renewable energy workshop: solar power and dg business models

©2014 Navigant Consulting, Inc.

D I S P U T E S & I N V E S T I G AT I O N S • E C O NO M I C S • F I N A N C I A L A D V I S O RY • M A N A G E M E N T C O N S U LT I N G

May 5‐8, 2014

Solar and DG Business Models

AWEA WINDPOWER 2014AWEA Renewable Energy WorkshopLas Vegas, NVKarin Corfee| Managing Director, Energy Practice

1©2014 Navigant Consulting, Inc. 1©2014 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy.

Agenda

The Situation

Solar Industry Trends

DG Business Models

California Solar Initiative Case Study

2©2014 Navigant Consulting, Inc.

» Technology advancements have driven costs down.– PV module costs have dropped from roughly $4/watt in 2006 to less

than $1/watt.– Total installed cost is expected to reach $1.76‐$2.47/watt by 2018

(without subsidies).

» Regulatory actions differ from region to region.– Renewable Energy Targets (29 U.S. states)– Renewable Energy Certificates (RECs)– Feed‐in Tariffs (FiT‐HI, OR, ME, VT, LADWP, Gainesville, LIPA,

Ontario, Germany, Spain, Czech, Italy, Japan, Taiwan, China )– Net metering (40 U.S. states)– Other related mechanisms (e.g., CA storage mandate)

The distributed solar PV issue is complex, at the intersection of energy technologies, regulations, and markets.

The Situation

Technology

RegulationsMarkets

» Market evolution (revolution?) has accelerated.– Incentives (e.g., U.S. ITC) and financing alternatives like solar leasing and green bonds have

removed financial hurdles.– Residential “socket parity” (including incentives) is already reached in the U.S. Southwest.– In high‐cost retail electricity markets, such as Holland, Hawaii, the Philippines, the Caribbean,

and other island nations, distributed solar PV is at grid parity even without incentives.

Source: Navigant Research, Navigant Consulting analysis


» A survey of over 500 U.S. electric utility professionals revealed concerns with current regulatory and revenue models and a focus on distributed generation.

Utility professionals view DG has a challenge.

The Situation

Source: “The State of the Electric Utility.” Utility Dive, 2014.

Related challenges


» The majority of respondents identified distributed generation as the technology with the most disruptive potential, and that it would actually be an opportunity for their utility.

Opportunity or Threat?

The Situation



» The majority of respondents anticipated minimal to zero demand growth for their utility in the next five years.

Addressing Demand Reduction

The Situation



» How big is the “threat” of distributed solar PV over time?– Revenue model/tariff structure– Earnings impact under several demand reduction/PV penetration scenarios

o Revenue losso Grid integration costs

– Customer impact for those with, and without, solar PV– People/process impact… new skills/capabilities/roles, etc.

» What potential opportunities exist related to distributed solar PV?– Utility rate‐based solar PV on distribution grid– Developer/owner/operator of distributed solar PV assets (through Pepco Energy Services)– Role as a market “enabler” for grid users– Other business opportunities

» How should the impact (opportunities and threats) of distributed solar PV be incorporated into the business planning process for the 1, 5, and 10‐year time horizon?

Key Questions for Utilities

The Situation


Agenda

The Situation


DG Business Models




A vision of the future filled with distributed rooftop PV . . .

“Anyone flying into the airports of Southern California can catch a bird’s eye glimpse of the future of the electric power system. The vast region is dotted with the reflections from shiny solar panels on the rooftops of homes, schools, and businesses. Photovoltaic (PV) solar systems also can be found on some parking lots and warehouses. . . . In the electric power business we expect to see more change in the next 10 years than we saw in the last 100.”

Ted Craver, EIX

Solar energy will eventually “takeover everything” because its costs keep on falling. Add storage, and its pretty much “game over” for traditional forms of power generation.

Jon Wellinghoff, outgoing Chairman FERC at the 2013 National Clean Energy Summit



News sources have contained startling messages about DG solar in 2013.

Companies Unplug From the Electric Grid, Delivering a Jolt to UtilitiesWall Street Journal, September 17, 2013

Why the U.S. Power Gridʹs Days Are Numbered: Homegrown Green Energy Is Making Power Utilities IrrelevantBloomberg BusinessWeek, August 22, 2013

Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric BusinessEdison Electric Institute, January 2013

An Epic Battle Between Solar Firms and Power Utilities Could Leave One Side UnpluggedPhoenix New Times1, July 11, 2013

1. Phoenix News Times used to illustrate local news that utility executives will pay attention to in their own service territories.


» Learning rates (i.e., price drop for every doubling of production) for PV modules could range from 22% to 40% going forward.

» According to EEI, installed system prices are now “in the money” for approximately 16% of the U.S. retail electricity market, and expected to reach 33% by 2017.

» In high‐cost retail electricity markets, such as Holland, Hawaii, the Philippines, and the Caribbean, distributed solar PV is at grid parity even without incentives.– In other markets, such as parts of California, New England, South Africa, Germany, and Italy,

solar PV is reaching grid parity with incentives.

Solar PV module costs (and total installed costs) have dramatically declined over the past 5 years, a trend that is expected to continue.


Solar PV Module Price Trend Distributed Solar PV Installed System Prices


2,300 2,500 3,500

4,400 2,900

3,600 4,000 4,300

2,400 3,100

3,100

3,400

2,100

2,400 2,500

2,700

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2013 2014 2015 2016 2017 2018 2019 2020

Sola

r PV

[MW

]

CentralizedDistributed

4,700

5,6005,000

7,800

6,6006,000

6,5007,000

Navigant expects PV to be a 7 GW market in 2020, despite the market dip caused by the ITC reduction in 2017.


1 Distributed is defined as projects < 1 MW whereas centralized is defined as projects ≥1 MW.

1

Source: Solar PV Market Forecast, Navigant Research, 2013.

U.S. PV Installed Capacity Forecast (Annual Additions)


U.S. PV Installed Capacity Forecast (Cumulative)

6,500 9,000 12,50017,000 20,000 24,000

28,00032,000

6,0009,000

12,000

15,50017,500

20,000

22,000

25,000

0

10,000

20,000

30,000

40,000

50,000

60,000

2013 2014 2015 2016 2017 2018 2019 2020

Sola

r PV

[MW

]

CentralizedDistributed

12,500

18,000

37,50032,500

24,500

44,000

50,000

57,000

Navigant forecasts the total U.S. installed solar capacity to be just shy of 60 GW by end of 2020; over 50% distributed.


1 Distributed is defined as projects < 1 MW whereas centralized is defined as projects ≥1 MW.

1

Source: Solar PV Market Forecast, Navigant Research, 2013.


Source: SEIA Website, 2013. Source: “Solar Means Business : Top Commercial Solar Customers in the U.S.”, SEIA, August 2013.

In April 2013, Walmartannounced its goal of : “Producing or procuring 7 Billion kWh of renewable energy globally by 2020 –an increase of over 600% versus 2010.”


In the C&I DG market, companies are installing solar as they realize multiple benefits, including cost savings.


ArizonaCaliforniaColorado

ConnecticutDelaware

HawaiiMaryland

MassachusettsNew JerseyNew YorkOregon

PennsylvaniaTexas

Washington D.C.Washington

A growing number of companies in the

residential leasing market . . .

. . . are collectively expanding their footprint

across the country . . .

. . . and are significantly impacting market growth

and ownership composition.

Source: Navigant team analysis of PowerClerk data, February 2013.


In the residential distributed market, growth is increasingly driven by third party ownership (leasing and PPA) models across the country.

11%7%

12%

23%

45%

71%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011 2012

Share of Installed Capacity

Third Party Ownership Market Share in CA Residential Sector


Agenda

The Situation


DG Business Models



DG Business Models

It is clear that utilities must adapt their business models to incorporate distributed generation.

Utilities are “in a flat to shrinking business, and as solar and batteries get cheaper and cheaper, they’re going to see their customer base of the best customers” install solar…“So I’m telling utility companies, this is coming down the line, so let’s think of a new business model where you can profit from this.”

Former Energy Secretary Steven Chu

Source: McMahon, Jeff. “Steven Chu Solves Utility Companies’ Death Spiral.” Forbes, March 21, 2014.

“The power company of the future will own both centralized generation and distributed generation (i.e., residential solar) assets.”

Nat Kreamer, Clean Power Finance

“We are positioning ourselves to succeed during a prolonged period through which the traditional centralized grid‐based power system co‐exists with the fast‐emerging high‐growth distributed generation sector – much like fixed‐line telephony has co‐existed with the wireless world for a couple of decades.”

David Crane, NRG


DG Business Models

Utilities are increasingly adding solar installation capabilities or related solar investments to their portfolios.

May 2013 – NextEra Energy Resources acquired Smart Energy Capital (a commercial solar developer).

April 2013 – Clean Power Finance completed a $37M equity round including Edison International, Duke Energy, Dominion, and Clear Sky (of NextEra Energy).

August 2013 – Edison International acquired SoCore (a Chicago‐based commercial solar developer).

September 2013 – Direct Energy created a dedicated investment fund with SolarCity for $124M in solar projects for commercial and industrial customers.

January 2014 ‐ Integrys Energy Services and Clean Power Finance partnered to create a residential solar finance fund through the CPF Market.

March 2014 – E.ON contributed to a Sungevity $70M equity round; they are also reportedly working together to expand Sungevity’s market reach.

March 2014 – NRG Energy purchased Roof Diagnostics Solar (the 8th largest solar installer in the U.S.).

November 2011 – NRG acquired Solar Power Partners (a San Francisco‐based commercial developer).

February 2010 – TXU Energy partnered with SolarCity to offer a solar program to customers.

Acquisitions Investments

Source: Company press releases and news coverage.


DG Business Models

The Solar Finance Company (SFC) market is expanding with increased investment from the utility sector.» Investment announcements for 8 solar PV financing companies

− Clean Power Finance, One Roof, Solar Universe, SolarCity, Sungevity, SunPower, Sunrun, and Vivint.

$‐

$100

$200

$300

$400

$500

2010 2011 2012 2013

$ Millions

Equity Investments

Average Individual Equity FundingLargest Individual Equity FundingTotal Equity Funding

$‐

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2010 2011 2012 2013$ Millions

Project Funding Investments

Average Individual Project FundingLargest Individual Project FundingTotal Project Funding

Note: Data through November 20, 2013, sourced from company press releases and news media. Equity figures include SolarCity initial public offering (IPO) and subsequent issuances of stock and convertible debt, but exclude September 2012 Blackstone acquisition of Vivint, valued at $2 billion.

Source: Navigant’s California Solar Initiative Market Transformation Study (Task 2): Final Report, 2014

Equity Investments Project Funding Investments


DG Business Models

From a regulatory perspective, a utility pilot project design in Maryland sets an example for the transition to electric services of the future. » Utility 2.0: A pilot project that would test the application of new technologies, business

models and strategies with the key objective to foster changes in utility business practices, reward structures, and the regulatory scheme for Maryland’s utilities.

» Categories targeting improvement:

» Potential pilot project tasks for participating utilities:

Source: Utility 2.0: Piloting the Future for Maryland’s Electric Utilities and their Customers. Energy Future Coalition, March 15, 2013.

Reliability and resiliency

Residential customer optionality

Large customer optionality

Utility system upgrades

Utility business model changes

Regulatory model adjustments

Align utility compensation with needs and values expressed by customers, using five parameters.

Support utility investment in an interoperable, integrated suite of smart‐grid technologies.

Allow utilities to finance customer Smart Grid and efficiency investments.

Optimize automated system sectionalizing and reclosing, and facilitate microgrids.

Facilitate electric vehicle deployment and utility‐managed vehicle battery charging.

− Cost− Reliability− Customer service− Adoption of smart grid

technologies and services− Support for alternate energy


DG Business Models

A new model in the U.K. sets an example for a performance‐based framework that rewards utilities for performance.Revenue = Incentives + Innovation + Outputs (RIIO)» RIIO is a performance‐based framework for setting price controls for energy network

companies in the U.K., regulated by Ofgem.− RIIO‐ED1 is the first electricity distribution price control, targeting the 14 Distribution

Network Operators from 2015 to 2023.» Model Objectives:

− Encourage energy network companies to fully participate in the delivery of sustainable energy. − Deliver network service with long‐term

value for money for existing and future consumers.

− Ensure the necessary investment in Britain’s energy network at a fair price to customers.

− Promote long‐term planning, reward innovation, and punish inefficiency in network companies.

Source: RIIO Handbook, 2010

» RIIO retains a price cap regime, and implements a system of rewards and penalties tied to performance on desired outcomes (outputs).

Illustrative Overview of a Balanced Scorecard


Agenda

The Situation


DG Business Models




With nearly 1,200 MW installed in the IOU service territories as of the end of 2012, California leads the nation for installed capacity of distributed solar PV systems.

CCSE is the Program Administrator for the CSI Program in SDG&E service territory



The Third Party Ownership (TPO) market has grown rapidly due to a favorable policy environment, and will likely continue to grow.

Source: Navigant team analysis of PowerClerk Data, February 2013

CSI Installed Capacity by Year, Sector, and Ownership Type (Incremental)



TPO has particularly gained traction within the residential market.

Source: Navigant team analysis of PowerClerk Data, February 2013

CSI Residential Installed Capacity by Ownership Type (Incremental)



The Solar Finance Company (SFC) market is expanding under diverse business models.


Solar PV Finance Companies: Incremental Capacity Additions for TPO Residential Projects



Market Actor Integration Across the California Residential Solar PV Supply Chain




Effective Lease or PPA rate for TPO Systems compare favorably to offset rates.

Source: Navigant analysis, based on a sample of PG&E TPO contracts from CSI PowerClerk data (n=52)



Most residential customers benefit from their TPO system.

Source: Navigant analysis, based on a sample of PG&E TPO contracts from CSI PowerClerk data (n=97)

KeyC O N T A C T S

©2010 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy.

KeyC O N T A C T S


KeyC O N T A C T S


KeyC O N T A C T S


Karin Corfee | Managing [email protected] direct

renewable energy workshop: solar power and dg business models

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