Distributed Generation Net Metering Policy Resources and Results JANUARY 2015 Consumer Protection $nngress sf ttle l$nitsil Ststes tEarltriugtan, B{[ e85$ November 19,2014 The Honorable Richard Cordray Director, Consumer Financial Protection Bureau 1700 G Street, N.W, Washington, D"C. 20552 Director Cordray, Over the next two years, hundreds of thousands of Americans will install rooftop solar panels on their homes, according to the U.S, Energy Information Administration's lrlnttc I Energ; Outlaok 20t4.We are supportive of this hend because solar is a key component of America's energy future. However, as the industry rapidly expands, we must be vigilant in protecting consurners from any misleading sales practices. While the cost of rooftop solar systems dropped 12-15 percent last year, the up-front cost cf rooftop solar panels is beyond the financial means of most U-S. househalds' As a result, many Americans are drawn into the solar market by the promise of a zero-money-down solar lease. lndustry analysts predict that 68 percent of rooftop solar installations will be financed through third-party leases in 20 14, a growth of over 20 percent since 201 I - A customer rvho signs a solar lease does not own the panels but contracts for the electricity produced by the system for 20 or more years. The initial attractiveness of a "no rnonty down" long-term lease may incentivize the installation of rooftop solar. Horvever, as was the case with the subprime mortgage crisis easy initial financial terms, increased demand and a rapidiy expanding indwtry can be high risk and ultirnately harmful to consumers and the industry. At the core of my concerns are reports that solar leasing companies may be overstating the economic benefits of signing a long-term solar lease while failing to disclose important information during the sales process. For example, customers are quoted savings each mcnth on their utility bills. However, rvho calculates those estimations and are they accurate? Also, it is my understanding that early solar lease payments are teaser rates that make solar eoergy payments seem aftbrdable. Horvever, do these rates escalate over time and are consumers made aware of those potential increases? Accordingly, I wouid appreciate your responses to the following questions: 1. What steps has the Consumer Financial Protection Bureau taken to investigate the possibility that misieading saies techniques are being employed in the rooftop solar industry? 2. What protections are in place to ensure that consumers who are considering entering into Iong-term solar leasing atrangements are made fully aware of the long-term implications of these transactions? For example, repofis suggest that third-party leases may result in PB]NTEO ON BECYCLEO PAFEfi escalating paymsnts to home sellers in the event that subsequent buyers do not want the solar system or cannot assume the lease, thus complieating real estate transactions. 3. What has the Consumer Financial Protection Bureau done to investigate complaints that have arisen about the marketing techniques employed by some rooftop solar leasing operations? 4. Has the Consumer Financial Protection Bureau considered performing a staffreview of third-party-teases in the rooftop solar industry and issuing recommendations on how we can better educate and protect consumsrs contemplating these tansactiors? Given the rapid expansion of the rooftop solar industry undenvay and the importance of effective protections to the continued well-being of U.S. consumers, 1ve look fonvard to your response to these questions within 30 days. Sincerely, s \ Ann K&kpatrictr Member of Congress Sinema E-".* Ron Barber Mernber of Congress $*- !* /^ ofCongress Cene Green Mernber of Congress PAUL A. GOSAR, D.D.S. FounrH DrsrnEt! .A,EtrottA COMMITTEE ON OVERSIGHT AND GOVEBNII.{ENT BEFOBM 504 Ceruox House Orrrcr Butono Wasnuctor, D-C. 20515 (292) 2?5-2315 Vrcr Ccarnu*rc, EteRcv Porrcv, HrtrH Cenr lNo ENr[LEMEtTs 122 N. Coffrcz Srnrer, Sunr #104 PREscon, AZ 86301 (e28) 445-r683 Emloxrc Gmrrnc, Joa CnanloN, 270 E. HuNr Hreswav, Surrr #12 SAN TAN VALLEY, AZ 851 43 suBco!,rHrTT€Es NarolnL Srcmrry elo FlEcuutoav Arrntcs 0ougres$ of tbs @uits! Ststrg ({80) 882.2697 22O N. 4rh STBEET AZ 86401 (ee8) 44s-r683 KrNoMAr.r, WWW,GOSAR.HOUSE.GOV COMMITTEE ON NATURAL RESOURCES SUSCOfiilIITEES frulrle of Beprerefitntibes @asl;irrgtsil, B€ 20515-0301 ENERGY AND MNEEALS lnoraN ero Amsu Nsrye Arrerns Werrg lro Powgn Decomber 12,2014 'Ihe Honorable Editli Rarnirez Chairwoman U.S. Federal Trade Conunission 600 Pennsylvania Avemre, NW Washington, DC 20580 Dear Chairrvoman Ramit'ez: Given the rapid expansion of the rooftop solar industty, rve wish to call your attention to the entergence of third-palty leases for rooftop solar systems. Some of these companies that tnarket leased solar systems to consurners as a lvay to levemge plornoting solal leasing products ale actually acting as sellers of financial products, leveraging the federal Investrnent Tax Credit (lTC) and applicable state rcnewable subsidies to obtain tax equity investlnent for the putposes of ttuning a profit. Under incteasing pressurc from Wall Street to sign up more leashrg customem before the ITC expites, tltese companies are reported to be using potentially deceptive sales tactics - practices that, iftrue, nrerit investigation' By rvay of backgtound, the rooftop solar market has sruged in recent years. This sutge is, in part, due to rcgulatory subsidies and the increased use of tliild-parfy leasilg arangelnents in residential rooftop solar installations. Consuuters are being enticed by solar leasing colnpatries who ofler zero-money-dolvn leases, essentially teaset'rates, for a20 year lease agrcement. Industry analysts pledict that a vast majority of rooftop solar installations across the nation will be financed throrrgh long-term, third-party leases in 2014. One of the largest solar leasing companies, has a stated goal of comrtritting one rnillion customers to long-term contracts by 2018. As a vety nerv industry with a limited track record and little regulatory oversight, the solar leasing market may pose a considerable risk to the increasingly large nuntbers of Arnerican colmumers that commit to the leasing product lvithout all of the relevant infbrmatiou (not to mention the Americau taxpayer, who heavily subsidizss each rooftop solar project). Of parlicular concern, is the possibility that these third party leasing companies lnay be utilizing deceptive marketing strategies that overstate the savings the homeowner will receive, while understating the risks associated with agleeiug to a decades-long lease that is often secttred by a srcond deed of trust to the house - a financial cotrunitrnerrt that \.Yill likely exceed both the life of the roof and duration of the lessor's horne olvnership. National solar leasing companies have aggressively marketed the zerc-moneydown leases to ltomeorvners in select states. In fact one of the largest solar leasing cornpanies has pafinered rvith a strategic sales company that sold large nurnbet's of subprirne moftgages to tmsuspecting homeowners in the lun up to the subprime mortgage t crisis,l Class action lawsuits have been filed in http;//rvrvrv.nhu-n,rivs.corn/irJ127844894/ns/business-sto ; !ttp;//rnvrv.{rrcB,onlive.con/busincs$/ore.aonianlindcx.sstlbase/btlsinesv12168663 52224170.xrn1; littl://rvrvrv.solarcity.uonr/trervsr.otit/plssslsolarcity'acguire'pararnount-solar-ilt$t-step-towatii-ntillio.-n-customer-soal hllp:/ihlogiealtlepi.com/rc'alestat,.-nervsl2009l05/ I 5/nrortBage-conrptrn*settles-rvith-stirte/ PHIHTED ON RECYCL€D PAP€B Califolnia and Louisiana by honeowners alleging fi'audulent mal'keting and overcktirrg potential savings fi'om zeto+noney-down ieases.2 Iu acldition, ilumel'ous repolts have founrl tlrat holneorurers lvJio have signed these zero-rnoney-down leases ale sh'Lrggling to sell their'liornes, itdicating that they rverp not firlly arvare of the terms of their 20-30 year lease commitrnents.3 Consufirer protection and fhirness require a clear explauation of possible risks. Faimess also requires accurate factual assurnptions when presenting the options to consul)rers. As it stands, solat'consulners at'e likely not ar.vare of these risks, A key concem is that if these leases ale not offbred in good faith or with accurate disclosurcs, the entire solar iirdustry could be tainted. nrerefore, rve ask that you respold to the tbllowing questious: 1. What options exist to erisure consurners are tirlly apprised of the costs and beuefits of solal leasing arangernents, including potential financial risks? At a minirnnm there appeals to exist a need tbl a resoluce centel fbr consrrlners to lveigh risks beforB lnaking a fiuancial cornmitment. 2. In the unlil 1MW) solar installations tied into the traditional grid system in the same mimner as conventional power plants- has been even more rapid. We estimate that in2014, utility scale solar generation will exceed that of distributed solar by over 50%. Going forward, we expect utility scale and distributed solar generation to enter into more direct competition for subsidy dollars and regulatory favor. The lower cost of utility-scale solar, combined with its compatibilify with regulated utilitiest business model, render it in our view, a looming threat to the distributed solar industry. Exhibit 2A Distributed solar generation directly challenges the legacy grid system, reducing consumption of utility-supplied electricity (see our June 9, 2014 ResearchCalJ, fjle-1,,y1g 1..l,Lj::iU t ul_e::Al:sti1iLpi {tal1il t' rL SlLk{tL{ i ti t i t g _L lill i:L:il=:ij_i:_l:t Lril ry .\ *:rl!;r). Because U. S. elechicity bills are based on kWh consumed, the loss of electricity sales s to distributed solar erodes utility revenues -- undemrining utilities'ability to recover capital invested in the grid. E " { Utility-scale solar presents no such threat to regulated utilities. When required to deploy it by state mandates, regulated utilities can recover its cost in retail electoicity rates. Given recent cost declines, utility-scale solar may even save consumers money; FPL's plan to add three *75 MW utility-scale solar farms to its grid does not respond to state renewable mandate (the Sunshine State doesn't have one), but rather grew out ofthe utility's integrated resource planning, which identifies the lowest cost resources to supply power to the grid. BERNSTETN RESEARCH ? 1 Both utility-scale and distributed solar generation have grown rapidly - but utility solar generation now exceeds distributed by over 50% 18 16 = =L 14 12 10 g I 6 4 2 0 a .S .r$ "$" .d Distributed Solar "d* "S d& Utility-scale Solar - .2014E dtrapolated based on 2014 YTD generation compared to equivalent 201 3 amilnt Sour@: ElA, ABB Ventyx, SEIA, Bernstein analysis and estimates NOVEMBER3,2014 BnRNsrEru ENeR.cv & PowER: HIGH NooN FoR DlsrRlButpp SoleR, on Ana REGULATED UrrLnms rHE FuruRE oF SoLARPowER? The competition betweeu distributed and utility-scale solar generation reflects the fact that they meet the same goals while relying on the same pots of money (taxpayers' and ratepayers') to do so. Both distributed and utility-scale solax axe generously subsidized because they emit no CO2, SO2, NOx, nrercury, particulate matter or ottrerpollutants; require little environmentally disruptive mining or transportation; and, critically, offer long terrn price stability. These benefits come at substantial cost, however. We estimate the unsubsidized lifetime cost of a residential distributed solar system at -$230/lv[Wh, or almost twice tle average residential price for electricity in the United States (see Exhibit 4). We estimate the cost of utility scale solar generation at -$91/lvIWh, or roughly twice the wholesale price of eleckicrty. To sustain its growth, therefore, the solar industry relies upon (i) renewable portfolio standards and feed-in ta.riffs, which essentially require utility customers to purchase solar generation at an above-market price, and (ii) investment tax credits, which require taxpayers to cover 30olo of the installed cost of solar power systems. We calculate tlat renewable portfolio standards and feed-in tariffs add -$2.1 billion annually to customers' electicity bills, in excess of the value of the electricity supplied by distributed solar, while the investrnent tax credit cost taxpayers -$3.5 billion :m2013. The combined cost of ratepayer and taxpayer subsidies for solar generation, at some $5.6 billion annually, is equivalent to -$50 per U.S. household per year. The cost of these subsidies grows in direct proportion to the capital invested in solar generation. Annual invesbnent in U.S. solar generation has increased at a compound annual rate of ^457o over the last five years. As the industry continues to grow, we believe this rising cost will drive taxpayers and consumers (and through themr legislators and regulators) to focus increasingly on costeffectiveness. Atrd a focus on cost will inevitably benefit utility scale solar, which can deliver 1[6 elviv6nmental advantages of solar generation at a cost that is 50o/o to 60% below that ofdistributed solar. In the next section we discuss the major cost differences between utility-scale and distributed solar, and make the case that cost advantages of utility*cale are likely to persist in the long term. Utility-scale solar: Utility-scale solar enjoys five key cost advantages relative to distributed solar: (i) lower customer acquisition costs, (ii) economies of scale in installation, (iii) market power in equipment procurement, (iv) a significantly lower cost of capital, and (v) higher average capacity factors. These differences, in our view, are inherent in the two BrnNsrrn{ RTSEARCH 2 technologies, and therefore will be reflected in a permanent cost advantage for utility scale solar projects. - Lower customer acquisition costs Customer acquisition is perhaps the most challengiag aspect of the distributed solar business. Contacting thousands of potential customers to discuss their interest in diskibuted solar is inherently a labor intensive and time consuming effort. The success rate is low. Many potential customers are not interested; some that are prove not to be creditworthy; and the properties of those that are both often prove unsuitable for distributed solar, due to shading from tees, the absence ofa southern facing exposure, or the presence of dormers or gables that limit suitable roof space. As monopoly suppliers of electricity in their service territories, utilities do not need to acquire customers or even consult them before installing solar generation. On the contrary, every utility customer, even aparknent dwellers without rooftops (like the authors of this note), can be supplied from a utility scale facility. - Economies of scalefor labor and installation The most obvious advantage utility-scale solar is its lower cost. The installation of a single 10 MW system, all else equal, costs less than the installation of 100 systems of l00kw (0.1MW). For the latter, installers must travel to 100 different locations, familiarize themselves with 100 different plans and unique circumstances, obtain 100 construction permits and secure 100 utiliff hookups. The costly repetition ofthese basic tasks is inherent to distributed solar generation and is avoided by utility scale projects. Distributed solar installations can also be more complex than utility-scale systems. lnstalling roof mounted panels is inherently costlier and riskier than building ground mounted panels. And installing rooftop systems (especially on houses with pitched roofs, gables, dormers or chimneys) requires significant customization relative to uniform ground mounted arrays. - Oligopsony Regulated utilities are the monopoly suppliers of electric within very large service territories. Thus a handful of major utilities may supply the overwhelming majority of consumers in a state the size of Texas or California, and interstate utility holding companies such as Duke Energy or Southern may supply the bulk of the power needs of several states. In any given region, therefore, a limited number of utilities comprise the market for utility-scale systems; they consequently enjoy the pricing power associated with oligopsony (a market with few buyers). Because of the scale and ongoing nature of their equipment purchases, moreover, utilities have dedicated procurement departments staffed with engineers and purchasing NoVEMBER3,2014 BERNSTEIN ENERCy & POWER: HIGH NOON FOR DISTRIBUTSO SOIER, OR ARE RECUIETE.O UTILITIES TTg FUTUru OP J SoLARPowER? managers. Through the competitive bidding process, these professionals are able to choose from an array ofoptions each time they want to expand solar capacity, selecting the lowest cost solution and paying the cheapest price. Contrast this with the dishibuted solar market, where customers are often unfamiliar with solar power before being approached by a developet, and may not have the technical expertise or even the time to aggressively seek the lowest price. As the distributed solar industry grows, we expect suppliers will be forced to compete more with each other (as opposed to simply beating the prevailing utility retail rate), and the potential to over-price distributed generation will be reduced. But the rnarket power enjoyed by utilities in the procurement of utility scale systems will persist. - - Higher capacity factors In any given location, a MW of utility-scale solar will generate more electricity, on average, than an equivalent amount of distributed solar capacity (i.e. will have a higher capacity factor). This reflects the fact that utility-scale solar can be designed such that the panels are optimally positioned (facing south at a tilt equal to latitride) so as to maximize the solar energy they receive. The capacity factor ofrooftop systems, by contrast, is often constrained by the direction and tilt of the roof (particularly for residential systems), and any nearby buildings or trees that block sunlight. As a result, distributed solar capacity factors average -20Yo nattonally, compared to 25o/o or higher for utility-scale systems. Lower trqnsmissian losses By generating electricity close to the point of consumption, distributed solar also avoids the power losses associated with sending electricity over transmission and distribution networks to the consumer (nationally averaging .-10%). The absence of transmission losses impties that each megawatthour generated by a distributed solar system can offset 1.1 MWh of utility generation. - Lower cost of capital Similar considerations favor utilities in procuring capital. As the monopoly suppliers of an essential service, supported by cost-of-service based rate regulation, utilities command unrivaled access to the capital markets. The risks of housing related consumer credit, by contrast, are still a painfirl memory for banks and institutional investors. - systems avoid the costs associated with building transmission lines to connect utility-scale installations to the grid, they can also put off the need for future investrnent in transmission systems by reducing the external electricity supply needed within a given area. Speed of Permitting Getting utility-scale soiar projects approved comes with the procedural and regulatory complications of any large-scale project. Many utility-scale solar projects in the Southwest are situated in sensitive desert habitats or on tribal lands; permitting of these projects has in certain cases been held up for years. The permitting of distributed solar systems is generally not subject to such delays. To the best of our knowledge, no distributed solar project has ever been held uo due to its threat to the habitat of the deserr tortoise. Putting it all together: a cost advantage for utility-scale solar Data on the installed cost of U.S. residential, commercial and utility-scale solar PV systems over time has been gathered and published by the Solar Energy lndushies Association and the Lawrence Berkeley National Laboratory (see Exhibit 2 and Exhibit 3, respectively). Both sets of data show a substantial and persistent cost advantage for utility scale systems. I Similarly, ground mounted utility scale systems allow for the deployment of heavier, more sophisticated technologies than are feasible for rooftop systems. An example is single-axis tracking, or panels that follow the sun's movement through the sky, a technology which, while more expensive, has consistently proved to be cost-effective for ground-mounted systems. Favoring distributed solar: Distributed solar also commands certain advantages, of course, the most important of which are transmission cost savings and, in certain cases, speed of permitting. - Lower transmission costs Distributed solar generation enjoys one major cost advantage relative to utility scale systems: it requires no investment in transmission infrastructure. Not only do distributed solar BERNSTEIN RESEARCH I We note that data on the installed cost of utility-scale and distributed solar systems do not capture fully the economic beneflt of the former because they fail to account for the fact that a watt of utility-scale capacity generates more electricity, on average, than a watt of distributed capacity. Nowlrnen3,2014 BERNSTEIN ENERGY & Powpn: HIGH NOON FOR DISTRIBUTEO SOLER. OR ARE REGULATED UTIIMTBS THE FUTURE OF 4 SolenPowen? A cosUbenefit analysis of renewable generation Exhibit 2 lnstalled coet of residential, commercial and utility+cale solar PV systems, 2009-2013 (reported prices, gathered by the Solar Energy lndustries Aesociation) $8.00 $7.00 $6.00 to $5.00 * D s+.oo $g.oo $2.00 $1.00 $0.00 2009 2010 2011 2012 Commercial Residential 2413 Utility-scale - Source: Solar Energy lndustries Assmiatim, Bernstein analysis Exhibit 3 lnstalled cost of residential, commercial and utility-scale solar PV systems, 2009-2013 (reported prices, gathered by Lawrence Berkeley National Laboratory) $9.00 $8.00 $7.00 o $6.00 T 3 e $5"00 $4.00 $3.00 $2.00 $1.00 $0.00 2009 2010 2011 2012 Commercial Residential 2013 Utility-scale - Sour@: Lawren@ Berkeley National Labomtory, Bemstein analysis It is possible that costs for distributed solar generation rnay decline more rapidly in future than those for utility scale systems, reflecting the potential for reductions ia customer acquisition and installation costs as the distributed solar industry grows and becomes more competitive. But for the reasons outlined above, we believe ut'rlity scale solar is inherently more efficient. Particularly when compared to residential systems, it is unlikely that the cost advantage for utilif scale systerns will ever disappear. In most countries, the cost/benefit analysis of environmental of renewable generation has been muddled at best, with costly results in countries such as Germany and Spain and, we would argue, in the United States as well. In this section we will illustrate tlte relevance of cost/benefit analysis and demonstrate how it favors utility-scale solar. Alternative sources of generation are frequently compared based upon their levelized cost of energy (LCOE), or the price per kWh of electricity that permits the recovery of all the costs of a generation system over its useful life. ln Exhibit 4 we show our estimates of the LCOEs for alternative power generation technologies. 'Note that our LCOEs for solar and wind generation exclude the benefit of fiscal incentives such as the production tax credit for wind and investment tax credits for solar. We have used modeled costs for solar PV systems of $3.00/Watt-dc for residential and $1.65AMatt-dc for utility scale. However, to properly assess the economic benefits of different generation technologies, it is important to take into account notjust their cost, but also the value ofthe energy they produce. This is in large part a function of when they generate electricity. In the U.S. today, on-peak power prices can be 330/oto 50% higher than oflpeak prices. A technology that generates electricity during onlreak hours, such as solar, thus produces more valuable electricity than a technology whose output is skewed to off-peak hours, such as wind. This difference in the value of electricity produced is reflected in the Levelized Avoided Cost of Energy (LACE), which calculates the market value of the energy displaced by different generation technologies. By comparing the Levelized Avoided Cost of Energy from a particular generation technology to its Levelized Cost of Energy it thus becomes possible to compare the value of power plant's output to its cost of production. The difference, if positive, represents the economic value-added of the generation technology; if negative, its economic cost. We compare the LACE and LCOE of the various generation technologies in Exhibit 5. As can be seen there, two renewable technologies, wind and utility-scale solar have a cost of generation (LCOE) that modestly exceeds the value of the electricity they produce (LACE). For rooftop solar, by contrast, the difference between the cost ofgeneration and the value of output is huge, at an estimated $153ltt4Wh. Perhaps the single most important benefit of renewable generation is its ability to supply electricity with zero emissions of CO2 or other heat-trapping gases. In Exhibit 5, therefore, we compare the cost across the various 2 Conventional coal fired plants are omitted from this analysis due to their failure to comply with the EPA's proposed New Source Performance Standards for CO2. BrnNsrsrx RESEARCH NoVEMBERt2014 ENERcv & Powsn: Hrcu NooN FoR DISTzuBUTEo Sor.q.t, oR ARE Rscularrn UTILITIES THE FuruRE oF SoLARPowER? BERNSTETN generation technologies of avoiding a ton of CO2 emissions. The colunms in Exhibit 5 represent the ratio of (i) the CO2 emissions avoided by the technology in question, relative to the average CO2 emissions rate of 0.5 metric tons per MWh for grid-supplied electricity, divided by (ii) the economic cost or benefit ofthe generation technology, calculated as its LACE less its LCOE. As can be seen there, wind and utility scale solar generation are capable of reducing CO2 5 emissions at a cost of $16 to $36 per metric ton. For distributed solar, the cost of this same environmental benefit is $306 per ton. Exhibit 4 Levelized Cost of Energy (LCOE) compaled to Levelized Avoided Gost of Energy (LAGE) for feasible ns sources of supply $227 $2s0 $200 $150 $100 $63 $50 = $41 $62 $68 g1 12 $91 $56 $64 $o = 0 ($so1 ($501 ($1oo) ($150) ($153). ($2001 Combined Cyde Gas Wind Nuclear Utility-scaleSolarPV lGCCwith Carbon Turbine tr Levelized Avoided Costof Residential Rooftop SolarFV Capture & Sequestration EnergyperMWh tr Levelized Cost of Energy per MWh tr Societal BenefiU(Cost)per MWh Source; ElA, NREL, ABB Ventyx, Bemstein analysis and estimates Exhibit 5 Cost of GO2 reduction for feasible new sources of supply, based on grid average carbon intensity of 0,5 tons of CO2/MWh $400 $331 $306 $300 o $200 F (, o E 4 $100 $12 $16 Nuclear Wind $36 $0 ($1oo) ($20o) ($136) CombinedCydeGe furbine Utility-scale SolarPV IGCC with Carbon Residential Capture& Rooftop Solar PV Sequestration Source: ElA, NREL, ABB Ventyx, Bemstein analysis and estimates BERNSTEIN RESEARCH NoVEMBER 3,2014 BuRNsrr,rN ENERGy & Powe,R: HTGHNooN pon Drsrrusurpo Sor-en. oR ARE Rpculere,o Urn-rups rHE FuruRE oF 6 Sornn Powrn? states. Under this program, subscribers*either households or businesses--purchase or lease shares in a solar project, Distributed solar offers a broader value proposition.,. It can be argued that our analysis has focused too narrowly on the economic disadvantages of distributed solar, while ignoring the fact that distributed generation also offers other, partially unquantifiable, benefits to customers. These are critical to its appeal, and for truly competitive alternatives to distributed solar to be offered by utilities, they will need to be largely replicated. - Direct promotion of renauable generatian Many distibuted solar customers are heavily motivated by the satisfaction they feel from their personal installation their solar rooftop - contributing to the larger good of environmentallybenign electricity. This personal connection carutot be fully replicated by utility scale renewable generation. - Price certainty Lacking an ongoing fuel expense and with little required O&M, solar installations offer far more predictable costs over their lifetime than conventional power plants, whose fuel costs fluctuate with the prices of coal or gas, and whose operation and maintenance costs rise with in{lation. Distributed solar providers are able to use this to their advantage in selling to customers who value price certainty, most notably retirees on fixed incomes, offering Z}-year, fixed price leases for rooftop solar systems. - A smse of self-reliance Some distributed solar customers are motivated by a sense of self-reliance that comes from generating a portion of their own power needs. This is largely a state of mind; to take advantage of the net energy metering subsidy, distributed solar systems must remain connected to the grid and sell their power back to the utility. ...but it can be replicated If utilities had marketing departrnents, they would have realized by now that some of these benefits, such as price whose output is sold to the local utility. In rehrm, they receive a credit on their utility bill for tleir share of the solar garden's generation, valued at a rate tlat moves with the retail rate. Since 2012, Colorado's largest utility, Xcel ()GL, not covered) has approved 25 such cornmunity solar installations with a combined capacrty of over 18MW. A quarter of this capacity is now operational. IrZAI3, Minnesota adopted a law requiring utilities to administer a similar commurnity solar garden progr{rm. Xcel, which also operates in Minnesota, has proposed a plan under which it wouldhave the option to develop solar gardens itself, as well as confractiag development out to third parties. Conclusion The combined cost of ratepayer and taxpayer subsidies for solar generation, at some $5.6 billion annually, is equivalent to -$50 per U.S. household per year. The cost of these subsidies grows in direct proportion to the capital invested in solar generation. Annual investment in U.S. solar generation has increased at a compound annual rate of 45o/o aver the last five years. As the industry continues to grow, we believe its cost will drive taxpayers and consumers (and through them, legislators and regulators) to focus increasingly on costeffectiveness. A focus on cost will inevitably benefit utility scale solar, which can deliver the environmental advantages ofsolar generation at a cost that is 50% to 600/o below that ofdistributed solar. The cost advantage of utilify scale solar, in our view, reflects differences inlerent in centralized versus distibuted generation systems. Utility-scale solar enjoys five key cost advantages relative to distributed solar: (i) lower customer acquisition costs, (ii) economies of scale in instailation, (iii) market power in equipment procurement, (iv) a significantly lower cost ofcapital, and (v) higher average capacity factors. These advantages are permanent in nature. The arc of the eleckicity industry is long, but it bends towards economics. certainty and the connection to particular solar installations, are well within utilities' ability to offer. It is possible, for example, for utilities to offer their customers a direct stake in utility-scale solar developments, allowing subscribers to see the direct impact of their spending. Such ownership stakes, moreover, can serve as a hedge against fluctuating powerprices. Some states and utilities are already moving in this diection. One example of this is Colorado's community solar gardens program, which has since been replicated in vmious other BrRusrrrx RESEARcH NoVEMBER 3,2014 BnnNsrpw ENERcy & PowER: HrGH NooN ron DrsrRlsurpo Soren. oR ARE REGULATED Urrlrrrps rHE FuruRE oF 7 SOLARPowER? This Week's Reports North American Oil & Gas E&Ps (Available on FirstCall/bernsteinresearch.com) US Utilities EXC: Exqlon's Earnines Continue to Staqnate. but Several Lons Term Upsides Are Getting Closer (1013012014) While we believe Exelon is challenged to realize organic earnings growth at either its competitive or regulated utility segments, we nonetheless see the potential for material eamings upside from three external sources. EXC's agreed acquisition ofPepco Holding would add, by our estimate, $0.14 to $0.16 per share to EXC's 2017 EPS. Second, EXC stands to bene{it from PJM's planned capacity market reforms; a $100/Ir4W-day rise in the capacity price would add $0.50 to EPS. Most importantly, EXC's predominantly nuclear fleet is uniquely levered to EPA's plan to regulate power plant emissions of CO2. We calculate that these regulations could add $ 1 .60 per share to long term eamings, equal to 60Yo ofEXC'g consensus 2016 EPS. EIX: CEO Warns Investors to Curb Their Enthusiasm. Earnines Will Revert to Allowed Levels: Raisins TP on Dividend Outlook ( I 0/29/20 I 4) EIX yesterday raised its guidance range for 201 4 core earnings to $4.25-$4.35 from $3.60-$3.80 previously. This dramatic increase primariiy reflects further reductions in expected 2014 operation and maintenance expense and income taxes. However, EIX CEO Ted Craver repeatedly emphasized that both the O&M and tax savings are expected to fall away in 201 5, as Edison's revenue requirement is re-set in its 201 5 General Rate Case to reflect the savings realized in 2014. We expect core eamings to remain below 2014 levels until at least 2018. However, as Edison raises its dividend payout to its target range, we expect -1 1o/o awr.u,al growth in dividends over 2014-2017. We are raising our year-end 2015 TP to $66 per share. Bernstein E&Ps : lYhat the Stronq Dollar Did (and Mav Do) to Oil Prices (10/3112014) The strengthening ofthe dollar has been invoked as one ofthe causes ofthe decline in oil price. Indeed, the dollar index has risen 7% YTD correspondiug to falling oil and commodity prices. The relation between Brent and the dollar is not simple. Over the long run, correlations do not persist but year to date, the beta of oil price to dollar is greater than 3. This requires that some other variable (macro fear is our hlpothesis) is driving both, rather than either driving the other. If you believe that oil price retums, then investing in oil-linked equities is an obvious strategy. We recommend EOG, CIE, APA, and TLM (a11 outperform) as equities that will respond positively to a rising crude price. Bernstein E&Ps: The Mvsterv of SWN and the West Vireinia Marcellus - Horse Tracks or Unicorn Tracks? t10128/2014) On Oct 17, SWN armounced the acquisition of SW Marcellus and Utica Assets from CHK. Purchase price was $5.375 billion with assets representing 4 1 3,000 net acres and 0.34 BCFED of production. Transaction comps suggest an overpayment of 95o/o. Equity markets rewarded CHK and punished SWN lTYo and -l}Yo respectively on day of announcement, erasing $l .3B of SWN market cap. We have always believed that SWN was one of the more retums-focused teams in our coverage space. This does not {it the mold. Altematively, there is more to this deal than meets the eye and a patient shareholder (having seen the 'bear case' aiready reflected in the stock) should consider waiting a month or two to decide. We reiterate outperform. Asia Pacific Oil & Gas China Economic & Enerev Indicators - September 2014: Sisns of Stabilization in Enerev Demand with the Fillinss of sPR (10/30/2014) U.S. Utilities: PJM Market Monitor Exoects New Canacitv Market Architecture to Triple Caoacitv Prices (1012112014) On Oct. 16, I interviewed Dr. Joseph Bowring, PJM's Independent Market Monitor, with respect to the radical changes to the architecture ofthe PJM capacity market currently under consideration by PJM. This note presents the transcript of our conversation. Bowring expects PJM's Capacity Performance Proposal, dated Oct. 7, to drive future capacity prices to Net CONE (ranging from $315 to$375ltr4W-day, depending on the region) compared to a clearing price of only $120MW-day in the 201712018 capacity auction. In the note, we quantifu the sensitivity of generators'eamings to a $10O,MW-day increase in PJM capacity prices. NRG has the most eamings leverage to a PJM eapacity price increase, followed by CPN, FE, EXC, DYN, PEG and PPL. Blended energy consumption growth in 3Q came in X3.5Yoy-oy, 2.8 percentage points lower than 2Q, consistent with the pullback in GDP growth. Despite weak readings in 3Q, China economic and energy indicators showed signs of stabilization in September. Oil demand increased strongly by 7.60/oyoy to 10.5Mbpd in September. Low oil prices and elevated geopolitical risk have led to accelerated fill of SPR. Gas output increased 12% yoy to 9.9bcm in August 2014 while total gas demand was up 8% yoy to 14.6bcm. Crude steel production in September 2014 was -67.5Mt, up 3.2Yo y-o-y and ry 1.3Yo m-o-m. Primary aluminum production in came in at 2.04Mt in September, up 9.9% y-o-y and up 4.0Yo m-o-m. LME all-in price approaching -US$2,500 per ton in US and Europe. European Oil Services Saioem: .,.And Into thq Fi,re; TP Cut bv 307o on Maior Write Down Threat. Underperform. TP €I0 QAB0tzot4) Following disappointing Q3 results the key eontroversy on Saipem is about entry point has the stock bottomed out? We think BERNSTEIN RESEARCH NoYEMBER3,20L4 BeRNsrBx ENsncv & Powrn: HIGH NooN FOR DIsrRIButpo Sor-en. on AnE REGULATED SoranPowsn? not. In our experience this many cracks alert to a new pioblem, and we highlight the five key datapoints investors should focus on. Unbilled invoices are getting worse uot better, increasing 15% to €1.5bn. Zero-profit contracts refuse to pass, increasing from l7%ta 20Yo of 2015 backlog. 2014 net debt, EBIT and net income were guided down 8% with little substantial reason. Multiple waming signs make us fear non-collection of the €l.5bn of rmbilled invoices will be larger than we thought. Hence we model a €350m write-down (20% of the total) into our forecast and accordingly cut our target price 30Yo tn €10.00. Underperform. European Utilities Southern Eurooean Utilities: Have No Fear - Whv lnvestors Should Not be Afraid of a Rise in Interest Rates (10/30/2014) 'What will happen to Southern European Utilities when interest rates rise?" We have invsstigated whether investors should fear a possible increass in interest rates and concluded that the perception ofinterest rate risk is largely overstated. Our 15-year analysis shows that no inverse relationship exists between rates & Utilities'prices. This is due to 3 key stabilizers: (a) networks' remuneration, (b) nuclear provisions, (c) shareholding structure skewed towards Gov't & strategic investors. We simulate 2 rising interest rat€ scenmios aud show that the greater near term risk might stem from an insufEcient rate increase, rather than the opposite. Hence, we reiterate ow ratings and TP: EDF, GSZ, Ene1, EGPW (OP), Snarn, GAS (MP), andIBE (UP). Euronean Utifities: UK Canacitv Market Auction - Updated analvsis based on notential biddine strateeies (1013012014) We update our eadier capacity market analysis to take into account a revised demand curve, revised supply numbers and granularly analyse over 500 potential supply sources to predict potential bidding pattems based on economics of various sources. Our estimate for clearing prices remain unchanged at -f38iKW perKW ofderated capacity (2012 prices), as we still expect existing plants that are'price-makers' or requiring refurbishments, depending on their bidding price, to set the price. Not all existing capacity will clear the auction - possibly only 2.6GW of otd CCGT and old coal; EDF and RWE have highest amount of capacity that is most likely to clear auction at 7.5GW and 7,2GW respectively followed by SSE at -5GW UTILITTES rup FuruRB op 8 RWE: Three reasons whv the recent underperformanee is unwarranted and reoresents a sood ertrv point {1012712014) In the last month, RWE is -13% vs DAX -6%; this has been attributed to (l) Challenges in sale of RWE DEA due the lack a comfort letter from the t K (2) A weaker German macro, declining coal prices (3) Discriminatory capacity markets. DEA sale has not been blocked by UK and UK assets can be ringfenced; RWE still targets year end closure. There has been a structural decoupling of its share price and power prices; besides forward power prices declines have been modest in the last month. Discriminatory capacity markets are not fayoured by the independent consultant reports commissioned by the Govemment; domestic and EU level political support is unlikely in our view. The recent performance is unwarranted and represents a good entry point Eurooean Utilities: Seven Frequentlv Asked Ouestions on German Power Markets (10127/2014) While central to our thesis on RWE and E.ON is the diminishing relevance ofthe power generation business, we find that this area continues to be biggest area of investor focus and concem. In this note, we address 7 most FAQs and update our forecasts. Commodity prices account for -80% of the drop in power prices: Capacity closures of 8- I 8GW needed for a -10-25Yo increase in prices; Renewables impact on prices limited; Power dd not on a downward trajectory unless there is continued economic contraction. CO2 prices will unlikely provide support due to limited political support for radical interventions; Coal has likely bottomed-out and lignite will offer a floor for prices in Germany; a capaclty market is preferable to a distorted energy only market UK Ufilities: What To Expect from the CMA Investieation on Enersy Retail ? - The Detailed Low-down (1012812014) In today's note, we tease-out the potentiai solutions that the CMA can look at, based on responses ofnew entrants and analyses. The outcome is far from clear and depends on how tough a stand they will take to eliminate real / perceived bariers to entry. We view the remedies of (1) Divestment (2) Some measure to shake-up 'inactive' customers (InformationaV opt-n/ maximum mark-up) as being most coutroversial and holding the key to the impact of reforms on the profitabilty of the Big Six. For Centrica (MP), we find that a bleak post-CMA world has been priced into the stock. For SSE (UP), while domestic retail is -12Yo of operating profits (vs 21Yo for Centrica), we find that very little of downsides from the investigation are priced in BERNSTEIN RESEARCH NoWMBER3,2014 BpRNsrpn ENrRcv & PowEn: Hrcu NooN roR DtsrRmurpo SoreR. oR ARE REGULATED UTTLITIES THE FuruRE oF 9 SoranPowrn? sclosure Appendix Ticker Table TTM 31 Oct 2014 Ticker AEP DM DUK EIX EXC FEM NEE PCG 1251.HK (SPT) 135.HK (Kunlun Energy) (lnpex) 1623.HK (Hilong) 2883.HK (COSL) 3337.HK (Anton) SNP 386.HK (SinoPec) PTR 1605.JP 857.HK CEO 883.HK roc PIE EPS Closing Target Rel. Price Price Perf. 2013A m14E 2015E 2013A 24148 2015E Rating CUR (Petrochina) (CNOOC) ONGC.IN OSH.AU PTTEP.TB RIL,IN RIGD.LI STO.AU WPL,AU BG/.LN BP/.LN BPM CNE.LN ENI.IM EO TOT FP.FP GALP.PL oGzD.Lr GAZP,RM LKOH.RM LKOD,LI NVTK,RM NWK.LI PMO,LN RDS/B RDSA.LN RDSA.NA RDSB.LN RDSB.NA RDS/A REP,SM ROSN,RM ROSN.LI SGGD.LI STO STL.NO TLW.LN APA APC Yield 58.34 ?{ a6 58.00 9.7Yo 3.23 3.46 3.57 18_1 16.9 16.3 3.60/o 48.00 -3.1Yo 3.05 3.25 3.36 23.4 21.2 21.2 3.4./, 82.15 78.00 -0.4% 4.35 4.62 4.75 18.9 17.8 17 .3 3.9o/o USD 62.58 66.00 12.8% 3.80 4.30 16.5 14.6 17 .6 ?.3v" USD 36_59 34.00 13.3% 2.50 2.35 3.55 caE 14.6 15.6 C.O 3.4v" USD 37.U 38.00 -16.3olo 2.54 3.00 12.3 14.7 NT USD 100.22 100.00 3.4Yo 3.04 4.57 5.28 5.47 20.2 19.0 O USD 50.32 50.00 5.4% 2.94 3.15 18.5 O HKD 2.45 4.70 -37 .70/o 0.27 0.41 9.8 U HKD 10.?8 10.00 17.6% 0.85 0.75 0,78 O JPY 350.00 1605.00 19.7% I lo.zc 125.80 O HKD 2.59 4.70 49.7o/o 0.26 M HKD 18.16 20.00 -14.70 M HKD t.ov 2.70 -61.6% M USD 87.09 96.70 9.00k M USD M USD USD O M 1 I 3.9% 18.3 2.9Yo 16.0 3.60k 9.1 6.0 2.50/o 12.1 13.7 13.2 2.20k 114.00 11.6 10.7 11.8 1.3yo 0.35 0.45 oo 7.4 5.8 3.8% 1.88 2.17 2.27 8.0 3.Oo/. 0.13 0.19 9.7 7q 8.4 o.22 13.0 8.9 3.7olo 8.77 9.41 10.44 9.9 9.3 8.3 4.3yo M HKD 6.79 7.50 12.SYo 0.81 10.0 9_3 84 4.3o/o USD 124.77 128.98 10.1v" 0.68 11.48 0.73 M 11.74 13.29 10.9 10.6 9.4 4.20k M HKD 9-84 10.00 10.9% 0.89 0.91 1.03 11.1 10.8 9.6 4.1o/o O USD 162.4? 206.29 -18.1o/o 20.50 24.50 7.9 7.7 6.6 4.50/o O HKD 12.56 16.00 -17.9% r(o 21.15 1.64 1.90 7.9 7.7 6.6 4.50k o USD 55.14 90.00 -31.6% -0.83 6.99 -0.59 2.5 26 2.5 NA M INR 391.70 380.00 -/o 30.60 35.27 40.50 12.8 11 .1 9.7 2.3'/o JJ. I O AUD 8.49 11.00 1.4% 0.68 53.1 21_2 12.5 0.5% THB 143.50 185.00 -14.6% 0.16 14.20 0.40 M 16.90 17.30 10.1 8.5 8.3 3.5To O INR 934.05 1050.00 6.6% 76.50 89.40 102.00 12.2 10.4 9.2 1.zyo O M USD 30.48 43.82 6.0% 3.73 +.zo 9.5 82 7.2 1.6% AUD 12.92 14.00 -13.20k 3.19 dE) 0.60 0.92 24.8 21.5 14.0 2.3v. M AUD 6,8% O GBp M GBp 1 39.74 43.00 I-YJ 3.08 18.6 13.6 12.9 1650.00 3.3% -18.0% 2.14 044.50 83.96 70.93 89.88 12.4 14.7 1 445.30 500.00 -7.30k 45.28 43.86 53.95 s-8 10.2 1.6 1.7% 83 5.57o 5.5% USD 42.90 50.00 -19.Qo/o 4.26 4.39 5.18 10.1 9.8 8.3 M GBp 154.60 330.00 41.20k -57.00 -14.00 -13.00 NM NM NM O EUR 16.33 20.00 -5.2o/o 1.?2 t.zJ l./o 13.4 13.3 ol 6.90/o NA USD 41.40 52.00 -21.90k 3.24 J. JJ 4.52 12.8 12.4 9.2 7 .4o/o O USD 58.64 -1 6.45 9.3 10.1 9.1 5.7 EUR 46.40 5.6% 4.28 4.73 5.81 O O 74.50 58.00 4.30 5.04 9.8 10.8 o) 5.3% EUR 1 1.49 17.00 -2.1% 0.23 0.36 0.47 50.0 31.9 24.4 2.5v. o USD 6.49 13.00 -231% 3.29 2.U 3.05 2.0 2.1 6.5olo O RUB 138.50 230.00 0.8% 49.94 43.96 39.88 2.8 5,2 J,5 5.40h M RUB 2042.50 2030.00 1.1% 322.O0 4?5.00 392.00 O,J 4.8 M USD 47.49 57.00 -22.90/o 10.38 13.62 12.68 4.6 3.5 3.7 7.2Vo [/1 RUB 427.97 362.97 24.52 34.28 35 97 17 .5 12.5 11.9 2.7o/o M USD 104.00 137.00 8.1% -23.0% 7.91 10.77 1 1.91 13.2 9.7 8.7 3,1v" O GBp 269.60 460.00 -13.0% 28.00 36.00 44.00 9.6 7.5 6.1 1.9v" O USD 74.28 83.00 -8.4% 5.32 7.79 8.69 14.0 9.5 5.1 O GBp 2235.50 2600.00 4.8% 172.73 233.00 12.9 9.6 O EUR 28.22 32.50 10.4o/o 2.00 2.89 272.00 a?o 8.5 o.z 14.1 9.8 8.3 4.9% O GBp 2313.50 2600.00 2.9% 172.73 233.00 272.00 13.4 9.9 8.5 4.8o/o O EUR 29.44 32.50 9.3Yo 2.00 2.89 3.39 14.7 10.2 8.7 4.7v" O USD 71.36 83.00 5.32 7.79 8.69 13.4 9.2 8.2 5.3v" M EUR 17.48 21.00 1.80k 1.80 1.29 1.43 s.7 13.6 M RUB 233.45 350.00 -6.2o/o 40.32 36 56 6.4 6.3 3.7% USO 5.45 9.90 -27.SYo 1.30 37.16 lna 5.8 M 4.2 4.5 4.4 4.5o/o M USD 6.36 8.00 -lC.qao 1.49 1.77 1.71 3.6 3.7 3.0% O USD 23.60 35.00 -9.4% 2.46 2.49 2.72 9.6 9.5 8.7 5.0% O NOK 158.70 10.4 O GBp 494.00 O USD M USD BERNSTEIN RESEARCH 1 .50k 210.00 9.4o/o 14.46 15.26 17.69 11.0 300.00 ^40.8% 12.00 32.00 40.00 41.2 77.20 121.00 -28.Ook 7.92 7.?8 8.26 9.7 91.78 106.00 -18.6% 4.45 5.88 6.16 20.6 1 0/o 6.0% o/o 5.0./. 9.0 4.4% 12.4 1.2o/o 10.6 9.3 1.3% 15.6 14.9 1 .2o/o NoVEMBER3,2014 BpRNsrErN ENsRcv & Powr,R: HrGH NooN poR DrsrRrsurpn Sol.q.R. or ARr, REGULATED UTILITrES THE FuruRE oF 10 Sou.nPowsn? CHK M USD 22.18 26.00 -31.0% 2.55 1_95 11.4 12.8 USD 11.71 27.00 $4.4o/o -1.46 -1 .71 NM NM NM NA COG o o 1.73 -2.26 8.7 crE USD 31.10 37.00 -26.8% 0.71 1.28 1.25 43.8 24.3 24.9 0.3% DVN M USD 60.00 69.00 -20.0% 4.27 5.46 5.57 14.1 11.0 10.8 1.60k ECA,CN M CAD 20.45 22.00 -2.5% 1.08 2.O1 1.72 18_9 10.2 11 .9 1.5% ECA M USD 18.63 20.00 -10.9% 1.08 1.83 1.57 17.3 10.2 1 1.9 1.5% EOG o USD 95.05 109.00 -8.3Yo 8.19 5.36 7.22 1 1.6 17 .7 13.2 0.7v" NBL M USD 57.63 62.00 -38.0% J,IJ 3.36 3.86 17.8 17.? 14.9 1.3Yo RRC USD 68.40 88.00 -?4.50/o 1.45 2.09 2.14 47.2 32.7 32.0 0.?Yo USD 32.51 51.00 -27.5% 2.00 2.58 z.4J 16.3 tzo 13.4 NA CAD 6.97 14.00 -59.6% .-0,24 0.05 0.09 NM NM 79.8 4,20k TLM o o o o USD -63.8% -0.24 0.05 0.08 NM NM 79.8 4.20k M NOK 6.38 45.20 13.00 AKSO.NO 100.00 0.3olo 4.U 7.?5 8.33 NA NA NA 9.10k PFC.LN o GBp 1045.00 1400.00 -28.5% 1.91 1.66 2.13 o. / 6.7 5.0 0.10/o SBMO,NA U EUR 10.10 9.00 -35.60k 0.56 LOO 0.88 8.9 8.3 12.1 NA SPM,IM U EUR 12.67 10.00 -25.4% -0.36 0.63 0.44 8.1 7.6 6.9 NA 1.28 SWN TLM.CN 1.60k SUBC.NO U NOK 74.45 86.00 -38.4o/o 1.04 3.4 3.1 3.7 0.8Yo TEC.FP o EUR 55.47 91.00 -36.7v. 5.06 5.81 7 .16 5.3 4.6 3.9 3.3% TEN.IM M EUR 15.35 16.00 -12.70/o 1.31 1.38 1.34 11.7 11.1 11.5 2.9Ya EUR 29.74 43.00 -37.0o/o 2.10 1.78 2.33 14.1 lb./ 6.Ov" VK,FP CNA.LN M GBp 292.70 300.00 -18.2Yo 25.90 19.89 24.14 1 1.3 14.7 12.1 DRX.LN U GBp 589.50 -10.5% 35.00 22.50 25.00 16.8 26.2 23.6 2.1b/o EOAN,GR o EUR 13.22 s50.00 17.00 .18 0.90 .19 11.2 14.7 11.1 4.40k NG/,LN o o GBp 891.00 960.00 14.1yo 54.00 59.00 63.00 16,5 15.1 14.1 4.70k RWE.GR EUR 27.24 37.00 1.0% 3.77 2.26 7.2 12.1 3.7o/o SSE.LN U GBp 1536.00 1 330.00 7 .8o/o 123.40 124.47 100.22 12.2 4a 1 15.3 5.80/o SVT.LN M GBp 1988.00 1914.00 6.60/o 88.00 90.1 0 74.70 22.1 26.6 4.3v. -1.9% 1 1 22.6 UU/,LN o GBp 838.00 970.00 45.87 JO,JZ 18.7 18.3 23.1 4.50/ o EUR 22.95 32.tU 16.5% -7.8% 44.71 EDF.FP 2.17 1.86 2.?0 10.6 12.3 10.4 5.5olo EGPW,IM EUR 1.S1 2.40 71% 0-11 0.10 0.12 18.1 18_8 15.6 1.7yo ENEL,IM o o EUR 3.91 4.90 26,6Yo 0.34 0.31 0.34 11.4 12.6 11.5 3.3% GAS,SM M EUR 22.55 21.00 23.4% 1.44 1.41 1.60 15.6 16.0 14.1 4.0o/o GSZ.FP o EUR 18.93 22.00 13.?.t 1.46 1.57 13.0 15.5 12_1 7 IBE.SM U EUR 5.54 4.20 24.9% 0.41 0.34 13.4 15.3 16.3 5.7% SRG,IM M EUR 4.18 4.10 5.5olo 6.0% JJ 15.4 13.9 12.7 130.04 18.6 I /.J tc.c 1.9Yo 33.75 36.74 40.57 14.3 13,1 11.9 3.1% 787.24 51.39 54.00 60.98 15.3 14.6 1?.9 1 1007.54 81 .77 85.54 95.64 12.3 1 1.8 10.5 2.lYo 86.93 91.10 102.61 tc./ 15.0 13.3 3.5o/o 108.50 MXJP MXEF MSDLElS 1363.01 MXAPJ O - Outperfom, M - Market-Perfom, U - .9o/o 16.87 0.27 2018.05 481.63 SPX 0.36 0.30 1 U. .9o/o Underperfom, N - Not Rated 1605.JP, SGGD.LI estimates are 2012A,/2O13E 2O14E; tOC metric is P/B; AKSO.NO, PFC.LN, SBMO.NA, SPM. M, SUBC.NO, TEC.FP retrics is EV/EB TDA Valuation Methodology European Oil Services & Equipment We value our coverage using one-year ahead earnings forecasts (201 5) applied to a target multiple. We use one-year ahead earnings to reflect the high degree of visibility typically afforded by orderbooks of work that is won but not yet delivered. We find that the market looks at EBITDA and net income (earnings per share) equally when assessirlg prospects for Oil Services, and so we calculate our target price on both of these measures and average the two. To derive our target multiple, we use stock-specific multiples. We prefer this method to using a sector-average multiple +/premiurn/discount, because the wide variety of business models at play in the sector lead to significant variation around the sector average. Whilst oil prices remain broadly flat we believe it is appropriate to base our target multiple on historical average multiples, selecting two-year averages rather than 10-year averages to reflect lower investor confidence since the oil price crash. European Oil & Gas Our target prices for the European Integrated Oils are calculated by applying our estimates for 2012 cashflow per share (CFPS) to a forward price-to-cashflow (P/CF) multiple. This P/CF multiple is generated through the relationship, and historically strong correlation, between 12 month forward P/CF multiples and Return on Average Capital Employed (ROACE) within the BERNSTEIN RESEARCH NoVEMBER 3,2014 BTRNsTBIN ENERGY & PowE,n: HIcu NOON FOR DISTRIBUTED SOLAR, OR ARE REGULATED UTILITIES THP FUTUNT OT 11" Solen Powpn? Integrated Oils group. Our calculation utilizes this relationship and an estimated long term, through the cycle ROACE to generate the target P/CF multiple. The price calculations for the Integrated are summarized below. We use $90/bbl Brent and $3.75lmcf for US gas in2012 and $115/bbl Brent atd$4.25lmcf for US gas in 2013. North American Oil & Gas Exploration/Production Our valuation framework for our coverage of North American E&P oil & gas stocks is based on the correlation of PiCF multiple and the recycle ratio (cash flow per banel divided by F&D costs). The recycle ratio-implied target multiples are supplemented by company-specific catalysts, which are valued independently under a full-life cycle NPV methodology and applied in the form of incremental (positive or negative) change. We adjust our target multiples to include the effects of growth, capitalization, capital efficiency, and risk. Asia-Pacific Oil & Gas We value large cap oil and gas companies by identifuing the forward price to book multiples they should trade at based on returns on equity, long term eamings growth expectations, dividend payout ratio and cost of equity. Our starting point is that Fwd P/B = (ROE x PO) / (Ke - g), where ROE is our estimates of ROE for 2015, PO is the dividend payout ratio, Ke is the cost ofequity, and g is the long term grouth rates. For Santos, Oi1 Search, Woodside and Inpex, we believe an NAV approach is appropriate given a significant portion of ther values are attached to future LNG projects. In calculating the NAV, we have assumed a long term oil price of $100 (real). We value RIL using a sum of the parts methodology. We value COSL using a sum of the parts method. We value Kunlun Energy using a sum of the parts method. U.S. Utilities Our target prices reflect the results of tkee alternative valuation methodologies: (i) a multiple-based valuation calculated by applying the median valuation multiples of a group of comparable companies to our estimates of a utility's future earnings. dividends and EBITDA; (ii) a discounted cash flow model over the forecast period of 2A14-2017, and a terminal value in 2018 discounted back to present value at the weighted average cost ofcapital; and (iii) a discounted dividend model over the forecast period of 2A14-2017, and a terminal value in 2018, discounted back to present value at the cost of equity. t UK and Northern European Utilities We value our coverage (except DRX) based on an average of Sum of the Parts DCF and Dividend Discount model (50%150%). We value DRX on a DCF basis only. Southern European Utilities: We use a blended (50%150%) valuation methodology of discounted cash flow (DCF) and adjusted multiples (P/E, EV/EBTTDA). Risks European Oil Services & Equipment Our coverage group's trading multiples and after a lag, eamings, are highly sensitive to changes in the oil price. Oil price forecasts are heavily dependent on GDP expectations and global supply expectations, both of which could be materially different from our macro-economic assumptions. Supply disruptions in particular caused by weather, terrorism or political events remain a material upside risk to the oil price. Hence the greatest risk to our target prices is a significant decline in crude oil prices, as these stocks commonly trade in line with commodity prices. For the Facilities Engineers in particular, project-specific complications in executing the scope of work are a common source of surprise to the market. Similarly the timing of profit recognition is significantly influenced by the status of a relatively smail number of lzrge construction projects. Accordingly a key risk to our target price is operational problems and delay to one or a number of these projects, as each can cause a material reduction iu share BERNSTEIN RssnARcH NoVEMBER3,2014 BENNSTEIN ENT,ncy & PowER: HIGH NooN FoR DISTRIBUTED SoTaR. oR ARE REGULATED UTILITIES THE FUTURE oF 12 SoLARPowER? European Oil & Gas For the European Majors, the greatest risk to our target prices is a significant decline in crude oil prices, as the Majors commonly trade in line with commodity prices. Additionally, downward revisions to production volume targets could adversely impact share prices. North American Oil & Gas Exploration/Production The primary risk to our target prices for the North American E&Ps is lower than expected commodity prices over the next few years. For instance, oil prices could be negatively affected by slower than expected economic growth, higher global supply, or faster switching to alternative fuel sources, which could depress product demand and drive oil prices below the marginal cost of supply. For natural gas, prices could be negatively affected by warm weather, continued healthy supply growth, lower coal-togas power switching, or higher LNG/pipeline net imports. Additionally, government policy and administration, including but not limited to the BOEM/BSEE's pace of permitting or leasing, or changes to various countries'tax rates/fiscal terms, have the potential to positively or negatively affect the commodities and companies. U.S. Utifities Our earnings and cash flow forecasts for the regulated utilities in our coverage (AEP, D, DUK, EfX, FE, NEE, and PCG) are driven primarily by our projections of volume sales and future rate relief and, in the long term, by the rate of growth in rate base and the retum on equity allowed by the utilities'regulators. If our assumptions in these critical areas prove overly optimistic/(pessimistic), our earnings and cash flow forecasts may need to be cut/(raised) and with them our target prices. Our eamings and cash flow forecasts for the competitive generators in our coverage (EXC), and for the competitive generation business of primarily regulated utilities, are predicated on currently prevailing forward price curves for power and generation fuels (coal, gas and nuclear fuel). Changes in these forward price curves can thus have a material impact on our forecasts of earnings and cash flow and consequently on our target prices for these stocks. Power prices can be quite sensitive to the price of natural gas, so that higher gas prices tend to be reflected in higher revenues, earnings and cash flow. However, higher prices for coal and nuclear fuel tend to depress generation margins. Finally, our forecasts for both regulated utilities and competitive generators are sensitive to the estimated growth in properry, plant and equipment, which drives depreciation and interest expense, as well as to the expected growth in operations and maintenance expense. European Utilities Adverse changes in commodity prices Adverse changes in regulationl policy Adverse credit conditions limiting access to credit BERNSTEIN RESEARCH Novglrnen3,2014 SRO REQUIRED DISCLOSURES . References to "Bernstein" relate to Sanford C. Bemstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited ffitSEPJAmAA, and Sanford C. Bemstein (business registration number 53193989L), a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, collectively. . Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating investment banking revenues- . Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the U.S. and Canadian exchanges, vergus the MSCI Pan Europe lndex for stocks listed on the European exchanges (except for Russian companies), versus the MSCI Emerging Markets lndex for Russian companies and stocks listed on emerging markets exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan lndex for stocks listed on the Asian (ex-Japan) exchanges - unless otherwise specified. We have three categories of ratings: Outperform: Stock will outpace the market index by more than 15 pp in the year ahead. Market-Perform: Stock will perform in line with the market index to within +115 PF in the year ahead. Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead. Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily. . . . . o . As of 1013112014, Bemstein's ratings were distributed as follows: Outperform - 46.7yo (2.2o/o banking clients) ; Market-Pedotm - 42.2o/o (0.4% banking clients); Underperform - 11.1o/o (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve (12) months. Neil Beveridge maintains a long position in BP PLC (BP). Hugh Wynne maintains a long position in Duke Energy Corp. (DUK). Accounts over which Bernstein and/or their affiliates exercise investment discretion own more lhan 1yo of the outstanding common stock of the following companies BG/.LN I BG Group PLC, PMO.LN / Premier Oil PLC, RDSA.LN / Royal Dutch Shell PLC, RDSA.NA / Royal Dutch Shell PLC, RDSB.LN / Royal Dutch Shell PLC, RDSB.NA / Royal Dutch Shell PLC, AKSO.NO / Aker Solutions ASA, TEC.FP / Technip SA, CNA.LN / Centrica PLC, NG/.LN / National Grid PLC, SW.LN I Sevem Trent PLC, UU/.LN / United Utilities Group PLC. The following companies are or during the past twelve (12) months were clients of Bemstein, which provided non-investment bankingsecurities related services and received compensation for such services BP/.LN / BP PLC, BP / BP PLC. An affiliate of Bernstein received compensation for non-investment banking-securities related services from the following companies BP/.LN I BP PLC, BP I BP PLC. r This research publication covers six or more companies. For price chart disclosures, please visit www.bemsteinresearch.com, you can also write to either: Sanford C. Bemstein & Co. LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105 or Sanford C. Bemstein Limited, Director of Compliance, 50 Bed) 6 T&D UTILITIES COULD SEE THEIR IMPROVE BUSINESS POSITION 7 DC POSES A COMPETITIVE THREATTO VERTICALLY INTEGRATED UTILITITS ASSETS 9 APPENDIX A - STATE RANKING BY FACTORS FAVORABLETO 11 APPENDIX B _ STATE VISIONS OF "UTILITY 2.0" FOR 13 MOODY'S RELATED 16 WITH CENERATION DC 2020+ RESEARCH >, MihokoManabe,CFA feature high electricity prices and have policies that encourage DG, such as renewable portfolio standards and net metering. mihoko manabe6moodys.com Shea - +1.212.553.1779 Senior Analyst )> DG Casselta +1.212.553.1665 competitive threat to vertically integrated utilities with generation assets if n.mber of their customers switch to DG; transmission and distribution (T&D) po.ses a a laqge toby.shea@moodys..om F. assets. markets that will see faster adoption tend to be those in states that are deregulated, +1.212.553.1942 Senior Vice President Jeffrey ofoperating utility Lawmakers and regulators also use policies to manage DG's market adoption. Utiliry NEW YORK Vice President The near-term agenda is reforming net energr metering (net metering) to avoid "cost shifting" berween customers who have rooftop solar and those who don't. Rate design reforms that fix the issues that arise from net metering include decoupling, which reduces volume risk to revenues, and higher {ixed charges, which better match the fixed costs Anatyst Contacts: Toby Proactive regulatory response is credit positive. Across the US, udlities are working with their regulators to refine their suite of recovery mechanisms to stay ahead of the potential industry transformation that a widespread adoption of DG would bring. A few srares are going funher in pursuing a brand new udliry business model that embraces DG, but most are tackling rate design and policy issues first, utilities don't face that threat. AssistantVice President - AnaLyst T&Ds could jef f rey.cassella6rrr rrodys.com Peter Ciannuzzi +1.212.553.2917 Hempstead Asso ci ate M an aq i n g D i recto tfieir business position improve from the increased investments in the well. Lessons learned from these early initiatives will set precedents for others in the Associate AnaLyst peter.giannuzzi@!'noodys.com Jim see electric grid. DG could be a business opportunity for vertically integrated utilities as sector, +1.212.553.4318 r iames. hempstead@moodys.com I lt',rv[sTofr5 5[RVrc€ NFRASTRUCTU RE Distributed generation poses a threat under traditional ratemaking but the ca[[ of a "death spirat" is premature Distributed generation (DG) is energy produced on a utility customer's site, off the utiliry's electric grid. The most common form of DG is solar photovoltaic (P\4 installations by residential customers. The falling cost of PV systems is driving a rapid growth in the residential market from a currently small base. Tariffs that promote DG, like net metering for residential customers, plus other state and federal incentives can significantly lower their utiliry bills. if enough customers install solar panels, utilities could see their revenues erode under the traditional rate design, in which most of the utiliry's rates are based on sales volume.I Customers can not only pay less to the utiliry, but also conceivably disconnect ("defect") from the grid and not pay rhe utiliry at all, if they couple their solar panels with battery storage, which saves the '$7e believe mass grid defection is energy that the panels produce during the day for use at night' unlikely in the foreseeable future because the cost of batteries is still an order of magnitude too high. '\7hile we do not rule out the potential for a large decline in bamery cost, numerous behavioral or physical barriers make most people unwilling or unable to defect from their utilities, Technological developments are inherently uncerain and could be disruptive, but todap we don't see the udlity structure being upset on the horizon. \7e discount the "death spiral" scenario ofa mass grid defection, leaving a dwindling number of customers to foot the utility s costs, because the electric grid is a critical piece of infrastructure that is a vehicle for polic'r.,rnakers to implement their energy policies. Consequentln we believe utilities wiil continue to receive reasonable regulatory treatment. In fact, the grid will become even more important as the platform for the more complex flows of power and information in the utiliry of the future. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuerlentity page on www.moodvs.com for the most updated credit rating action information anci rating history. Across the US, utiiities are working with their regulators to refine their suite of recovery mechanisms to stay ahead of the potential industry transformation that a widespread adoption of DG would bring' Many Iegislatures and regulatory commissions are assessing DG, including pre-emptively in states, such as Idaho and Oklahoma, where DG is still miniscule.'1 V4rile solar overall accounts for less than lTor ofelectric generating capaciry in the US, the double-digit increases in residential solar installations (a 45o/o leap in capacity berween qZ 2013 and Q2 2074a) are pushing lawmakers and regulators to act sooner rather than later. Hawaii has by far the highest market penetration, with 1 1% of Hawaiian Electric Company, Inc.'s (Baa1) residential customers with solar PV.5 The rapid adoption has tested Hawaiian Electric's operations and strained relationships with regulators and customers, a situation uriliries want to avoid, Y4rile energy storage is too expensive and impracticai for homeowners now, technology will advance to make storage more common in the next decade. By starting to address the potential impact now, utilities and regulators wiil have more dme to prepare by improving their rate designs and planning ou viem on DC and nte design issucs, pleoe refer to the Special Comments Roofiop Solar, Distributcd Gmration Not Expectcd to Pose Threat to utilitics, ptblished in November 2011, md fugulanry Framework Holds Kry to Risbs and Rruards,*nciated With Dk*ibuted Genaatiofl, Apfl 2014, and Credit Focu Airuna Public Seruice: Getting aJamp on Roortop Solar Distibuted Generatioz, published in May 20i4. For more information on Oklahoma has only 350 DG customers, according to Ohhhoma Exestiuc Arder 2014-a7, Oklahoma Senate Biil 1416, 21 Apr\l2014" That nmber would account for 0.020/o ofthe state's utiliry customers, according to data from rhe US Enerry Informarion Administration. Fedeml Energr Regularory Commission, Office of Energy Pro)ects, Energt Infrasmtcnre Updzte, Jvly 2014 Solar Ener5, Induries Association md GTM Rsearch, US Solzr Marhet Imight Report, Q) 2Ol4 Hawaiian Electric lndustries,lnc. Sercnd Quartn 2014 Financial Raubs and Outlnok slide, 1 I August 2014 2 NOVEMBTR 6,2014 SPECIAL COMMENTT US UTILITIES: RECULATORY RESPONSE LOOKS IO STAY AHEAD OF THE DISIRIBUIED CENERATION CURVE I P1OODY'9 INVTSTORS STRViCE N FRASTR UCTU R E longer term for infrastructure that will integrate more DG into the electric grid. Consequently, stakeholders (lawmakers, regulators, the utilities, their customers and the solar industry) are tackling rate design and policy issues ffrst. Across the country, utilities and their stakeholders are studying what "Utiliry 2.0,"6 the next generation udliry, should be. In fact, California, Hawaii and New York have already begun initiatives to transform their utiliry models (see Appendix B - State uisiors of "Utiliy, 2.0"for 2020+ for details on each of those states). As shown in Exhibit 1 , we expect these plans will be evolutions extending well into the next decade, in time for when energy storage and electric vehicles are expected to be more commonplace. EXHIBIT 1 lllustrative Road Maps to "Utility 2.0" Extend lnto the Next Decade hitidto6 Reu@ Oisfibution o,uu'oltour."orror"rr,""T: PIM o€ with T&o tiet meGy met€aot retffi - i::r", grid----- pricmg----'--*--------------> t&D End Energy 2rl! ?0?! (alifrrnia ndop:r *ofrge c;r GrEel El#.vehicle5 kwaii de*ivde ciLf ired War plans hart frets sM I Srid Net erergy rutfing refom ner meteflngtanlf I €neGy io66e I 'J:t Ei€6icvehicls Lrtiilty a;th€ tuture -expisratron of luture -- rora$igstion vr'ith i mdel-> ltekGhclde6 i'l;;";;;;;;;;;.;#:::r;.i;:;;;;,,,;";-;;;;l-",;;.;:,-;,;;;*,;; rrltrrl lgredEr ure of Sourcei Moody's lnvestos ,eruice, regulatory 6 A name coined Customers, 15 3 NOVEMBIR 6,2014 end ener€y etfieency, new s*icEs lbenefiE from nevt irardl5nft intramdure filings L'y the Energr Future Coalition's repon to Much 20i DG - -i Marylald Governor Mardn O'Malley, Utility 2.0: Piloting the Faturefor Mar1ltnd\ Elcaic Utilitia and their 3. SPECIAL CGMMENl: US U rlUTiES: RFCULATORY RESPONSE LoOKS TO STAY AHEAD OF THE DIsTRIBUTED CENERATION CURVE I MOOOY'5'NVESTORS SEBvtCE htreae"-terrn agereda is N FRASTR UCTU RE ref*rnling net n'retering to av*id "c*st shift[rug" The ffrst order of business for polirymakers is net metering, which principally applies to residential rooftop soiar. Most residential solar customers subscribe to a net metering tarifi, which allows them to offset the cost of the power they buy from the grid with the price of the power they sell to the grid. Available in 43 states, net metering has been around for 30 years as an incentive to promote clean erLery, but numerous utilities are calling to reform this incentive, now that it has worked to make rooftop solar more commonplace, Rooftop solar and net metering raise the issue of cost shifting. First, residential solar customers will need less power from the utility, and thus pay less under the traditional volumetric rate design. Utilities with decoupling mechanisms may be made whole for these lost revenues, but the cost of doing so will shift to other customers. Second, net metering allows solar customers to credit their bills at a retail rate (the same rate at which they buy electriciry), lowering the amount they pay to the utiliry. Here, too, the lost contributions to the ucility will shift from the net metered customers to others, As shown in Exhibit 2, regulators in numerous states are responding to this cost-shifting issue. A common approach reduces the volumetric component of rates, by assessing a ffxed customer charge on everyone. All else being equal, the customer's total bill (and the utiliry's tevenue requirement) is the same, but more of it is fixed, which makes revenues more predictable, a credit positive for the utiliry. Another approach is imposing additional charges only on rooftop solar customers, but such proposals by Central Maine Power Company (A3) and PacifrCorp (A3) in Utah did not prevail this year. \7ith regard to the retail price on the excess energy from net metering customers, regulators in Hawaii and California are considering proposals to lower the rate of compensation. 4 NOVEMBER 6, 2O'I4 SPECI.AL COMHTNI: US UrlllTiE S: RECULATORY RESPONSE LOOKS 1O 51AY AHEAD Or THt DISTRIBUTED CENERATION CURVE I rf'lyE5troR5 5i.fivicE N F RASTR UCTU RE EXHIBIT 2 Recent Regutatory Responses to Reform Net Metering lssue Fix Fewer customers without rooftop solar have to pay more of the fixed costs to maintain Assess a fixed customer charge Maine CentraI Maine Power increased fixed charges by S3/month on atl customers to pay for the utility's fixed costs California 2013 legistation enabted net metering reform, including the implementation of a fixed charge of up to $10/month beginning in ?417 Connecticut Connecticut Light & Power has proposed to increase fixed charges by S9.50/month Arizona Arizona Pub[ic Service increased fixed charges by about SS/month Hawaii Hawaiian Electric has proposed upfront interconnection fee and fixed standby or demand charges for DG customers Oklahoma Enabling [egistation passed in 2014 to consider fixed customer charges as welI as time-of-use rates, minimum bil[s, and demand charges Responses the utitity's facilities lmpose an additional demand charge on rooftop solar customers to pay for the capacity utility has to maintain for them Central Maine Power's proposal to impose 525 standby charge Maine dropped Utah PacifiCorp's request for S4.6s/month facitities charge denied Cotorado Rooftop solar customers se[[ power to the grid at a higher retai[ rate that is credited to their bills, resulting in lower revenues that must be made up by other customers in order to meet the utility's revenue requirement Reform net metering to change the compensation that the rooftop solar customers receive to some lower avoided cost rate that reflects the price of power the utitity woutd have paid in the market Rates for power generated by Replace net metering with a Value of Solar tariff that incorporates the value that solar energy brings (capital cost savings, environmentat benefits) netted against the additionaI costs it requires (voltage rooftop solar do not sufficientty caPture the value sotar energy brings to the grid Pubtic Service Co. of Cotorado has proposed a demand charge Wisconsin We Energies has proposed to implement a demand charge of s3.79lKW Hawaii Hawaiian Etectric has proposed compensation at wholesale rates Califomia Under consideration as part of net metering reform mentioned above Austin, Texas Minnesota Austin Energy implemented Value of Sotar tariffs in 2013 Value of Solar enabting law passed in 2014; yet to be imptemented controts) Sources: Moody's,5NL 5 NOVEMBER 6,2014 SPECIAt COMMENT: US UTILITIES: REGULATORY RESPONST LOOKS TO STAY AHIAD OF THE DISTRISUT[D CTNERATION CURVE INFRASTRUCTURE MOOOY'3 NYISTORS SIRV,CI Some regulators are considering whether to replace net metering with another new rate scheme that recognizes not only the additional costs, but also the beneffts of rooftop solar, including operational (e.g., avoided costs of fuel, maintenance, generation, transmission and distribution) and environmental (e.g,, avoided compliance costs, cleaner air, less water used). Ausrin Energ, and the Minnesota Public Utilities Commission have approved such Value of Solar rate methodology as an alternative to net metering, though this scheme has a very limited track record at this stage.T Laurrmak*rs and regul*tors use pei[ieies te ffi*nage il6's market ad*pti*lr Aside from changing utilitF rate design, policpnakers cirn us€ rules and regulations to manage the pace of DG adoption. Poliry is important, because emerging DG technologies need government incentives to prornote them (see Exhibit 3). In 6ct, some recent regulacory activity was a result of incentives nearing enpiration. lawmakers and regulators will enact policies that reflect what their voters (who also happen to be utility customers) want, whether it be lower elecriciry prices or more access to clean energy. EXHIBIT 3 Factors That Promote or Constrain DG (Principatty Focused on Rooftop Sotar) Promote Constrain No Net Metering Poticy Low 3r d RPS Par ty Solar I inancing Resrr icled No lncentives Economic Low Eiectriciry Price Factols High PV System Costs Rental Housing Regutatory Verticalty {ntegrated Utilities Scheme Fixed Utility Charges No Decoupling "Hassle Factor" Behavior Technology Ceek Fossil Energy Bias Natural Ciouds Environment Sourc"j5,: Shade Trees !EA" The US Internal Reyenue Senice (IRS) is curently reviewing the tu deductibility of income that a distributed solar omer receives for selling power to (A1) under its value ofsolar ariff. The IRS rulilg will determine whether other jurisdictions adopt the tariff. Adqted.from Raidential Prosumns - Dium and Poliry Options (RE-Prcsu-^), pagr 38, International Energy Agency - Autin Energy Renwable Energy Technology Deployment, June 2014 6 NOVEMBER 6,2014 SPECIAL COMMENTi US UTILITIES: RECULATORY RESPONSE LOOKS TO STAY AHEAD Or THE DISTRISUTED CENERATION CURVE iNvlST0Et 5[RV]6[ I N FRASTRUCTU RE To promote solar energy adoption, net metering is a cenral policy tool that reduces utiliry bills for the residential customer. Another tool is the renewable portfolio standard (RPS) which, in 29 states, requires utilities to derive a certain percentage of their energy from renewables. A rooftop soiar owner can generate valuable renewable energy credits and sell them to the utiliry which will use that credit towards its RPS requirement. In addition, numerous federal, state and local tax exemptions, subsidized ioans, and rebates are available that could significantly cut solar installation costs and turn a costly investment into an economic one for the owner. On the other hand, polic.r.nnakers can slow down the spread of DG, for example, by setting caps on net metered capacity, setting expiration dates, and reducing government funding for an incentive ptogram. California and New York, where new utiliry models embracing DG are actively being pursued, are jurisdictions where utilities divested generation assets during the electriciry deregulation in the 1990s. These utilities, which are mosdy T6aD,'q do not face the comperitive threat that vertically integrated utilities with generation assets do, if a large number of their customers switch to DG to generate their own power supply. The lack of this competitive threat to a T&D contributes to distributed solar business flourishing in certain markers. Other factors can promote or constrain the market adoption of rooftop solar and other forms of DG. Exhibit 4 shows the top i0 states favorable to DG adoption. These are the states that need to deal with DG, rare design and policy issues earlier, if they aren't already. These states have the policies and circumstances that promote DG (shown in green): high electriciry prices and policy matters such as renewable portfolio standards (a reflection of customer priorities and the political will), net metering and third-parrysolar financing. In addition, utilities that don't own generation and have decoupled rates are more likely to promote DG in their service territories. These poiicy and regulatory hctors trump natural factors (most top 10 states are in the less sunny Northeast) as important to the market adoption of DG.to e Utilitia in Caiifornia own some generation but purchase the majoriry oftheir enerry from independent porver producem. Consolidated Edison Cornpany ofNew York owns some st€am generation. l0 For more informatiol on how incentiyes can offset low insolation, plme refer ro the Special Comment Cbudy Shies and Low Rztes Sbield. Washington State Ebctic Utilitiesfrom Unfettred Roofiop Solar Groath, published in August 2014. 7 NOVEMBER 6, 2014 SPECIAL COMMENTT US UTILITIE5: REGULATORY RESPONSE tOOl(5 TO STAY AHIAD OF IHE DIsTRIBUTED CENERATION CURVE I F4()0$Y'5 {NVttTOtS 5i,RVICt EXHIBIT NF RASTRUCTU RE 4 Top 10 States Favorabte to DG Adoption Have Mostly Decoupled T&D Utitities Nature Policies Economics Regutatory Scheme Annual Avg Sotar 9i,of NetMetered 3rd PartysotarPV Above/Below US Avg States Res Price (S/kwh) N€t M€tering RPS to Ttt customers PPAS authorized Resource (kwh/s'zlDay) E lectric D&oupling !lectricity Dercgulated / T&Ds California Hawaii Connecticut 4 O.19olo -s2.08 Oregon 5 5 De[aware -s0.s9 Arizona No 15o/oby 2025 Massachusetts 22.1o/oby 2A?O O.20o/o 0.13% New York 20.38o/oby 2021 New Jersey Maryland s0.96 Constrains DC Key Sources: MooE't No 5 Zoo/oby 202O No 5 o.170/0 I E!A, Natural Resource Defense Council, Database of state lncentives for Renewab{es 0 Efficiency, National Renewab{e Eneryy Laboratory For the full list of states, see Appendix A - State ranhing by factors fauorable to DG. In fact, DG would be positive for utilities as a rate base growh opportunity, because the T6cD grid need substantial investments in order to accommodate more DG,tt making the grid even more essential. For example, more distributed energy resources (not only power from DG, but also energy srorage in rhe future) will necessitate an upgrade to the grid to accommodate two-way power flows rarher than just one way and to control greater and more frequent voltage fluctuations, On the other hand, DG can reduce the need for *re utiliry sector to invest in new generation and transmission, wili resuiting in cost savings to ratepayers. Hawaiian Eiectric's DG Interconnection Plan, referenced in Exhibit 5, suggests new technologies can provide utilities with better information to manage their loads and achieve greater energy efficiency, whiie giving customers more options, such as the abiliry to monitor and control their usage to manage their bills. rr 8 California utilities curently spend $6 billior a yar in distribution investmenrs, while preparing to integrate over l5 gigawans of DG to the grid, according to the California Public Udlides Commission. New York estimates avemgc capital spending of$3 billion a yer over the next decade; for more, see the Appendix. NOVEMBER 6,2014 SPECIAL COMMENT: U5 UTltlllE!: RECUTAIORY RESPONSE LOO(S TO SIAY AHEAD OF THE DISTRIBUTED CENERATIoN CURVT F,rOO9Y'5 tr"JVIITSRS ${8,V1 I Ct NFRASTRUCTU R E EXHIBIT 5 lnvestments in the T&D Grid to Lower Costs, lncrease Energy Efficiency and Retiabitity Lower Electricity Bitls Expanded Customer Vo[t Optimization Choices Customer Energy Portal Advanced Metering lncreased Retiabitity lnfrastructure Outage Management Fault Circuit lndicator Altows utiIities to more accuratety controt the leveI of power detivered to the end-consumer Auows customers to monitor their bitls and usage patterns to reduce energy consumption Enables automated bitling for customers, reducing meter reading costs, as we[[ as acts as a sensor for outage detection and many other applications Helps utilities find outages on the grid to restore power to customers more quickty Optimat lntegration of Reduced CO, DC Emissions Source: Hawaiian Electric 1 Remote Switching Enables devices in the field to be remotely controtted to get an outage fixed more quickly Direct Load Controt to ensure the grid can safely manage variabte energy sources such as renewabte wind or solar Etectric Vehicle Charging Shapes energy demand Enables the scheduting of electric vehicle charging 2 DG poses a competitive threat to verticatly integrated utilities with generation assets poses a competirive threat to vertica.lly integrated utilities with generation assets if a large number of their customers switch to DG, but DG tends to have less penetration in their markets. As shown in Exhibit 6, utilides in the states most likely to lag in DG adopdon are all vertically integrated and do DG not hal'e decoupling. Sotrce: Distributed Gcnration lntncotnertion ?hn, page 44, fi]ed, with the Hawai'i Public Utilities Commission, 26 Augut 2014 9 NOVEMBER 6,2014 SPEClAt COMMENT: US UTll lTlESr RECULAIORY RESPONSE LOO(S TO 5IAY AHTAD OF THE DISTRIBUTED CENtRATIOI.{ CURVE t I ioooY'5 lNYt5roR5 5tfivicE EXHIBIT NFRASTRUCTU RE 6 Bottom 10 States Favorable to DG Adoption At[ Under Traditionat Verticatty lntegrated Regulation Nature Policies Economics 5cheme Annual Avg 5olar Abave/Below US Avg States ?e Res Price of Net Metered 3rd Pnrty Solar PV toTtl Cuslomers Net RPS PPAS authorized Resourae Eledric Etectricity (kwh/m'!/Day) /T&Ds Louisiana -S2.03 No Yes o.o7ca 6 No Nebraska -s1.84 No Yes 0.01% 5 No Mrginia -51.81 10% by 2015 0 00% 5 No lowa -51.06 Yes 0.01% 4 No lndiana -s1.3s Yes 0.019,o 4 No South Carolina -S0.41 0.00% 5 No Kentucky -52.4s Alabama -50.48 Mississippi -51.62 Tennessee -s1.78 Yes H 0.01% No 0.00% 5 No 0.00% E No 0.00% 5 No Constrains DG Key '$7'e note that five of the above states are served by the Tennessee Valiey Authoriry (TVA, Aaa), an agenry of the US, which has electric rates weli below the US average. The bottom 10 states, generally in the South and the Midwest, all have below-average electric rates, usually due to lowcost coal-ffred power generation and lack the incentives to switch to DG as another source. Although TVA has initiated a study on DG, the competitive threat appears distant in these states. DG could be a business opportuniry for vertically integrated utilities as well, as seen by a number of projects across the country. For example, Florida Power & Light Company (A1) recendy announced a utiliry-scale solar project as a cost-efFective option that could satisi/ some customers who want clean energy. Another option is a communiry solar project, such as those Xcel Energy Inc. (A3) is rolling out in C,olorado and Minnesota, where residential and commercial customers can own an interest in a centralized solar faciliry. Additionally, Arizona Public Service Company (A3) has proposed installing and rate-basing solar panels on customers' rooftops and giving those customers a monthly credit for the use of their roofs. Lessons learned from these projects and the "Utiliqy 2.0" initiatives in other states will set precedents for others in the sector. 10 NOVEMBER 6,2014 SPECIAL COMMENT: U5 UI lLlTlE5r RECUTATORY RESPONSE TOOKS TO SIAY AHEAD Or lHE DISTRIBUIED CENERATION CURVE I t'{00sY'5 iNvtsT0R5 sEnv!ct N FRASTRU CTU RE Appendix A - State ranking by factors favorabte to DG The table belovr ranks states in order from the most to least favorable towards DG under eight factors. EXHIBIT 7 State Ranking by Factors Favorable to DG Adoption Above/Below States Res Price US Nature Policies Economics % of Net Avg (5/kwh) Net Metering RP5 Meterad toTtl Customers 3rd Party solar PV PPAS authorized Regutatory Scheme Annua[ Avg Solar Resoutce Etect.i. Ele(tri.ity (kwh/m'zlD.y) T&Ds CaIifornia No Hawaii Connecticut 4 0.190/o -52.08 Oregon 5 Detaware -s0.s9 Arizona Massachusetts 1SYoby 2O25 22.1o/o by 2O?0 0.20o/o 0.13% New York NewJersey 20.38o/oby 2A21 Marytand s0.96 Co[orado -S0.42 2Oe/oby 2A2O 5 5 0.17o/o No Michigan 10% by 2015 O.jZY" Rhode lstand 16o/o by 2019 0.040,/o Vermont ZA%by2017 New Hampshire t\o 0.11o,'o New Mexico -So.s1 Nevada -s0.0s Ohio -S0.12 No 20% Sotar by 2020 0.18% 12.5o/oby 2024 0.02% l[[inois -So.5o Texas -s0.90 12%by 2015 0.00% Pennsytvania s0.87 18%by 202a o.13% 4 Utah -(1 qq 20% of adjusted retail sales by 2025 0.15% 6 Minnesota -s0.s3 0.040/" 4 0 01% 0.170/. Maine Wisconsin 1O%by 2O15 0.O4o/o Montana 'si.80 15o/oby 2A15 4.17% Arkansas :$2.58 No 0.02o/o 5 No Partiat Nil No No No No No No 5 No 5 North Carotina -s0.97 12.5o/oby 2021 0.Q1o/c 5 Kansas -s0.64 20% of each peak demand capacity by o o1v" 5 No Washington -53.35 1So/oby 202A 0.10% Florida -S0.46 No 0.05% No 5 No 4.0?% No 2020 Alaska 11 NOVEMBER 6,2014 5P€CIAt COMMENl: US UTltlTlES: RECUTATORY RESPONSE LOOKS No No IO STAY AHEAD OF IHE DISTRIBUTED CENERATION CURVE I MOOSY'5 lNVt5TCR5 5IRViCE NFRAsTRUCTURE EXHIBIl T State Ranking by Factors Favorabte to DG Adoption Economits Above/Betow US Avg States Re5 Price Nature Policies % of (Slkwh) Net Metering RPS Net Metered 3rd Party Sotar PV Cufimers PPA5 authori:ed toTtl Regulatory Scheme /0.nnua[ Avg Sotar Resource Ele.tric (kwh/m'zlDay) Decoupling Etectricity Dsegulded / T&Ds No No Georgia -S0.71 No 0.01o/o No E Missouri -s1.71 15%by2021 0.04olo Nb 5 West Virginia -s2.03 0.02% t\o Louisiana -53.sl 4.17o/o No 5 Virginia -s0.80 O-O4olo No 5 ldaho -S3.21 0.00o2'o No 5 No 107o by 2015 0.00% No 5 No by 2A15 0.01% 5 A.O7e/o 6 0.01% 5 North Dakota - Oktahoma -5t.3 t Wyoming -s2.03 Nebraska ryE No South Dakota fIE 1oo/oby 2015 lowa -51.06 already met lndiana South Carotina S2.82 15o/o No No No 5 No 4 No No - S1.3 5 0.01% No 4 No No -S0.41 0.00% No 5 No No No m No No No -52.4s No Alabama -S0.48 No Mississippi -51.62 Key 0.009" No 0.01% Kentucky -$1.78 Tennessee No No 4.o10/" No 0.000/o 5 No 0.00% 5 No t\o 5 t\o No No 0.007o Constreins DC Moody's, ElA, Natural Resource Defense Counci{, Database of State tncentives for Renewables L. Efficiency National Rerewable Energy Laboratory 'ources: 12 NOVIMBIR 6,2014 SPECIAL COMMENT: U5 UTILITIE5: RTCULATORY RESPONSE LOoKS TO STAY AHEAD Or THE DlSl RlSUTtD CENERATION CURVE INFRASTRUCTURE MOODY'5 TNVESTORS StRvrCt The Utility 2.0 envisioned in the plans in California, Hawaii and New York are similar. The plans all integrate power from a utiliry as weli as DG, energy storage and electric vehicles onto the grid. They transition &om a century-old centralized utiliry model, in which power flowed one way from the utiliry to its cusromers ro a rwo-way transactive model (see Exhibit 7). The two-way flow of customer and load data will allow the utiliry to provide a wider menu of services, so that customers have a la carte options, such as standby service for rooftop solar, special tariffs for electric vehicle owners and time-of-use rates. Of these three states, California is closest to this model, because it already has not only rooftop solar, but also initiatives underway for energy storage and electric vehicles. California is also the only one that has deployed smafi meters, which are essentiai for the rwo-way communications required for this future model. EXHIBIT 8 Future Utitity Model lntegrates Two-Way Power Flows From Diverse Power Sources Today: A Centratized One-Way Model Future: A Distributed Transactiver4 Model + *c .s' *d i "t' ,{ Source: San Dieoo Gas €, Electric's Drcsentation to the Arizona CorDorutiffi Commission, 20 13 For California, the future is already here. A leader in adopting clean energy and technological innovation, California has been promoting distributed energF generation for over a decade. California continues to move ahead with nurnerous rulemakings that envision an electric grid that will work very differently by 2A20. These initiatives involve distributed resource planning to add more distributed energy generation to their s)6tems and the integration of energy storage and eiectric vehicles. The state is still in the development phase of its "smart grid" modernization project. Having substantially completed the rollout of "smart meters," the utilities are just beginning to activate the two-way communications functionality of those meters, through which the utiliry can provide demand response arrd pricing signals to the customer. Parallel with these efforts, the California Public Utilities Commission is doing a comprehensive study of the utilities' residential rate structures and rates that varyby the time of day (time-of-use rates) and load conditions. rr lc 13 hup://rwv.uc-Sov/Divisions/Utilities/ElectriclValue SrCost de&ult.asp. Acmred 29 September 20i4. Mmaging the power grid ard comurnption with dynmic, intemctive muket signals. For morc, click here. htrp://rwrr.gridwiseac.org/abour/rransamive energ)-.upr.Acased30Septmber2014. NOVTMBTR 6,2014 5PECIAt CoMMENT: US UTtLlTlES: RECULATORY RESPONSE TOOKS IO STAY AHEAD OF THE DISIRIBUTED CENERAIION CURVE INFRASTRUCTURE ll\rv{5Ts[5 5[RViCl Promoted by the policies and incentives that have long been in place, the state leads the US in the number of net metered customers, plug-in electric vehicles and battery energy storage projects. The need to modernize the grid is all the more acute in California, where the increase in DG and electric cars is qulckly changing how the grid operates. The Caiifornia Independent System Operator projects unusually wide fluctuations in California's daily electric load, the so-called "duck curve," in which **.s an oversupply of power in midday, while requiring a rapid ramp-Lrp in demand as the ::f::J Time-of-use rates are not common yet among retail customers, but a pilot by San Diego Gas & Electric Company (A1) has demonstrated that this mechanism can motivate owners of electric vehicles to charge them in the wee hours when power demand is low and prices are cheaper.15 Like New York, California's electric utilities own limited generarion; therefore, they are more agnostic to a competitive threat from distributed generation than a rypical v€rtically integrated utility. New York and California also each have an independent system operator (ISO) that operates in a single state, which will make it easier to integrate the wholesale markets that the ISO coordinates with the retail markets at the utilities' level. Among the three states cited in the Appendix, Hawaii faces the most irrgent change in its utiliry model. Unlike utilities in California and New York, Hawaiian Electric, the iargest utiliry in the state, owns a significant amount of generation, most of it fueied byvery expensive fuel oil. This reliance on oil has led to the highest electriciry costs in the country by far and, as a result, the highest penetration of rooftop solar in the US. These conditions have strained Hawaiian Electric's relationship with both its customers and reguiators. Hawaiian Electric has proposed plans'u that involve a "dean slate" approach, remaking its business model over the 15 years from 2015 to 2030, The plans propose to retire all of Hawaiian Electric's oilfired generating units and replace them with liquefied natural gas in 2017 . At the same time, the utiiiry plans to triple rooftop solar on its system and enter into purchase power agreements to procure wind and solar, raising renewables rc 670/o of its energy, which would exceed the state's 40olo renewable portfolio standard target by 2030. This overhaul will be costlywith a price tag of $6 billion estimated for the island of Oahu alone, half of which will be spent over the 2015-20 timeframe. It will be a large capital program for Hawaiian Electric relative to its balance sheet ($5 billion in roral assers reported as of30 June 2014) spread across a small customer base on three disconnected isiands.'7 These customers are mostly on the island of Oahu, but most of the renewable resourc€s are on other islands without any transmission connecring them. Nevertheless, Hawaiian Electric forecasts a 23o/o-28o/o reduction in customers' bills by lowering the fuel costs from lower priced liquefied natural gas and purchased power agreements and reducing operating expenses with new, more efficient infrastructure. 15 lbid, slide 13. t6 Hamiim Elcctric's Distribuad Cenration Interanneaion Pkn and Powet Supply Impm*mttzt Plar, ffled wkh the Hawai'i Public Utilities Comission, 26 August 2014. 17 In terme of state population, Hawaii tanked as 40s ir rtrc US with ore rnilllon residmu, while California maked fust with 38 million and New York nnked third with 20 million http;//w.censu.gov/popqt/data/mtional/totals/2013lindq.html, accesr€d 3 October 2014. 14 NOVIMBER 6,2014 SPECIAL COMMENT: US UTIL!TIES: RECUIATORY RESPONSE LOOKS TO STAY AHEAD OF THE DlSl R!BUTED CENERAT!ON CURVE I MOODY',S tl.,Iv[5T0R5 SERViCE NFRASTR UCTU RE 2014, New York began a process of transforming the utiliry business model in what it calls a Reforming the Energy Vision (RED initiative, with the goal of determining generic policies by early 2015. The call for utiliry reform did not arise from net metering, although New York ranks in the top 10 by number of rooftop solar installations, Rather, the catalysts rhat put energy issues on Governor Andrew Cuomo's agenda were arguably climate change events, such as Superstorm Sandy in 2012, which highlighted the weaknesses in the state's power infrastructure, and the Polar Vortex in the winter of 2013-14, when customers' bilis soared. REV is still in an early exploratory phase as numerous stakehoidersl'are providing input into formulating the final pian, In The utiiities' century-old legary transmission and distriburion systems are aging and need to be upgraded ar a cosr of$30 billion over the next 10 years, roughly double the $17 billion spent over the past decade. re Policymakers want to grow distributed energy resources to accomplish a number of goals, including ( 1) promoting more diverse, cleaner sources of power; and (2) providing the information and tools needed to empo\^/er customers to effectiveiy manage their toral energT bill. RIIO (an acronym for Revenue = Incentives + Innovation + Outputs) is a utiliry rate scheme that was in 2010. Udlities are incentivized on certain performance measures and can be introduced in the UK rewarded with higher returns if they outperform their peers. Conversely, underperformers wiil face penalties or lower returns. A long period of price controls (eight years) and ex-ant€ formuia rates in a multi-year capital program. According to the REV proposal, a distributed system platform (DSP), most likely the incumbent utiliry, will coordinate demand and supply at the distribution level. The DSP will have rwo-way communications and power flows among retail customers (which could be gen€rating their own power) and other sources of generation. Likewise, the DSP will have Nvo-way power flows with the New York Independent System Operator AIYISO), which will coordinate demand and suppiy at the bulk whoiesaie level. In addition to the huge cost of modernizing the grid, New York faces numerous structural and culturai in implementing REV. First, the state has not rolled out sman meters that would enable the rwo-way communications envisioned in the plan. \Tithout the smart meters, the state lacks the customer data that can be used to formulate new energy services and products, and the tariffs to challenges provide them. Many New Yorkers are wary of smart meters because of concerns over privacy and data securiry. These concerns are particularly pertinent in New York, where consumers can choose to buy their power from a host ofunregulated energyservice companies. Another challenge is changing customer behavior. Historically, customers in New York have been disengaged with their enerSy use and underutilized the state's DG and energy efficiency programs.2. This disinterest stems from many New Yorkers living in rented apartments and, therefore, having little control or incentive to conserve energy or invest in DG, in contrast to a long-term homeowner. r8 Curently, some 260 panies ue collaboraring in rhe REV prmess. Re-mining Smar. Power: How Electric Utilities Can Respond to Climate Change Challenges, Energy Secuity initiative Conference, Brookings Institurion, 1 October 2014. 1e Shaping the Futue of Energy, l0 2014, 'r5 Nw York State Energy Plan, Volume 1, New York Sate Energr Plmring Bord, Jmuary 2014, page 2. REV Woil> D ii:irtrr*nts: Australian Power Industrir Increased Rooftop Solar Penetration \Would Present Lons-Term Challenqes for Power lndustrv. October 20 l4 ( I 768 l6) UK Electriciw Nerwori> Cloudv Skies and Low Rates Shield Washington State Electric Utilities From Unfettered Rooftoo Solar Crowth. ALrsust 2014 (174242) > Regularorv Framework Holds Key ro Risl$ and Re\Mards Associated'With Disrributed Gererarion. Aoril20t4 fi65944\ > Rooftop Solar, Distributed Generation Not Expected ro Pose Threar to Utilities, November 2013 (160080) >r Regulatorv Chanees Have Proved Bene{icial to Date but A-EFordabilirv Issues Mav Exem NeEative Pressure on Electriciry TSOs, August 2013 (156573) (-iry,lit rc,:i;r: >> Arizona Public Service: Gettine a Iumo on Rooftop Solar Disiribured Generation. Mav 2014 (.t69745) ii -'-:r,..'-: i:,n:,r . rr i rOt > > fusl lMW) solar installations tied into the traditional grid system in the same manner as conventional As we explain in our note of November 3'd, E,:t'ttrlt:iu oi' ,tt't i{tqtli;ri'rl l,'r:1irii.'r titc l'-uriu'r,cf Sitl* Pr;rr'r,r"i}, 12 BnnxsrErxRpsEARCH November 17r 2014 Hugh f,lynne (Senior Analyst) . hugh.wynne@bernstein.com . +1-212-823-2692 plants- has been even more rapid. We estimate that in 2014, utility scale solar generation will exceed that of distributed solar by over 507o. In part this success reflects the fact that utility scale systems have over time demonstrated a subskntial and persistent cost advantage relative to distributed solar generation (see Exhibit 1l). The lower cost of utility-scale solar, combined with its eompatibility with regulated utilities'business model, render it, in our view, a looming threat to the distrihuted solar industry. power The competition between disftibut€d and utility-scale solar generation reflects the fact that they meet the sarne goals while relying on the sarne pots of money (taxpayers' and ratepayers') to do so. Both distributed and utility-scale solar are generously subsidized because they emit no CO2, SO2, NOx, mercury, particulate matter or other pollutants; require little environmentally disruptive mining or tralsportation; an4 critically, offer long term price stabili{. These berefits come at substantial cost, however. We estimate the unsubsidized lifetime cost of a residential distributed solar system at -$230/IvIWh, or aknost trrice the ayerage residential price for elecfficity in the United States. We estimate the cost of utility scale solar generation at -$911N{Wh, or rougbly twice the wholesale price of electricity. To sustain its growth, therefore, the solar industry relies upon (i) renewable portfolio standards and feed-in tariffs, which essentially require utilif customers to purchase solar generation at an above-market price, and (ii) investnent tax credits, which require taxpayers to cover 30% of the installed cost of solar power systems. We calculate that renewable porlfolio standards and feed-in tariffs add -$2.1 billion annually to customers' electricity bills, in excess of the value of the electricity supplied, while the investnent tax credit cost taxpayers -$3.5 billion in 2013. The combined cost of ratepayer and hxpayer subsidies for solar generation, at some $5.6 billion annually, is equivalent to -$50 per U.S. household per year. The cost of these subsidies grows in direct proportion to the capital invested in solar generation. Amual invesffnent in U.S. solar generation has increased at a compound annual rate af 45o/o overthe last five years. As the industry continues to grow, we believe this rising cost will drive taxpayers and consumers (and through thern, legislators and regulators) to focus increasingly on cost-effectiveness. And a focus on cost will inevitably benefit utility scale solar, which can deliver the environmental advantages of solar generation at a cost that is 5fflo ta 6OYo below that ofdistributed solar. 13 BpnxsrerhiREsEARCH ilovember 17r2014 Hugh Wtmne (Senior Analyst) . hugh.wynne@bemstein.com . +1-212-823-2692 Exhibit 10 Both utility-scale and distributed solar generation have grown rapidly - but utility solar generation now exceeds distributed by over 50% (1) Exhibit 11 lnstalled cost of residential, commercial and utility-scale solar PV systems, 2009-2013 (reported prices, gathered by the Solar Energy lndustries Association) 20 $8.00 $7.00 16 14 $6.00 E =12 $5.00 (, E'O ? E ' $4.00 q b $3.00 H 4 2 $2.00 0 ,s" "p"" .f d ".''t "dt Distributed Solar $1.00 .f"O Utility-scale Solar 1. 2014E extrapolated based on 2014 YTD generation compared to equivalent 2013 amount Sftre; $0.00 2010 2011 2012 Residential 2013 Commercial - Source; Solar Energy Industdes Association, Bemstein analysis ElA, ABB Ventyx, SEIA, Bemstein analysis and estimates Utility-scale solar enjoys five key cost advantages relative to distributed solar: (i) lower customer acquisition costs, (ii) economies of scale in installation, (iii) market power in equipment procurement, (iv) a significantly lower cost of capital, and (v) higher average capacity factors. These differences, il our view, are inherent in the two technologies, and therefore will be reflected in a permanent cost advantage for utility scale solar projects. - Lower customer acquisition costs Customer acquisition is perhaps the most challenging aspect of the distributed solar busfuess. Contacting thousands of potential customers to discuss their interest in distributed solar is inherently a labor intensivi and time consuming effort. The success rate is low. Many potential customers are not interested; some that are prove not to be creditworlhy; and the properties ofthose that are both often prove unsuitable for distributed solar, due to shading from trees, the absence ofa southern facing exposure, or the presence of dormers or gables that limit suitable roof space. As monopoly suppliers of electricity in their service territories, utilities do not need to acquire customers or even consult them before installing solar generation. On the contrary, every utility customer, even apartment dwellers without rooftops (like the authors of this note), can be supplied from a utility scale facility. - Economies of scalefor labor and installation The most obvious advantage of utility-scale solar is its lower cost. The installation of a single l0 MW system, all else equal, costs less than the installation of 100 systems of 100kW (0.lMW). For the latter, 14 Bsnxsrr,rNRrsEARCH November 17,2014 Hugh }Vlmne (Senior Analyst) . hugh.wynne@bernstein.com . +1-212-823-2692 installers must travel to 100 different locations, familiarize themselves with 100 different plans and unique circumstances, obtain 100 construction permits and secure 100 utility hookups. The costly repetition of these basic tasks is inherent to distributed solar generation and is avoided by utility scale projects. Distributed solar installations can also be more complex than utility-scale systems. Installing roof mounted panels is inherently costlier and riskier than building ground mounted panels. And installing rooftop systems (especially on houses with pitched roofs, gables, dormers or chimneys) requires significant customization relative to uniform ground mounted arrays. - Oligopsony Regulated utilities are the monopoly suppliers of elechicity within very large service territories. Thus a handful of major utilities may supply the overwhelming majority of consumers in a state the size of Texas or California, and interstate utility holding companies such as Duke Energy or Southern may supply the bulk of the power needs of several states. In any given region, therefore, a limited number of utilities comprise the market for utility-scale systems; they consequently enjoy the pricing power associated with oligopsony (a market with few buyers). Because of the scale and ongoing nature of their equipment purchases, moreover, utilities have dedicated procurement departments staffed with engineers and purchasing managers. Through the competitive bidding process, these professionals are able to choose from an array of options each time they want to expand solar capacity, selecting the lowest cost solution and paying the cheapest price. Contrast this with the distributed solar market, where customers are often unfamiliar with solar power before being approached by a developer, and may not have the technical expertise or even the time to aggressively seek the lowest price. As the distributed solar industry grows, we expect suppliers will be forced to compete more with each other (as opposed to simply beating the prevailing utility retail rate), and the potential to over-price distributed generation will be reduced. But the market power enjoyed by utilities in the procurement of utility scale systems will persist. - Lower cost of capital Similar considerations favor utilities in procuring capital. As the monopoly suppliers of an essential service, supported by cost-of-service based rate regulation, utilities command unrivaled access to the capital markets. The risks of housing related consumer credit, by contrast, are still a painful memory for banks and institutional investors. - Higher capacity factors In any given location, a MW of utility-scale solar will generate more electricity, on average, than an equivalent amount of distributed solar capacity (i.e. will have a higher capacity factor). This reflects the fact that utility-scale solar can be designed such that the panels are optimally positioned (facing south at a tilt equal to latitude) so as to maximize the solar energy they receive. The capacity factor of rooftop systems, by contrast, is often constrained by the direction and tilt of the roof (particularly for residential systems), and any nearby buildings ortrees that block sunlight. As a result, distributed solar capacity factors averago -20o/o nationally, comparedto 25o/o or higher for utility-scale systems. Similarly, ground mounted utility scale systerls allow for the deployment of heavier, more sophisticated technologies than are feasible for rooftop systems. An example is single-axis tracking, or panels that follow the sun's movement through the sky, a technology which, while more expensive, has consistently proved to be cost-effective for ground-mo unted systems. 15 Br,nxs:rr,rxREsEARCH November 17r2014 Hsgh YYtmno (Senior Analyst) . hugh.wynne@bernslein.com . +1-212-823-2692 A New Vision of the Utility Business and Regulatory Model Some U.S. eleckic utilities, particularly those operating in states that have decoupled utility revenues from the volume of electric deliveries, are already embracing a future in which their role will encompass both (i) operating the power Cnd in ruumer that ensures high levels of systernreliability while (ii) facilitating the growth of distributed solar generation as well as renewable generation procured by the utility on behalf of its customers. Hawaii Electric is perhaps the most telling example. Hawaiian Electric's reliance on high cost imported fuel oil to power its fossil generation fleet renders both utility scale and distributed solar generation economically attractive sources of power supply (see the cost comparison provided by Hawaiian Elechic ir1 Exhibit 12). On the mainland, renewable generation remains, as a general matter, a more expensive source of power that conventioral resources, but widespread political support for renewables render their growth inevitable in states such as Catifornia, whose state renewable mandate requires utilities to procure a thfud of the power the supply their customers from renewable resources by 2020. Exhibit 12 Hawaii's reliance on high cost imported fuel oil to pourer its fossil generation fleet renders both utility scale and distributed solar gensration an economically attractive source of power supply 0.+0 Energy costs subjeet to volatile oil prices 0" Renewables : long-terrn fix*d price fontruCts with prsdetermined esealators i5 B iilfEl .x {* t, U $l 1 r,J Energy Proposals at <$o.15 I rc Range of HECO Companies fossilfuel energy cost ....--.-.*-'-,-..] Soure: Hawaiian Electric lndustries Edison International CEO Ted Craver offers in our view the clearest vision of the role of the incumbent electric utility in these circumstances. Craver sees the utility's roles as (i) ensuring reliable supplies of power at the constant voltage required to operate household, commercial, industrial and transportation 16 Br,nNsrnrNRssEARCH November 17r2014 Hugh lYtmne (Senior Analyst) . hugh.wynne@bernstein.com ' +1-212-823-2692 equipment (including electric vehicles) while (ii) allowing the roll-out of distributed solar generation by consumers as well as the integration of utility scale renewable resources onto the grid (see Exhibit 10.) Viewed holistically, the integration of high volumes of intermittent wind and solar generation is feasible only due to the offsetting flexibility of the power grid's rapid dispatch gas turbine and hydroelectric capacity. Distributed solar generation in particular is attractive only because of the back-up supply of conventional generation that is available from the grid at night, as well as the grid's ability to absorb the output of distributed solar generation during the day. Without the back up of the grid, very few consumers would find distributed solar generation attractive, nor would they be likely to in the foreseeable future. (see !.'tLt- titr'{rriitt Exhibit 13 Role of the Utility in a Changing lndustry Role of the Utility in a Changing Industry Kev Califolnia Errerqv Mandates and Ledslatien: Renewables - 33ort, by 2020 Gtobal !$Valnling - AB32 gr"eerihouse gas enrissions reductions to 199(t levels by 2020 C.llifornia Solal Initiative - 1,940 MW residential soldr inst"rllations by 2017 . . . . r Enetgy Storage - 1,3m ntegauratts by 2020 Energy Efficiency, Denund Response, Smatt Meters Prr:vide the tratkbone distribution sytteni Create a'plug and play'systenr capable of tr,vo-reray elettlicity flows Facilit*te integratinn of clistributed €nerqy regourc*s Ensrrre gr id reliability arid pow*r quality Support continued growflr and investnrent Thc elcttric por,rrer industry is going through a period of transformative change, driven simultaneously by technology and public policy 4 j.l.'_g od B L]: , ,',tt.i-rr,,rt. 1.1 BEFgBB z-q:5c g.r-rni9* NET L, - f,Lttr!€'lorm h4 - i4*kei-F'er it-,rm U - $ftlirpertsrm N - N,3 FBted PCG ,'PG&f Cotp T, i"., FEdin(l l:.':!."11 .i :--'--'iiij l D i:,1,_, o J _ , -r,,' f4 r!. r. .i!, t, r-: !'l fi Jl ! I 11 t3 D r! ,' .,- ,'l : li.' .1 _-1: r...j.,lj a !:.,, : :' ,'-tr:' ar',,t,-, rl i,. ,,.,, r:! Pdi-: + . in-atrfrltrr', l'4 - lt irl*l-Perrr}lm t-l - ll--l T.rgd Fnee !,r*** Srrn:lerrr. r,J - $!at **t*t 3..,: ai 1l/t ll:tll.l l-ltu1err*rtnrrrl OTHER DISCLOSURES A price movement of a security which may be temporary will not necessarily tdgger a recommendation change. Bernstein will advise as and when coverage of securities commences and ceases. Bemstein has no policy or standard as to the frequency of any updates or changes to its coveEge policies. Although the definition and application of these methods are based on generally accepted industry practices and models, please note that there is a range of reasonable variations within these models. 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All rights reserved. Utility Rate Changes An Ominous Sign For SolarCity - SolarCity Corp. (NASDAQ:SCT... Page 1 of 3 Seeking Aipha c Utility Rate Changes An Ominous Sign For SolarGity Dec.12,2AM2:47 PM ET by: Casual Analyst Summary . We expect utility rate structures to fundamentally break the residential solar lease company business model. . The risks for SolarCity are outsized and we see mostly negative catalysts going forward. . We are revising our view of SolarCity from Avoid to Sell. the utility industry and how they are going to impact the specifically. tn this article, we discuss the rationale for the rate changes in residential solar market and SolarCity (NASDAQ: : ') beyond what investors may realize. As a sign of things to come, Public Service Company of New Mexico, on Thursday, indicated that it is proposing a . ' . The talk of utility death spirals, the r . . i r r,, the loss of market share to customer generated solar power and third-party systems, and the fear of survival has caused the utility companies across much of the developing world to get out of their slumber. Utilities across the US and rest of the world are waking up to the impact solar can have on their business models and are starting to reevaluate their long-term service and business models. A fundamenlal reality with most utilities is that typical energy pricing models are based on simple per KWH charges. These decades'old KWH models worked well during monopolistic times but no longer work in today's competitive landscape. The root of the problem can be traced to utilities' cost structure. Most utilities tend to have large asset bases and high fixed cost structures. Some of the larger utility fixed costs include power plants, transmission and distribution infrastructure. These fixed costs tend to be a large percentage of utilities'total costs (about 73% in the case of SRP as can be seen from the .., , ' ) llou ('trras ar* Incllrrrd H*rw lle*'roue* srr (]{dlrl;lcd Variable While the fixed costs dominate the cost structure, the utility revenue model is dominated by variable per KWH charges (see picture above). http://seekingalpha.corr/artiele/Z752295-utility-rate-changes-an-ominous-sign-for-solarcit.'. L2ll4120l4 Utility Rate Changes An Ominous Sign For SolarCity - SolarCity Corp. (NASDAQ:SCT... Page 2 of 3 As customers move to rooftop or other distributed solar, the variable revenues decline but the fixed cost structure does not change. lf energy sales are less than expected, the fixed costs simply are not recovered. What this means is that the utilities cannot recover their costs with the variable cost pricing structure. lncreasing KWH charges to make up for the shortfall reduces the utility competitiveness and increases customer defections. Misinformed pundits, taking this dynamic to the extremes, have pontificated about the utility death spiral. Utilities realize the fallacy of this revenue model and are starting to align their rate plans to be more consistent with the fixed cost base. What this means is that utilities will start moving to a model where the customers'electric bills will more closely reflect the utility cost structure and more accurately reflect the incremental value of delivered energy. This rate realignment leads to the following changes: - Fixed charges will start increasing and will end up becoming a large part of the customers' bills. At the extrerne, a case ean be made that since about 70% of utilities costs are fixed, about 70% of the customers' bills also should be fixed. As the fixed component increases, solar becomes increasingly unattractive unless customers completely disassociate from the grid. For most customers, it will be uneconomical to disassociate from the grid for years to come. - Per KWH charges will start declining across the US. ln some cases the declines are likety to be steep - maybe as much as 50% from the current KWH levels. This change will immediately make PPA-type pricing models that SolarCity, Vivint Solar (NYSE:VS -E) and other residential installers use highly unattractive. - New changes based on peak demand may start appearing to pay for the natural gas or other peaker plants. This charge once again works to the detriment of the solar lease model. (However, these demand charges could encourage battery deployment). - Utilities will increasingly reduce customer compensation for customer power generation. Net metering will be increasingly effective at or below wholesale rates. Again, a substantial setback to solar deployment and SolarCity's business model. Rate realignment efforts have become a top priority for utilities in geographies with high current or potential solar penetration. ln spite of resistance from the solar industry, utilities are indicating they intend to move to new rate plan proposals. ln this environment, utilities in deregulated markets and utilities in markets that are not subject to rate reviews are set to move quickly with new rate structures. What we saw in the case of the SRP utility in Arizona was a community entity that moved quickly to adjust the rate structures. As the reality of rapid solar deployment sets in, utility rate changes and other business model changes are happening faster than expected. With a Republican Congress, we expect this trend will further accelerate starting 2015. We expect to see a flood of utility rate changes in 2015 and 2016. By 2017, we estimate that most, if not all, of the major utilities in impacted markets will move to new rate structures. By 2020, as solar installation costs continue to go down, and as new markets become economical, we expect substantially all utitities across the US to move to new rate models. As these rate changes are adopted, the market dynamics of solar installations will change dramatically. Utility rate changes will lead to the following consequences: - These changes will essentially push out the economics of many new solar installations by three to five years. ln other words, the oft-misused "grid parity" will get pushed out in each rate change market by 3 to 5 years. ln particular, the economics of small residential solar systems will be impacted significantly. ln other words, groMh prospects for the residential solar industry and the likes of SolarCity are set to collapse. - The rate changes will make solar leases and PPAs unattractive and reduce the overall residential market TAM in any given year. This does not mean solar will not be uneconomical in all cases in these markets. However, it does mean that the number of customers who can benefit with solar will decline substantially. Smaller residential scale system TAM will be particularly hard hit. - ln pursuit of growth, solar installers like SolarCity will increasingly chase the declining number of markets with favorable rate regimes. This will intensify competition in these markets and reduce PPA rates and margins. - The rate changes, depending on the grandfathering aspects, will create an angry pool of customers whose existing installations and leases may no longer be economical. We expect to see a considerable increase in negative customer sentiment as the new rate plans take hold. http:l/seekingalpha.corn/articlre 2752295-utility-rate-changes-an-ominous-sign-for-solarcit... 12114/2A14 Utility Rate Changes An Ominous Sign For SolarCity - SolarCity Corp. (NASDAQ:SCT... Page 3 of 3 Because of these dynamics, we expect the residential solar market to slow down starting in 2015 and dramatically slow down when ITC benefits expire at the end of 2016. This slowdown will create yet another outsized risk for SolarCity in particular. By the time SolarCity ramps its new fab, there is a high risk that there will not be enough business for SolarCity to fill the fab. Given the highly leveraged balance sheet, the fab could create significant headwinds. Our Take: ln summary, with the emerging reality of utility rate structures, SolarCity now faces several significant risks: - Shrinking TAM - Lower PPA rates and margins - Customer backlash from underwater leases - Uncertainty if there will be sufficient demand to fill the New York fab. We have always felt that SolarCity stock should be avoided given the frothy valuation levels. However, the residential solar boom and the Musk factor have largely kept the stock from facing the realities on the ground. Given these dynamics, especially the Musk factor, in spite of the poor fundamentals, there was always a risk that momentum players would push the stock further into the stratosphere. However, with the onset of new utility rate structures, we believe the residential solar PPA sector is now fundamentalty broken. We do not see a significant risk of momentum building behind this name. As such, we see increasingly negative news and no positive catalysts for the company on the horizon. We do not betrieve this stock should be valued above its hard asset valuation. For a detailed review on a good way to value this company, see our earlier article: At this point, we beiieve the stock is worthy of consideration for shorts. Our sentiment: Sell. http://seekingalpha.corn/articlel2752295-utility-rate-changes-an-ominous-sigu-for-solarcit. .. 12/1412014 Figure 1. NEM and Federal Tax Credit Subsidies Shift from Customer to Leasing Company when Customer Leases Rooftop Solar (results based on 4 kW rooftop solar system in southern California that costs about $14,500). 4 kW Rooftop Solar Subsidy in Southern CA s3o,0oo 524,358 524,358 s25,ooo Customer Subsidy s20,000 $15,ooo 5e,ses s20,o44 Subsidy S13,1os s1o,o0o Leasing Company Subsidy $5,000 ($17,419) s4,314 $4314 so Customer Purchases Rooftop Federal Tax Credit Solar NEM-Leasing Customer Leases Rooftop Solar Company NEM-Customer Source: Net Energy lVletering: Subsldy /ssues and Regulatory Solutions. lnstitute for Electric lnnovation lssue Brief. September 2014. www.edisonfoundation.net State Updates States with Key Activities on NEMIDG lssues December 75,2014 Summary of Key State Activities on NEM and Related DG lssues: 43 States and D.C, AR Legislative debate sn SIEM cornpensation AZ ACe : CA CFU{; Rate reform, sucfc$sor NEM tariff, shared solar, distribution resource planning, demarrd manasenient, $t*rage, intercoftnection " Further RES expansion uia rulemaking co Regulators ccnsider NEM issues, solar incentive levels . Bebate on centraliaed vs" distributeei solar CT Expanded Vf{M DC lrnplernentati*n of sl'lared renewables law FL Pntential GA Pctitions tc: PsC on V05, cornpetitive pr*eurement of HI Proceedings cn $ER pollcy ineluding rate design, Bower supply, interconneetion IA Regulatory f\iOl om DG - lrnpaet of state high court nuling allnwing 3'd party rooftop solar financing ID S*lar integratlon eharges for QSs - $olar advocates poised tc defend against fix*d charges, push VfiS IL Rulernakings on hlEM chang*s, interconnection , Expected tegislation on DGllSfiM inclelding VNM ljtieatio* of rate case oufeome including SFV rate design IN Regu{atary proceeding to extendlnrodify NlFSe0 feed-in tariff " En*rgy strategy rollout KS lmpiernentation of law allowing lower l\EIV! eredit, special eharges KY Lltility rate Value of EG/grid, rate design, utility-owned DG, DG earve-out rules . Tax & eon*umer issu*s NEIVI ' Rate case w/hig}rer fixed charges . Recurring efforts on shared s*lar legislatlon rulemaking, legislatloni debate rnay conflate NEM w/ choiee issues . eases irre{udir:g higher eustcmel eharges 1 FSC refornr bili DG ' RES repeai legisl*tion " study of NEM costs/benefits . NHM eaps . Raoftop solar tax, 3'd party financing, collsumer issxes LA FSC ME N0i/repert to legislature on distributed VOS . Regulatory consideration af residential dernand clrarge MA lrnplernentatiqrn of NEM law raising eaps, ereating task fcree " Longer-tern'! prograr$ design ts ffiaet govennor's goal of 16$0 MW by 202$ " NEM for: small hydro MI Bills on l$EM, eommunity solar. Rate design & c*mmunity salar dockets. Rate ca:e w/higher fixed charges MN r,!tility solar garden prsgral'yl , Rulenraking or: NElti changes . Possible proeeeding on standby r;*tes MS PUC vueigi'ls MT Review of rooftop solar subsidy via Universal System Benefits charge . l\lEM legis ation MO Debat* on ro*ftop solar incentives/VOS . Rate .ases wy'lrigher fixed el'larges . Stats energy strategy NV PLle weighs separate rate elass NH lrnplementation of group NJ Ruternaking on aggregat€d NEM " Updates ef renewables rules w/NEM . Legislatinn on h,lfiM eaps, NM eornrnunity renetErables developrnent , Utility rate case wlrate design proposals NY Gov*rnor-F5f 'Refornning the Energy Vision' initiative-regulatory/raternaking reforml ' fiate cases wlhighxr fix*d charges, eorxn:unity solar " Other utility dockets w/DG, NEM issues " SJEM icgislation NC Value sf DG - PURPA avoided cost proceeding . Pcssible proceeding on hlEM rhanges " Rccurring legisiative efforts on shared renewables, 3'd party solar financing OH hl[M nule changes , lmBaet of OK lrnpl*melrtation of law addressing NEM cost shift; utility prcposals in 2015 OR FUC PA PUC NOPR RI ln'lplementatian of law replacing contrast DG w/tariff-based pro6ram, elirninati*'lg $*ttVI caps SC lnrplementation of law creating statewide DfR program including ncw NEM rnethsdology, VOS SD Reeurring legislation to institute NEM TN Advocacy for expanded TVA green pcl&rer prsgram; TVA eonsiders VOS st*dy TX No statewide NEM but recurring cfforts to ;nstituts to pronn$te solar rale in eompetitive rnark*t & as aid for c*mplianee wIEPA carhon lirnits . &uEtin VOS tariff studied as model UT lmplernentati*n of law requiring NEM cast/benefit study, authoriaing speei*l rharges VT Redesign of NEM program under new law . Persistent solar growth chalienges new VA legislative consideratisn of administration NEM cost/benetit study, updated energy stret€gy w/ffG WA UTC investigates ES, $eeks to regulate 3'd party providers " Governor exec. srder on canbonfclean energy; seeks rnore rooftop solar " e*mprornise legislation rn 3'd party leasing WI Sebate ein 3'd party solsr finaneing, esmmunity solar . Psssible legal challenge of utility rate cas* outcorrle including higher fixed charges WV Utility rate case including higher fixed charges . Debate on next steps, e.9., V05 structur€, following study of NEM ecsnonric impaet tc eensider resoilrce for OG ' Legislature ccnsiders FUC report on NEIV! eostsfbenefits tl[M . I\lew state energy strategy w/DG provides legislative fodder RES freeze law . FUe seeks SFV rate design proposals VOS, NEM cost cn itEM rule changes ' RES shift , il-egislature weighs PUe reper"t on soiar incer':tiv*s Rate eases wllrigher fixed e*rarges ' Fstential legislation on fixed cost recovery 2 RES repeal frJE[\A caps EEI Confidential Draft * Not for Distribution State Activity on DG & Residential Fixed Charges December 75,2A74 Special Charges to DG Customers Approved special charges for DG customers: Special charges for a AL, M, CO, VA, Wl DG customers under consideration: Hl, NM Separate DG rate class under consideration: CO, NV State Company Docket/Date At AL AZ APS Power lJ-4226 Decided:7/t}l13 CO BHE 12/3h3 Case: 12AL-1052E Decided: 6128h3 CO Generic Case: HI Case: HECO Charge Summary reservation S5/kW /mo. cost Customer charge for customers NEM w/solar 14M-0235E Separate rate class for DG Case opened: 3lt*l74 customers 2014-0192 8126114 Fixed charge for standby capacity requirements Case: L4-00332-UT DG interconnection fee Filed:12171/14 Decision expected by Filed NM PNM Type of Capacity charge Case: E-01345A-13-0248 lnterim lost fixed Decided: recovery DG adjustment Case: generation & Status 50.70lkwmo. 55/mo. (plus $16.50 customer charge to all customers for total 5zr.so1 for legal briefs as part of investigation of DG issues; trial staff said PUC has authority to create separate rate class & impose higher fixed charges on DG customers $16/mo. (total $7L for DG PUC asked Pending Proposed customers incl. proposed S55/mo. minimum charge for all customers) 56/kWmo. (residential) for new Proposed customers as of 12/31/15; varies by rate class 3/15/16 (orig. Separate rate class for DG 14-03026) customers NV Generic Case: L3-07010 VA Case: Petition for investigation by AG Bureau of Consumer Protection Pending Filed:413/74 Dominion PUE-2011-00088 Decided: VA APCo Case: 11,123117 PUE-2014-00026 Decided: LU26 L4 for Standby charge residential > 10 kW up 20 kW of installed capacity for to S4.19lkW = 52.79 for distribution & 51.40 for transmission Standby charge 51.77/kW = 51.94 for distribution & residential > 10 kW up S1.83 for transmission 20 kW of installed capacity Note: Final numbers pending compliance filing incorporati ng to approved modification of transmission component WI We Energies Case: 05-UR-107 111141L4 Decidedt DG of to Demand charge for customers w/< 300 kW installed capacity recover gen & dist standby costs; applies to customers on new COGSNM & COGS-NP tariffs* *COGS-NM $3.79/KWlmo. for COGS-NM & COGS-NP customers using intermittent technology, e.g., solar & wind = customer owned generation service-net metering; COGS-NP = customer owned generation service-non-purchase. **The results are preliminary pending issuance of a final written order. 1 Fixed Charges to All Residential Customers . r o r Approved increase in customer charges: FL, MS, NJ, NV, WA, Wl Customer charge increases under consideration: CA, CT, Hl, KV, Ml, MN, MO, NM, Ny, OK, pA, SD, VA, WA, WV Residential demand charge under consideration or development: CT, ME Straight fixed variable rate design acted on but unresolved: lL, OH State Company Docket/Date Type ofCharge CA Summary Status PG&E, SCE, Case: R12-06-013 Filed:2128/14 Customer charge Gradual increases thru 2018 for non-low income: PG&E: From zero to 51,O.42/mo. SCE: From 50.94 to S10/mo. SDG&E: From zero to St0/mo. lncrease from S16 to 525.50/mo. Proposed SDG&E Customer charge (called fixed charge Customer charge (called customer lncreased from S12 to 514/mo per settlement APPROVED Customer charge New-S55/mo. Proposed Case: 13-0387 Modified straight ICC reversed its 2011 approval Decided: 12/78/13 fixed variable (SFV) modified SFV and adopted rate design for 2 residential classes (single family homes w/ & w/o electric space heat) that increases fixed customer charge & decreases volumetric charge Decision expected in March 20L5 CT CL&P Case: 14-05-06 by SCE, monthly service fee by PG&E and SDG&E) Proposed Filed:6/6/74 Decision expected by 12/17/1"4 FL FPU Case: 140025-El Decided:9/29/14 facilities charge) HECO Case: 2014-0192 Filed:8/26/14 IL ComEd rate design of Appealed by REACTto lL Appellate Court, 2nd District, Case 2-L4- 0202 (REACT = Coalition Request Equitable Allocation of Costs Together) KY KU Case: 2014-00371 Filed L7/26/74 Customer charge (called basic service Decision expected by charge) lncrease from S10.75 to S18/mo Proposed 6/26hs KY LG&E Case: 2014-00372 Filed tL/26/14 Decision expected by S18/mo. Customer charge (called basic service charge) lncrease from $10.75 to Demand charge PUC directed CMP to develop optional residential demand charge; proposal not yet filed proposed 6/26lts ME CMP Case: 2013-00L68 Decided: 8/251L4 (development of option, not actual proposal) MI MI CE WPS Case: U-17735 lncrease from $7 to 57,50/mo. Proposed Filed:1215/14 Customer charge (called system access charge) Case: U-17669 Customer charge lncrease from $9 to 512/mo. Proposed Customer charge lncrease from 58 to 59.25/mo. (overhead) lncrease from S1.0 to $11.25lmo. Proposed Customer charge lncrease from S12.52 to S18.75lmo. Filed:1O/I7/1,4 MN Xcel Case: 13-868 Filed 1.1/4/73 Decision expected by 3/261ls MO EDE Case: ER-2014-0351 (underground) Filed:8/29/74 2 Proposed to Decision expected by 7 MO KCP&L /26lts Case: ER-2014-0370 Customer charge lncrease from 59 to S25/mo Customer charge lncrease from 58 to Proposed Filed 10/30114 Decision expected by 8/31/75 MO Ameren Case: ER-2014-0258 $8.771mo. Proposed Filed:71311.4 Decision expected by 5/30115 MS Entergy Case: 2014-UN-132 Customer charge lncreased from 54.57 to S6.75lmo. APPAOVED** Customer charge lncreased from 53 to S4/mo. per settlement lncrease from 55 to S12.80/mo. APPROVED Decided: 72/lUL4; written order pending NJ ACE Case: ER1403025 NM PNM Case: 14-00332-UT Decided:8/2A/M Customer charge Proposed Filed t2lI1lL4 Decision expected by 3hslL6 NV NVPower Case: 14-05004 Decided: 10/15/14 NY CHG&E Case: 14-E-0318 Customer charge (called basic service charge) Customer charge lncreased from S10 to S12.75lmo. lncreasefromS24to$30/mo. Proposed Filed 7/25/t4 Decision expected by 6/30/15 NY ORU Case: 14-E-0493 Customer charge Increase frorn 520 to $25lmo. Proposed Filed tLl14/t4 OH Generic Case: 12-2050-ELORD Straight fixed variable rate design Decided: 8l2UL3 OK PSO Filed llL7l1.4 Customer charge (called base service Decision expected by charge) Case: PUD 207300277 The PUC found SFV may best accomplish energy efficiency, DG, other policy goals & encouraged utilities to file SFV proposal in next rate case; if utilities do not file, staff is directed to do so. lncrease from 516.16 to $20lmo. (PUC request rate designs) Proposed L2l3Ll14 PA West Penn Case: R-201.4- Customer charge lncrease from 55 to S7.35/mo. Proposed 2428742 Filed:8/41t4 Decision expected by 4130/ls PA Penelec Case: R-2014- Increase from 57.98 to Customer charge PA Penn Power Case: R-2014- Proposed S11.92lmo. 2428743 Filed:814174 Decision expected by 4/30/1.s lncrease from 58.89 to Customer charge 2428744 Proposed 512.71/mo. Filed:8/41t4 Decision expected by 4/3017s PA MetEd Case: R-2014- lncrease from 58.11 to Customer charge 513.29lmo. 2428745 3 for utility proposals, not actual Proposed Filed 8/4/t4 Decision expected by 4/30/t5 SD )kel Case: EL14-058 Customer charge lncrease from $8.25 to 59.25 {overhead); from S10.25 to S11.25 Customer charge @ INCREASE BEJECTED lncreased from $8 to 58.50/mo. per settlement APPROVED Decision expected by th/1s VA APCo Case: PUE-2014- Proposed (underground) 00026 Decided: tL/26/1.4 WA Avista Case: UE-140188 Decided: 1L125114 Customer charge (called basic charge) WA PacifiCorp Case: UE-140762 Customer charge lncrease from 57.75 to 514/mo. Proposed Filed:511./M Decision expected by 3131/t5 WI MG&E Case: 3270-UR-120 Customer charge & Decided: L7/26114 grid connection charge lncreased customer charge from 510.44 to 5r4.97 /mo. + $4.03/mo. grid connection charge = total APPROVED** $19/mo. WI We Case: 05-UR-107 Energies Decided: lLlL4/74 lncreased from 59.13 to S16/mo. APPROVED*X Customer charge lncreased from S10.40 to S19/mo APPROVED** Customer charge (called basic service lngease from 55 to 510/mo. Proposed Customer charge (called facilities charge) WI WPS Case: 6690-UR-123 Decided: tU6/1.4 WV APCo Case: 14-1152-E-42T Filed:6/30114 Decision expected by charge) 4126/15 **The results are preliminary pending issuance of a final written order 4 Legislation State DocketNo. HB 2019 48327 HB 2L01^ OK sB 1456 SC sB 1189 UT SB VA HB 1983 Summary Status Authorizes PSC to allow utilities to assess DG customers a greater fee or charge Provides for residential rate reform including customer charges up to Enacted 2013;a proposal has not been filed at the PSC S10/mo. Enacted 2013; CPUC has generic proceeding underway Utilities may propose a minimum bill, TOU rate, or other rate structure for DG customers Authorizes utility recovery of full costs of serving DG customers & imposition of higher fixed costs; prohibits subsidy of DG customers by Enacted 2014; a proposal has not been filed with the KCC Enacted 2014; the OCC has begun discussing how to implement non-DG customers, 208 Establishes statewide DER program; allows utility investment & cost recovery related to serving DG customers Enacted; the PSC has opened a generic docket Requires the PSC to study NEM costs & benefits & authorizes it to determine a charge, credit or ratemaking structure in tight of study Enacted 2014; the PUC has opened a generic docket DG resu lts EEI Co nt a ct : M a rth Provides that residential customers with capacity greater than 10 kW and up to 20 kW must pay a monthly standby charge a Row I ey, Ap_lykt-@Se_gg, 2 0 2 - 5 A 8- 5 2 5 1 5 Enacted 2011; the SCC approved a standby charge for Dominion & is considering one for APCo t Fl C) N o ltc, tr o () o o I o tn o E' o o o. IL G 1l c G t, o 0 o a. o TL o a0 (! (J o 'E .5 t! s-a c o =o E o IA 5 (! I c .E o ln E' o G, o o qluou rad vi d S o a N o n N N o) .! il 1 o o o ffi,rt ' ,, I,..:..':,,'," 3[r,.. Im't [ &,,, "ffi o "* 4'o4+, % g-% % o t o d s 5 E c .x E o d o g P s .x U o P ! .a d LF e L r{ o N 6 s# Eg (J(u >cl to C ttt O(! -(J =' 9CL =o EO FcL d{ UlC o(o E o vt o CL o L e flo NN o ID \ lD d rO H rO si 6 q rJt I r}0 I qPou.tad$ r,l o I I a n * 3 S o 3 oc E 6 G L ! 0) o. 0l bo 6 -> E o (, M OJ -o s-> U i h= '=U :sr o!4 El o6 L U o (J = .9 bo OJ c U U o 3 o- G .:< €z o oa (J0 = Au N *E Key News Clips Key News Clips 2014 Index: Journal Sentinel: Learn from German mistakes [Op-Ed] Eric Bott December 11,2014 Forbes: Net Energy Metering Jim Conca November 28,2014 - Are We Capitalists Or What CNBC.com: Solar firms, power companies battle over'net metering' Javier David October 12,2014 The Wall Street Journal: Germany's Coal Binge [Editorial] Green energ/ mandstes have achieved the opposite of their intent. September 25,2014 Foxllews.com: The sunshine of other peopleos money: The truth about 'net metering' [OpEdl Benjamin Zycher September 24,2014 TIME: \Mall Street Goes Green Michael Grunwald August 28,20t4 The Huffington Post: Support Solar, But Not at the Cost of the Working Poor [Op-Ed] JeffJohnson July 16,2014 NPR: Leased Solar Panels Can Cast A Shadow Over a Home's Value Jeff Brady July 15, 2014 Smart Energy Universe: Innovations in the Utility Industry [Op-Edl Lisa Wood June 23,2014 SmartGridNews: The net metering debate: Solar power unfair to the poor says former regulator Jesse Berst June 18,2014 Forbes.com: The Poor Shouldn't Have To Bear The Cost Of Solar Power [Op-Edl Monica Martinez June 13,2014 The Wall Street Journal: Throwing Light on Value at SolarCity Liam Denning May 11,2A14 The New York Times [LTEI Ashley Brown May 4,2414 The Wall Street Journal: No Solar Subsidies for the Wetl-Off ILTEI Rep. Joseph Gibbons May 2,2014 Full Text Clips: Journal Sentinel: Learn from German mistakes [Op-Edl Eric Bott December ll,20l4 ht6://mjsonline.com/opiniorlwisconsin-should-learn-from-germanys-energy-mistakesb994063 l2zl -28543505 1 .htrnl It was surprising that the Gennan experience was recently held up as an example of successful energy policy-making ("On energy, Germany is ahead of Wisconsin," Crossroads, Nov. 23). Gerrranfs energy transformation or energiewende calls for a nuclear-free and carbon-reduced economy through the vast deployment of renewable technoiogies, but its results thus far have been higher prices, greater carbon intensity and a less reliable electric delivery network. While that column pointed to Germany as a potential model, Wisconsin Manufacturers & Commerce views Germany as providing valuable lessons on missteps that the state of Wisconsin should avoid. Indeed, policy-makers in Germany now are reversing course on the iarge cost of renewable subsidies and the impact of those subsidies on residential and industrial electric rates ard carbon dioxide emissions. German consumers already pay the highest electricity prices in Europe and about double what most Americans pay. On average, German households pay an extra $355 a year just to subsidize renewables. Costs also are going up for Gerrran employers, making them less competitive than rivals from America. Average electricity prices for German businesses and manufacturers have jumped 6A% over the past five years because of costs passed along as part of government subsidies of renewable energy developments. Germany's transformational energy policies have put the country's future economic competitiveness at risk. GDP growth shrank in the second quartff and industrial output and exports are plunging. The biggest concern is that German industry, the mainstay of its economy, is becoming less competitive. According to a recent survey by PricewaterhouseCoopers and the Federation of German Industry, nearly 75% of Germany's small- and medium-sized industrial businesses are most concemed with risks associated with rising energy costs. Moreover, Germany is highly dependent on the success of its manufacturing sector, and high energy costs are leading to indushial invesfi:rent losses, as German companies are being forced to invest abroad to stay competitive. Renewable eoergy subsidies also are having a regressive effect on wealth distribution as poor and middle-class families pay higher rates to subsidize solar panels for the more affluent. Should Wisconsin go down this same path, forcing someone living in a small rental apartment, for instance, to subsidize a wealthy homeowner's roof-mounted solar panels through that renter's electricity bill? Simple fairness dictates no. In addition to increasing energy costs for families and businesses and contributing to the loss of domestic investnent, energiewende has recently had the perverse effect of increasi.g carbon dioxide emissions in Germany. The combination of a auclear phase-out, dependence on highpriced Russian natural gas and the tremendous ineff,ciencies of renewables have combined to force Germany to burn more lignite and hard coal, which boosts greenhouse gas emissions. Germany is a classic example of the severe consequences of adding extensive amounts of distributed generation without an integrated approach. Policy-makers are increasingly realizing that they must reform the energiewende to maintain the vitality of the German economy. The lessons learned in Europe prove that the large-scale integration of renewable power will result in increased costs to consumers and other stakeholders, and may not actually achieve well-intended environmental goals. Wisconsin should heed the lessons learned in Germany and not repeat the same mistakes. Eric Bott is environmental policy director of Wisconsin Manufacturers & Commerce, the state's largest business group. d<*rt Forbes: Net Energy Metering Jim Conca November 28,20L4 - Are We Capitalists Or What h whatl The public thinks that electricity is all about what generates it. Coal, naflral gas, nuclear, hydro, wind, solar or biomass, heated discussions have focused on costs, carbon and reliability. Few know or care about the grid that delivers the electricity. It's as important. But net metering just doesn't sound like a hot issue. Nevertheless, it could become a major problem in the future if we don't get it right. Net metering, or net energy metering (NEM), is a billing system that credits small customers at the full retail electric price for any excess electricity they generate and sell to their local electric company via the grid from on-site small sources such as residential rooftop solar arrays. Currently in place in 43 states and the District of Columbia, net metering is becoming another unnecessarily controversial issue. This graph shows the typical energy production and consumption for a small source owner, or distributed generation (DG) customer with a rooftop PV solar aray. When the customer produces more power than is being consume4 during peak sunlight hours, they can sell it back to the utility company at the full retail price. This is called net energy metering (NEM) or net metering. In 43 States and the District of Columbia, the utilities are forced to pay the fullretail price even though it usually costs those utilities much less to produce that electricity themselves, or even to buy it on the wholesale market, and the utilities pay over half of that price in infrastructure support. These small users are still connected to the grid, a requirement for net metering, and also to power their hornes at night or when their solar systems don't produce enough power. Source: Edison Foundation Institute for Electric Innovation. This graph shows the typical energy production and consumption for a small source owner, or distributed generation (DG) customer with a rooftop PV solar artay. When the customer produces more power then is Ssing consumed during peak sunlight houts, they can sell it back to the utility company at the full retail price. This is called net energy metering (NEM) or net metering. In 43 States and the District of Columbia, the utilities are forced to pay the fuli retail price even though it usually costs those utilities much less to produce that elecfticity themselves, or even to buy it on the wholesale market, and the utilities pay over half of that price in infrastructure support. These small users are still connected to the grid, a requirement for net metering, and also to power their homes at night or when their solar systems don't produce enough power. Source: Edison Foundation Institute for Electric Innovation. Rooftop solar owners say net metering is necessary to encourage solar installations and help reduce fossil fuel use. Utilities say it gives rooftop owners a &ee pass on paying their fair share of maintaining the electric grid like everyone else does. These smali generation sources are referred to as distibuted generation (DG) and someone owning or leasing a rooftop solar array is a DG customer. Rooftop solar is the major small distributed energy source ?95%). Wind and other renewables like biomass are very small contributors. Under most net metering policies, utilities are required to buy a DG customer's excess power at full retail price even though it costs those utilities much less to produce that electricity themselves, or buy it on the wholesale market. The point of tbese policies is to encourage the adoption of distributed solar on residential and business rooftops, parking garages and other buildings, to take advantage of existing surfaces, to generate the energy right where it's needed and to reduce the total electric load during peak hours of the day. Along with increased efficiency and conservation, distributed generation can reduce the need to build new large power plants even as the population grows. Small DG users are still connected to the grid, which is necessary to have net metering, and also to power their homes at night or when their solar arrays don't produce enough power (see figure). This is not an academic matter. When - not if - DG customers expand to a significant number, say 5o/o or 10% of total capacrty in the next ten years, the utilities will lose significant power sales. But the utilities are still required to maintain the electric grid from which everyone, including DG customers, must obtain their electricity. So the burden of maintaining the gnd, and providing these services, falls on fewer and fewer non'DG customers, and their cost grows. Isn't the obvious solution to adjust this practice so it's equitable to everyone? Grid-connected solar PV systems effectively use the grid as a big battery, absorbing excess power without having to purchase actual batteries or back-up generation. At the same time, it is essential to appreciate the value of distributed solar to the grid itself, by reducing peak demand lowering fuel costs and reducing the demand for fossil fuel generation. This is all part of the global electricity revolution. According to Charlie Ebinger, Director of the Energy Security tnitiative at the Brookings Institution, "distributed generation represents the most recent trend in a decades-old evolution of a changing electric power industry." We do have a few years to hammer out a real solution. Dishibuted solar only makes up 0.2% of the U.S. electricity supply. Even in states that have pushed it hard with solar-friendly policies, it's still less the Zo/a.Tbis gives us a bit of time to work out the best system to employ it before adverse economic and infrastructure effects are felt on the electric grid. The adverse effects are becoming visible, however. A report issued last yearby the California Public Utilities Commission found that non-solar customers in the state face over Sl billion annually in higher costs because of net metering. In a state with a GDP of over a trillion dollars, that may not seem like a lot, and the pain is quite distributed over the other 30 million people. While I dislike unfettered Capitalism, we do generally have to pay for what we use. This is America. If something doesn't make money, no one will do it. And if someone starts losing money, they generally stop doing it. If homeowners don't make money on rooftop affays, they won't install them. If make money on grid services, they will stop providing them. the utilities don't As Lisa Wood of the Edison Foundation puts it, "lWe need] to recognize the value of these grid services and to develop a methodology for the DG customer to pay for using them." When norrnal conflurers pay their elecfic bill, parf of the bill is for the electricity they actually used, but the other part goes to maintaining the grid, referred to as grid services. Consider aR average residential monthly electricity (11plkwhr). That $110 provides: bill (EIA) of $ 1 10 paid for 1 ,000 kWhs - S10 for transmission systems - S30 for distribution services - $19 for generation capacrty - $l for ancillary/balancing services, and - $50 for the generation of the electricity. So $60 of this $110, more than half, goes to support these grid activities while only $50 goes to producing the electricity in the first place. Since small source owners, or DG customers, are not ever "off the grid", even if they're making more energy than they consume, a 55Yo glatuity is not a trivial gift given to them by net metering. Unfortunately, net metering shifts these grid costs from the generally high-income homeowners, that can afford rooftop solar, to non-DG-customers through higher elecficity bills. These are often low-income families that can least afford an increase in their monthly bill. Utilities are not anti-solar. The utilities are the ones that have to maintain and use the grid. In fact, utilities are leading the way in our transition to a cleaner energy economy through the grid itself (Xcel Energy, Tucson Electric Power, Consolidated Edison, Duke Energy). Using the grid smartly allows more renewable energy, more load following, more demand response, more efficiency and conservation, and provides greater grid stability. None of this could happen without the grid and it provides a good deal of benefit to solar owners as well. In the end, we need to adopt a billing practice that supports both installation and distribution. As geologist and energy coosultant Dr. Judith Wright says, o'We need a real shift in our energy meme. Perhaps grandfathering in older DG customers at full retail price since they broke this ground, and giving later customers a more equitable wholesale value. Or maybe the DG customer receives the full retail price until the capital investment is paid off. We cannot thrive without a healthy grid. Aild we should not support income inequality." Charlie Ebinger is hopeful. "There have been several notable attempts to fine tune or alter existing policy to address these [net metering] issues. For example, Austin Energy and the State of Minnesota have developed a value of solar tariffas a mechanism to better incorporate all the costs and benefits of solar rooftop PV." This Thanksglving, I'm thnnkfrrl there's still time to evolve a robust energy system that rewards reliability and distribution, self-reliance and environmental sustainability. Ald that saves the grid! {.f * CNBC.com: Solar firms, power companies battle over'net metering' Javier David October 12,2014 http:llwww.cnbc.cornlid/ I 02075665#. As solar power expands its reach into greater residential use, can solar companies and utilities find common ground? The flashpoint is over net-metering-a process where consumers use renewable energy to generate their own electricity, then cut their bills by sending excess power back to the grid at retail rates. The system, which saves consumers money on utility bills, is gaining popularity yet remains the subject of fierce debate. At least 43 states have laws making it easy for residents to save via the sun; still, utilities are pushing back against solar's rapid encroachment on the retail market. The U.S. is consuming more electricity than ever, costing consumers a pretty penny and encouraging them to turn to solar energy, which can save them money. The Energy Information Administration notes that retail electricity is up neariy 3 percent per kilowatt how in 2014 versus a year ago, with costs rising for 20 consecutive months. This, despite the United States being in the midst of a massive domestic energy boom. Power companies acknowledge that rooftop panels are forcing them to modernize the grid and rethink their business models. Additionally, residential units can help reduce strains on power systems during peak times and seasons. "The good news from the net metering perspective is it reduces net demand" on utility companies, said Dan Bedell, senior director of their Principal Solar Institute. "But the downside is that not only are you taking away their revenue, they also have to pay for the excess power at a retail rate." The rise of solar means utilities "have to price ftheir] products differently," said David Owens, executive vice president of business operations and regulatory policy at Edison Electric lnstitute, the association of publicly-traded electric companies. "Rooftop solar panels are recognition that technology, public policy and customer preferences are requiring the utilities to look at this differently," Owens said in an interview. However, he argued that net-metering was creating a classic "free-rider" economic conundrum, where non-rooftop clients are ultimately paying more for elecricity than net-metering clients. Certain costs, such as infrasffucture and grid usage, are not being captured in what net-metering customers are charged, Owens said. For that reason, he thinks power companies-as well as other parties-are justified in challenging some of the presumptions behind solar panel use. Consumers "want choice, but we want to make sure customers at the upper-income bracket are not being subsidized by non-rooftop customers," Owens said. "Utilities are not afraid of competition, but if you're using the grid, you need to pay for it." Lynn Jurich, CEO of residential solar company Sunrun, said in a recent interview that solar power accounted for at least 50 percent of new elecffic capacity, helped in large part by a 10 percent yeaf,-over-year drop in solar costs. The breakneck penetration of solar power is making utilities nervous while draining their coffers, Jurich said. She rejected the idea that net metering acted as some sort of wealth transfer. "Utilities say solar is OK as long as they are the only ones building it," Jurich said. "We welcome utilities competing in open and competitive solar markets, [but] we are opposed to utilities getting guaranteed profits from ratepayers for installing rooftop solar," she added. To be certain, utilities are waging a ground war in multiple states to get govemments to reconsider subsidies and pass more costs on to net-metering clients. However, observers say developments are likely to ramp up in solar's favor. ln consumptionheary places like Texas-the 2nd largest energy consuming state and one of the biggest markets for renewable energy-soaring demand and shuttered carbon-based plants all but guarantee solar will partly fil1the void. "What you're going to see across next 2-10 years is a big increase in solar, but not a big decrease in base load generation," said Principal Solar's Bedell. "Fossil fuel will continue to carry the torch until isolar] batteries become really big and really cheap." *** The Wall Street Journal: Germany's Coal Binge [Editorial] Green energy mandates have achieved the opposite of their intent. September 25,2014 /online. 1 5 Berlin's "energy revolution" is going great-if you own acoal mine. The German shift to renewable power sources that started in 2000 has brought the green share of German electricity up to around 25%.But the rest of the energy mix has become more heavily concentrated on coa1, which now accounts for some 45Vo of power generation and growing. Embarrassingly for such an eco-conscious country, Germany is on track to miss its carbon emissions reduction goal by 2020. Greens profess horror at this result, but no one who knows anything about economics will be surprised. It's the result of ChancellorAngela Merkel's Energiewende, or energy revolution, a drive to thwart market forces and especially price signals, that might otherwise allocate energy resources. Now the market is striking back. Take the so-called feed-in tariff, which requires distributors to buy electricity from green geoerators at fixed prices before buyrng power from other sources. Greens tout the measure because it has encouraged renewable generation to the point that Germany now sometimes experiences electricity gluts if the weather is particularly sunny or windy. Yet by diverting demand to renewables, the tariffdeprives traditional generators of revenue and makes it harder for them to forecast demand for thermal power plants that require millions of euros of investnent and years to build. No wonder utilities favor cheaper coal plants to pick up the slack whenever renewables don't deliver as promised. Mrs. Merkel's accelerated phase-out of nuclear power after the 2011 Fukushima disaster in Japan has had a similar effect. Shutting profitable nuclear plants deprives utilities of revenue and saddles them with steep decommissioning costs, which makes cheaper coal more appealing. To top it CIff, Berlin has imposed a moratorium on fracking. By preventing exploitation of ample shale-gas reseryes, the ban leaves Germany more exposed to strategic pressure from gas exporters (read: Russia) and raises the cost ofgas relative to coal. This is another reason cheap, local coal is back in favor. Ordinary Germans foot the bill for these market distortions, having ponied up an estimated €100 billion ($129 billion) extra on their electricity bills since 2000 to fund the renewable drive. The government ostimates this revolution could cost a total of €1 trillion by 2M0. Berlin is scaling back some taxpayer subsidies for green power. But Gerrrans still also pay for the energy revolution when job-creating inveshent goes to countries with lower power costs, as happened earlier this year when chemical company BASF said it would cut its investments in Germany to one-quarter of its global total from one-third, and when bad incentives skew generation toward dirtier coai instead of cleaner natural gas. None of this is what environmentalists promise voters when they plug the virtues of a lowcarbon future. Gennany's coal renaissance is a cautionary tale in what happens when you try to substitute green dreams for economic realities. *** Foxl{ews.com: The sunshine of other people's money: The truth about rnet metering' [OpEdl Benjamin Zychet September 24,2014 http:/lwww.foxnews.com/opinian/2O14/09/24lsunshine-other-peoples-money-truth-about-netmeteringl Politics is the art of wealth redistribution, an eternal truth illustrated well by the various machinations employed by bureaucrats and politicians to force goods and services uncompetitive but favored politically upon the market, despite adverse economic pressures. One central recipient of this largesse is expensive electricity---wind and soiar power in particular---the costs of which arc far higher than those of such conventional electricity sources as coal and natural gas. This political interference results in a large array of policies used by government to support energy technologies that cannot survive market competition. A prominent example is "net metering," an important system of shifting the costs of photovoltaic solar systems onto the consumers of electricity generally, with deeply adverse implications for costs and for the future reliability of the electric gnd. Over the long run---not necessarily a long period of time---the higher costs and prices mean that investment in maintenance and new generating capital will fall, and with it reliability and the economic benefits of inexpensive power. How does net metering work? Power consumers who install solar panels--again,large subsidies are paid for such installations-' -receive a credit for the po\I/er that they produce but do not consume. The excess electicity is transferred into the power grid for use by other consumers, and the owners of the solar systems receive a credit for the excess power, paymg only for their "net" electricity consumption. So: What problems are created by net metering? First, in most jurisdictions, the credit paid for the excess solar power is far higher than the cost of altemative electricity sources, usually from utilities or from the spot power market. Consumers without such solar installations have to finance that credit, that is, the excessively expensive electricity, so that overall power prices are forced above the level that would prevail in the absence of the net metering system. This problem is exacerbated by the tax and other incentives to install solar systems: The combination of the installation subsidies and the excessive prices paid for the power fed into the grid means that more solar capacity is installed than otherwise would be the case, more expensive power is fed into the grid, and prices are forced up, in principle in a sort of upward spiral process. There is the further matter that reliability is a hugely valuable athibute of power systems; no one likes blackouts. Electricity bills reflect the cost of that reliability in the form of "capacit5r" charges, that is, the part of the bill covering the cost of the physical system and its spare capacity, before fuel expenses and other such generation costs. People who install solar systems benefit from the reliability provided by the grid--they consume conventional power at night and at other times that the sun fails to shine:-but because they pay only for their "nef'power consumption, they get a free ride on the cost of the generation equipment and other capital that yield the reliability upon which they depend. Except the free ride is not free: Other consumers have to pay for it. Over the long run--not necessarily a long period of time--the higher costs and prices mean that investment in maintenance and new generating capitai will fall, and with it reliability and the economic benefits of inexpensive power. Only costs will rise, not a salutary outcome. Net metering receives strong political support in substantial part because it is useful politically. A11 subsidies--direct, indirect, explicit, or hidden--must be financed by someone, be it taxpayers, ratepayers, or the beneficiaries of other government progmms. Political incentives to hide the costs of such policies are powerful--it is better for bureaucrats and politicians that the losers not know that they are losing--and net metering serves that end beautifully. A recent study of net metering in California found that the median income of households installing such systems is $9 I ,2 10, while the comparable figure for all households in the relevant geographic areas is $67,821, a difference of over a third. Some part of the subsidies must be capfured by the producers of the solar systems, whether in the U.S. or overseas, but it is difficult to avoid the conclusion that net metering forces those with relatively lower incomes to subsidize those with incomes relatively higher. Is a regressive wealth transfer an appropriate outcome for public policy? As with most other goods and services, those consuming them should pay the attendant costs. Hiding those costs and shifting them onto others is deeply perverse, and corrosive of the competitive resource productivity---in this context, lower costs and greater system reliability--that yields higher living standards for all. Benjamin Zycher is the John G. Searle scholar at the American Enterprise Institute. {.t* TIME: Wall Street Goes Green Michael Grunwald August 28,2014 hup: //time.com/320425 8/wa11-street- goes-qreen/ Why is solar booming? Finance I've often heard the wind and solar industries mocked as "hippie energy" or "Obama power." Mitt Romney once dissed them as "imaginary." But at this summer's Renewable Energy Finance Forum (REFF) Wall Street, clean-tech venture capitalist Christian Zabbal offered a new jibe: "bulge brackets." Zabbal complained that the wind and soiar space has become so safe-and so overcrowded with grants like Bank of America, Citigroup and Goldman Sachs-that it's no longer attractive to cutting-edge investors. The cool kids don't want to play in bulge brackets. They prefer wide-open spaces that the big guys won't touch. "We're getting out of solar," saidZabbal, managing director of Black Coral Capital. "It's gotten too mainstream." In other words, the clean-power revolution is for real. The bulge brackets are bulging because wind and solar have gotten much cheaper, less novel and more predictable. Renewable projects are producing steady returns, so vast pools ofrisk-averse institutional capital are seeking new ones. Green electricity is no longer avant-garde; it has produced more than half of new U.S. generating capacity this year. Wind has tripled since 2008, while solar is up 1,200%. This is terrific news-for homeowners who reduce their electric bills by going solar, ratepayers whose utilities save them money by buying wind power, and the planet. But there's a deeper message in the bulge brackets. People assume the future of clean energy depends on gee-whiz technologieal innovations: better solar panels and wind turbines, cheaper batteries and biofuels. And we will need those advances in the iong term to cut carbon emissions 80% by 2050. But the biggest advances in the near term are likely to be boring financial innovations. The direct costs of depioying renewables are dropping fast, but the capital costs are stiil too high. The future builders who bring clean power to scale probably won't be scientists but financial wizards like the suits at REFF Wall Street. This is already happening in the solar industry, where gradual improvements in photovoltaic panels-by the ill-fated manufacturer Solyndra? among others-have not been the key to making them cost-competitive. The innovation that launched the sunshine revolution was the solar lease, which has helped homeowners and businesses install rooftop systems without having to plunk down tens of thousands of dollars up front. Now they can sign 2}-year contracts with no money down to lease panels from installers like SolarCity or Sunrun, then make payments out of the savings on their electric bills. Now we're moving into the next phase of the renewable revolution, Those 2A-year leases look a lot like mortgages, auto loans or other financial insffuments that Wall Street routinely packages into securities. The financial crisis made securitization a dirry word, but it's a powerful tool that can convert a dribble of investment into a cascade and slash capital costs. And Wali Street has begun to package solar contracts into securities. The market for commercial solar securities has grown from less than $1 billion to $15 billion since 2008. The buzz at REFF Wall Skeet was about MLPs, yieldcos and other obscure financial arrangements designed to sluice rivers of cash into clean energy. The market in green bonds has exploded from $2 billion ta2OLZ to $16.7 billion in the first half of 2014. At a panel moderated by Kyung-Ah Parlg a Goidman Sachs managing director, solar developer Jeff Weiss summed up *You can't ask Kyung-Ah for a million dolla$," said Weiss, cothe industry's challenge. chairman of Distributed Sun. "You can only ask her for a billion dollars." Goldman isn't interested in your roof, but it might get interested in thousands of roofs. Distributed Sun's new product, truSolar, typifies today's green innovation. It's an invesfrnent platform that makes solar contracts much easier to evaluate, breaking down more than 600 potential risk factors for investors. The goal is to make solar deals as dull as any other financial instrument so the Kyung-Ahs of the world will feel even more comfortable throwing biilions of oYou've got this in every other asset class," Weiss said. "Why not ours?" dollars at them. This is how the bulge brackets will get bulgier. As it gets cheaper to finance green projects, more will be deployed, so they'Il get even cheaper to finance. Green finance isn't cool, but it can help cut emissions now. And it can free up the cool venture capitalists to focus on geniuses in garages so their inventions can cut emissions even more down the road. *** The Huffington Post: Support Solar, But Not at the Cost of the Working Poor [Op-Ed] Jeff Johnson July 16,2014 http://www.huffingtonpost.coml-ieff-johnson/solar-working-poor-b*5593050.htrnl Recently, many people throughout the country celebrated the first day of summer and the longest day of the yearby urging consumers and businesses to "Put Solar on It." I also support "Putting Solar on It," because renewable energy sources of all types have many benefits for our country, helping to reduce carbon emissions, diversiff our energy supply, and create jobs, But as we all work to reap the benefits of the spread of renewable energy sources, we need to make sure to look carefully at the policies in place around "Puffing Solar on It," because one of these might end up hurting those who don't have the option of using rooftop solar panels. In fact, a policy called "net metering" is causing costs to increase for lower-income and minority groups that cannot afford such systems or do not have access to them in their current living situation. So, I am in support of putting solar on it, but not at an unfair cost to the working poor. Let's first examine what net metering actually is. Net metering is allowed in many states, stemming from policymakers' desire to spur on the growth of renewable energy sources such as solar power. Net metering customers are allowed to sell back the extra elecfricity they generate to their electric company at the retail rate of electricity, which essentially allows them to avoid covering their fair share of the grid. This might not sound like a big deal -- but the problems with this policy become apparent once you look at how electricity bills work. One part of your electricity bill is for the power you use, and the other part covers the costs of the electric grid. If some customers avoid paying that latter portion of their electricity bill, guess what? Someone else is stuck with the difference. Because of old net metering requirements, customers without rooftop solar panels are the ones who end up shouldering those avoided costs. This goes beyond not being fair. We all use the electric system, whether we have solar paneis on our roofs or not. And actually, the grid plays a helpful role in facilitating the selling of excess electricity for rooftop solar customers. Without the grid, these customers also wouldn't be able to power their homes when their rooftop solar systems can't provide enough elecficity to meet their needs (at night, for example). This situation becomes even more unfair when you consider that homeowners who have solar panels are, for the most part, wealthier than those who do not. That's not surprising, because installing solar panels can be expensive, sometimes costing more than $50,000. But even when the cost of installation is lower, families on a budget have a difficult time seeing the benefit. Something I think we need to address. Wealthy families and home owners are kking advantage of not just the positive aspects of solar (something more of us should do), but a flawed policy that sticks someone else with part of the cost. A May 2AL4 Wall Street Jou:nal story notes how some customers with rooftop solar have houses that are valued at $1.75 million dollars! What's more, those who live in aparhnents or rent -- including many low-income families -- don't even have the option of "putting solar on it" as these soiar voices advocate. Low income households that are already spending a significant portion of their income on household energy costs shouldn't be saddled with additional financial burdens because of their wealthier neighbors' decision to install rooftop solar systems. Switching to clean energy sources is something we should all be working towards -- but we can do'{rithout shifting energy costs from the affluent to the poor. In any discussion about "putting solar on ig" we should find a way to balance our environmental goals with economic equality. Let's change net metering policies to make sure we don't hurt those who are most in need. *** NPR: Leased Solar Panels Can Cast A Shadow Over a Homeos Value Jeff Brady July 15,2014 http:/lwww.npr.org/2014/07/15/330769382/leased-solar-panels-can-cast-a*shadow-over-ahomes-value Installing solar panels on a house to generate electricity often costs $20,000 or more, and many homeowners have turned to leasing programs to avoid those upfront costs. But most leases are for 20 years, and that can present problems if someone wants to sell the house before the lease is completed. Peter Auditore of El Granada, Calif., was happy with the leased solar panels he installed a few years back. When he decided to sell, he found a buyer who also appreciated the environmental benefits of solar panels. But then there was a hitch just as the sale was about to go through. "The buyers all the sudden disclosed that they hadn't looked at the solar lease and that the lease was going to go out for another 15, 16 years," Auditore says. In last-minute negotiations, he and his real estate agent agreed to credit the buyer $10,000 in exchange for assuming the rest of the lease. In this case, you could argue that those leased solar panels on the roofreduced the value of his home. Real estate appraisers are grappling with this issue now. Sandra Adomatis, an appraiser in Punta Gorda, Fla., wrote il _hqpk for the Appraisal Institute on how to value homes with energy efficient features. don't the buyers in the market "If you're in a market where the market participants understand solar leases and they're fearful of it, they may totally steer away from homes with a leased system," she says. Today, it's difficult to determine whether a particular house with leased solar panels is worth less, Adomatis says. There just isn't a long history of sales involving such houses. That is changing, though. Soon appraisers will have rnore data, because the number of houses with solar panels has increased tenfold in just the past seven years, according to the Solar Energy Industries Association. And much of that growth is due to the popularity of leased panels. Exact Solar is a small company in Yardley, Pa., that both sells and leases solar systems. Owner Mark Bortman says ffansferring a lease does add an extra step dudng a house sale. "Typically what most people would do is just have the new buyer assume the lease," Bortman says. "It's a relatively straightforward process. The finance company wants to be sure the new buyer is creditworthy." And at big companies like Solar City in San Mateo, Calif., transferring leases is a regular part of doing business now. "We have a team of 12 who work on this allday long to make sure that it's as smooth a process as possible for both the solar customer who's selling their home as well as the new Solar City customer," says William Craven, the company's director of public affairs. He says Solar City transferred more than 200 leases in June. And he estimates 95 percent of them were completed without any complications. rki<* Smart Energy Universe: lnnovations in the Utility lndustry [Op-Ed] Lisa Wood June 23,2014 [No link available] Op-Ed by Lisa Wood, Executive Director of the Institutefor Electric Innovation, The Edison Foundation Electric utilities are driving technological innovations that are changing the way electricity is generated, delivered, stored, and used across the nation. By partnering with a range of unique companies and stakeholders, from Apple to the U.S. Amry, electric utilities are providing electricity to consumers reliably and in better and faster ways than ever before. Components that were once separate - such as power, information, and telecommunications systems - are increasingly operating as one intelligent and modern grid that has two-way data communication and control capabilities across physical power assets, sensor technologies, and business systems - all fueled by new technology and innovation. Despite this momentum, awareness is lacking about all of the exciting changes that are taking place behind the light switch. I would like to highlight a few of the cutting-edge projects that utilities across the country are engaging in today. The U.S. Army Goes Solar The U.S. Army announced that it will develop three 30 megawatt (MW), solar photovoltaic affays on Forts Stewart, Gordon, and Benning, a grcat example of the kinds of public private parlnerships that are happening in the electric power industry. Thanks to a range of partners who are collaborating on the project, including the U.S. Army Energy Initiatives Task Force; Forts Stewart, Gordon, and Benning; the General Services Administration; and Georgia Power, the U.S. Army will be able to increase its energy security and sustainability with these arrays. Once operational, an impressive 18 percent of the energy the U.S. Army consumes in Georgia willbe generated on-site by renewable sources. Georgia Power, an operating utili$ of Southern Company, will finance, design, build, own, and operate the projects, which are expected to be complete by the end of 2016. That's not all, though. In Arizona, another large solar array is being built by the U.S. Department of Defense. The 18 MW array at Fort Huachuca wili provide the base with clean and costeffective electricity, courtesy of a parhrership between Tucson Electric Power (TEP) and the U.S. Army Of note, the system will offset more than 58,000 tons of carbon dioxide per year. Meeting Consumers Where They Are increasingly, electric utilities are putting information and technologies at the fingertips of consumers, for easy access and convenience on smartphones and other mobile devices. In New York, Consolidated Edison's "coolNYC" program helps customers lower their energy consumption by managing their air conditioning usage more efficiently. Participants receive a free smartAC "modlet" which allows them to control their room air conditioning unit remotely with a smartphone - and set temperature schedules. The modlets are essentially plug-level meters with load control capabilities. This is especially exciting in a city with over 6 million room airconditioning units. - DTE is in the process of developing an "Energy Awareness" mobile application. The platform engages users around discovering and improving their personal energy consumption, while providing DTE Energy with a next generation self-service channel that is rooted in positive customer touch points. With a unique blend of coaching, gamification, and social elements, it enables DTE customers to engage with their personal energy consumption and ultimately reduce their energy use. Customers receive rewards for performance, including online and retail goods and virtual avatar upgrades. The application is being developed alongside Vectorform. A Bite at the Apple Another great example of innovation that's happening in conjunction with one of today's most exciting companies is NV Energy's partrership with Apple. Working with Apple's Reno Data Center, NV Energy is developinga 137-acre project that will host 18-20 MW of new solar capacity next to NV Energy's existing natural gas-fueled Fort Churchill Generating Station in Nevada. The unique parhrership will generate more than 43 million kilowatt-hours of clean energy per year - equivalent to taking 6,400 passenger vehicles off the road per year - allowing customers to have a greater proportion of their energy generated by renewables. It's Blowing in the Wind Incredibly, electric utilities are also making headway in the prediction of wind pattems for electric generation. Advanced wind forecasting is being used to smartly integrate wind energy into the power grid. In its fifth year of use by Xcel Energy, the WindWX forecast technology has saved Xcel's customers more than $30 million by reducing wind power forecasting errors. Realtime, turbine-level operating data provide &e input and WindWX's sophisticated aigorithms forecast the amount of wind power that willbe produced for a fuil week, every 15 minutes across the entire Xcel Energy service territory covering eight Westem and Midwestem states. Smart Meters Everywhere With almost 50 million smart meters deployed across the U.S., utilities all across the country are demonstrating the value of digitizing the power grid. Infonnation provided by smart meters and other investments in the grid improve the efficiency and reliability of the electric system. Florida Power and Light (FPL), together with GE, Honeywell, and Silver Spring Networks has deployed 4.5 million smart meters, installed more than 10,000 intelligent devices on the electric grid, and added enhanced digital technology to nearly 600 substations. Investing in advanced technologies has resulted in a more reliable and efficient grid, outage prevention, and faster outage restoration. This is just one example of how investments in new technologies are changing the power sector. More Smart Technoiogy PG&E has parbrered with Opower and Honeywell to deliver a Smart Thermostat Soiution pilot program in California.. The program provides customers with mobile access to their heating and cooling systems via a Honeywell Wi-Fi Thermostat platform and Opower thermostat management software. The solution coaches customers to create optimal thermostat schedules that fit their lifestyles. The OpowerlHoneywell pilot is helping to provide answers about energy efficiency potential' The Opower-designed mobile and web applications control Honeywell's thermostat, and provide real-time energy efficient feedback to customers for reducing heating and cooling costs by improving their therrnostat settings. Also, the thermostat is programmed for energy savings (via the Opower solution) using efficient default set points before installation, which helps guide customers on the right path to efficiency from the onset. As all of these technology stories illustrate that our electricity grid is evolving into a broader platform for new energy services and technology. And, a more integrated grid platform improves performance benefitting everyone - utilities and consumers alike. The power grid is the ultimate plug-and-play platform ! *r.rk SmartGridNews: The net metering debate: Solar power unfair to the poor says former regulator Jesse Berst June 18,2014 htb://www.smartgridnews.sorn/artmar/publish/Technologies*DG-Renewables/The-netmetering-debate-Soiar-power-unfair-to-the-poor-says-former-regulator65 87. html/? fpf#. U SPzJPldX5M Quick Take: I've alerted 3tou before that utilities may have an unlikely ally in the form of for the rights of low-incomefamilies. Those groups are o.ften opposed to utilities, or at utility rate hikes. In this case, however, they agree with those utilities who feel that the least to current net metering structure subsidizes high-income families that can affird rooftop solar, while penalizing apartment dwellers and the poor who cannot. advacates And now here comes aformer utility commissioner who agrees. To date, utilities have often been stymied in their attempts to have net metering amended to be more fair. But if regulators are catching on, perhaps the tide will change. - Jesse Berst "The poor shouldn't have to bear the cost of solar power!" trumpets former utility commissioner for the Forbes Monica Martinez in a recent Martinez agrees that the country needs to move to cleaner energy sources. But not at the cost of putting low-income and middle-income families in worse economic shape. She argues that the net metering policies set many years ago in 42 states and the District of Columbia are unfair to those groups. Net metering allows those with rooftop solar to sell excess power back to the local power company at the full retallrate. As a result, they do not pay their share of the cost of running the very grid that makes it possible for them to get paid for that excess power. This shifts the burden *Did I mention that you have to have a high to those who cannot participate in net metering. credit score or your own cash to get the solar panels?" she asks. "I'm pretty srre a solar user isn't the family in rental housing - not to mention, families living in apartments it can't get solar systems - or the one out of every two families who live from paycheck to paycheck." The California State Fublic Utilities Commission estimates that the state's non-solar customers will pay an extra $1 billion annually by 2A20 if current policies stay in place. "As our nation moves to greater adoption of solar power, and as policy battles heat up in various states on this issue, I urge policyaakers and all stakeholders involved to keep the very real consequences of net metering in mind and to ensure economic fairness for a11," Martinez concludes. Jesse Berst is thefounder and Chief Analyst of SGN and Chairman of the Smart Cities Council, an industry coalition. {