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PO Box 1070, Frankfort, KY 40602  Phone 502.875.2428, Fax 502.875.2845

Effort To Expand Net Metering in Kentucky Stalls  Posted: February 26, 2016
February 26, 2016

Dear Senator McGarvey:

I’m writing to thank you for your efforts to expand the availability of net metering in Kentucky.

I am also writing to express my profound disappointment with the response of the electric utility industry to the most recent proposal developed by solar advocates with my assistance. I take issue with a number of the negative statements regarding the bill and believe a response is in order.

The utility response, delivered by email from Mr. Freibert of LG&E, makes these assertions:

1. The bill “directs the Commission to consider items that currently do not have a value in the market and/or are not actually quantifiable,” and the requirement that the Commission “consider” the items “would serve to weigh heavily towards a Commission finding of net benefits.” Later in the email the utility response asserts that the most recent draft “opens the door to a value-of-solar calculation designed to heavily weight intangibles that the utility industry has been clear should not, and cannot, be considered when arriving at the cost of serving net-metering customers.”

Before responding to each assertion, it is instructive to review what the items are that the proposal would require the Commission to consider in determining whether there is a net cost or net benefit: energy, capacity, transmission and distribution, system resiliency, environmental compliance, interconnection, ancillary services, administration, and fuel price volatility.

These same factors are required to be evaluated in determining cost and benefit, and nothing in the draft bill requires that the Commission give greater or lesser weight to any cost factor or any type of benefit.

As to the claim that the listed items currently have no market value and/or are unquantifiable “intangibles” that should and cannot be considered when arriving at the cost of serving net–metering customers, the record in PSC Case No. 2014-00002 reflects that these factors are not only capable of quantification, but are drivers in determining what constitute least-cost options for meeting customer demand.

In defending the decision to construct a 10 MW solar array in the Public Service Commission Case 2014-00002 as the least-cost option to “meet customer needs while at the same time complying with recently enacted and anticipated air quality regulations in the most cost-effective manner,” the Chief Operating Officer of Louisville Gas and Electric Company made these observations under oath:

•“[C]onstructing the Brown Solar Facility will allow the Companies to add a renewable resource with relatively minor impact to customer revenue requirements in the coming years.”
•“[T]he Brown Solar Facility will broaden and further diversify the Companies’ fuel supply sources and reduce future greenhouse gas emissions.”
•“The Companies believe it is prudent at this time to construct a facility to expand their renewable energy sources. A number of developments have enabled the Companies, for the first time, to present a feasible proposal to the Commission for a solar generation facility. The declining price of solar panels, available federal tax credits, and renewable energy certificates have helped create this opportunity.… These developments, along with the increased likelihood of carbon constraints, have created a reasonable opportunity for the Companies to add a renewable source to their generation portfolio and gain the valuable experience that will result from constructing and operating that source.”

Thus, according to the sworn testimony of the COO for LG&E/KU, adding renewable energy to the utility portfolio has measurable value, the likelihood of carbon constraints and decline in future greenhouse gas emissions have tangible value, and diversification of fuel supply sources likewise has value.

Other testimony presented in the Joint Application of Louisville Gas and Electric Company and Kentucky Utilities Company For Certificates Of Public Convenience And Necessity For The Construction Of A Combined Cycle Combustion Turbine At The Green River Generating Station And A Solar Photovoltaic Facility At The E.W. Brown Generating Station in support of the 10 MW solar array is instructive on the question of value and tangibility of solar benefits in terms of diversification of fuel sources and environmental regulatory compliance:

•“The Companies believe it is prudent at this time to construct a facility to expand their renewable energy sources.”
•“Given the increasing likelihood of carbon constraints, the ability to sell renewable energy credits, and the availability of federal tax credits if a solar facility is operational by the end of 2016, the Companies believe a solar facility will be a prudent fuel-diverse addition to the generation portfolio and will reduce future greenhouse gas emissions.”

In describing the factors that led to the decision to construct the combined-cycle gas and the solar arrays, the LG&E/KU witness in charge of energy supply and analysis gave these factors as being key to the decision:

•"[The] decision was reached after an extensive process that considered: (1) the Companies’ load forecast and the uncertainty associated with it; (2) the impact of the Companies’ demand-side management (“DSM”) programs on future generation resource needs; (3) the potential for future regulation of greenhouse gas (“GHG”) emissions by the U.S. Environmental Protection Agency (“EPA”); (4) the issuance and evaluation of a Request for Proposals (“RFP”) for capacity and energy to replace the retired generation facilities and meet future load growth; and (5) the uncertainty associated with future natural gas prices."

Distributed solar provides many of these same benefits to the utility and other utility customers that the utility-proposed array would, according to its’ own witnesses, provide with respect to price volatility, adaptation to greenhouse gas regulation, and more.

Mr. Sinclair continued:

•Q. You have previously testified that regulation of CO2 was essentially “unknown and unknowable.” Has your position changed?
•A. Somewhat. As I said, the future remains highly uncertain regarding CO2 regulation in the U.S. Many people believe that the Clean Air Act is not really suited for regulating CO2 emissions and that new legislation is needed from Congress. Given the current climate in Washington, it is hard to envision bipartisan support for GHG legislation. Second, court challenges continue related to past actions taken by EPA to regulate CO2 emissions and threats of future litigation are being made should EPA press ahead on regulations for existing power stations. In this environment, much remains unknown about if, when, and how CO2 might be regulated in the future. However, the Companies feel that enough is known that the risk of future CO2 regulations should be part of a 30-year analysis related to the next generation resource and that a resource should be economically robust with or without future CO2 regulations. I would add, however, that there is not enough known about the potential for CO2 regulations to evaluate material changes to the Companies’ existing generation fleet.” (Italics added).

•“I would point out that the Companies are recommending the construction of a NGCC unit and a solar facility, both of which become more economically attractive the greater the weight one places on future CO2 emission costs.”

•“While the Brown Solar Facility is not a lowest reasonable cost resource absent REC prices greater than $57/REC, as can be seen in Tables 35, 36, and 37 in the Resource Assessment, the Companies are proposing to move forward with the project because (i) it is a prudent hedge against both GHG regulations and natural gas price risk; (ii) it will reduce the Companies’ GHG emissions; (iii) it affords the Companies the opportunity gain operational experience with an intermittent renewable resource; and (iv) it does not materially add to revenue requirements over the next 30 years.”

Thus, what tipped the scales in favor of solar even where renewable energy credits are below the cutpoint that they would make the solar array the least-cost resource was the value of solar as a prudent hedge against greenhouse gas regulations and natural gas price risk, and the reduction it would provide in GHG emissions by the companies. These same benefits accrue to the utility and other utility customers from an increase in distributed solar generation, yet the utilities claim that those values are intangible and unquantifiable in the latter context.

Finally, in the 2013 LG&E and KU Resource Assessment appended to the LG&E/KU testimony of David S. Sinclair in Case No. 2014-00002, it is noted that

•“As long as Kentucky does not have a renewable portfolio standard, the Companies would have the option to sell the Renewable Energy Certificates (RECs) that are created when the facility produces electricity. Today, the market price in Ohio for solar RECs from Kentucky is $24-28 per REC.”
•“Given the increasing likelihood of CO2 constraints and the ability to sell Renewable Energy Certificates (“RECs”), the Companies also recommend building a 10 MW solar facility at the existing E.W. Brown station. The solar facility is a prudent hedge against both GHG regulations and natural gas price risk, it will reduce GHG emissions, it affords the Companies the opportunity to gain operational experience with a solar PV resource, and it does not materially add to revenue requirements over the next 30 years.”

The testimony of John Voyles on behalf of LG&E/KU further underscores that there are tangible, measurable benefits to expanded solar generation within a utility system in the Commonwealth:

•“Given the increased likelihood of carbon constraints, the Companies believe the Brown Solar Facility will be a valuable addition to their generation portfolio[.]”

Finally, the testimony of the Director of Environmental Affairs in support of the E.W. Brown solar array noted the value of solar with respect to environmental permitting and regulatory compliance costs, noting that “[t]here will be no requirements for an air permit or water withdraw/discharge permit.”

It is curious indeed that when expanding solar generation is proposed by the utility, values and benefits described as “intangible” and “unquantifiable” take on a quantifiable, measurable, and tangible form. It is equally curious that benefits dismissed in the utility response to this bill draft as having no quantifiable value or tangibility become such a weighty burden when required to be evaluated in the context of distributed generation.

It is disappointing that while the solar community has offered an opportunity for the utilities to treat solar net metering customers in a manner that they and I believe is discriminatory, and to allow adjustment of fixed charges to net-metering customers if there are net costs, the utilities are refusing to consider that net metering has benefits to non-net metering customers, despite numerous studies that recognize such values, and despite the sworn testimony in Case No. 2014-00002 asserting that such values make solar a least-cost option for new generation.

3. The third objection is that the “constraints the proposed legislation place on ratemaking to account for net costs or benefits resulting from net metering make the legislation unworkable, i.e. proposed KRS 278.466(6) appears internally inconsistent.”

The bill allows the utilities the opportunity to make their case that there are discernible costs to serve the net-metering customers and to impose a greater fixed charge for such service if they can make their case in a rate case. The other language carries forward existing language from the statute designed to prevent the utility from end-running the requirement to assess measurable costs and benefits by altering the rate design.

4. The fourth objection is that “[t]he proposal offers no remedy for systems under 30 kW. Current and future customers would be permitted to continue net metering at the full retail rate indefinitely.”

This statement is quite simply inaccurate. The utilities freely admitted that any costs currently incurred in serving net metering customers that are not fully recovered due to lower volume of usage, is minimal. The bill plainly provides that any 30 kW or below net metering customer beginning service after January 1, 2017 would be subject to the same increase in fixed charges if the utility made a demonstration in a rate case that there were net costs.

5. “The most recent draft still allows for recovery of costs through the DSM Rider which assigns the costs to “all” customers – the utilities central concern from the outset. Such incentives appear misaligned with current state policy.”

The entire section of the bill could be removed, as far as the solar community is concerned. It was intended to assure that, in the event that the utility could not or did not want to make the demonstration in a rate case to impose disparate fixed charges on net-metering customers, it could recover those costs. If the utilities would rather not have the ability to recover those costs, that is fine with the solar community.

6. The final complaint is that the “timing remains disconnected. All elements of the proposal, (system and facility limits, leasing, grandfathering and cost allocation) must be aligned from a timing standpoint. Once cannot come before the other.”

While the solar community is open to adjustment of dates in order to bring them into “alignment,” the reality is that there will not be a significant expansion overnight in larger solar arrays, and that the cost or value of serving solar net-metering customers could be established, if the utility so chose, long before the increase in solar customers becomes a significant revenue concern.

In sum, the solar community invested significant time and effort in attempting to address legitimate utility concerns while recognizing the benefits that accrue to the utilities from having a greater portion of the available energy portfolio comprised of distributed solar energy. It is disappointing that the utilities failed to move from their entrenched position of ignoring benefits while emphasizing costs. It is an opportunity missed to allow Kentucky’s businesses and industries to choose an energy strategy that would help them control one of their major expenses.

Thank you again, Senator, for your leadership on this issue.

Cordially,


Tom FitzGerald
Director

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