How Microsoft and a Wyoming utility designed a data center tariff that works for everyone

Collaboration on corporate rate design makes Black Hills Energy 'a banner for what utilities should be,' software execs say

Utilities’ big corporate customers, and especially data centers, are getting more of what they want by respecting one of their utilities' most important concerns: Do no harm to other customers.

An example is the new tariff collaboratively designed by Microsoft and Wyoming utility Black Hills Energy. 

As approved by the Public Service Commission of Wyoming, the Large Power Contract Service (LPCS) (Record Number 14242) will save the company money, save the utility’s customers on their electricity bills, and deliver the power Microsoft wants at its data center in Cheyenne.

It's not a "green" or renewable energy tariff, as tech companies often seek, but it could be a template for utility-customer partnerships in other parts of the nation and end up helping wind and solar all the same. 

“We have data centers with five different regulated utilities but we have only been able structure a tariff with one that we believe helps us,” Kenneth Davies, Microsoft's Director of Renewable Energy Strategy and Research said at the recent Edison Electric Institute Financial Conference audience. “Black Hills Energy is a banner for what utilities should be.”

Microsoft Director of Energy Strategy Brian Janous worked closely with the utility. “The very first conversation we had with Black Hills was about how this tariff would affect other ratepayers,” he told Utility Dive.

“We both knew if this had any detrimental impact on them it would be a non-starter,” he added. “The challenge was designing it to address one customer’s growth on the system in a way that would protect the rest of the ratepayers.”

Microsoft always builds a megawatt of onsite backup generation for every megawatt of grid-supplied electricity consumed at its data centers, Janous said. Growing power needs from anticipated expansion at its Cheyenne facility led both the utility and the tech giant to begin thinking about the need for new generation.

“We proposed to Black Hills that if a natural gas turbine could meet their capacity need and our need for fast response backup, it would make more sense to build one plant instead of two,” Janous said.  

Black Hills Energy President and Chief Operation Officer Linn Evans made it sound simple. “We negotiated an agreement that gives us access to their backup to meet our peak demand needs and allows us to purchase power from the market on their behalf at a firm price to meet their energy needs.”

The new tariff formalizing that negotiated agreement will be open to any Black Hills retail customer with a load of over 13 MW that can similarly deliver generation as utility capacity, Linn added.

The tariff does not meet the highest standard for utility-private sector green tariffs, according to Letha Tawney, director of utility programs at the World Resources Institute (WRI).

Because of its electricity rate and other details, the tariff falls short as a green tariff for growing renewables, she said. Led by WRI, the 62 signatories to the six Corporate Renewable Energy Buyers’ Principles, including Microsoft, are pushing regulators across the country for new designs for utility-corporate agreements.

But the new Black Hills-Microsoft tariff could offer an important new path to aggregation of renewables buyers, Tawney said. “The utility or another aggregator could let customers too small to own an entire utility-scale installation take bites of a big project.”

Janous agreed. “Our hope is that in the long run utilities will increasingly be leaning on customer-sited resources, whether that is rooftop solar or an electric vehicle or some kind residential storage or a controllable load,” he said.

The LPCS tariff

Three things – load growth, the retirement of existing assets, or a change on the system like the variability of new wind or solar – will drive incremental investment by a utility, Janous said. In this case, Microsoft’s load was growing and it wanted more renewables.

“With both those at work, we all recognized the utility would have to respond,” he said. “The typical response would be for both them and ust to add generation. This was an opportunity to partner with the utility so that each is not optimizing on its side of the fence to end up with a suboptimal solution of redundant generation expenditures.”

There were two basic concerns with that kind of solution and both are resolved by the tariff. The first was the load growth itself.

“Microsoft estimates its load could grow over the next 10 years,” its post-proceeding PSC filing reported. This growth, which the tech giant has not disclosed publicly, would be “well beyond” the utility’s existing capacity to meet its summer peak load of 212 MW and its winter peak of 197 MW, the filing adds.

The second concern was that Microsoft’s future load is unpredictable. It would depend on data center market circumstances and “developments in technology and other market considerations,” the filing reported.

The utility made specific arguments to the commission and other stakeholders to address those concerns, said Chris Kilpatrick, director of rates and resource planning at Black Hills Energy.

First, “we told the commission there is a benefit to our existing customers in deferring the need to build utility-scale generation because Microsoft is supplying their behind-the-meter generation for their load,” he said. “That allows us to avoid costs that would have been passed along to the customers.”

The utility also explained how the tariff “mitigated risk to our customers,” Kilpatrick said. “Technology can change fast. Microsoft might only be in Cheyenne for 10 years or 15 years, but we build utility assets for 40 years.”

If the utility built the generation and the data center market changed, Kilpatrick said, “those assets would have to be paid for by the rest of our customers."

The agreement to share the power plant Microsoft will build for its backup, along with the utility’s new tariff that makes the arrangement possible, will “avoid that risk to our customers,” he added.

Janous agreed. A utility investment in generation to meet Microsoft’s load puts “the most risk on the ratepayers,” he said. “The way the tariff was designed, the ratepayers are shielded from future investment because Microsoft is paying for the generation and it does not go into the utility’s rate base. That’s why the Consumer Advocate endorsed the tariff.”

A filing from Chris Leger, attorney in the Office of the Consumer Advocate, confirmed this, saying the tariff is "in the best interest of all parties and all citizens of the State of Wyoming."

“The tariff is an outside-the-box solution to a really unique problem,” Leger told Utility Dive. “We really appreciate the utility and Microsoft thinking outside the box to bring this to us.”

The financials

Specifics of the tariff remain undisclosed. Microsoft is obligated to supply capacity to the system when the utility is constrained. The utility can call on the data center to transfer its load to its own generators when demand peaks.

There are three noteworthy specifics. First, any other retail customer seeking to use the tariff must have at least a 13 MW load. Microsoft is at present adding “tens of megawatts,” Janous said.

Second, the retail customer’s energy charge will be “based on actual energy costs.” This is key to Microsoft’s satisfaction with the deal.

“The value of having a market-based rate is simple,” Janous said. “We are making massive investments in generation and energy storage. To optimize those investments, we need a price signal from the market about how to invest.”

Without clear and accurate market price signals, Microsoft could make “suboptimal decisions on whether the market prefers building fast-start capacity or long-duration storage,” he said.

Third, although this agreement resembles a conventional demand response arrangement, the tariff excludes a demand side management surcharge.

“There is no direct payment from them to us to take our load off the system but there is avoided cost,” Janous said. “Our total cost for power would have been the cost of building backup generation as well as the electricity rate increase from the utility’s rate based power plant.”

Avoiding that rate increase in the data center electricity bill will eventually save more money than the cost to build the power plant, he acknowledged. “It was readily obvious from the beginning that building one power plant was better than building two.”

There is one other way the new tariff offers the customer a financial opportunity, Janous pointed out. “If the utility is experiencing a constraint and the customer is able to offer the next best option to meet that constraint, that effectively puts the customer into the bid stack.”

What about renewables?

Microsoft already buys the renewable energy credits (RECs) from two Black Hills wind facilities and the tariff “makes it possible for us to take the next step with them,” COO Linn said.

Kilpatrick added a vital insight. “It allows us to buy energy for them through project procurement or in the wholesale markets. That makes it possible for them to access generation from renewables facilities and, if the wind is not blowing or the sun is not shining, they have generation to meet their load.”

As Aaron Carr, Black Hills’ Director of Corp. Development, pointed out, the alternative was new generation to serve the new load that would have likely been conventional generation. “With this tariff, the utility can go to the market and procure competitively-priced renewable resources.”

The tariff, Linn added, puts in place two of the three long term objectives the utility and Microsoft targeted — access to markets for the tech company and avoiding the utility power plant build. The remaining objective is procurement by the utility of additional renewables to meet Microsoft-specific demand.

“That is what we are working on now,” Linn said.

A key to the second and third of those objectives was proving the natural gas power plant technology, Janous said. Microsoft typically uses diesel generators because their data centers need backup power “in less than a minute after the lights go out,” he said. “But that is not the right solution to displace a power plant.”

Natural gas turbines would make it possible to displace the plant Black Hills was planning. And their flexibility would make the integration of variable renewables easier.

Though many advised Microsoft that natural gas turbines could not respond as fast as diesel generators, their engineers and those from Black Hills and the turbine company did “extensive testing, piloting, and tweaking to get the turbines to do more than they were designed to do,” Janous said.

The bigger picture is the enormous opportunity when the customer is engaged by the utility and the market, he said. The customer can then make more optimal decisions about how to invest in infrastructure and how to design operations. “Black Hills was willing to engage with us and think about how we could work together to create optimized solutions.”

Microsoft sees the tariff as the way to add more renewables because it allows access to market-based rates, Janous said. “A market-based rate eases the transition to more renewable energy because I have a link between what I am spending on my utility power bill and my renewable energy contract market price.”

The tariff’s strengths and weaknesses

Special contracts and green power programs have enabled customer procurement of RECs at premium retail prices since the early 2000s, WRI’s Tawney said.

“The price on Microsoft's energy bill from Black Hills, though not a bad deal, seems to be higher than the cost of their wind project power purchase agreements," she said. 

More significantly, the tariff does not meet all six Buyers’ Principles, Tawney pointed out.

They WRI/WWF Buyers' Principles for corporate renewable energy procurement

The Black Hills tariff seems to offer greater choice in procurement options, Principle 1, in the potential it holds to work with the utility on the purchase of projects they want, she said.

It offers more access to cost competitive generation, Principle 2, because the overall cost of power is reduced by making the natural gas facility available to the utility.

The tariff's reliance on the spot markets moves it away from Principle 3’s call for longer- and variable-term contracts, Tawney said. “Their retail energy bill will continue to move around with the utility’s energy mix, though it will be lower than what it would have been.”

The exciting and new thing about the tariff is the different value streams it includes, Tawney added. “It reduces the data center’s costs, the utility’s costs, and the risks to ratepayers. We want to see packages that bring both public benefits and private benefits.”

The wind projects Microsoft is buying RECs from are not new, so the tariff does not now meet the "additionality" in Principle 4 by driving the development of new renewables projects, Tawney said. That fourth principle will be met, she acknowledged, if the utility procures new renewables to meet the data center’s load, as Linn said he is working toward.

In addition, Tawney said, Microsoft’s purchase of RECs from the Black Hills’ existing wind facilities could be a driver in the utility decision to build new renewables. “If it opens the door for Black Hills to secure new renewables for the general load, that's not absolute additionality but it is very positive.”

Microsoft building new generation to meet the utility's capacity need is essentially Microsoft making capital available to the utility, Tawney said. “It meets Principle 5’s streamlined third-party financing because it is an efficient use of private sector capital.”

The collaboration at the core of the LPCS tariff is also a new and creative way for the utility to offer Microsoft Principle 6’s increased purchasing options, Tawney said. “Modernizing the grid will require an enormous outlay of capital and should be done as efficiently as possible. This is a way to be efficient in which the ratepayers will benefit, not just be held cost neutral.”

'A baby step'

Wyoming has long worked to use its rich energy resources to attract data centers, Linn said. “Working with Microsoft to set up this tariff was an opportunity for Black Hills Energy to support the city, the state, and the Governor’s work on economic development.”

The LPCS tariff is approved by the commission and can be used without renegotiation by any customer who locates in our service territory and meets the basic requirements, he added. “We are open for business.”

Janous thinks it is an opportunity for utilities and for data centers. “The most efficient solutions will include the capabilities the customer brings to the table, be it storage, generation, or controllable load, and what the utility can offer to balance those resources,” he said. “This is a baby step in that direction.”

Filed Under: Generation Solar & Renewables Regulation & Policy Corporate News