—made before the death of Associate Justice Antonin Scalia—has simply delayed implementation of the EPA rule pending review at the U.S. Court of Appeals for the District of Columbia (DC Circuit).  The DC Circuit is scheduled to hear the case on June 2, 2016 with a decision to be rendered later in the year.  The DC Circuit is likely to be favorably disposed to EPA’s plan as our analysis below shows.  Their ultimate ruling is critical because if the Supreme Court is later deadlocked at 4-4 on an appeal of the DC Circuit’s ruling, then the DC Circuit decision will stand (although it could be reviewed again later once a full complement of nine justices is empaneled).

The CPP issued by EPA is based on Section 111 of the Clean Air Act (CAA) authorizing performance standards for both new and existing sources.  The plan seeks to reduce power plant emissions through state compliance plans (SCPs) to be implemented by 2022.  More detail on the CPP can be found here: https://www.epa.gov/cleanpowerplan.  However, despite flexible compliance mechanisms, 27 states and other manufacturing groups filed to appeal the CPP rule.

Prior legal challenges to block EPA from finalizing CPP rules had failed up until the Supreme Court stay in February.  Generally, CPP opponents claim EPA is overstepping its authority under Section 111(d) of CAA, and since EPA’s plan extends deeply into unchartered legal territory, the Supreme Court decided to stay further actions.  While EPA cannot compel the states to take additional action on the CPP right now, it can still advance understanding of emissions trading and benefits of greenhouse gas (GHG) regulation.  Almost 20 states are still moving forward with development of their SCPs.

Legal Issues

When the Clean Air Act was enacted and later amended in 1990, there were two different versions of Section 111(d) in the final statue from the House and Senate.  These differences were never reconciled in Conference Committee before being signed by the President.  Indeed, EPA chose to follow the Senate version of this section in the CPP because it prohibits the agency from writing a second rule controlling a pollutant that is already regulated.  Since GHGs are not regulated from power plants elsewhere in Section 112, the EPA would be free to regulate them under Section 111. In fact, EPA believes it is simply upholding current law following its 2009 Endangerment Finding that GHGs (including CO2) meet the necessary guidelines to be regulated under the existing Clean Air Act, and thus the CPP is not intended to foster conflict but merely adhere to existing law.

The CPP’s definition of the “best system of emission reduction” is also being challenged. EPA believes this system can be applied to entire power sector on a statewide basis.  In contrast, opponents believe the system is limited to individual emitting sources, since all emission sources within a state are not equally integrated into the power sector.  CPP proponents favor EPA’s expertise and flexibility in determining the scope of the rule.

Additionally, federalism is being advanced as an issue by some states that do not wish to implement a national policy that runs counter to state authority.  This same issue has arisen related to water and healthcare with the states as well.

Timing is also a challenge. While the DC Circuit plans to rule on this case later in 2016, because of the annual rotation of law clerks in the DC Circuit every August, appellate justices could lose research continuity and support soon after the hearing thereby impeding progress.  Separately, if the Supreme Court elects to hear an appeal of the DC Circuit decision in early 2017, a final decision is likely not until 2018 from the Supreme Court on the merits of the case.  Regardless, the final outcome could hinge on the 2016 elections, as the party that wins the White House will likely appoint the next justice to the Supreme Court (replacing Justice Scalia).

Precedent and Conclusion

History shows a judicial deference to EPA decisions.  The authors reviewed all judicial rulings at the DC Circuit since President Obama took office (2009-present) in cases where EPA was the Appellee and an Appellant was challenging an EPA policy (or ruling) previously upheld at a lower court.  Out of the 289 cases reviewed, EPA’s record at the DC Circuit was 239 wins, 30 losses, and 20 mixed results.  Only slightly more than 10 percent of the time did EPA lose outright on cases decided before the DC Circuit, evidence of deference to EPA at the Appellate Court level.  Recall the DC Circuit’s ruling might prove to be pivotal because lower court rulings stand when the Supreme Court has a tied vote (e.g. 4-4).

The international Paris Agreement in December 2015 adds broader interest and pressures for GHG regulations.  The Paris commitments may need additional policies in the U.S. beyond the CPP and tax incentives to succeed—an opportunity for tools under existing law to be used for the first time to reduce emissions.  For example, Section 115 of the Clean Air Act could support GHG action beyond the power sector in the U.S. by offering broad country reciprocity over any air pollutant anticipated to harm or threaten public health or welfare in a foreign country.  The U.S. already treats GHG emissions as pollutants and the United Nations Framework Convention on Climate Change offers the U.S. the reciprocity required to pursue Section 115.

The CPP is a part of an ongoing public debate in the U.S. regarding energy and environmental policy.  Pivotal to that public debate will be the judicial rulings on the CPP likely to arrive in early 2017 by the DC Circuit.  With the prospect of Congressional action on climate policy unlikely, all eyes are on the courts to decide if the first, nationwide policy limiting GHG emissions in the U.S. will take effect or not.

Addendum: On May 16, the DC Circuit announced that oral arguments will be delayed until September 27, 2016.  Furthermore, the case will be heard en banc by the full panel of DC Circuit judges, rather than the usual, smaller three-judge panel.  Experts believe that the en banc review at this step of the judicial review will expedite final resolution of the legal issues surrounding the Clean Power Plan.

CE3 Blog by Daniel H. Karney, Department of Economics and Michael J. Zimmer, Executive in Residence & Senior Fellow, Ohio University; Edited by Elissa E. Welch, Project Manager, CE3. May 2016.