Electric utility primer john chowdhury 2012 final

2. What’s In This Research US Electric US Utility Industry and Utility Regulatory Landscape Key Value Key Utility Processes Steps Value of How Smart Grid can Benefit? Smart Grid How can you Profit from it? © 2012 Smarterutility.com | Not to be reproduced without permission Page: 2

3. US Electric Utility Primer 2012Why you should consider this report • Understand US Electric Industry • Regulatory Landscape • Key Utility Processes • How Smart Grid can Benefit the Industry • Example Components 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 3

4. US Electric Utility 101John Chowdhury:• has been working in the Utility Industry for the last 23 years• His clients includes CenterPoint, San Diego Gas & Electric, APS, Southern California Edison, Vectren, TXU, NIPSCO to name a few Objectives of SmarterUtility.com:• Create a Federated Knowledge Repository to take advantage of knowledge, regardless of where it is housed• Support multiple channels from a single knowledge repository (Country‐State‐City‐Utility‐Regulator‐Partner ‐Vendor‐etc.)• Knowledge repository is based on the context and intent• To Leverage Subject Matter Experts to improve your success factors• Adaptive Knowledge architecture that will support all your needs with a single repository and remain flexible to change as needed• Use the Adaptive Knowledge architecture to support Transparency of knowledge, Cloud computing, Mobile presentation, and Social use of knowledge with no additional changesIt’s about Success, and Knowledge Sharing © 2012 Smarterutility.com | Not to be reproduced without permission Page: 4

5. Contents • Electric utility industry overview – Industry structure and value chain steps – Market and utility types – Regulatory overview • Overview of each value chain step • Factors that incentivize electrical utilities • Benefits of Smart Grid for electrical utilities • Appendix 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 5

6. There are 3 Core Physical Elements of the Electric Utility Value Chain Generation Transmission Distribution • Convert fuel energy into • Transmit electricity over • Reduce (step down’) Role electrical energy long distances voltage • Increase (‘step up’) • Deliver electricity to • Deliver electricity locally voltage for efficient large industrial to commercial and transmission customers residential customers • From fuel to the high‐ • From the high‐voltage • From the substation Start and end voltage output of the output of the generating transformer to the points generating station* station to the customer meter transformer in the substation* Fuel* Some utilities consider the step up and step down transformer to be part of the transmission network 6 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 6

7. Examples of Electric Utility Assets Generation Transmission Distribution Coal Transmission substation Distribution wires & Natural gas Low‐voltage transformer Pad mount gear Nuclear 765 KV transmission lines Hydroelectric 230 KV transmission lines Residential meters Generation transformer Substation 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 7

8. In the Beginning, Utilities Were Granted Monopoly Status with Oversight by RegulatorsUtilities Regulator(Electric, Gas, Water, Telephone, Railroad) • Granted monopoly status due to economies • Approved capital investment plans and of scale operating costs • Allowed recovery of reasonable and • Ensured excessive costs borne by necessary operating costs utility investors • Allowed reasonable return on invested • Required utility to support social goals capital 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 8

9. Over Time Some States Deregulated and Broke Up the Monopolies Until the late 70s Late 70s – mid 90s Mid 90s – early 00s Early 00s ‐ today• Utilities act as • Oil shock leads to push for • Government pushes to • Regulators attempt to monopolies lower energy costs deregulate many achieve lower prices, industries but several backfire • Environmental awareness increases • Some large commercial • Deregulation stalls users push for • Generation no longer seen deregulation in hopes of • Regulators attempt to as a natural monopoly lower prices encourage utilities to build generation and • Independent power • Some states begin to save energy producers (IPP) emerge in deregulate – CA is first some states • Independent • Existing utilities become organizations are created hesitant to build capacity to oversee access to transmission & wholesale power* • Energy retailers are created in some states* Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 9

10. Wholesale and Retail Businesses Emerged Due to Deregulation Generation Transmission Distribution Wholesale Generation Transmission Distribution Retail trading Purchase fuel Facilitate buying/ Transmit Deliver Sell power to selling of power customers and and produce between power over power locally handle billing power Generation and long to customers Retail players distances © 2012 Smarterutility.com | Not to be reproduced without permission Page: 10

11. There are 3 Types of Electric Utility Markets Across the US Regulated Un-regulated Wholesale Trans- Example market Generation Distribution RetailMarket Type trading mission Fully regulated Alabama Fully regulated Utility Deregulated Utility Holding Company Generation subsidiary Trading Retail Texas Wires / T&D Utility subsidiary subsidiary IPP* Hybrid- Utility Holding Company regulated Generation subsidiary California Hybrid-regulated Utility IPP** IPP = Independent Power Producer © 2012 Smarterutility.com | Not to be reproduced without permission Page: 11

12. Most States are Still Regulated Regulated Deregulated Hybrid • • Regulated: 34 Regulated: 34 • • Deregulated: 16* Deregulated: 16* • Hybrid: 1 • Hybrid: 1* Includes Washington DC, 6 states are deregulated but have a rate cap or state oversight of rates (AZ, MI, NH, OH, PA, RI)Source: USA Today Aug‐10, 2007 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 12

13. There Are Also 3 Types of Electric Utility Companies, Differentiated By Ownership TypeInvestor‐Owned Utilities Municipally‐Owned Utilities Cooperatives(IOU) (Munis) (Coops) • Publicly traded company • Owned by customers • Owned by customers • Electricity only • Electricity only • Electricity only • One of US’s largest generators of • Regulated by an elected Board of • Regulated by 10‐person elected electricity (38 GW) Directors Board or Directors • US largest electricity transmission • 6th largest publicly owned utility • Operates in 14 counties north and system (39k miles) • 3.3 GW peak capacity west of Austin, TX • States served: AK, IN, KY, LA, MI, OH, • Own transmission and distribution OK, TN, TX, VA, WV • Serve Sacramento County and a • Regulated according to each state’s portion of Placer County regulatory framework• 210 IOUs in the US (7% of US utilities) • 2009 Munis in the US (65%) • 883 Coops in the US (28%)• Serve 105M customers (74% of total) • Serve 14% of customers • Serve 12% of customers Source: EIA, aep.com, smud.org, bluebonnetelectric.coop 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 13

14. IOUs are Influenced by Several State and Federal Entities (CA example) Federal State • Reliability of interstate electricity transmission • Service standards and safety rules • Interstate electricity sales and wholesale • Utility rate changes electric rates* • Monitoring anti‐competitive behavior • Energy efficiency and conservation programs • Programs for low‐income households • National standards related to air and water quality • State standards related to air and water quality • Proposed construction • Reactor safety • Reactor licensing • Promoting energy efficiency, renewables • Radioactive material safety • Licensing large thermal power plants These organizations are independent of the utilities * Also regulate interstate natural gas and oil transport and sales 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 14

15. Some Utilities Offer More than Electricity Utilities Offering Different Services INDICATIVE ESTIMATE; Count (from a sample of 213 large utilities) NOT COMPREHENSIVE Electricity only • 2/3 of IOUs offer IOU 52 24 1 electricity only, most of Electricity & Gas the rest also offer gas Electricity & Water • Coops are largely designed to provide rural Electricity & Gas & electricity Coops 76 0 Water • ~1/2 of Munis offer electricity only, while half offer electricity and waterMunis 30 2 26 0 20 40 60 80 100 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 15

16. Contents • Electric utility industry overview • Overview of each value chain step – Generation – Wholesale – Transmission and Distribution – Retail • Factors that incentivize electrical utilities • Benefits of Smart Grid for electrical utilities • Appendix 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 16

17. Generation: Power Plants Convert Fuel Energy into Electrical EnergyChemical, atomic, Mechanical energy Electrical energythermal energy text text steam Magnet text text Furnace / Fuel Boiler Spinning turbine Alternating current (AC) • Most electricity in • Turbine converts the • The generator has a stationary the US is produced kinetic energy of a cylindrical conductor that is wrapped in steam turbines moving fluid (liquid or with a coil (wire) • In a fossil‐fueled gas) into mechanical • The shaft has a magnet attached to it, steam turbine, the energy which rotates within the conductor fuel is burned in a • Steam hits the blades • When the magnet rotates, it induces furnace to heat and rotates the shaft an electric current in the wire water in a boiler to connected to the produce steam generator © 2012 Smarterutility.com | Not to be reproduced without permission Page: 17

18. Generation: Coal, Natural Gas and Nuclear Generate 90%+ of US Electricity US Electricity generation by source, 2008 Generation of Other Renewables, 2008 Percent Percent 4,110 TWh 123 TWh 100% 100% 1% 3% 6% 12% 90% 90% Other* 80% 20% 80% Other Gases 70% 70% Petroleum 42% 60% 21% 60% Solar/PV Other Renewables Geothermal 50% 50% Hydroelectric Wind Conventional Biomass Nuclear 40% 40% Natural Gas 30% 30% 49% 45% Coal 20% 20% 10% 10% 0% 0% • Coal + Natural Gas + Nuclear generate 90%+ • Coal is the dominant source, almost 50% of generation • Non‐hydroelectric renewables make up only 3%* Includes hydro pumped storageSource: EIA © 2012 Smarterutility.com | Not to be reproduced without permission Page: 18

19. Generation: Electricity Demand Fluctuates Throughout the Day and Year – This Requires Energy Sources with Varying Levels of Flexibility ILLUSTRATIVE Daily (peak day) Annual Maximum Peak load Capacity Reserve margin• Unpredictable demand Peak load• Sources must be • Semi‐predictable demand able to start Cycling load • Energy sources must be flexible to quickly – or be follow changes in demand held in reserve• Resulting energy Demand cost is high Minimum load Midnight Noon Midnight 1/1 12/31 • Predictable level of demand Base load • Addressed by very large power plants that produce energy inexpensively when operated continuously at high utilization (…you can’t just crank them up and down with demand) 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 19

20. Wholesale: Facilitates Matching Demand with Supply Demand ILLUSTRATIVE Daily; MW Supply available at a given Peak load time may not exactly track capacity demand. Additional power may Excess power may need to need to be acquired be sold off through through wholesale markets wholesale markets to meet demand Cycling load capacity Demand Base load curve capacity Time of Day The lack of efficient storage for electricity creates the need to match demand and supply in real time 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 20

21. Transmission: NERC Divides the Nation’s Transmission and Distribution into 3 “Interconnections” Eastern Interconnection Western Interconnection ERCOT ERCOT Interconnection Each interconnection effectively acts as an independent grid system, with limited Source: FERC power crossing between “seams” Source: EIA © 2012 Smarterutility.com | Not to be reproduced without permission Page: 21

22. Transmission and Distribution: Deliver Power from Power Plants to Customers • High voltage transmission lines transport power to distribution substations • Because transmission infrastructure impacts so many customers downstream, transmission has been equipped with ‘smart technologies’ (sensors, automated controls and communications) for many years• The distribution network delivers power over medium‐ and low‐voltage power lines• Transformers (that look like big buckets hung on power poles) further reduce the voltage to normal household electrical service• The distribution network includes the electricity meter © 2012 Smarterutility.com | Not to be reproduced without permission Page: 22

23. Retail: Electrical Utility Customers and Consumption # Average sales per customer (MWh/yr) Customers by Sector, Electrical Energy Sales 2007* by Sector, 2007 Percent, 100% = 142 M Percent, 100% = 3.7M GWh • Residential customers make up almost 90% of all 100% 0.0% 0.6% 0.2% 11,000 customers. Commercial 12.2% customers make up almost 90% 27.4% 1,300 all of the rest.80% Transportation • Although Residential is the 70% Industrial biggest sector by sales (in 60% Commercial other words, consumption) 35.6% at 37%, sales are more 50% Residential evenly distributed across 87.2% sectors40% 7730% • Net result… average sales per customer is very low for 20% 37.1% Residential relative to 10% 11 Commercial and Industrial 0%* The Transportation sector ‘s 750 customers constitute less than 0.1% of customers Source: EIA 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 23

24. The U.S. is the Largest Electricity Consumer in the World Consumption of Electrical Energy by Share of Global Country, 2006 – Top 12* Consumption GWh United States 23% China 15% • US is the largest consumer Japan 6% Russia 5% • Top 10 consuming countries Germany 3% plus Australia and Mexico consume 69% of world total Canada 3% India 3% France 3% Brazil 2% South Korea 2% Australia 1% Mexico 1% 0 1,000 2,000 3,000 4,000 5,000 69%* Australia is ranked 14 worldwide (not 11) and Mexico is 17, but they are shown here for referenceSource: EIA 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 24

25. Contents • Electric utility industry overview • Overview of each value chain step • Factors that incentivize electrical utilities – Financial – Operational – Environmental – Typical utility behavior • Benefits of Smart Grid for electrical utilities • Appendix 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 25

26. New Challenges are Emerging for Utilities Italics: new challenges Traditional Tension Financial Operational• Providing affordable electricity • Reliability New Tension New Tension • Safety• Expectation for more efficient operation • Increasingly stringent • New environmental reliability metrics costs increasing Environmental • Integrating • Generation costs distributed and increasing intermittent • Likely legislation on carbon cost generation, EVs, • Renewable power standards and microgrids energy efficiency requirements • Maintaining power IOUs have a profit • Growing penetration of grid security motivation, Munis and distributed generation Coops do not (especially rooftop PV) • Emergence of electric vehicles Some Munis also are responsible for Police & Fire services © 2012 Smarterutility.com | Not to be reproduced without permission Page: 26

27. Financial: First… How Do Utilities Earn Profits?Munis • Munis and Coops are owned by their customers, so they are not profit‐orientedCoopsGeneration • Generation companies earn profits through selling electricitycompaniesRetail • Retail companies (which operate in deregulated markets) earn profits through companies buying and re‐selling electricityIOUs • However, (T&D) IOUs do NOT earn profits on the electricity they sell • Yes, they do receive revenues for the electricity through the rates that consumers pay… • But the regulators set rates so they cover utility costs to purchase and deliver that energy • The rates also cover their other costs • Regulators grant the companies a “fair rate of return” on the value of their assets, such as the distribution lines, transformers, meters, etc. This return, too, is reflected in the rates that utility customers pay. 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 27

28. Financial: Many Regulators Set IOU Revenues Based on Cost‐of‐Service Cost‐of‐Service Calculation Roles RR = O + T + D + r*(RB) RR = utility’s revenue requirement O = operating costs T = taxes Monopoly status and fair rate of return D = depreciation allowance Integrated Regulator r = fair rate of return utility RB = rate base Obligation to serve • Generally represents the property and assets used to provide utility service Guarantee of • May be based on fair value, prudent Payment for reliable service at investment, reproduction cost, original cost service reasonable rates • IOUs make profits based on the rate of return (r) and the rate base (RB), so there is an incentive for IOUs to increase the rate base. • They don’t make money on the commodity. They just recover their costs for it. Customer * ROE rules differ by state. Can be based on treasuries/borrowing costs, peer‐group ROEs 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 28

29. Financial: What Utilities Show on Your Bill (PG&E Example) Back page of your bill (the fine print) These per‐kWh rates include amounts for cost recovery and the rate of return • As you can see, the rate includes many elements (described on the back page of your bill) • Generation and Distribution make up 81% of this bill • Generation includes fuel and purchased power • Both also include construction, maintenance and Source: pge.com financing costs 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 29

30. Financial: There are Several Approaches to Billing for Usage Description Consumption PG&E bill excerpt Tiers • Multiple rates based on consumption • Baseline: based on average monthly usage for a given customer type • Higher rates charge for consumption above the baseline quantity allocated Timing Time of use • Different rates charged for electricity used at different times during the day: higher rates (TOU) are charged during times of greater demand • Allows the utility to better match revenues with their energy procurement costs and encourages consumers to use less during peak demand times Critical Peak • Utilities project energy demand for the following day and, if demand is expected to be Pricing (CPP) very high as on hot summer days, designate the following day as a “critical peak” day Demand response (DR) • Utilities charge higher rates on CPP days and lower rates on non‐CPP mechanisms • Within CPP days, there may be more than one rate in TOU pricing The purpose is to reduce and Real‐time • Rates are set “real‐time”, so they are more dynamic than TOU shift energy Pricing (RTP) • Based on shorter time intervals, typically minutes, not blocks of hours demand during • Not yet widely adopted – requires frequent meter reads and either consumer access peak times to price signals or direct utility control of customer loadsSource: pge.com 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 30

31. Financial/Environmental: Demand Response is Emerging States with established Demand Response Plans (as of Sept‐09) In CA, between the 3 IOUs, there are 26 DR programs, but only 3 (1 each) geared to residential customers 11states* have established Demand Response programs or plans* Includes Hawaii (not shown on the map)Source: FERC September 2009; California Flex Your Power 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 31

32. Financial/Environmental: ‘Decoupling’ Profits from Energy Sales to Encourage Efficiency • Decoupling separates a utility’s revenues from its energy quantity sales to not discourage energy efficiency • Rates (per kWh) for the utility are adjusted up if energy sales quantity goes down (or down if they go up) Revenue_old = Rate_old * Quantity_old = Rate_new * Quantity_new = Revenue_new • As of the end of 2008, 6 states had adopted electric decoupling • Expectation is for increased decoupling; 9 states were pendingSource: National Resource Defence Council 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 32

33. Environmental targets: Energy Efficiency TargetsSummary States with EE targets (2009)• The primary purpose of EE is to reduce overall demand and secondarily to reduce peak demand• 22 states have EE targets• Target level, ramp up, elements (e.g., demand, peak demand) differ by state• Typical programs: • Rebates for energy‐efficient appliances and lighting • Loans for energy‐efficient building• Incentives and penalties also differ by state. For example: • CO and MI have incentives to exceed targets but no penalties for non‐compliance • In CT, providers that fail to meet efficiency requirements must pay a per‐kWh charge to the PUC Source: Pew Center 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 33

34. Environmental targets: Renewable Portfolio Standards• Summary States with RPS or RPG (2009)• A renewable portfolio standard (RPS) is a state policy that requires electricity providers to obtain a minimum percentage of their power OR NY: 24% by 2013 from renewable energy resources by 25% by 2025 (large utilities) a certain date 5%‐10% by 2025 (smaller utilities)• 24 states and DC have RPS policies in place and 5 others have nonbinding renewable portfolio goals (RPG) CA: 33% by 2020*• Standards can differ by type/size of utility in a state NC 12.5% by 2021 (IOUs)• Incentives and enforcement are 10% by 2018 (co‐ops & munis) managed by individual states• Relative to the US average of 3% of power from RPS, these targets represent a significant increase * From ~13% in 2008 Source: US Department of Energy ‐ Energy Efficiency and Renewable Energy, DSIRE and NREL; CA CPUC 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 34

35. Operational: Reliability has a Major Impact on BusinessesAverage annual cost of interruptions by business type*Dollars80,000 • Costs due to interruptions vary widely by 60,000 business type40,000 • In total (not shown) electrical interruptions 20,000 cost US businesses more than $100B 0 annually** Digital Continuous Fabrication Economy Process Mnfr & Essential ServicesAverage cost per business by interruption durationDollars • Even momentary interruptions can be costly10,000 • Average of $1477 per business for 1 second interruptions 8,000 • For continuous manufacturing, 6,000 average 1 second interruption cost is 4,000 much higher: $12.6k on average (not 2,000 shown) 0 1 second 3 minutes 1 hour * Digital Economy includes companies that rely heavily on data storage, retrieval and processing (e.g., telecom, financial services, research and development); Continuous Process Manufacturing includes companies that continuous feed raw materials, often at high temperatures; Fabrication and Essential Services includes other manufacturing as well as utilities and transportation ** Conservative estimate based on CEIDS calculation of $104B‐$164B in 2001. Loss categories include: production, labor, materials, equipment damage, backup, overhead, restart, other Source: CEIDS (Cost_of_Power_Disturbances_to_Industrial_and_Digital_Technology_Companies.pdf) 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 35

36. Operational: Utilities Have Reliability Metrics and Incentives/Penalties for Missing ThemMetrics* Example (Southern CA Edison**) Duration‐ SAIDI • Benchmark: 56 minutes based • System Average Interruption Duration Index • Increment: +/‐ 1 minute • Average total outage time (in minutes) over a year for • Incentive: +/‐$2M (up to $18M) each customer served CAIDI • Customer Average Interruption Duration Index • Average outage time (in minutes) Frequency‐ SAIFI • Benchmark: 1.07/yr based • System Average Interruption Frequency Index • Average number of interruptions for each customer • Increment: +/‐0.01 served • Incentive: +/‐$1M (up to $18M) MAIFI • Benchmark: 1.26 • Momentary Average Interruption Frequency Index • Average number of momentary interruptions for each • Increment: +/‐0.01 customer served • Incentive: +/‐$0.2M (up to $3.6M) • Definition of ‘momentary’ differs by utility (typically • Threshold: 5 minutes under 5 minutes) These incentives are an alternative proxy for the value of reliability* Metrics exclude planned outages. Metrics also have a duration threshold (typically 5 minutes), so interruptions shorter than the threshold are not counted in SAIDI, CAIDI or SAIFI.** Targets established in 2004 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 36

37. Contents • Electric utility industry overview • Overview of each value chain step • Factors that motivate electrical utilities • Benefits of Smart Grid for electrical utilities • Appendix 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 37

38. There are Many Benefits to Smart Grid Solutions… Example Benefits of Smart Grid Solutions • Fewer outages • Shorter duration of outages Reliability • Better power quality • More efficient operations and maintenance • Energy/Grid efficiency Cost • Energy conservation • Reduced peak demand • Reduced energy demand Environment • Ability to integrate renewables • Enabling EVs • Consumer empowerment • Improved customer Customer satisfaction • Lower energy bills … but benefits can differ between regulated and deregulated markets © 2012 Smarterutility.com | Not to be reproduced without permission Page: 38

39. Let’s Look at 2 Examples – First Demand Response Demand Response (DR) Energy Efficiency (EE) • DR programs are designed to… – Shift loads from peak to off‐ peak times – Reduce overall energy demand • DR programs use energy rates that are more expensive during times of higher demand – Time‐of‐use (TOU) billing – Critical peak pricing (CPP) – Real time pricing (RTP) • The action at the customer can be taken by the customer or by the utility using direct load control 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 39

40. Demand Response – Greater Benefits in Regulated MarketsRegulated Utilitymarket Generation Transmission Distribution Customer • Peak load • Deferred distribution • Potentially lower reduction capacity expansion energy bill • Can target DR at specific circuitsDeregulated Utility Retailmarket • Peak load • Potentially lower reduction energy bill No distribution benefits because Utility owns the wires but Retail owns the DR program and customer interface, so the Utility doesn’t have full control 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 40

41. Now Let’s Look at Energy Efficiency Demand Response (DR) Energy Efficiency (EE) • DR programs are designed to… • EE programs are designed to… – Shift loads from peak to off‐ • Reduce overall energy demand peak times • And in doing so, reduce peak – Reduce overall energy demand load • DR programs use energy rates that • EE programs incentivize behavior by are more expensive during times of using rebates for efficient higher demand appliances or lighting as well as – Time‐of‐use (TOU) billing loans for energy efficient – Critical peak pricing (CPP) construction – Real time pricing (RTP) • Programs are funded through • The action at the customer can be surcharges on customers (included taken by the customer or by the in electricity rates) utility using direct load control 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 41

42. Energy Efficiency – Greater Benefits in Regulated MarketsRegulated Utilitymarket(with decoupling) Generation Transmission Distribution Customer • Deferred • Customer reduces generation usage • Utility makes same profitDeregulated Utility Retailmarket Challenging to implement: Retailers compete with rates. If they sell less energy, they make less money. 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 42

44. Recommended Reading• Electric Power System Basics for the • Electric Power Distribution Reliability Nonelectrical Professional – Steven W. Blume • Richard E. Brown – ISBN: 978‐0‐470‐18580‐3 – January 2008, Wiley‐IEEE Press • Distribution System Modeling and Analysis• Understanding Todays Electricity Business – Authors: Bob Shively & John Ferrare • William H. Kersting – ISBN 0‐9741744‐1‐6 – www.enerdynamics.com • Business Essentials for Utility • From Edison to Enron: The Business of Power Engineers and What It Means for the Future of Electricity • Richard E. Brown – Author: Richard Munson – ISBN: 978‐0313361869• Electric Power Industry in Nontechnical Language – Author: Denise Warkentin‐Glenn – ISBN‐10: 1593700679 – ISBN‐13: 978‐1593700676 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 44

45. Electricity Basics (1/2) • Current flows in one directionDirect current (DC) • Batteries produce direct current • Current amplitude and direction change over timeAlternating • The electrical grid and wiring in our homes and businesses use current (AC) AC. Why?... • Energy can be transmitted over long distances with less line loss than with DC • AC voltage can be stepped up or stepped down via transformers DC AC 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 45

46. Electricity Basics (2/2) • Single‐phase electric power refers to the distribution of electric power using a system Single phase in which all the voltages of the supply vary in unison • Used to supply electricity to residential customers and smaller commercial customers • In North America, there are generally 3 wires that come to your house, but they are all on the same phase • Three‐phase electric power systems have three alternating currents (of the same frequency) which reach their peak values at different timesThree phase • Delta between peaks is the phase difference • Used to supply electricity to industrial and some commercial customers • Combination of phases has the effects of giving constant power transfer over each cycle of the current 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 46

47. Technical losses in the electrical grid BASED ON INDIANA URC EXAMPLE** Substation transformers: 0.7% % loss Coal: ~65% Transmission lines: Gas CCGT: 50% 0.5% Nuclear: 2% Distribution transformers: 2.1% Primary network:1.0% Customer Meter: 0.3% Substation connection: 0.3% transformers: 0.7%* Total: ~9% (for Nuclear) to ~70% (for Coal)* Assumed equal to distribution substation transformer loss** T&D losses are from the Indiana URCSource: Indiana URC 2007; DOI USBR; NEI 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 47

48. Power System Devices (1/4) Definition Generation / • Generates electricity from a fuel source (potential energy) into electrical power plant energy • Fuel types include: biomass, coal, natural gas, geothermal, solar, wind • Built to a nameplate capacity rated in MW (MegaWatts) Trans‐ • Transports electricity at very high voltages (usually 66‐765kV) over long mission line distances • In the US, transmission is primarily alternating current (A/C), direct current (DC) is used in some areas Substation • The location where electricity is converted from one voltage to another via large transformers • Step down substations reduce the voltage (used to send electricity from transmission lines to distribution lines), step up substations increases the voltage High voltage • The devices that convert or “transform” the electricity from one voltage transformers to another • Rated in k/MVA (Volt‐Amperes), which is theoretically the same as watts 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 48

49. Power System Devices (2/4) Definition Load tap • Located inside the substations, LTCs are mechanical devices that control changer and change the voltage being sent down the line, more granularly than the transformer • Generally, lifetimes of load tap changers are a function of the number of “taps” or actions taken • Some utilities will use voltage regulators or large capacitor banks to perform the same function Voltage • Device that senses voltage on input side and raises or lowers the voltage regulators on output side to maintain a preset voltage level plus or minus a bandwidth • Generally in substations, may also be along feeders Circuit • An automatically operated switch that opens the circuit (ie – stops power breaker flow) when it detects an overload or short circuit in order to protect the circuit Lightning • Located in substations, and through the electric grid, lightning arrestors arrestor protect the power system from the effects of lightning, which can cause surges on power lines • Aka – surge arrestor 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 49

50. Power System Devices (3/4) Definition Sectional‐ • Protection device that opens a circuit, but does not have the ability to izer interrupt a line with current on it • Requires devices on source side to interrupt current and voltage so it can open • Replaces fuses with the advantage that it can be used multiple times without needing to replace pieces (the fused elements) Fuses • Device located in the electric grid, on a single phase, that protects the grid against excessive current, literally melting (thus, fuse) to open the circuit and interrupt power flow Recloser • Protection devices that opens a circuit, but can be programmed to close a pre‐set number of times to allow a line to be re‐energized if the fault is momentary • Has the ability to interrupt fault current Load break • Used primary to isolate faults and transfer load between connecting switches feeders or substations • Can be opened or closed to transfer sections of load from one feeder to another 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 50

51. Power System Devices (4/4) Definition Capacitor • Devices that offset reactive power on a system, creating the potential to banks reduce losses due to reactive power • Rated in kVAR (kilo Volt Ampere Reactive) Faulted • Provides visual or audio indication of fault current to identify where a circuit fault has occurred indicators • Aka – Fault Current Indicators Low voltage • Converts higher distribution voltages (primary side) to lower voltages for transformers use in premises (secondary side), usually 120/240 volts in US • Most ubiquitous grid device after the meter Meter • Measures electricity consumed at the premise • More advanced meters also can measure other elements – voltage, reactive power, etc… 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 51

52. Generation: Due to This Variability, A Portfolio of Generation Types is Needed to Efficiently and Effectively Meet Demand Generation plant characteristics Typical plant types Load type Peak • Low fixed costs • Combustion turbines • High variable costs • Pumped storage hydro • Quick start capability Cycling • Lower variable costs relative to peak • Oil and gas steam plants capacity • Lower fixed costs relative to base capacity • Load following capability (i.e., ability to move quickly between varying levels of demand) Base • High fixed costs • Coal • Low variable costs • Nuclear • Reliability • Hydro plants • Combined cycles • Traditionally, utilities have looked at demand as uncontrollable, so they’ve needed various types of supply to meet the demand. • With renewable energy supplies like solar, utilities face uncontrolled supply, which requires active loads (e.g. electric vehicles and demand response) to balance. © 2012 Smarterutility.com | Not to be reproduced without permission Page: 52

53. Transmission: Role of RTOs and ISOs • RTOs (Regional Transmission Organizations) • Independent, federally regulated entities established to coordinate regional transmission in a non‐discriminatory manner and ensure the safety and reliability of the electric system • Play a role in coordinating wholesale trading • Usually operate across state borders • ISOs (Independent System Operators) play a similar role to that of RTOs but each typically operates within a given stateSource: FERC 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 53

54. Distribution: Network Topology Commercial Feeder & Industrial (3 phase) customer750kv 33kv Substation 33kv  12kv Transformer Transformer R Transformer R Feeder S Sectionalizer Reclosers (3 phase) Lateral (single phase) Large Industrial Transformer Feeders customer All single phase (3 phase) Home Home Home Home Home Typically 5 homes served by each of these transformers 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 54

55. Distribution: Substation Map HV line in HV line in EXAMPLE: (33kV) (33kV) SIMPLE LAYOUT Disconnect switch Normally High‐voltage open circuit breaker Power transformer… …with voltage regulating load tap changer at output Breaker Bus Bus Normally open Feeder breakers Feeders( Feeders( 11kV) 11kV) 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 55

56. Financial: How Utilities Recover Costs (PG&E Example)Cost of Service RateComponent component Rate-setting structure FERC/CA ▪ FERC/CA ISO ▪ FERC jurisdictional transmission revenue requirements and CA ISO pass through ISO costs costs costs PGC charge ▪ Public Goods ▪ Recovery of costs related to Energy Efficiency and other public good components Charge (e.g., appliance and CFL rebates, customer care programs) DWR contract ▪ DWR Revenue ▪ During the 2000-2001 CA Energy Crisis, the Department of Water Resources costs* Requirement procured long term power for the utilities, which is recovered in rates ▪ Energy Related ▪ Filed twice a year, one forecast and one historical for fuel & purchased power costs Fuel & Recovery ▪ Has a balancing account mechanism to true-up for fluctuations between forecast Purchased Account (ERRA) and actual costs Power ▪ If costs are >5% of forecast, automatically triggers the process for a rate increase • Utility accounting is complex (!) • Rates are adjusted over Return, interest, ▪ General Rate ▪ Three year cycle, de-coupled from energy sales time to provide cost and taxes Case (GRC) ▪ Covers all Operations & Maintenance and other opex recovery – and ensure ▪ Cost reductions/overruns within 3 year cycle flow to earnings that cost improvements Other taxes flow back to rate payers Depreciation & ▪ Cost of Capital ▪ Filed annually • Investment cost Amortization (COC) ▪ Covers the allowed ROE and capital structure overruns are borne by the utility Operating & ▪ Special purpose ▪ Created to recover costs of special one-time projects (e.g., AMI) • The combination of low Maintenance balancing ▪ Generally have a fixed cap for expenditures, but under spent reward for risk leads to costs accounts portions are not recovered risk aversionSource: PG&E GRC filings © 2012 Smarterutility.com | Not to be reproduced without permission Page: 56

57. Financial: Measurements used for Billing Applicable for Residential and Small Large Commercial and Measurement Description Commercial Industrial • Based on energy consumed Usage • Measured in watt‐hours (Wh): a 40 watt light bulb operating for 2 hours will consume 80 Wh Yes Yes • Usually appears as thousands of watt‐hours (kWh) • Based on the maximum kilowatts needed at any instant over the Demand charge course of the billing period No Yes • Measured in watts and expressed at kilowatts (kW) • The utility needs to have enough capacity available to meet demand, so they levy an additional charge Power factor • Power factor is a ratio between the “real power” available to the No Yes (or VARs) customer (W) and the “apparent power” that the utility provides (volts*amps or VA) Example PF penalty • In a perfect world, the W = VA • They are not the same in the real world because some devices (e.g., motors) create a sort of resistance (called reactance) • To overcome this reactance, the utility needs to provide more VA for each W. The difference is called volts amps reactive (VAr) • To pay for this extra generation capacity, utilities charge based on the power factor (W/VA) or the VAr. Reactive power Real powerSource: Detroit Edison Tariff Structure 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 57

58. Example Electricity Rates: NC IOU Example (Duke Energy) Flat rate for distribution For transmission Energy charge Additional distribution fee For fuel purchases Generation charge Additional generation For environmental charges compliance, taxes and homeland securitySource: Duke Energy 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 58

59. Hope our Research was Helpful If you have any questions… Please email or call me: John Chowdhury Phone: 214‐213‐6226 John.chowdhury@smarterutility.com http://www.smarterutility.com. Upload, embed, and share away! 3/28/2012 © 2012 Smarterutility.com | Not to be reproduced without permission Page: 59