Small Renewable Net Metering -An Investor Owned Utility Perspective

John R. GrimwadeSenior Director Strategic Planning & Development

Presentation to the Kansas Renewable Energy and

Energy Efficiency Conference

September 24, 2007

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Agenda

KCP&L overview What is Net Metering and how does it work? Kansas Parallel Generation Act Regulated Utility Economics 101 Elements of Net Metering structures Summary

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KCP&L Overview

Completed merger with Aquila in mid 2008

Approximately 800,000 customers in 47 counties in Eastern Kansas and Western Missouri

Service territory of approximately 18,000 sq. miles

9 generation plant sites and 10 peaking facilities

3,309 miles transmission, 24,466 miles distribution, and 322 substations

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Our Comprehensive Energy Plan represents a balanced approach to meet the needs of our customers

Affordable, reliable energy to fuel long-term economic growth

Environmental improvements to keep our area’s air clean

Renewable energy

Infrastructure investment to reduce frequency and duration of outages

Programs to give customers more control over their energy usage

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What is Net Metering?

• A billing methodology that allows for customers with self generation to “net” the amount of electricity that they generate against the amount that they use from the grid

• Many states adopted net metering in the early 1980s as a way of implementing PURPA Section 210's requirement that utilities buy the output of qualifying small power production facilities

• A relatively simple method for utilities to measure the amount of electricity to bill where generation does not typically follow a customer’s demand usage (such as with small wind and solar)

• Usually requires the use of a single meter that “spins backward” when customers are generating more than they are consuming

• Typically results in customers receiving the full retail rate of the amount of energy that is netted which acts as an incentive for small renewable generation to develop

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How Does Net Metering Work?

Source: ATTRA - National Sustainable Agriculture Information Service

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Parallel Generation Act K.S.A. 66-1,184 as Modified in 2001

SENATE Substitute for HOUSE BILL No. 2145

• Typically two meters – a system use meter and an excess generation meter

• Requires utilities to buy back the excess generation from parallel generators at not less than 150% of the utility’s monthly system average cost of energy per kilowatt hour

• Limits to residential installations of 25 kW or less, Commercial installations of 200 kW or less and certain school exemptions allow for up to 1500 kW installations

• 2007 modifications limited a utility’s obligation to purchase to 4% of a utility's peak power requirements

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Why do some states promote state policies that support the development of small renewables

• Reduced pressure on the local electricity grid• Increased security: can provide back-up power to strategic applications

like police stations or hospitals for “hazard mitigation” purposes.• Increased local energy independence• Increased property values• Reduced peak power demands• Increased in-state electricity generation• Diversification of the state’s energy supply portfolio• Displaced pollutants from traditional forms of energy• More visible indicators of community support for clean energy• Regional economic growth

Source: AWEA “POLICIES TO PROMOTE SMALL WIND TURBINESA MENU FOR STATE AND LOCAL GOVERNMENTS”

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There are several key issues that states need to address when developing net metering policy

• First - should a self generator be subsidized by other rate payers through net metering?

• Second – How should excess generation be accounted for and at what rate should a self generator be compensated for excess generation?

• Third – What is the appropriate size for a self generator’s installation and should there be a limit on the size of self generator net output?

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Should a self generator be subsidized through net metering?

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Utility scale wind farms generally are a lower cost alternative when compared to smaller customer owned

installations

Small Wind

•Typically Single installations 100 kW or lower

•Capital cost $3000-5000 kW

Utility Scale Wind

•Typically multiple installations >100 MW

•Capital cost $1240-2600 kW

Sources: NREL and AWEA

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Regulated Utility Economics 101

Basic structure of how revenue requirements are determined

Ratebase

Existing Power Plants

Existing Distribution Assets

Existing Transmission Assets

Capitalized Maintenance

New Investments

Annual Revenue Requirement

Depreciation

Return on Rate Base (profit)

Deferred Taxes

Taxes

Fixed O&M Expenses

Fuel & Purchased Power

(Wholesale Energy Sales)

= Revenue Requirement

÷ Retail kW Hours Sold

= net cost per kWh

Fixed

Variable

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Economics 101 (Continued)

Customer Class Revenue Requirement

Class Cost Allocated Return

MWh Delivered

Revenue / KWh

All Classes $696 million

Residential $492 million $402 million

$90 million 4,406,309 $0.116

Customer (Fixed) $123 million

Energy (Variable) $369 million

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What do we mean by subsidization?

• Fixed costs of service are imbedded in the energy charge of most utilities tariffs

• These costs are necessary to pay for already approved investments and to provide reliable service if and when the self generator is not producing

• When the net meter spins backwards because of generation that exceeds a self generator’s own demand, there is generally an under-recovery of fixed costs to the utility

• There are also time of use and seasonal variations that may play a factor in the value of the energy produced by the self generator

• If a utility is granted by the KCC the ability to have full recovery of prudently incurred revenue requirements, for each dollar of under recovery as a result of net metering, all other non-self generators will have to pay more in rates to yield the same net revenue requirement

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Subsidization (Continued)

If state policy is to allow for a subsidization to incent a customer’s ability to self generate, should the size of the installation be limited?

• Most states have size limits on the units that qualify for net metering. For example, Indiana and New Mexico limit qualifying units to no larger than 10 kW and 25 kW, respectively.

• Some states have also imposed a limit on the total number of consumers, or total capacity of consumer-owned generation, for which any utility has to provide net metering service. Utah and Idaho limit net metering to between 0.10/ 0 of the utility’s historic peak load.

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How should excess generation be accounted for and at what rate should a self generator be compensated for

excess generation?

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How is excess energy accounted for and at what price?

• Settled at end of every billing cycle– At the utility’s avoided energy cost– At the utility’s average wholesale market price– In rare instances, the utility’s full retail rate

• Credited on a kWh basis to next month’s bill• Settled at end of year

– Payment for annual residual at avoided cost or in rare cases, full retail rate– Residual is granted to utility at the end of the year

• In some cases the excess is allowed to be carried over to the next year

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What is the appropriate size for a self generator’s installation and should there be a limit on the size of self

generator net output?

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Should state policy limit the size of the installations?

• Most states have limitations on the size installations to limit the incentive to generate only to offset the amount of demand the customer uses

• Some states also limit the amount of total net metering generation a utility has to purchase to a percentage of their total peak demand

• Size limits help mitigate the risk of individuals over generating to take advantage of the incentives and rate subsidy

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Summary

• Most states have adopted some form of net metering policy and have some form of subsidization to incent self generation

• Kansas has a form of net metering already in place in the parallel generation tariff which provides compensation to self generators that is comparable to most state’s net metering rules

• Size limits are necessary to prevent gaming and ensure that self generation is aligned with a customer’s useage

• Current net metering policies in most states are designed for low participation due to the expected relevant cost of the self generating installations. Higher participation levels would warrant rethinking of the policy

• Other issues – non-discriminatory interconnection rules need to be recognized such that utilities can maintain appropriate protection to the grid but do not create an impediment to self generators from being able to connect to the grid

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KCP&L’s Spearville, Kansas Wind Generating Facility