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HomeMy WebLinkAboutStaff Report 4272 City of Palo Alto (ID # 4272) Finance Committee Staff Report Report Type: Action Items Meeting Date: 12/17/2013 City of Palo Alto Page 1 Summary Title: Palo Alto CLEAN Program Update Title: Utilities Advisory Commission Recommendation that Council Continue the Palo Alto Clean Local Energy Accessible Now (CLEAN) Program at the Rate of 16.5 cents per Kilowatt -hour for a 20-Year Contract and a Program Cap of 2 Megawatts From: City Manager Lead Department: Utilities Recommendation Staff and the Utilities Advisory Commission (UAC) request that the Finance Committee recommend that the City Council: 1. Approve the continuation of the Palo Alto CLEAN program with a price of 16.5 cents per kilowatt-hour (¢/kWh) for a 20-year contract, a program cap of 2 megawatts (MW) of generating capacity, and a review of the program in one year or at the time the program capacity is filled, whichever comes first; and 2. Approve changes to the Program Eligibility Rules and Requirements (as shown in Attachment A) to clarify that the 2 MW cap is a limit and to update the “pre - certification” price. Executive Summary The City Council adopted Palo Alto CLEAN (Clean Local Energy Accessible Now) program (also commonly referred to as a feed-in tariff, or FIT, program) in April 2012. The program was designed to complement the City of Palo Alto Utilities’ (CPAU’s) existing partners solar rebate program, which was established in 1999 to encourage installations of solar photovoltaic (PV) systems and which has one of the highest participation levels per customer in the country. Palo Alto CLEAN created an additional alternative for property owners by enabling them to build a new solar system on their property and sell the energy to CPAU under a long-term, fixed-rate contract rather than participate in the PV Partners program and use the energy on site. City of Palo Alto Page 2 Though solar developers expressed interest in Palo Alto CLEAN in 2012, the price (14 ¢/kWh for a 20 year contract) did not attract project developers. In December 2012, Council increased the CLEAN program price to 16.5 ¢/kWh for a 20 year contract with a program cap of 2 megawatts (MW). At that time, Council directed staff to return w ith a review of the program in one year, or at the time the program cap was reached, whichever occurred first. Although no applications have been received to date, there continues to be interest by developers in the CLEAN program. Staff recommends continuing Palo Alto CLEAN at the current price for another year, or until the 2 MW cap is reached. Staff believes that the 16.5 ¢/kWh price is sufficient to attract projects and that further education of property owners about the program will yield program participation. Although Palo Alto CLEAN is available to residential customers, staff expects PV Partners or solar system leasing arrangements (after PV Partners funding runs out) will continue to be their preferred program. At its November 6, 2013 meeting, the UAC unanimously supported staff’s recommendation to continue the Palo Alto CLEAN program at the current price. There was concern raised about the subsidy the program could require from electric ratepayers if the program attracts applicants, and commissioners voiced the hope that, if the 2 MW of program capacity is reached, the price can be reduced. Background CPAU has a long history of supporting solar power. It initiated the PV Partners program in 1999, and in 2007 the program was expanded to meet the requirements of the State’s Million Solar Roofs Bill (Senate Bill 1, 2006). Under the PV Partners program CPAU provides rebates to residential and commercial customers who install solar for their own use. The program has been successful at stimulating solar development, with more than 3.9 MW of local solar capacity installed by nearly 565 participants as of the end of September 2013. Palo Alto is one of the top ten utilities nationwide in PV installations per customer. Through the PV Partners program, CPAU already provides substantial financial support for local solar. The total CPAU SB1 program budget for 2008-2017 is $13 million and the total program goal is 6.6 MW. When this goal is achieved the energy generated by the program annually will be 11.2 GWh (1.1% of Palo Alto load). The average annual cost to ratepayers of these rebate payments is roughly $1.3 million per year plus the cost of administration and the lost distribution system revenue associated with net metering. The rate impact of this program is roughly 1-1.5% per year while rebates are being paid. Once all rebates have been paid the rate impact of lost revenue due to net metering will continue to be 0.3-0.5% per year. Due to SB1, PV Partners is now a state mandated program, and r egardless of the rate impact, CPAU is required to offer it. City of Palo Alto Page 3 In March 2012 the City expanded its support for local distributed generation by launching Palo Alto CLEAN with a price of 14 ¢/kWh for a 20-year contract (Resolution 9236). The program expanded the options available to property owners by enabling them to sell energy directly to CPAU under a long term contract instead of using the energy on site. Initially Palo Alto CLEAN generated a high level of interest from solar developers who wanted to lea se rooftops in Palo Alto in order to build a solar system and sell the energy to CPAU. However, it soon became apparent that the 14 ¢/kWh price was insufficient to enable third-party developers to earn their target returns while still offering attractive rooftop lease rates. In December 2012, Council extended the CLEAN program and increased the rate to 16.5 ¢/kWh for a 20-year contract (Staff Report 3316, Resolution 9308). Although the Palo Alto CLEAN program has no deadline for participation, Council di rected staff to return to the Finance Committee after one year or when the program cap was reached, whichever occurred first. Interest from solar developers remains, but no applications have been received for the CLEAN program as of the end of November 2013. Although no applications were received, staff stepped up its marketing efforts in 2013. Program marketing activities included staff presentations to the local IEEE (Institute of Electrical and Electronics Engineers) chapter and VoteSolar (via webinar), meetings with local solar developers, commercial property owners and the CLEAN Coalition organization, the emailing of program updates to over 275 contacts on the distribution list, and working with Public Works, Real Estate and Office of Emergency Serv ices staff to identify potential City-owned sites suitable for solar PV. The property owners who have investigated the program to-date either chose not to participate or chose to evaluate projects under the PV Partners program instead. Staff still regula rly receives new inquiries about the CLEAN program from developers and property owners. Despite the lack of participation, there have been positive outcomes from the program offering. The program prompted developers to take a serious look at the cost of developing solar projects in Palo Alto, and some of them shared that information with CPAU staff. At the same time, the solar project permitting processes at the development center have been improved based on input gathered from solar developers. In addition, many public utilities across the country have called requesting information on Palo Alto’s model in order to develop a CLEAN program in their own service areas. Discussion The Palo Alto CLEAN program does not expire in December 2013, but Council req uested that it be reviewed after one year or when the 2 MW cap was reached , whichever was first. When establishing the price of 16.5 ¢/kWh, Council reviewed the market value of the local solar energy and determined that there were additional financial and environmental benefits to increasing solar generation locally. In December 2012, when Council established the 16.5 City of Palo Alto Page 4 ¢/kWh price, staff estimated the cost of buying renewable energy outside of Palo Alto was 11.6 ¢/kWh (including transmission) for a 20-year contract. Therefore, purchasing the energy generated from 2 MW of local solar projects at 16.5 ¢/kWh was expected to cost about $160,000 per year more than buying the same energy outside of Palo Alto (and having it transported to Palo Alto). This was eq uivalent to a 0.1% increase in the electric utility’s costs. Council determined that this additional cost was acceptable as a means to encourage local solar installations and in light of additional benefits of encouraging local solar generation. Updated Value of Renewable Energy Since December 2012, the City has signed long-term Power Purchase Agreements (PPAs) to buy renewable energy from 3 solar energy projects in central California, totaling 80 MW at a cost of about 6.9 ¢/kWh. The cost to deliver that energy to Palo Alto, combined with the capacity related benefits that local solar would provide, is projected to be an additional 3.0 ¢/kWh , for a total value of local solar energy of 9.9 ¢/kWh. Using the cost of the three signed PPAs (plus transmission costs and capacity value) of 9.9 ¢/kWh, the cost of continuing the 16.5 ¢/kWh CLEAN price for 2 MW of solar PV projects is about $215,000 per year more than buying the same energy outside of Palo Alto. This is equivalent to a 0.18% increase in the electri c utility’s costs. Alternatives Considered Since the estimated value of local solar energy decreased from last year’s estimate, the price for the Palo Alto CLEAN program should be re -evaluated. One alternative is to take into account the value that Council placed on local solar energy when it approved the 16.5 ¢/kWh price in December 2012. At that time, Council determined that an incremental price of 4.9 ¢/kWh over the cost of remote renewable energy (estimated at 11.6 ¢/kWh at that time) resulted in an acceptable overall cost increase, would improve the chances that the program would have participants, and covered the intangible value of having solar installations locally. However, since the cost of remote renewable energy has fallen, a reduced price may not attract many program participants. Another alternative is to set the price at 9.9 ¢/kWh, the expected value of local solar without consideration of the intangible financial benefits Council earlier identified. This would eliminate any financial impact of the program on electric ratepayers, but is expected to effectively eliminate the program, as it would not likely attract any participants. City of Palo Alto Page 5 While there are many different possibilities for pricing alternatives, given the reduction in the cost of remote, renewable energy, staff focused more closely on the three pricing alternatives described below: 1. Current program (UAC and Staff Recommendation): Extend the current program at the same price (16.5 ¢/kWh for a 20-year contract) with the current cap (2 MW). 2. Decrease Price: Decrease the price to 14.8 ¢/kWh such that the incremental cost over remote renewable energy is the same incremental cost that Council determined was acceptable when it approved the 16.5 ¢/kWh price in December 2012 ($160,000 per year) with a cap of 2 MW. 3. Cost-neutral program: Set the price at the same cost as buying renewable energy from a remote (outside Palo Alto) project and transporting it to Palo Alto (9.9 ¢/kWh for a 20 - year contract), without accounting for any additional financial and intangible benefits of local solar. The three pricing alternatives are summarized in Table 1 below and the costs are compared to CPAU’s avoided cost of renewable energy. The annual costs are calculated based on a 2 MW program. TABLE 1: Annual Cost of Program Alternatives Pricing Alternative Energy Cost (₵/kWh) Annual Excess Cost* (Rate Impact) 1 – Continue Current Price 16.5 $215,000 (0.18%) 2 – Decrease Price 14.8 $160,000 (0.13%) 3 – Cost-Neutral Price 9.9 0 * The cost compared to the cost of buying renewable energy outside of Palo Alto. If the program increased costs by $215,000 per year, the system average electric rate would have to increase by 0.02 ¢/kWh. This is equivalent to a bill impact of $1.60 per year for a customer using 650 kWh/month. In addition to the costs described above, the program requires staff time for marketing and project review. The project review can be absorbed with existing staff over the life of the program, and costs will be recovered through pr oject review fees. The marketing requires about 0.1 FTE of staff time and may involve an additional budget for marketing materials, which would be requested through the annual budget process. The marketing work is absorbed by City of Palo Alto Page 6 existing staff and decreases time spent on other customer account management activities and efficiency program delivery. Recommendation Staff recommends that the current price of 16.5 ¢/kWh continue for another year, or until the 2 MW cap is reached. There has been renewed interest by customers and solar developers and solar system costs have continued to decrease so it is anticipated that the price should be sufficient to attract some participation in 2014. Small changes to the Program Eligibility Rules and Requirements (as shown in Attachment A) are needed to clarify that the 2 MW cap is a limit and to update the “pre -certification” price, which is the price that would be paid if the facility did not obtain certification from the California Energy Commission as an Eligible Renewable Energy Resource. Commission Review and Recommendation The UAC considered staff’s recommendation at its November 6, 2013 meeting. While expressing overall support for the Palo Alto CLEAN program, commissioners voiced concerns about the extra cost paid by electric ratepayers to support the 16.5 ¢/kWh price. The commission recognized that the 2 MW cap limits that cost . Commissioners also stated their hope that the price can be reduced after the first 2 MW of capacity is taken. After its discussion, the UAC voted unanimously (6-0 with Chair Cook absent) to recommend that the City Council: 1. Continue the Palo Alto CLEAN program at the current price of 16.5 cents per kilowatt - hour (¢/kWh) for a 20 year contract with a program limit of 2 megawatts (MW). 2. Direct staff to return to the Council for direction after the 2 MW limit is reached or at the end of 2014, whichever comes first. The draft notes from the UAC’s November 6, 2013 are provided as Attachment B. Resource Impact Staff estimates the current cost of buying renewable energy outside of Palo Alto is 9.9 ¢/kWh (including transmission) for a 20-year contract. Purchasing the energy generated from 2 MW of local solar projects at 16.5 ¢/kWh is expected to cost about $215,000 per year more than buying the same energy outside of Palo Alto. This is equivalent to a 0.18% increase in the electric utility’s costs. While any rate impacts created by the program would be evaluated as City of Palo Alto Page 7 part of an electric cost of service study and/or revenue requirement analysis , if the program increased costs by $215,000 per year, the system average electric rate would have to increase by 0.02 ¢/kWh. This is equivalent to a bill impact of $1.60 per year for a customer using 650 kWh/month or $1.00 per year for the median residential customer using 410 kWh/month. In addition to the energy costs described above, staff time is associated with marketing and project review. The project review can be absorbed with existing staff over the life of the program, and costs will be recovered through project review fees. The additional marketing will require about 0.1 FTE of staff time and may involve an additional budget for marketing materials, which would be requested through the annual budget process. The marketing work will be absorbed by existing staff, but will decrease time spent on other account management and efficiency program delivery activities. Policy Impact The recommendation implements Long-term Electric Acquisition Plan (LEAP) Strategy #4, Local Generation, which is to “promote and facilitate the deployment of cost-effective local resources.” The program will facilitate the deployment of local resources, and the recommended price, 16.5 ¢/kWh, is set to encourage the development of efficient local solar projects. It also implements Climate Protection Plan Chapter 3 (Utilities), Goal 3, “Expand use of renewable energy installed or purchased directly by customers.” The program also implements Comprehensive Plan Goal N-9, “A clean, efficient, competitively-priced energy supply that makes use of cost-effective renewable resources” and Policy N-48, “Encourage the appropriate use of alternative energy technologies.” Environmental Review Adoption of this resolution is not subject to California Environmental Quality Act review under California Public Resources Code section 21080(b)(8), because the price adopted reflects the reasonable cost of the CLEAN Program’s operating expenses, including the cost of purchasing renewable energy from local solar generating systems and the value of lo cal benefits to CPAU and its ratepayers. Attachments:  Attachment A: Revised Palo Alto CLEAN Program Eligibility Rules (PDF)  Attachment B: Excerpted Draft UAC Minutes of November 6, 2013 (PDF) PALO ALTO CLEAN (CLEAN LOCAL ENERGY ACCESSIBLE NOW) PROGRAM ELIGIBILITY RULES AND REQUIREMENTS Effective January 1, 2013 A. PARTICIPATION ELIGIBILITY REQUIREMENT: The Palo Alto Clean Local Energy Accessible Now Program (the “CLEAN Program”) is open to participation by any Eligible Renewable Energy Resource, as defined in Section D.4. B. TERRITORIALITY REQUIREMENT: In order to be eligible to participate in the CLEAN Program, an Eligible Renewable Energy Resource must be located in and generating electricity from within the utility service area of the City of Palo Alto. C. PRICES FOR CERTIFIED RENEWABLE POWER: The following purchase prices shall apply to the electricity produced by an Eligible Renewable Energy Resource participating in the Program, except as provided in Section D.5. Solar generation facilities: Contract Term Contract Price 20 years 16.5 ¢$0.165 / kWh D. ADDITIONAL RULES AND REQUIREMENTS: 1. The owner of the Eligible Renewable Energy Resource shall enter into an Eligible Renewable Energy Resource Power Purchase Agreement (“PPA”) with the City of Palo Alto. 2. The maximum capacity allowed under the last Eligible Renewable Energy Resource that is eligible for participation in the CLEAN Program is will be the Eligible Renewable Energy Resource that first causes the total capacity of Eligible Renewable Energy Resources receiving payments under the Program to exceed two (2) MW (the “Program Capacity”, based on the generating facility’s California Energy Commission rating, CEC-AC). 3. An application for participation in the CLEAN Program to sell output to the City (the “Application”) may be submitted at any time. Applications will be considered in the order received. 4. Eligible Renewable Energy Resource means an electric generating facility that: (a) is defined and qualifies as an “eligible renewable energy resource” under California Public Utilities Code Section 399.12(e) and California Public Resources Code Section 25471, respectively, as amended; (b) uses a solar fuel source; and (c) meets the territoriality requirement set forth in Section B. PALO ALTO CLEAN (CLEAN LOCAL ENERGY ACCESSIBLE NOW) PROGRAM ELIGIBILITY RULES AND REQUIREMENTS Effective January 1, 2013 5. The California Energy Commission’s (“CEC”) certification of the Eligible Renewable Energy Resource shall be required within six (6) months of the commercial operation date of the electric generating facility; the facility’s owner shall provide written notice of the CEC’s certification to the City within ten (10) business days. If the City takes delivery of the facility’s electricity prior to the CEC’s certification, then, as the facility’s electricity cannot be considered in fulfillment of the City’s Renewable Portfolio Standard requirements, the price that the City will pay for the facility’s electricity (the “Pre- Certification Price”) will be set at 65% of the applicable Contract Price.to $0.08 per kWh, the estimated 20-year levelized cost of brown power delivered to the City. Upon the CEC’s certification of the facility, the City will pay the applicable Contract Price for the facility’s electricity delivered on and after the date of the CEC’s certification. The City will “true-up”, as appropriate, the difference between the Contract Price and the Pre- Certification Price for any electricity received and paid for by the City, effective as of the date of certification of the Resource. 6. If an Eligible Renewable Energy Resource is authorized to participate in the CLEAN Program, then that Resource shall not be entitled to receive any rebate or other incentive from the City’s Photovoltaic (PV) Partners Program, Power from Local Ultra- Clean Generation Incentive (PLUG-In) Program, or other similar programs funded by the City’s ratepayers. To the extent any rebate or incentive is paid to the owner of the Resource, that rebate or incentive shall be disgorged and refunded to the City if the Eligible Renewable Energy Resource continues to participate in the CLEAN Program. If a rebate or an incentive has been paid to the Eligible Renewable Energy Resource, then that Resource shall be ineligible to participate in the CLEAN Program. 7. All electricity generated by the Eligible Renewable Energy Resource shall be delivered only to the City. No portion of the electricity may be used to offset any load of the generating facility (other than incidental loads associated with operating the generating facility). 8. A metering and administration fee will be charged to each Eligible Renewable Energy Resource that participates in the CLEAN Program. See Utilities Rate Schedule E-15 (Electric Service Connection Fees). EXCERPTED DRAFT MINUTES OF THE NOVEMBER 6, 2013 UTILITIES ADVISORY COMMISSION MEETING ITEM 3: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend that Council Continue the Palo Alto Clean Local Energy Accessible Now (CLEAN) Program at the Rate of 16.5 cents per Kilowatt-hour for a 20-Year Contract and a Program Cap of 2 Megawatts Vice Chair Foster asked for public comment on this item. Craig Lewis, CLEAN Coalition, stated that the experience in CLEAN programs throughout the country is that it takes some time for projects to develop after introduction of the programs. He stated that the price should be sufficient to have program takers and he expects that this will occur next year. Lewis said that Palo Alto’s progra m is well structured and that the price is fair, but that property owners need to be educated and may not be motivated by making extra money from leasing their roofs. Similar programs elsewhere have been able to attract participants and been fully subscribed. Lewis stated that the CLEAN Coalition will help to find developers and property owners to take advantage of the program. He stated that he supports the staff recommendation to continue the program at the existing price. Commissioner Waldfogel asked Lewis what it will take to get developers to take up the program offering. Lewis responded that, fundamentally, it will take education with property owners. He has had meetings with about 15 property owners and they need to spend the time to understand how the program can work. He indicated that parking structures are prime candidates for using the CLEAN program and that PV systems provide other benefits such as shade for parked cars. Howard Lee, Palo Alto resident, stated that he agreed with Craig Lewis's recommendation to continue the CLEAN program. He stated that time is needed for property owners to get comfortable with the business model. This is a somewhat new idea for developers and extending the program for another year should yield some participation since opportunities will come, but take time to develop. Assistant Director Jane Ratchye provided a brief presentation summarizing the written report. She stated that when Council increased the price from 14 cents per kilowatt -hour (₵/kWh) to 16.5 ₵/kWh at the end of 2012, Council also directed staff to return when the 2 megawatt (MW) cap was reached or after one year. Staff is now returning after one year and has re - evaluated the price and recommends continuing with the 16.5 ₵/kWh and the 2 MW cap. Commissioner Melton noted that the City moved from cost -based to market-based pricing, but based on the input from the two speakers, there is professional opinion that the program will succeed in time and he supports the staff recommendation to conti nue the program at the same price and that there was no basis to lower the price. Commissioner Eglash said that the dilemma is not whether to continue the program, but at what price. He recalled that there was angst last year with whether and how much to pay more than renewable energy could be purchased on the market. He said that the question is how much the ratepayers should encourage local solar and noted that any amount over 9.9 ₵/kWh is a subsidy from ratepayers to property owners. Commissioner Eg lash said that because of this subsidy, he struggles with this issue and, although he would love to see solar locally, these are long-term contracts that obligate the ratepayers to pay more for solar power. Commissioner Eglash continued that on one hand, there needs to be some consistency in the pricing. He indicated that the proposal is both too aggressive (with the price of 16.5 ₵/kWh) and too cautious (only allowing 2 MW). He asked whether offering a lower price for a longer time period or for a larger cap would be workable. He wondered if an alternative such as 15 ₵/kWh for 2 MW, then 12 ₵/kWh for 10 MW until 2017 could be considered. Setting pricing for a longer period could address the long-term predictability for property owners such that the higher price would be only available until end of 2014 and then would fall after that time. Ratchye indicated that the program proposal is not to end the program at the end of 2014, but to return at the end of one year or when the cap was reached to re-assess the price. She added that the City would like to get some uptake with the program and, if there is a run on the program because of the 16.5 ₵/kWh price, we can adjust the price after reaching the cap. Commissioner Eglash asked what would happen if the price was set to a very high number. Director Fong indicated that the Finance Committee set the 2 MW cap on total program size to cap the risk with the intent that staff would return with an updated and lower price once the 2 MW are fully subscribed. Commissioner Waldfogel asked how many projects would it take to use up the 2 MW cap. Utilities Marketing Engineer Lindsay Joye stated that the cap could be used up with just 2 to 3 large projects, but she has also heard from developers with smaller projects so there could be more. Commissioner Waldfogel asked Joye if she agreed with the speakers that they need more education before participating. Joye agreed with the comments and stated that it's not their primary business so property owners need time to evaluate the program. Commissioner Waldfogel said that, because of the subsidy, it would be awkward if one developer were to take half or two-thirds of the program capacity. Vice Chair Foster indicated that he supports the staff recommendation despite t he small subsidy. He stated that the City has been subsidizing solar over the years through the rebate program (PV Partners). He added that lowering the price to 12 or 15₵/kWh would not be productive at this time, but that the hope is that the price coul d be lowered in the future after the first 2 MW is used up. Commissioner Hall said that he supports the recommendation, but would be uncomfortable if we extended the price after the 2 MW is filled since he would want to limit the subsidy. Commissioner Chang said she supports the recommendation, but recommends ratcheting down the price after reaching the 2 MW cap as she shares the concern regarding the subsidy. Commissioner Eglash stated that the price is aggressive and doesn't want to douse the enthusiasm before there are any takers. However, he stated that it needs to be clear that the price/subsidy will have to fall. He said that it should be clear that the 16.5 ₵/kWh is a limited time offer. Commissioner Waldfogel stated that if the City is willing to offer 16.5 ₵/kWh, it could be structured to have 18 ₵/kWh for 1 MW, then 15 ₵/kWh for the second MW. Commissioner Chang responded that the commission has heard that it's not a totally economic decision. Commissioner Eglash indicated that he was not eager to go to 18 ₵/kWh since he is still somewhat uncomfortable with the 16.5 ₵/kWh. ACTION: Commissioner Melton moved staff's recommendation. Vice Chair Foster seconded the motion. The motion carried unanimously (6-0) with Chair Cook absent.