rap allen fijipresentationontariffs 2014 mar

8/12/2019 RAP Allen FijiPresentationOnTariffs 2014 MAR

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The Regulatory Assistance Project www.raponline.org

Sustainable Tariffs Setting for IslandSystems

Organized by Asian Development Bank (ADB) andSecretariat for the Pacific Community (SPC)

Fiji, 25-27 March 2014

Presented by J. Riley AllenRAP, Global Research Manager

March 26, 2014


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Common characteristics of island systems

High rates and moderating to

declining loads

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High proportion of fossil fuelgeneration (esp. diesel)

Source: RAP/EIA, www.eia.gov


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Cost-Effective Clean Resources Available toIslands Include Solar and Wind

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Significant opportunity forrenewables and distributedgeneration


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Almost Everything is Cheaper thanDiesel

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Oil Generated Electricity @ $110/bbl oil $0.32/kWh

Solar PV


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PV Costs versus Retail Prices andAvoided Costs

6Source: RAP, Jim Lazar

$-

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

$0.35

$0.40

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

PV Solar Cost

Hawaii Electricity Prices

Avoided Fuel Cost


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Utility and Policy Avenues for Promoting CleanResource Initiatives and Commitments

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NetMetering

Standard

Offer

UtilityInvestment

RFP

Energy Efficiency

Markets/PortfolioRequirements

Renewables

Integrated

Planning

PolicyTargets


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Alternative Regulatory Frameworks forSetting Tariffs

1. Cost of Service (TraditionalRegulation) sets prices

2. Performance-Based Regulation

Multi-year framework

Price Cap Regulation (Inflation minus X or CPI-X)

Revenue Cap Regulation (Inflation minus X) withPerformance metrics

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Traditional Regulation

1. In most jurisdictions, regulators only setprices forutility services

2. Consequently, the actual revenue that a companycollects depends on sales:

- Revenue = Price * Units Sold

- Utility makes money in two ways: cutting costs and increasingsales

Marginal cost is almost always less than marginal revenue

This is called the throughput incentive3. This means that changes in sales can have a powerful

effect on profits

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Impacts of sales growth or decline onearnings (investor-owned utility)

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12.31%11.88%$11,076,180$1,176,180$1,809,5081.00%

13.61%23.76%$12,252,360$2,352,360$3,619,0152.00%14.92%35.64%$13,428,540$3,528,540$5,428,5233.00%

16.23%47.52%$14,604,720$4,704,720$7,238,0314.00%

17.53%59.40%$15,780,900$5,880,900$9,047,5385.00%

11.00%0.00%$9,900,000$0$00.00%

4.47%-59.40%$4,019,100-$5,880,900-$9,047,538-5.00%

5.77%-47.52%$5,195,280-$4,704,720-$7,238,031-4.00%

7.08%-35.64%$6,371,460-$3,528,540-$5,428,523-3.00%8.39%-23.76%$7,547,640-$2,352,360-$3,619,015-2.00%

9.69%-11.88%$8,723,820-$1,176,180-$1,809,508-1.00%

Actual ROE% ChangeNet EarningsAfter-taxPre-tax

% Change

in Sales

Impact on EarningsRevenue Change


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Least-Cost Service Should be the MostProfitable

1. The throughput incentive is at odds with public policyto supply electric power services at the lowest total cost:- inhibits a company from supporting investment in and use of

least-cost energy resources, when they are most efficient,

- encourages the company to promote incremental sales, evenwhen they are wasteful

2. Ratemaking policy should align utilities profit motiveswith public policy goals: acquiring all cost-effectiveresources, whether supply or demand

3. The utilities throughput incentive promotes inefficient

outcomes, even where:- there is no programmatic energy efficiency; and

- even with third-party administration of energy efficiencyprograms.

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Revenue Cap

Revenue cap regulation targets revenuelevels and decouples sales from margin orprofits.

Profits increase by managing costs.

Risks Reduced for Customers and Utility

Weather

Economy

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The EssentialCharacteristic of Decoupling

Traditional Regulation:Constant Price =

Fluctuating Revenues

Decoupling:Precise Revenue Recovery =

Fluctuating Prices

Revenues = Price * Sales Price = Target Revenues Sales

$0.1147

$0.1152

$0.1157

$0.1162

$0.1167

$114,800,000

$115,000,000

$115,200,000

$115,400,000

$115,600,000

$115,800,000

$116,000,000

1 2 3 4

Adjusted Revenues Adjusted Price Rate Case Price

$0.1147

$0.1152

$0.1157

$0.1162

$0.1167

$114,800,000

$115,000,000

$115,200,000

$115,400,000

$115,600,000

$115,800,000

$116,000,000

1 2 3 4

Actual Revenues Rate Case Rev. Req. Rate Case Price


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Performance-based regulation inconcert with decoupling or revenue

cap regulation can1. Remove disincentives to encouraging

in energy efficiency and distributed

generation;2. Create incentives (through PBR) to do

the same;

3. Encourage the development of helpfulrate designs to encourage clean energyand demand-side flexibility.

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S l i i l i b d


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Several pricing regulations can be usedto support increased utility investments

in EE and RE

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Graphic Image: HawaiiElectric website


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Recommendations

1. Foster sound planning (e.g., IRP) and policytargets, creative solutions to cost-effective cleanenergy (renewables and EE).

2. Create regulatory framework that aligns utilityperformance with least-cost solutions (PBRRevenue-Cap Regulation);

3. Look integration strategies/optional retail

services to foster flexible loads to complementvariable energy resources

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Suggested Reading and Reference Materials Allen, R., Migden-Ostrander, J., The Role of a Power Sector Regulator to

Strengthen Sector Performance in Puerto Rico, RAP, Feb 2014,http://www.raponline.org/document/download/id/7043

Lazar, Jim; Teaching the Duck to Fly, RAP, Feb 2014, available athttp://www.raponline.org/document/download/id/6977

Schwartz, L., Hogan, M., Lamont, D., Meeting Renewable Energy Targets in theWest at Least Cost: The Integration Challenge, RAP, Jun 2012, available athttp://www.raponline.org/document/download/id/5041

Linville, C., Shenot, J., Lazar, J., Designing Distributed Generation Tariffs Well,Nov 2013, http://www.raponline.org/document/download/id/6898

Lazar, J., Weston, R., Shirley, W., Revenue Regulation and Decoupling: A Guide toTheory and Application, Jun, 2011,http://www.raponline.org/document/download/id/902

Salvatore, J., H1 2014 Levelized Cost of Electricity Update, BNEF, January 2014,

www.bnef.com

Lazard Associates, Lazards Levelized Costs of Energy Analysis, Version 7.0, August2013,http://gallery.mailchimp.com/ce17780900c3d223633ecfa59/files/Lazard_Levelized_Cost_of_Energy_v7.0.1.pdf

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http://www.raponline.org/document/download/id/7043http://www.raponline.org/document/download/id/7043http://www.raponline.org/document/download/id/6977http://www.raponline.org/document/download/id/6977http://www.raponline.org/document/download/id/5041http://www.raponline.org/document/download/id/5041http://www.raponline.org/document/download/id/6898http://www.raponline.org/document/download/id/6898http://www.raponline.org/document/download/id/902http://www.raponline.org/document/download/id/902http://www.bnef.com/http://gallery.mailchimp.com/ce17780900c3d223633ecfa59/files/Lazard_Levelized_Cost_of_Energy_v7.0.1.pdfhttp://gallery.mailchimp.com/ce17780900c3d223633ecfa59/files/Lazard_Levelized_Cost_of_Energy_v7.0.1.pdfhttp://gallery.mailchimp.com/ce17780900c3d223633ecfa59/files/Lazard_Levelized_Cost_of_Energy_v7.0.1.pdfhttp://gallery.mailchimp.com/ce17780900c3d223633ecfa59/files/Lazard_Levelized_Cost_of_Energy_v7.0.1.pdfhttp://gallery.mailchimp.com/ce17780900c3d223633ecfa59/files/Lazard_Levelized_Cost_of_Energy_v7.0.1.pdfhttp://www.bnef.com/http://www.raponline.org/document/download/id/902http://www.raponline.org/document/download/id/6898http://www.raponline.org/document/download/id/5041http://www.raponline.org/document/download/id/6977http://www.raponline.org/document/download/id/7043


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About RAP

The Regulatory Assistance Project (RAP) is a global, non-profit team of experts thatfocuses on the long-term economic and environmental sustainability of the powerand natural gas sectors. RAP has deep expertise in regulatory and market policiesthat:

Promote economic efficiency Protect the environment Ensure system reliability Allocate system benefits fairly among all consumers

Learn more about RAP atwww.raponline.org

Email: [email protected]


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Extra Slides

Lazard Associates, Lazards

Levelized Costs of EnergyAnalysis, Version 7.0

rap allen fijipresentationontariffs 2014 mar

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