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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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.