Thursday, January 26, 2012

An Insider’s Perspective on Colorado's Renewable Energy Standard – Some Critical Thinking about Colorado's "Successful" RES

As indicated in Mark Jaffe’s article, Power Surge Slows (The Denver Post, January 22, 2012), Colorado’s Renewable Energy Standard (RES) has in many respects been one of the more successful ones in the country. With rare exception, such as California’s 33% by 2020 goal, it is certainly one of the most ambitious. But, there is more to understand before we declare it an unqualified success. Importantly, the slow-down described in the article did not have to occur if only the state’s principal utility, bolstered by lax regulatory oversight, had acquired renewable resources in a more fiscally responsible and sustainable manner.

Among the benefits derived from the RES is that Colorado has attracted a handful of big name manufacturers such as Vestas and General Electric in wind turbine and solar panel manufacturing, respectively. Hopefully their local operations will prosper in spite of a difficult economic climate and tenacious competition from abroad. Colorado also has had, until recently, a thriving small solar installer industry but its success was predicated on too-generous incentives that broke the Ratepayer Bank while the Public Utilities Commission was late in recognizing the severity of the problem. Mark Jaffe’s article noted that Xcel Energy’s renewable fund – known as the Renewable Energy Standard Adjustment (RESA) account – is $51 million in the red and headed for worse before it gets better. What is less well known is that the utility earns its Commission approved rate of return on this deficit – a great deal if you can get it.

Xcel has asserted that it has already met Colorado's 30% RPS clear out to 2028. On the surface, that sounds great. But let’s come back to that RESA deficit. What achieving compliance with the renewable standard a decade early really means is that ratepayers have been on the hook for resources that were not needed for compliance or to serve load. As the PUC Staff warned more than once, Xcel was purchasing “too much, too soon, at too high a cost” and that, especially with regard to the small solar program, this would lead to the same boom and bust that has afflicted myriad other solar incentive programs that over-compensated solar customers. One needn’t have been prescient to predict this outcome. Rather than stage its acquisition of renewable resources commensurate with the ramp-up in the RES, and in so doing take advantage of the rapidly declining cost of renewable energy in the process, Xcel spent future receipts from the renewable fund driving it deep into the hole until the deficit became so severe that even the most ardent supporters of renewable energy had to take notice. It was at that point that Xcel came to the PUC with a drastic plan to cut back on the incentives it was doling out to solar customers. Xcel and its customers were not alone. The same affliction befell the state’s other investor owned utility (IOU), Black Hills Colorado Electric, though at a much smaller scale. The result was inevitable – a boom and bust that did not have to be and one that the Commission’s staff warned about as early as 2007. Moreover, the slow-down described in Mark Jaffe’s article extends to the development of utility scale projects as well as the small solar market. 

Xcel has argued that, while it has exceeded the goals for the renewable energy mandate, it has stayed within the 2% cap established in the enabling legislation for the RES. This misrepresents the true situation due to the convoluted and opaque rate cap formula used in Colorado’s RES which makes it difficult to discern the actual rate impact. Xcel argues that it is only charging an additional 2% on each customer’s bill. That is true, but it does not consider the accrued liability in the hemorrhaging RESA deferred account nor does it include the cost of resources for which the PUC has granted a “waiver” from the rate impact calculation. As demonstrated in numerous PUC Staff analyses, when all of the costs are accounted for, the actual costs of renewable energy penetration in Colorado have far exceeded the 2% rate cap by any reasonable, common sense definition of the term. Unfortunately, the IOUs have been allowed to redefine the plain meaning of 2% in a way that masks the true cost of renewable energy in Colorado. Were this not the case, and had the PUC under the prior administration exercised proper oversight of the regulated utilities' renewable expenditures, the small solar industry in Colorado would not now be decrying the drastic, but necessary, reductions in incentive payments available to their customers. 

A sufficiently skeptical observer might ask why a utility that fought the imposition of the renewable standard so vigorously back in 2004 would later reverse course and spend more than necessary to blow the compliance targets away and brag that it has met its compliance obligation more than a decade early. Many observers believe that it is because the utility figured out how to make money at it! Bear in mind that the utility has invested none of its own money in renewable energy and is promised full recovery of every dime – often plus interest – of consumer funds that it does spend. In my post on the 12th of January, I wrote about the PUC's rejection of Xcel's attempt to profit unconscionably from this behavior (Click here for that column).

The evidence from multiple PUC proceedings is that Xcel has acquired renewable resources (primarily wind energy) that it does not need either to serve load or for RES compliance so that it can profit from the sale of the excess renewable energy credits (RECs) to other utilities. As I wrote in testimony in Xcel’s 2010 Amended Resource Planning proceeding, this provides the utility with a perverse incentive to acquire more RECs than needed, bought and paid for with interest by Colorado ratepayers, allowing the utility to profit on both ends of the transaction.

Not surprisingly, the utility has gone to great lengths to prevent the disclosure of this fact – something that the PUC's own Staff has warned about for several years now. But, the data do not lie. Fortunately, with a new governor and under the leadership of new PUC Chairman Joshua Epel, the Commission is now taking steps to right the ship. But it's a big job and it will take a while to pay down the deficit in the renewable energy accounts. Thus vigilance by an informed public is still needed. 

Unfortunately, balancing the renewable budget now will not mitigate the boom and bust I spoke about earlier or the need to transition to clean energy in a sustainable manner as the utility, in its current resource planning docket, has made it clear that it has very modest needs for additional renewable generation for some time to come. 

So, how do we move forward from here? Clearly we need to restructure some of the details of the RES including, most importantly, the way it is administered. Obviously, the widely discussed tax incentives available to renewable developers, including the soon to expire production tax credit for wind energy, are important, but the individual states have limited ability to influence that. So, here is a short list of things that we may want to consider:
  1. Modify the liberal REC banking rules, i.e. the shelf life of RECs, in the Colorado RES. At the present time, a REC may be used for compliance for as long as five years beyond the year in which it was generated. Restricting the bankability of RECs would more closely tie actual renewable generation to current compliance obligations and discourage making expenditures far in advance of requirements. 
  2. Consider a different mechanism for funding renewable energy development – perhaps a Public Benefits Fund paid into by all utility customers in Colorado with investment in renewable projects flowing back to the areas in approximate proportion to their level of contribution. As all the rest of us must do, set a transparent, firm budget and manage to it. 
  3. Increase the renewable compliance targets for the state’s rural electric coops and municipal utilities (presently only 10% by 2020) to something akin to that for the two investor owned utilities. The obligation for compliance with the renewable standard should be shared equally by all of the residents of Colorado, not just the 55% who are customers of the state’s two IOUs. Furthermore, it seems unfair for the availability of consumer benefits, such as solar incentive payments, under a statewide program such as the renewable energy standard to be solely a function of your address. 
  4. Perhaps the most important change would shift responsibility for administration of the renewable standard away from the utilities and into the hands of a public agency (perhaps the PUC or the Governor’s Energy Office) or a non-profit third party administrator. The state’s investor owned utilities, upon whom the bulk of the obligation for compliance with the renewable standard has fallen, have not shown themselves to be good stewards of the public’s investment in renewable energy. 
There are many people, including me, who would be willing to pay more than 2% to aid the transition to a clean energy infrastructure – if the money is spent responsibly. But, a promise made to the voters to limit the cost impact should be a promise kept. With proper management and guidance, compliance with the RES could have been achieved in a responsible manner and at reasonable cost. Unfortunately, you cannot build a sustainable energy infrastructure on the back of unsustainable economics.
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Thursday, January 12, 2012

Consumers go 2-0 in recent decisions at Colorado PUC

Consumers went 2-0 in important decisions at the Colorado PUC this week in cases involving the state's dominant utility, Xcel Energy.  One decision, yesterday's rejection of Xcel's request for interim "rate relief" (right, not really sure who is in need of the relief but that's what they called it) made the papers and the blogosphere this morning.  The other, an equally if not more important decision on Tuesday concerning the utility's request to keep 40% of the proceeds from the trading of what are known at Hybrid RECs (docket 11A-510E), received little if any notice because a) it is far more difficult to understand and b) the impact is less noticeable to consumers.... note, I said less noticeable, not less important.  

So, let's start with the 510E docket.  As I've written about here previously and in testimony before the commission as well as some other public arenas, the PUC has allowed Xcel to acquire "too much, too soon, at too high a cost" with the ultimate impact that the 2% rate impact limitation in the renewable standard statute has been circumvented by the adept use of misdirection, accounting chicanery, and political decision making.  But, why would a utility that fought the imposition of the renewable standard so vigorously then turn around and spend more than necessary to blow the compliance targets away and brag that it has met its compliance obligation more than a decade early? There is no way to fully explain the volumes of PUC Staff analysis and testimony in this small space, but the bottom line answer is that Xcel (aka Public Service Company of Colorado or PSCo) has figured out how to make money at it!  Keep in mind that the utility has invested none of its own money (zero, nada) in renewable energy and is promised full recovery of every dime -- plus interest -- of consumer funds that it does spend.  The unfortunate impact has been that consumers are being saddled with costs in excess of the statutory 2% rate cap.  Another impact that only a few understand is that, as I explained in testimony way back in the 2007 RES Compliance Plan docket, it would and -- and indeed has -- lead to a boom and bust in the Colorado renewable energy market.  

Hence, being flush with more RECs than needed for compliance under any scenario, Xcel saw an opportunity to sell its excess RECs to utilities in California that were having difficulty complying with that state's RPS.  The term "hybrid REC" came about because California, ever hungry for electricity, required that RECs generated outside the state be bundled with energy from another source that could be imported into the state.  In the process, the company has made an obscene profit from the sale of these excess RECs that have been bought and paid for by Colorado consumers with interest.  In return for employing its "skill" in effectuating such transactions, Xcel thought that it should be allowed to retain an astonishing 40% of the proceeds with the remainder being used to buy down the deficit in its renewable accounts (known as the RESA deferred account) so that it could.... you guessed it.... acquire even more RECs at consumer expense for it to sell at a profit using OPM (that's Other People's Money).  Keep in mind that we're talking about margins well into the eight and approaching nine figures here (that's without the decimal point) so this was not exactly pocket change (OK, that's tens and approaching hundreds of millions of dollars in play).  This was about as close to a perpetual motion money making machine as I've ever seen.

The PUC's staff, the Office of Consumer Counsel, large industrial customers and others did recognize that the company should be credited with some finder's fee for identifying these trading opportunities but nowhere near 40%.  They also differed on the mechanism through which the customer share should be returned to ratepayers.  On Tuesday, after volumes of testimony submitted by all sides and aborted settlement negotiations that failed to yield an acceptable outcome, the commission deliberated and made its decision.  Where did they come down?

The ultimate decision awarded Xcel even less than the 20% share proposed by the PUC staff and most of the other intervenors.  The outcome was that Xcel could retain 20% of the first $10 million in margins, 15% of margins greater than $10 million and up to $30 million, and only 10% of margins beyond $30 million -- proof that it doesn't pay to be greedy.  These sharing percentages are to remain in effect through 2014 after which the PUC could reevaluate the situation.  As to the mechanism for returning the customer share, here is where the PUC could have done a better job.  Concerned about the deficit in the RESA deferred account that is well into the tens of millions of dollars (see my RPS rate cap presentation posted elsewhere on this blog), the commission elected to first use the proceeds to pay down the RESA, but I am a bit less concerned about that now that the commission has indicated its intent to keep a closer eye on this.  As is typical we'll have to wait for the final written decision, to be followed by the inevitable RRR (that's application for rehearing, reargument, and reconsideration) before we're fully comfortable with this outcome.  And, unfortunately, none of this completely mitigates the boom and bust I spoke about earlier or the need to transition to clean energy in a sustainable manner as the utility, in its active resource planning docket, has made it clear that it doesn't need any more renewable generation for some time to come.

As for Xcel's application for interim rate relief (docket 11M-951E) that was rejected by the commission on Wednesday, Chairman Epel said it best when he noted that without some showing of adversity, "there is no need for rate relief."  Though their reasons differed, the three commissioners came down on the side of rejecting the interim rate hike.  Commissioner Tarpey noted that the company is already close to its authorized rate of return and Commissioner Baker was the closest to granting the request noting that "regulatory lag could be considered a form of adversity." Fortunately, neither of the other two commissioners bought that argument.  And, while this is encouraging, Xcel still has before the commission its request for a $142 million rate increase (docket 11AL-947E) which has yet to be adjudicated.  All this decision did was prevent the utility from collecting the lion's share of that request prior to a final decision in that case.  Thus, continued vigilance by the public is still necessary.
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Back after a hiatus: A Chat About RPS Costs and an Unconventional Solar Array

Folks, you can probably tell that it's been a while since I've kept this blog up to date.  I now hope to do a better job of keeping it current.  But in the time I've been away, the technology has marched on and Blogger has made a number of modifications to its system.  So, to get back into the swing of things, I thought I might just lob myself a softball to get started.

In the presentations widget in the right hand column is an image of a presentation that I gave at the State/Federal RPS Summit in Washington, DC back in October as part of a panel discussing how states are attempting to manage the costs of compliance with their renewable standards.  The gist of that presentation was that Colorado has not done a very good job in that regard.  The state's major utility, Xcel Energy, has bragged about having already met Colorado's 30% RPS clear out to 2028, but this has come about because the utility has "acquired too much, too soon, at too high a cost."  The result is that the actual cost to ratepayers has been far in excess of the 2% rate cap that is also a part of the RPS.  Not unexpectedly, the utility  has gone to great lengths to prevent the disclosure of this fact -- something that the PUC's own Staff has warned about for several years now.  But, the data is what it is.  Fortunately, with a new governor and a new, more cost conscious PUC Chairman, the Commission is finally trying to get these cost overruns under control.  But it's a big job and it will take a while to pay down the deficit in the renewable energy accounts.  Still, a recent decision by the Commission will go a long way in achieving that aim.  More on that in my next column.

Finally, a few days ago, the Wall Street Journal carried a story about a 13-year old boy in Northport, NY who, for a school science project, developed a new way of arraying solar panels to emulate leaves on a tree in the hope that this configuration would yield a greater output than the conventional 2-dimensional rooftop array (see A Youngster's Bright Idea is Something New Under the Sun, WSJ, 05Jan2012).  Well, the so-called experts interviewed for the article were divided on whether or not young Aidan Dwyer's idea had merit and some questioned whether his measurements were valid.  One of these "experts" criticized the experiment for measuring voltage contending that he needed to calculate power.  Sorry, but that's wrong too.  He needed to record energy (as in kWh as opposed to kW).  More importantly, however, is that all of this is irrelevant.  What is relevant is that Aidan's curiosity led him to hypothesize a solution to a problem and devise an experiment to test it.  And that recognition by a 13-year old is more important than whether or not his tree array was more productive than a flat panel array.  Either way, the young scientist is to be commended.
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