JUICE: Not Enough Green

By Published On: May 1, 2009

The Mission District of San Francisco is ablaze with art, fury, amazing food, Chihuahuas and danger. While walking though the neighborhood with a friend, we got on the subject of energy. He’s installed two photovoltaic units in the neighborhood, but makes his living as a restaurateur. Suddenly he blurted out: “The answer is distributed energy!” He’s right. But he’s naïve. There’s not enough greenbacks to attract utilities to invest in distributed green (and fossil heat-and-power) cogeneration plants. Alas, where naivety and regulated utility economics collide is return on equity. Let me explain. Imagine you are a big California utility. One that probably has tens of billions of dollars in revenues/year. Perhaps you are even a big utility that believes the future of the state is in renewable energy. A big utility could contract with renewable energy providers either near their load centers, or far away, like for wind energy from the Tehachapis. If you are a big utility, you would have two choices. Choice No. 1: Invest less than $1 million in a small, local renewable facility where the energy is used on premises or in the neighborhood, with no new wires or other infrastructure necessary. With $1 million in investment, a California utility would get about 11 percent rate of return on the equity part of the investment. Not a bad deal--probably about 10 times what a local bank would give us regular folk for stashing our capital away in savings. As a big utility, though, $1 million is too small an investment to consider. At 11 percent, it would bring in “only” $110,000 in profits. Choice No. 2: Invest $100s of millions--even billions of dollars--in cross-county or even cross-state infrastructure. A regulated utility can string transmission wires from big renewable power projects in remote windy areas, solar-rich deserts, and bubbling geysers in eastern California. Those transmission projects could receive 11 percent return on investment. Thus, $1 billion worth of transmission lines to bring renewables in from wherever they are to load centers could amount to $110 million in returns. Transmission projects are only one investment that can reap big rewards. Utilities could build their own big renewable energy plants. Those investments also could qualify for an 11 percent rate of return on equity. Thus, a $500 million solar plant, combined with a $1 billion transmission line starts looking like a $165 million in returns for a utility. Choice No. 2 is why nuclear power plants were en vogue in the 1970s. Then, utilities could invest in fossil fuel-fired plants for a few hundred million dollars, or they could invest a billion dollars (in California, that escalated to $5.5 billion with Diablo Canyon) and get the same rate of return. As long as utilities could raise the capital, nukes were a safe investment--return wise. In other words, the more utilities spend, the more the state requires ratepayers to pay them back for those investments. There are some niggling regulatory parameters. The California Public Utilities Commission may require oversight on spending, and may, if utilities are found to have been profligate with their spending, call for a “disallowance” on the pre-approved investments. Pacific Gas & Electric’s Diablo Canyon nuclear plant was one of those, but regulators only called for a minor financial reconciliation in the scheme of investments. Recently, utilities are asking for, and regulators are often granting, immunity from over-investing. Again, using Diablo Canyon as an example, PG&E asked that there be no “reasonableness review” (the regulatory version of a bank “stress test”) if the utility’s investments in upgrading the nuclear plant come in under a certain budget. That was approved. Last month, PG&E asked for the same leeway in spending funds to decommission its Humboldt Bay nuclear plant. It’s the regulatory version of “no harm, no foul.” Except it can be a quite good rate of return and it’s imposed on ratepayers. Back to my small-time solar friend. I’ll call him the “youtilitiy.” He creates power in his neighborhood. Unlike the dominant utility in the Mission District, he gets no return on equity investment. He’s right, distributed generation could solve many of the state’s potential reliability problems. Yet the only ones thinking that small are people like him--youtilities. From my reconnaissance, people who take it upon themselves to make the grid a better place are selfless. My experience is that they have to prostate themselves at permit departments throughout cities and counties. While probably not indicative of the vast majority of solar system installers, in my small PV poll, to a person they did not get a cent from the “million solar” subsidies offered from the state. Then at the meter, utilities have charged them for the privilege of being hooked to the grid. Supposedly, net metering addresses this inequity, but it isn’t happening among the people I know with photovoltaics. As a policy issue, distributed generation should be the cheapest, most efficient energy future for the state after conservation/efficiency measures. Crafting investment strategies to make it a reality is only a percentage number away.

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