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HomeMy WebLinkAboutStaff Report 7346 City of Palo Alto (ID # 7346) City Council Staff Report Report Type: Consent Calendar Meeting Date: 11/7/2016 City of Palo Alto Page 1 Council Priority: Environmental Sustainability Summary Title: Net Energy Metering Transition Policy and Increased NEM Cap Title: Utilities Advisory Commission Recommendation that the Council Adopt the Net Energy Metering (NEM) Transition Policy and Adopt a Resolution Revising the NEM Cap Calculation Methodology From: City Manager Lead Department: Utilities Recommendation Staff and the Utilities Advisory Commission (UAC) recommend that Council: 1. Adopt the following net energy metering (NEM) Transition Policy for eligible NEM customers: a. Establish a 20-year transition period from the time of system interconnection through which NEM customers will remain eligible for net metering and related terms and conditions described in California Public Utilities Code Section 2827, and b. Allow NEM customers to expand their systems by any amount, and adjust the transition period by a ratio of the expanded and original system sizes, according to the following formula: New Remaining NEM Term = Original system’s remaining NEM term X (Original system size in kW / New system size in kW); and 2. Adopt a resolution (Attachment A) revising the NEM cap calculation methodology to increase the cap from 9.5 megawatts (MW) to 10.8 MW, and repealing Resolution 9557. Executive Summary Net energy metering (NEM) is a billing mechanism designed to promote the installation of renewable distributed generation by allowing customers to be compensated at the full retail rate for electricity generated by their on-site systems, such as solar photovoltaic (solar PV) systems. State law requires all electric utilities to offer NEM to customers with eligible renewable distributed generation up to a maximum cap, or “NEM cap”. Council adopted a NEM Successor Program to be implemented when the NEM cap is reached, but requested City of Palo Alto Page 2 that staff evaluate options and a recommendation for the NEM Transition Policy and change the method for calculating the NEM cap. The proposed NEM Transition Policy provides an equitable way for customers under NEM to expand their systems and remain under NEM for a reasonable period of time before transitioning to the NEM Successor Program. In August, Council approved a new methodology to calculate the NEM cap. The new methodology results in a 13.3% increase in the NEM cap— from 9.5 MW to 10.8 MW. At its October 5, 2016, the UAC voted unanimously to recommend that Council approve the proposed NEM Transition Policy. Background Council Action on NEM Successor Program On August 22, 2016, the Council reviewed the proposed NEM Successor Program and NEM Transition Policy (Staff Report 7150). The Council voted unanimously (8-0 with Council Member Filseth absent) to: 1. Adopt a resolution: a. Adopting a Net Energy Metering (NEM) Successor Rate, E-EEC-1 (“Export Electricity Compensation”); and b. Amending Utilities Rule and Regulation 2 (“Definitions and Abbreviations”) and 29 (“Net Energy Metering and Interconnection”); and 2. Direct staff to: a. Return to Council within four months with options and a recommendation for the NEM Transition Policy b. Return to Council within one year of reaching the cap from the expiring NEM program with a report describing other NEM programs in California, with a comparison to the Palo Alto program including the effectiveness of Palo Alto’s program in spurring local residential solar options; and c. Change the method for calculating the NEM cap to five percent of the customer class non-coincident peak. Discussion NEM Cap The California Public Utilities Code requires all electric utilities to offer NEM to eligible customers with renewable distributed generation, up to a cap. Currently, the California Public Utilities Code affords publicly-owned utilities (POUs), like Palo Alto, with flexibility to define the City’s 5% NEM cap. Section 2827(c)(4)(A) of the California Public Utilities Code specifies that POUs must offer NEM until “combined total peak demand” of NEM customers exceeds 5% of “aggregate customer peak demand” of the electric utility. The statute is silent as to how to define “aggregate customer peak demand” for POUs, leaving matters such as the best method City of Palo Alto Page 3 for calculating aggregate customer peak demand, or what reference year to use to the City to decide.1 In October 2015 Council formally adopted a resolution setting a NEM cap calculation methodology which resulted in a 9.5 MW cap for Palo Alto, which is equal to 5% of the City’s 2006 system peak demand for electricity of 190 MW (Staff Report 6139, Resolution 9557). The reference year (2006) was utilized since California Senate Bill 1 (SB1) took effect on January 1, 2007, which set a statewide goal of deploying 3,000 MW of new solar PV systems by 2017 and concurrently modified the California Public Utilities Code to raise the NEM cap from 0.5% to 2.5%.2 On August 22, 2016, Council directed staff to change the methodology to determine the City’s NEM cap to be 5% of the customer class non-coincident peak. The sum of the customer class non-coincident peaks is estimated to be about 215 MW, so the new methodology will revise the City’s new NEM cap to 10.8 MW, or 5% of 215.6 MW, as shown below. Approval of the proposed resolution (Attachment A) will formalize the NEM cap revision. As of early September 2016, the installed NEM capacity in the City is 7.8 MW, or 72% of the new NEM cap. Rate: Customer Class Non-Coincident Peak in 2006 (MW) E-1: Residential 36.8 E-2: Small Non-residential 18.5 E-4: Medium Non-residential 89.2 E-7: Large Non-residential 66.2 E-18: City Accounts 3.8 Street/Traffic Lights 1.1 Total 215.6 Proposed NEM Transition Policy Transition Period In March 2014, the CPUC ruled that the investor-owned utilities’ (IOU’s) existing NEM customers (and all those who install eligible systems within each IOU’s respective NEM cap) can remain in NEM through a 20-year transition period from the date of interconnection. The length of the transition period was determined in part based on an assessment of expected useful life, as indicated by module warranties, power purchase agreements, and third-party financing agreements. The Sacramento Municipal Utility District (SMUD), the San Francisco Public Utilities Commission (SFPUC) and the Modesto Irrigation District (MID) have also 1 By contrast, the statute and the CPUC afford Investor Owned Utilities (IOUs) with no discretion for how to calculate “aggregate customer peak demand.” The CPUC approved a decision requiring the large IOUs to define aggregate customer peak demand as the sum of individual customers’ peak demands, or so-called non-coincident peak demands. The Public Utilities Code was later modified to further clarify this definition for the IOUs (Cal. Public Utilities Code, §2827 (c)(4)(B)). 2 The NEM cap was later raised from 2.5% to the current 5% in 2010 by Assembly Bill 510. City of Palo Alto Page 4 proposed that NEM customers remain eligible for NEM for 20 years from the date of initial system interconnection. To help promote regulatory certainty and transparency for existing NEM customers who have invested in solar PV systems and for solar developers operating in Palo Alto, staff proposes that existing NEM customers and all eligible customers within the NEM cap in CPAU service territory remain eligible for NEM through a 20-year transition period. System Expansions Some customers who install systems within the NEM cap may wish to expand their systems after the NEM cap has been reached. Allowing system expansion up to a given threshold is broadly in-line with system expansion policies established in the California IOU service territories and Turlock Irrigation District, as shown in the table below. Adopting a system expansion policy would allow a customer to expand their system or to replace panels that failed prematurely with higher efficiency panels while still remaining eligible for NEM. Policies of California utilities for system expansions after the NEM cap has been reached Utility Description of System Expansion Policy IOUs: PG&E, SDG&E, So Cal Edison Customers may increase the system size up to 10% of the original system size and remain eligible for NEM. Customers who wish to expand their systems more may either 1) meter the added capacity separately under the NEM successor tariff, or 2) elect for the entire system to take service under the NEM successor tariff. Turlock Irrigation District Residential customers whose original system size is less than 10 kW may increase their system up to 11 kW total. Residential customers with an original system size of 10 kW or greater and non-residential customers may increase their system by a maximum of 10%. For expansions beyond these thresholds, the customer must transition the entire system capacity to the NEM successor rate. Imperial Irrigation District No existing policy for system expansions. Modesto Irrigation District Proposal: PV systems operating under NEM that want to add panels must reapply under the NEM successor for the total system. City of Lompoc No existing policy for system expansions. Staff originally proposed that if the existing NEM system is modified or repaired after the NEM cap is reached, the customer will remain eligible for NEM as long as the system does not increase by more than 10% of the original system size. If the system modification or expansion results in an increase of over 10% of the original system size, the customer would be required to transition to the NEM successor program for the entire system capacity. City of Palo Alto Page 5 A community stakeholder, Carbon Free Palo Alto, proposed a formula for system expansions that would allow customers to expand their systems and remain under NEM for a term that is proportional to the original and expanded system sizes. The formula for the modified transition period (“Remaining NEM term”) for an expanded system is as follows: New remaining NEM Term = Original system’s remaining NEM term x (Original system size in kW/ New system size in kW). For example, if a 4 KW system, which was interconnected for 5 years (thus, had 15 years remaining under NEM), was expanded by 2 KW to 6 KW, the new NEM transition period would be 10 years for the entire expanded 6 KW system using the formula as follows: New remaining NEM term = 15 years X (4 KW/6 KW) = 15 years X 2/3 = 10 years This formula results in the same amount of NEM-eligible “capacity-years” before and after the expansion.3 Carbon Free Palo Alto argues that limiting the NEM transition period for expansions to only 10% is not reasonable as customers are unlikely to make such small system additions. Instead, they may seek to upsize their systems by at least 25% due to additional electricity needs due to the addition of an electric vehicle or electrification of a gas-using appliance. Options for system expansion policies are described in the table below. Alternative policies for system expansions after the NEM cap has been reached Alternative System Expansion Policy Discussion Original Staff Proposal Customers remain eligible for NEM for system expansions within 10% of the original system size using the original system interconnection date for the transition period. Larger system expansions require the entire system capacity to be transitioned to the NEM successor rate. This policy accommodates small expansions that are driven by replacement of damaged panels or those that failed prematurely. Since newer panels may be larger, or more efficient, a simple panel-for-panel replacement will likely increase system size. Carbon Free Palo Alto Proposal Additions of any size are acceptable, but the expanded system transition period is shortened pro-rata by the ratio of the original system size and the expanded system size. This policy allows all system expansions to remain eligible for NEM, but shortens the transition period by the fraction that the system is expanded. This would accommodate system expansions that are sought to meet increased electric usage. 3 Before the expansion, the 4 KW system had 15 years left in NEM, or 60 kW-years. After the expansion, the 6 kW system has 10 years left in NEM, or (again) 60 kW-years. City of Palo Alto Page 6 Alternative System Expansion Policy Discussion Allow expansions of up to 25% Customers remain eligible for NEM for system expansions within 25% of the original system size. Larger system expansions require the entire system capacity to be transitioned to the NEM successor rate. This policy is similar to the original staff proposal above, but allows larger expansions. This policy is not recommended since it could allow significant additions to remain NEM- eligible, pushing the installed NEM capacity far over the NEM cap. No Expansion For any system expansions, the customer must transition the entire system capacity to the NEM successor rate. This policy does not allow expansions of any kind to remain under NEM so that all expanded systems would be transitioned to the NEM successor. This policy is not recommended as repairing failed panels or even minor system expansions would not be accommodated. Expansion only under NEM Successor System expansion capacity would be under the NEM Successor while the original system capacity would remain under NEM for the transition period (20 years from the date of interconnection). This policy is not recommended as it would be a large metering and administrative burden to accommodate both NEM and the NEM successor program and rates for the combined system. Staff Recommendation Staff considered the options for how to treat solar PV system expansion in the City’s NEM Transition Policy. Staff’s original proposal was targeted at small additions that were likely prompted by the need to replace defective panels and, thus, limited the chance that significant additional solar capacity would be added to the NEM program after the NEM cap was reached. The proposal from Carbon Free Palo Alto is a creative and fair way to allow system expansions prompted by customers who desire to add more solar PV capacity to their systems while keeping the overall capacity under the NEM cap. Thus, staff recommends the Carbon Free Palo Alto proposal to pro-rate the transition period for an expanded system according the formula: New remaining NEM Term = Original system’s remaining NEM term x (Original system size in kW/ New system size in kW). Committee Review and Recommendation The UAC reviewed the proposed NEM Transition Policy at its October 5, 2016 meeting. In its discussion, the UAC clarified that the revised PV system expansion policy will reduce the transition period even if the system is only increased by 10% or less and noted that this is different from the original proposal that would allow system expansions of up to 10% to remain under NEM with no reduction in the transition period. City of Palo Alto Page 7 The UAC voted unanimously (4-0 with Vice Chair Danaher and Commissioners Forssell, Johnston, and Trumbull voting yes and Chair Cook and Commissioners Ballantine and Schwartz absent) to approve the proposed NEM Transition Policy. Draft minutes from the UAC’s October 5, 2016 meeting are provided as Attachment B. Resource Impact The proposed NEM Transition Policy and expansion of the NEM cap support Strategy #2 of the Local Solar Plan, to “develop proper policies, incentives, price signals and rates to encourage solar installation”. Environmental Impact Council’s adoption of the proposed NEM Transition Policy and adoption of a resolution revising the NEM cap do not meet the California Environmental Quality Act’s (CEQA) definition of “project” under California Public Resources Code Sec. 21065 and CEQA Guidelines Section 15378(b)(5), because it is an administrative governmental activity which will not cause a direct or indirect physical change in the environment, thus no environmental review is required. Attachments:  Attachment A: Resolution of the Council of the City of Palo Alto Adopting a Revised Net Energy Metering Cap Calculation Methodology and Repealing Resolution 9557 (PDF)  Attachment B: Excerpted UAC Minutes of October 5, 2016 Meeting (PDF) Attachment A NOT YET APPROVED 161011 jb 6053846 1 Resolution No. Resolution of the Council of the City of Palo Alto Adopting a Revised Net Energy Metering Cap Calculation Methodology and Repealing Resolution 9557 R E C I T A L S A. Net energy metering (NEM), is a billing arrangement that provides credit to customers for the full retail value of the electricity their system generates. B. State law requires all electric utilities to offer NEM to eligible customers with local distributed renewable generation up to a maximum cap of 5% of the utility's aggregate customer peak demand. C. The California Public Utilities Code affords publicly owned utilities (POUs), like Palo Alto, with the discretion to define "aggregate customer peak demand," leaving matters such as the best method for calculating "aggregate customer peak demand" and what reference year to use up to the City. D. Given the flexibility available to POUs and other non-Investor Owned Utilities, there are a variety of differing methodologies in use for calculating the NEM cap across the state, resulting in confusion for utility customers and renewable energy installers operating across multiple utility service territories. E. On October 26, 2015, via Resolution 9557, Council formally adopted a NEM cap to be five percent of the City's peak demand achieved in 2006, or 9.5 megawatts (MW). F. On August 22, 2016, Council directed staff to revise the NEM cap calculation methodology to be five percent of the customer class non-coincident peak. Staff determined that the sum of the customer class non-coincident peaks in 2006 was 215.6 MW and that five percent of that is equal to 10.8 MW. The City's NEM installations are currently approximately 70% of the revised 10.8 MW NEM cap and staff estimates that the cap could be reached in 2017. Local renewable generation installations after the NEM cap is reached will be subject to the NEM Successor Program. G. Increasing Palo Alto’s NEM cap will encourage additional local renewable generation and formal adoption of the NEM cap promotes greater market certainty and transparency for customers and renewable energy installers operating within the community. The proposed revision to the NEM cap is consistent with NEM legislative and regulatory obligations and the Council-adopted Local Solar Plan to promote distributed solar projects. The Council of the City of Palo Alto does hereby RESOLVE as follows: SECTION 1. The City Council adopts the methodology for calculating the City's NEM cap to be five (5) percent of the sum of the City's non-coincident customer class peak demands, Attachment A NOT YET APPROVED 161011 jb 6053846 2 which is defined as the sum of the 2006 historical non-coincident customer class peak electric demands of 215.6 megawatts (MW), or 10.8 MW. SECTION 2. Resolution 9557, which formally adopted a Net Energy Metering Cap Calculation Methodology as of October 26, 2015, is repealed. SECTION 3. The Council finds that adoption of the revision to the NEM cap does not meet the California Environmental Quality Act's definition of a "project" under Public Resources Code Section 21065 and CEQA Guidelines Section 15378(b)(5), because it is an administrative governmental activity which will not cause a direct or indirect physical change in the environment, thus no environmental review is required. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: City Clerk Mayor APPROVED AS TO FORM: APPROVED: Senior Deputy City Attorney City Manager Director of Utilities Director of Administrative Services EXCERPTED DRAFT MINUTES OF THE OCTOBER 5, 2016 UTILITIES ADVISORY COMMISSION ITEM 1: ACTION: Recommendation that the Utilities Advisory Commission Recommend that Council Adopt a Net Energy Metering (NEM) Transition Policy Assistant Director Jane Ratchye noted that, in accordance with the UAC’s recommendation, Council adopted the proposed Net Energy Metering (NEM) Successor Program on August 22, 2016, but requested that staff return to Council with options for the NEM Transition Policy. She added that Council also directed staff to use an alternate method to calculate the NEM cap. Ratchye indicated that the original staff proposal for the NEM Transition Policy was that customers would remain in NEM for 20 years from the date of interconnection and that customers may expand their systems by up to 10% and still remain in NEM. However, solar photovoltaic (PV) system expansions larger than 10% would result in the entire system being under the NEM Successor Program. Ratchye indicated that a community group, Carbon Free Palo Alto, developed an alternative for the system expansion aspect of the Transition Policy such that systems could expand and remain under NEM, but that the transition period would be proportionally reduced by the amount of the increase. Ratchye said that the proposal is now staff’s new recommendation. She explained that staff’s original proposal accommodated increased systems that would be prompted by the need to replace a failed panel or two in a system. The revised expansion policy accommodates larger PV system expansions that could be prompted by the desire to increase a system size since the price of PV panels has decreased or because electric use has increased with the addition of an electric vehicle (EV), or after electrification of an appliance. Ratchye indicated that the revised methodology for calculating the NEM cap is 5% of the sum of the customer class non-coincident peak loads, rather than 5% of the overall system load. The revised calculation increases the NEM cap from 9.5 megawatts (MW) to 10.8 MW providing more room under the cap for the Vice Chair Danaher described the NEM program as one that pays the retail rate for all PV generation and noted that the program will transition to the NEM Success Commissioner Johnston clarified that the original proposal allowed an expansion of a system by up to 10% without any change in the transition period, but the new proposal would shorten the transition period even with a system expansion of up to 10%. Ratchye said that this statement was correct. ATTACHMENT B ACTION: Commissioner Forssell made a motion that the UAC recommend that Council adopt the proposed Net Energy Metering Transition Policy. Commissioner Johnston seconded the motion. The motion carried unanimously (4-0, with Vice Chair Danaher and Commissioners Forssell, Johnston, and Trumbull voting yes and Chair Cook and Commissioners Ballantine and Schwartz absent).