How forward-thinking utilities are addressing corporate demand for renewables
New green tariffs from Puget Sound, PNM, Rocky Mountain Power and Dominion could be game-changers
It could be one of the utility regulatory stories of the year: In 2016, utilities across the country doubled the number of renewable tariff programs to meet skyrocketing demand from large corporate customers.
At the end of 2015, only five regulated utilities offered contracts through which large buyers could obtain renewables-generated power. None had all the attributes corporate customers typically seek. Five were added this year, and observers say they mark a significant improvement.
These breakthrough tariff structures, being invented by utilities as they go, differ in many ways. But all allow utilities to sell green electricity to key customers without imposing costs on other ratepayers.
The opportunity to add load by serving the demand of large commercial customers is real — as is the risk of losing that revenue if companies forgo utility service. In the Fortune 500, 215 companies have renewable energy, emissions, or efficiency goals, according to a recent report from Ceres and partners, and 60 of the Fortune 100 have them.
In 2015, large corporate customers contracted for a record 3.2 GW of renewable energy — over 21% of the 16.4 GW of renewables added to the U.S. grid last year, according to a report from World Wildlife Fund (WWF), World Resources Institute (WRI), and the Edison Electric Institute (EEI).
Since 2015, more than 450 MW of new solar were contracted through the five less-than-perfect tariffs, and over 500 megawatts of deals are currently under negotiation.
The five new tariffs in 2016 have already accelerated that growth: Facebook recently announced its planned New Mexico data center will use the tariff just introduced by Public Service Company of New Mexico (PNM).
Where utilities in regulated markets do not offer renewables tariffs, corporate buyers take their demand directly to power producers. About 90% of current corporate renewables-generated electricity purchases are now through contracts between corporate off-takers and independent power producers in unregulated markets, according to Rocky Mountain Institute Managing Director and former E-ON executive Hervé Touati.
Many utilities would like to meet their corporate clients’ demand for renewables, but without a green tariff they cannot, Tuoati recently told Utility Dive.
Now Puget Sound Energy (PSE), Rocky Mountain Power (RMP), PNM, Xcel Energy, and Dominion Virginia have joined the slim but rapidly-growing ranks of regulated utilities that can satisfy that rising corporate appetite for renewables.
What is a green tariff?
Until recently, regulators kept green tariff prices above retail electricity rates to prevent shifting any cost to utility customers not receiving the renewables-generated electricity. These emerging structures allow large customers to contract at more equitable prices, WRI Director of Utility Innovation Letha Tawney told Utility Dive. But they are still highly varied, relatively complicated one-offs.
The tariffs typically provide a way for utilities to contract with the customer to provide renewables-generated electricity “at a competitive, long-term fixed price that reflects the direct cost of generating and delivering [it],” Tawney and colleagues recently wrote. “This allows customers to mitigate the risk of future fossil-fuel price fluctuations in their electricity bill.”
The tariff also transfers the Renewable Energy Certificates (RECs) to the customer, confirming the power purchase’s contribution to the customer’s sustainability commitment.
Variations include both tariffs and riders, Tawney wrote. A tariff is a charge at the cost of the renewables-generated electricity instead of at the retail rate. A rider is added to the bill and usually includes both the cost of the renewables-generated electricity and a credit for the fossil-fuel-generated electricity it replaces.
Both allow a contractual relationship between the owner of a renewables facility, the utility, and the customer. New tariffs for RMP, PNM, and Dominion have these structures.
In a subscriber program like those just introduced by Puget Sound and Xcel, the contractual arrangement is different. The utility works directly with the renewables facility owner, sells portions of the generation to subscribers, and locks the consumer into a long-term rate linked to the predictable cost of renewable generation.
Like the smaller-scale community shared solar concept, a renewables tariff subscriber program allows participation by smaller companies. By aggregating such subscribers, the utility can build a larger, more cost-effective renewables facility and benefit from economies of scale.
To guide utilities and regulators, the WRI, WWF, and a core group of corporate-scale electricity customers collaborated to formulate six Corporate Renewable Energy Buyers’ Principles. They define what the Principles' 62 corporate signatories want in a contract based on a renewables tariff.
The first three principles are that corporate buyers need the widest possible range of resource options, those options must be cost-competitive, and they must come through longer-term, fixed price contracts.
An “additionality” principle requires that the resources procured for the corporate customer must be “additional” to the utility’s existing generation so that the investment adds new renewables to its portfolio.
The tariff structure must allow relatively simplified and standardized third-party financing through power purchase agreements (PPAs) and/or facility leases.
Finally, the tariff should be structured to allow the customer to work with regulators and the utility to innovate new procurement options that share the net costs and benefits of renewables to the system but do not impose costs on other customers.
The PSE, PNM, and RMP tariffs were the first to meet all six buyers principles, Tawney said.
The best tariffs to date
Dominion Virginia’s Schedule MBR (market-based rate) is a different approach that was built on a special contract the utility developed with Amazon, Tawney said. “It gives companies the ability to tap into PJM’s wholesale market pricing and enables a PPA, but allows the buyer to remain a Dominion customer.”
This is done through what are essentially two side-by-side transactions that allow customers to hedge their electricity cost against the sales of power by the renewables facility.
Amazon was already investing in wind and solar PPAs and selling into the PJM wholesale market. The company wanted to purchase their retail load in a similar way but could not do that in Dominion’s regulated territory, Director of Customer Rates and Regulations Greg Morgan told Utility Dive.
Through the MBR tariff, Amazon or any other customer will pay for its retail load at Dominion’s PJM market rate. At the same time, it can sell its fixed-price, PPA-acquired wind and solar electricity into the PJM market, Morgan said. “That is essentially a hedge against the volatility of a power market dominated by fossil fuels."
If the PPA price is below the PJM market price, the customer will save on the portion of electricity supplied by the contract. If the PPA price is higher than the market price, the customer will pay more for the renewables, but get the rest of its electricity at the market clearing price.
Though Dominion’s MBR was only recently approved by the Virginia Corporation Commission, “we already have interested customers,” Morgan said.
Customers are interested in the tariff as a hedge and as a way of increasing their use of renewables-generated electricity, he added. “It is a customer-driven initiative and, behind that, we think it is a renewables-driven initiative. We will presumably now learn which customers are interested and whether their interest is in renewable energy or purely the economics.”
The PNM tariff in New Mexico and the RMP tariff in Utah are traditional structures in which the utility “wheels” renewables-generated power from a wind or solar project selected by the customer to the customer, Tawney said
“The two utilities were competing for a Facebook data center, she added. “PNM got the data center, but both got good and very similar tariffs.”
“PNM seeks expedited approval in order to attract Facebook,” the utility’s filing reported to the New Mexico Public Regulation Commission.
“To locate to New Mexico, the Customer requires that PNM add a sufficient amount of renewable energy resources to match the Customer’s capacity and energy requirements as they are projected to increase over time,” the filing went on. “The Customer is also considering locating its new facility in another state. The state which is best able to meet its requirements will be the state chosen.”
Utility Dive was unable to reach PNM for comment, but its regulatory filings detail the elements of what it calls “Rider No. 47.”
The Facebook facility will be in the utility’s territory and purchase electricity at a “new Special Service Rate (SSR)” for the first ten years of the contract and there will be “a formula for calculating the costs allocated to the SSR” for the contract’s second ten years.
PNM will procure solar energy-generated electricity equivalent to 100% of the Facebook facility’s load through a PPA and the new “Green Energy Rider” will allow PNM to “recover all of the reasonable costs of procuring those resources.”
Utah’s S.B. 115, the Sustainable Transportation and Energy Plan (STEP), required state regulators to approve a renewable energy tariff to replace the complicated Schedule 32, Rocky Mountain Power COO Gary Hoogeveen told Utility Dive.
RMP and Facebook negotiated the terms of Schedule 34, the new tariff.
“It allows new Utah customers to be 100% renewable by paying for the difference in price between our avoided cost and the specific renewable energy the customer picks,” Hoogeveen said.
Though the Utah commission promptly approved Schedule 34, the tech giant chose New Mexico because it was offered a better package of tax benefits, Hoogeveen said.
The tariff’s structure is simple, he added. The customer selects a renewables facility and “is charged the 20 year levelized cost of the renewable energy and credited for the utility’s avoided cost.”
“If the avoided cost is lower than the PPA, the customer profits. If the avoided cost is higher than the PPA, the customer pays the utility,” Hoogeveen said.
The tariff meets the requirement of not imposing a cost on other customers because RMP’s avoided cost, set quarterly by Utah regulators, is “the theoretical rate at which all customers are indifferent,” he said. “If we charge the full rate of the PPA and we credit the avoided cost, the rest of the customers will be indifferent and won’t be paying for the RE that is being used only by the RE customer.”
There is some concern about the difference in charges to new and existing customers, Hoogeveen said. Existing customers face an extra bill charge to cover the cost of utility assets they would leave stranded by moving to new renewable resources.
“We will help them transition to renewable energy as long as it does not transfer the costs of their commitment to existing assets to other customers,” he said. “They pay their current tariff rate minus avoided cost plus the new PPA rate.”
RMP is already talking to several customers interested in the new tariff, especially other data center owners.
The trend toward demand for renewables-generated electricity by corporate customers is why the Utah commission quickly approved the new tariff, Hoogeveen said. “The commissioners are very aware of the market dynamics and the need to both protect our existing customers and be flexible enough to attract new load.”
Tawney finds it “especially interesting” that the utilities and their commissions moved so quickly. “They were competing for the economic development the tariff would bring to the state.”
RMP’s tariff is broader in several size parameters, she added. “They seem to have decided that if they were going through the regulatory process, they wanted a tariff they could use with other customers.”
“The Puget Sound Energy approach is very different but meets all six of the Buyers Principles,” Tawney said. “It is the first commission approval for the subscriber program model that Xcel is working on in Colorado.”
It is similar to community solar because the utility contracts with a renewables facility developer and aggregates subscribers for the project’s output, she said. “It will be many customers on one green tariff.”
It differs from the RMP, PNM, and Dominion tariffs in who takes the lead on obtaining the PPA, how big the project will be, and how big and diverse the customers will be, she added.
There is not a “bright line” that separates the Puget Sound and Xcel tariffs from community solar but the utility projects are much larger, Tawney said. “Community solar arrays are usually 5 MW or less. Xcel Colorado has proposed a 50 MW project and Puget Sound is planning a 40 MW project.”
Puget Sound Manager for Renewable Energy and Distributed Generation Thomas Maclean agreed. "We have 22 community solar projects and they are focused more on residential customers,” he said. This new tariff “is to meet the demand from large commercial and institutional customers for a product with the key characteristics of the Buyers Principles.”
The utility chose the subscriber program model so a single installation could serve multiple smaller customers and relieve them from searching for a resource to meet their climate, sustainability, and clean energy goals, Maclean added.
Obtaining regulatory approval was not as difficult for Puget Sound as it has been for Xcel in Colorado, so the tariff structure has fewer constraints, Tawney said.
The Commission was aware of this product as a way for regulated utilities to meet customer demand for renewables and was “very supportive,” Maclean said.
Though only recently approved, there is already a lot of interest from large commercial customers, he added. But it is likely to be priced at a slight premium over current retail rates initially. Customers will need to make at least a ten-year commitment to obtain bill savings.
Tawney was equally hesitant. “If there are enough subscribers, they will move ahead but it will likely come down to what prices developers propose.”
The Xcel Energy “Connect” tariffs in Minnesota and Colorado are expected to get commission approval in early 2017, according to Tawney. Both face hurdles they are expected to clear.
The Colorado Connect tariff is structured similarly to Puget Sound’s subscriber program. It faces opposition from community solar developers who say its 50 MW size gives the utility an anti-competitive advantage. But Colorado’s larger solar community in Colorado reached a far-reaching settlement with Xcel earlier this year that will allow the Connect proposal to go forward with state regulators’ approval.
The Minnesota tariff will be more traditional, like those in Utah and New Mexico. Through contracted agreements, Xcel will wheel renewables-generated electricity to large corporate customers at a potentially below retail price. Regulatory approval will put it into service but renewables advocates object to its failure to meet one Buyers’ Principle.
The proposal lacks "additionality" because Xcel has proposed delivering the renewable generation from existing facilities to make the tariff available as soon as possible, Fresh Energy’s Energy Markets Director Allen Gleckner told Utility Dive.
“We are working to get an additionality assurance into the proposal that would allow Xcel to add 75 MW of new renewables in the near term but after the tariff is approved,” he said.
Commissions moving like lightning
Both the proliferation of renewables tariffs and the speed with which regulators are approving them impress Tawney.
The doubling of proposals across the country is an indication that utilities are looking for products that meet large customer needs and an indication that large commercial and industrial customers are helping drive renewables growth, Tawney wrote.
The regulatory approvals, coming at what for utilities commissions is the lightning-like speed of months instead of years, shows that commissioners are more familiar with the tariffs, understand their importance to utilities, and understand that properly structured tariffs won’t shift costs to other customers.
“Three years ago, a customer would find a good PPA price and start negotiations with the utility that could become complicated and might not end with a deal,” Tawney said. “Now there are tariffs in place and corporate buyers and utilities will find out what the real opportunity is. If we see deals get done, we will know we are on to something.”