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Responsible for Renewable Development

Updated 12.2018 Prepared by Public Sector Consultants Lansing, Michigan www.publicsectorconsultants.com Prepared for Michigan Energy First Okemos, Michigan TABLE OF CONTENTS SUMMARY...... 4 HISTORY OF ...... 7 TRANSFORMATIONAL TRENDS IN THE ELECTRIC SECTOR...... 11 AGING GENERATION ...... 11 FLAT DEMAND FOR ENERGY...... 13 CHANGING GENERATION ECONOMICS ...... 14 Limitations of LCOE Metric...... 16 Trends in New Generating Capacity...... 19 ADVANCING ...... 21 REINVESTMENT IN THE ELECTRIC GRID...... 23 RENEWABLE ENERGY POLICIES ...... 24 CREDITS, DIRECT SUPPORT, AND INVESTMENT SUBSIDIES...... 24 History of Federal Funding for Renewable Energy...... 24 RENEWABLE PORTFOLIO STANDARDS...... 26 History of RPSs...... 27 CUSTOMER-OWNED ...... 28 History of ...... 28 Evolution of Net Metering Policies...... 29 PUBLIC REGULATORY POLICIES ACT...... 33 History of PURPA...... 33 Evolution of PURPA...... 36 IMPLICATIONS FOR PUBLIC ...... 39 SUCCESS OF THE RENEWABLE ENERGY PORTFOLIO STANDARD...... 39 THE RIGHT ROLE FOR PURPA ...... 40 ACCOMODATING CUSTOMER-OWNED DISTRIBUTED GENERATION...... 41 Need for New Rate Designs...... 42 Environmental Benefits...... 42 ...... 42 Comprehensive Planning...... 43 REFERENCES...... 46

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable 3 EXECUTIVE SUMMARY

The industry is in a period of disruption and transformation—driven largely by aging generation and grid infrastructure; declining costs for new generation ; advances in technology, especially renewable energy and battery storage; and changing customer demands. Together, these factors have the potential to irrevocably change the , and because of this, today’s energy providers are in a position to fundamentally remake the nation’s electric system into a smarter, cleaner, more advanced grid.

In the last decade alone, the installed costs for new solar and have fallen dramatically—by 81 and 58 percent, respectively. In addition to this economic incentive, renewable energy offers a number of other benefits. Renewables hedge against variable supply costs, enjoy strong customer support, and boast environmental benefits, such as reduced use, lower air , and fewer emissions. Together, these factors have helped new renewable energy developments grow substantially. For example, in 2017, projects represented 30 percent of all new generating capacity brought online, second only to . And since 2010, wind and solar combined have added more than 120 gigawatts (GW) of new generating capacity.

Buoyed by lower prices and other favorable trends, this growth in renewable energy generation is also the result of various federal and state policies that have supported the industry over the years. In particular, four policies have primarily been used to encourage renewable energy development—federal funding, renewable portfolio standards (RPSs), net metering, and the Regulatory Policies Act (PURPA):

• Much of the early research, development, and testing for renewable energy was supported by the federal government in the form of tax credits, investment subsidies, and other direct aid. These investments helped mature to the point where they can, in many cases, compete with more conventional generating resources like nuclear and fossil . • State RPSs establish a required minimum level of renewable energy. More than half of states now have an RPS, and since 2000, these policies have accounted for roughly half of all new renewable energy expansion in the country. • More recently, renewable energy growth has been driven by states’ adoption of net metering polices, which allow customers to supply their household (usually through rooftop solar) and sell excess generation back to their energy provider at the retail rate. Net metering has fostered a growing market for renewable energy and has been responsible for nearly 20 GW of newly installed customer- owned distributed generation throughout the nation. • PURPA has also played a role in increasing renewable energy development. Although it is not explicitly a renewable , PURPA has been responsible for 13 percent of renewable energy capacity created within the last decade. The convergence of favorable economics for For the IRP process to successfully help Michigan renewable energy and other trends in the achieve its broader energy goals, we must realign electric power sector have highlighted the need the current patchwork of renewable energy to reexamine these policies that have, to date, policies, mandates, and subsidies. The current promoted the development of renewable energy. system has done the opposite of integrating While the changes underway undoubtedly offer Michigan’s decisions; it has benefits for consumers, policymakers, regulators, created a system that forces utility planners to and energy systems planners, there is also . make decisions piecemeal, without long-term Future planning must carefully balance these planning or consideration for where investment is changes with Michigan’s core principles for its most needed. PURPA, RPS, and customer-owned electric grid—affordability, reliability, adaptability, distributed generation are and will continue to and environmental protection. be a part of Michigan’s energy , but allowing these policies to each independently drive These principles were central to the formation Michigan’s renewable energy future leaves the of Michigan’s newest energy policy—Public state unable to design its in a way Acts 341 and 342 of 2016. After nearly four that best suits Michigan residents and businesses. years of stakeholder workgroups, protracted legislative debate, and a final middle-of-the-night If the state does not take a holistic view of how compromise, this was supported by a renewable energy policy is established and bipartisan group of lawmakers and passed by wide implemented, then customers could miss out on margins. the full potential offered by renewable energy technologies, and the state will be set back in Central to this new energy was the attaining a more sustainable, advanced energy establishment of the state’s first integrated grid. However, if Michigan can embrace the planning (IRP) process. The IRP process potential of renewable energy through policies like creates a holistic planning construct that requires the IRP process, we have a greater opportunity to evaluate all resource options in a to create an energy future that serves customers contested case proceeding. This allows various reliably and affordably, adapts to the latest parties, including state regulators, to review plans technology, and protects our environment for and ensure that companies will provide energy to generations to come. customers in the most valuable and cost-effective manner.

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 5 “The renewable is in the midst of an historic growth period. Advances in technology are driving prices down and enabling new ways to incorporate renewables into the electric grid.”

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 6 HISTORY OF RENEWABLE ENERGY

It is easy to forget that renewable energy is the oldest form of energy harnessed by civilization, and, for most of history, was the only source available. Eventually, technological discoveries led to the wide use of fossil fuels to meet our energy needs. Now, just as technological advances moved away from renewable energy during the early 20th century, new innovations are reintroducing it into the mainstream (Sorenson 1991).

Renewable energy generation has been around since the earliest days of the . The same year that Edison opened the nation’s first commercial power in 1882, the first commercial hydroelectric power plant began operation in Wisconsin (Schmalensee 2009). Hydroelectric power became a major source of electricity during the first half of the 20th century, as the federal government was investing heavily in new and hydroelectric facilities. By the 1940s, hydroelectric power comprised 40 percent the nation’s electric generation, according to the U.S. Department of Energy, or DOE (DOE n.d.). Hydroelectric power’s share of the nation’s generating output has declined steadily since the 1950s, as demand for electricity grew and power providers built new and nuclear generation to meet growing demand, shown in Exhibit 1.

For most of the 20th century, hydroelectric power was essentially the only commercially viable renewable .1 Through 1989, other nonhydroelectric renewable energy technologies, such as , geothermal, wind, and solar, made up less than 1 percent of the U.S.’s electricity production combined, as shown in Exhibit 2.

Interest in developing other renewable energy technologies began in earnest during the 1970s, brought on by global prices and availability shocks, culminating in the 1973 oil embargo. In response to the risk exposed by the oil crisis, policymakers began considering options to diversify the U.S.’s fuel mix.

President Nixon called for the creation of a cabinet-level agency to oversee national energy policy issues, including energy security and independence. In 1974, the Energy Research and Development Administration (ERDA) was created and, in 1975, released the first national energy plan, calling for a transition from oil and gas to new fuel sources.2 The plan outlined five objectives for diversifying the nation’s energy system, which included recommendations to promote the expansion of and production and advance electricity generated by , such as solar heating and cooling, as well as . The ERDA was instrumental in promoting research into new energy sources, , and commercialization of renewable energy technologies. It led to the founding of the Solar Energy Research Institute and advanced studies of geothermal technology, wind energy, and other technologies (Buck 1982).

1 Electricity production from biomass (e.g., and wood waste products) is another source of renewable energy that has been used since the early days of the electric power industry; however, it has historically accounted for less than 1 percent of all generation.

2 ERDA was the predecessor to the U.S. Department of Energy, which was established in 1977.

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 7 EXHIBIT 1. Percentage of from All Sources, 1949–2017

100% 4,500,000

90% 4,000,000

80% 3,500,000 70% 3,000,000 60% 2,500,000 50% 2,000,000 40% million kwhs 1,500,000 30% 1,000,000 20%

10% 500,000

0% 0

Total Generation Hydroelectric Wood Waste Geothermal Fossil fuels Nuclear

Source: U.S. EIA April 26, 2018a.

EXHIBIT 2. Renewable Energy Generation, 1949–2017

100% 800,000

90% 700,000 80% 600,000 70% 60% 500,000 50% 400,000

40% 300,000 million kwhs 30% 200,000 20% 10% 100,000 0% 0 1 3 5 7 9 111315171921232527293133353739414345474951535557596163656769

Hydroelectric Wind Wood Waste Geothermal Solar Percent of Renewables from Hydro

Source: U.S. EIA April 26, 2018a.

8 The upheaval over energy supplies during the The success of new policy initiatives during the 1970s also led to what was ostensibly the first 1970s and 1980s is evidenced by the increase in federal energy policy that promoted renewable new, nonhydroelectric renewable energy projects energy. Responding to the desire to diversify built in subsequent years. As shown in Exhibit 3 the electric sector, Congress enacted PURPA in below, a limited amount of new nonhydroelectric 1978, creating a market for independent power renewable energy capacity was brought online production by requiring energy companies to during the 1970s, but development took off in purchase power from qualifying facilities. (More subsequent decades. Energy providers added detail on PURPA is provided in Section III.) 3.7 GW of new capacity during the 1980s. Development slowed during the 1990s; however, Another factor that promoted renewable energy with the onset of new policies promoting development during the 1970s was the push for renewable energy at the start of the 21st century, environmental protection. During this time, three the sector grew again. Of all new renewable energy of the nation’s most sweeping environmental capacity additions, 82 percent have been from were passed, including the energy projects, as shown in Exhibit 3. Act, the Clean Water Act, and the Clean Air Act. While it would be The trend for renewable energy in Michigan has several years before these policies were used to been similar to what has played out on the national advance renewable energy in the electric power level. Historically, hydroelectric power was the sector, at the time, they represented a growing primary renewable energy resource in the state— shift in America’s consciousness to promote only in the last two decades have wind and solar environmental protection. begun to play a more sizeable role in the state’s resource mix. (See Exhibit 4.) EXHIBIT 3. U.S. Nonhydroelectric Renewable Energy Capacity Additions, Summer Capacity (Megawatts)

Nonhydroelectric Year Geothermal Solar Wind Wood Renewables 1970–1979 349 0 17 174 540 1980–1989 1,255 268 544 1,636 3,702 1990–1999 273 88 1,088 897 2,346 2000–2009 361 242 32,389 287 33,278 2010–2018 841 21,726 97,799 1,325 121,691 Total 3,079 22,324 131,837 4,319 161,557 Total Percentage 2% 14% 82% 3%

Source: U.S. EIA March 23, 2018.

EXHIBIT 4. Renewable Energy Capacity by Operating Decade, Michigan

4000

3500

3000

2500

2000 (MWs) 1500

NetSummer Capacity 1000

500

0 Pre–1900 1900–1919 1920–1939 1940–1959 1950–1969 1970–1979 1980–1989 1990–1999 2000–2009 2010–2018 Year

Hydroelectric Wind - offshore Municipal waste Solar Hydroelectric pumped storage Geothermal Wood Solar thermal Wind Batteries Solar thermal with energy storage Other

Source: U.S. EIA March 23, 2018.

10 TRANSFORMATIONAL TRENDS IN THE ELECTRIC POWER SECTOR

The energy sector is at an inflection point. New technologies are playing a role in changing customer preferences and behaviors, and energy companies are facing a seismic shift in the way they operate as older technologies become obsolete and new ones have the potential to fundamentally reform the way companies plan for and build infrastructure. In this paper, five transformational trends are identified that are setting the stage for the electric power sector’s evolution: aging generation infrastructure, a flat demand for energy, changing generation economics, advancing energy storage technology, and reinvestment in the electric grid.

AGING GENERATION INFRASTRUCTURE

The average power plant in the U.S. is more than 30 years old and in Michigan the average power plant is even older, having been in operation for over 44 years, as shown in Exhibit 5 (U.S. EIA June 2018). Due in large part to their age, many of these are coming to the end of their useful .

Nationwide, between 2010 and 2016, 97 GW of electric generating capacity were retired. The majority of these retirements were coal-fired power plants that had reached the end of their useful lives or faced high environmental compliance costs to continue operating. These plants had been in operation, on average, for 50–60 years. Despite the number of retirements already made, based on the average age of the nation’s power plants, they are likely just the beginning of many retirements soon to occur (Mills, Wiser, and Seel 2017).

Through the 1960s and 1970s, the electric industry showed a strong preference for large coal and nuclear power plants with long lifespans (in some cases, 60 years or more). However, preferences changed during the 1990s and . As technology and markets evolved, the industry began building somewhat smaller natural gas plants with projected 30-year lifespans. By some analysts’ measures, these factors are creating a looming retirement cliff in 2030 that will require new capacity construction and, potentially, significant new spending from energy companies—in excess of five times their historic average capital expenditures— to address construction costs (Rode, Fischbeck, and Páez 2017).

Beyond the age of plants currently in operation, there are several other factors driving dramatic change in plant retirement and thus the composition of the nation’s electric supplies. These factors include:

• Declining wholesale power prices driven by reductions in • Low growth in electric demand • High reserve margins in many regions of the country • Newer plants that offer better efficiency, improved flexibility, and lower operating costs and emissions • Rising costs for existing plants driven by increasing maintenance costs or environmental controls (Mills, Wiser, and Seel 2017)

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 11 EXHIBIT 5. Average Age of Power Plants in Operation Hydroelectric Coal Hydro Pumped Storage MSW NG Combined Cycle NG Turbine NG Internal Combustion Engine NG Steam Turbine Nuclear Onshore Wind Coke Petroleum Solar Biomass Waste Wood/Wood Average

Michigan 75 49 45 17 30 22 26 36 45 40 6 40 43 2 33 44

U.S. Average 65 44 43 12 30 19 23 27 51 37 9 33 31 4 36 31

Note: NG—Natural Gas, MSW— Source: U.S. EIA June 2018.

EXHIBIT 6. Percentage Change in U.S. Annual Electric Generation, 1949–2017

20%

15%

10%

5%

0%

-5%

-10% 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Percent change Linear (Percent change)

Source: U.S. EIA April 26, 2018a.

12 FLAT DEMAND FOR ENERGY fell by 7.2 percent from 2008 to 2009 in response to the Great Recession.1 Since Throughout the 20th century, demand for 2010, demand has been essentially flat, averaging electricity grew consistently. Despite this growth, 0.1 percent growth in the last eight years, but the rate of increase began to slow during the despite this returned growth, the state’s annual latter half of the century to 9 percent per year in electric consumption is still below prerecession the 1950s; an average of 6 percent in the 1960s levels (U.S. EIA November 6, 2017). and 1970s; 2–3 percent in the 1980s and 1990s; and, finally, by the year 2000, less than 1 percent Other than a lack of demand, a variety of factors growth annually. Since 2000, the average growth have contributed to declining electric load growth rate has, essentially, been flat. These changes in in the U.S., the most influential of which have been demand are displayed below in Exhibit 6. greater investment in energy-efficiency measures, changing weather patterns, and slowed gross The trend for electricity demand in Michigan over domestic product growth (Nadel and Young 2014). recent years has been in line with the national trend. During the 1990s, electricity consumption Current projections from the U.S. Energy grew 2.6 percent per year. From 2000 to 2010, Information Administration (U.S. EIA) show the state’s year-over-year growth in electricity that recent trends are expected to continue. In its consumption was actually negative, averaging Annual Energy Outlook 2018 report, the U.S. EIA -0.5 percent. This decline was largely driven by a sharp drop in industrial electricity consumption 1 The Great Recession officially lasted from December 2007 in 2002 and 2009. The state’s overall electricity to June 2009 and was the longest period of economic downturn since the Great Depression (Isidore 2010). predicts that demand for electricity will continue of different generation technologies because it to grow at less than 1 percent per year through presents the average cost in terms of the full - 2050 despite expectations for continued economic cycle per megawatt hour (MWh), which includes growth. This small growth in electricity demand is construction, operations, and financing expenses. the result of improved technology efficiency, which effectively erodes any new growth in demand as In 2017, the weighted average LCOE for utility- technology can now do more with less. scale solar was 73 percent less than 2010 prices. This was mainly due to an 81 percent decline Though experts expect stagnant electricity in the cost of solar modules as the technology demand, there is still an expected need for new has advanced (IRENA 2018). Wind energy generation resources in the coming years due to has undergone similar advances during the “retirements of older, less-efficient fossil fuel units, same period. Improved turbine technologies, the near-term availability of renewable energy tax coupled with taller towers and longer blades, credits, and the continued decline in the capital have increased capacity factors for new wind cost of renewables, especially solar photovoltaic” installations from 27 to 30 percent. Costs for (U.S. EIA February 6, 2018). new wind turbines have also declined: the total installed cost for new wind generation was up to CHANGING GENERATION ECONOMICS 58 percent lower than just a decade ago (IRENA 2018).

Another major trend leading to transformation Improvements in the economics of other in the energy industry is changing economics for renewable energy sources, such as , renewable generation sources. Historically, electric biomass, and geothermal, have been more generation has come from four primary sources: limited in recent years. In many cases, these hydroelectric, coal, nuclear, and petroleum resources are already able to compete with products like oil and natural gas. It was not until conventional resources, but they require specific the 1970s that other forms were considered, sets of conditions and readied access to resources and, even then, their application was limited to for construction, making them less desirable, predominately small, site-specific installations. especially as costs for wind and solar have Only in the last two decades have resources like declined. renewable energy increasingly gained shares of new generation. This is due to substantial price The latest national LCOE estimates show that drops resulting from technological innovations, many renewable energy technologies, including improved , and policy support. wind and solar, are becoming cost competitive The two renewable energy technologies gaining with conventional resources, such as natural gas the largest share of new generation in the U.S. combined-cycle power plants. In some cases where have been wind and solar, largely because they investment or production tax credits are available, have the most favorable economics out of current renewables exhibit lower LCOE than conventional technologies, as indicated by recent price trends. technologies. A summary of the unsubsidized, levelized costs for new generation is shown in One way to compare different generating Exhibit 7 (Lazard 2017). technologies is to use (LCOE) studies. LCOE is a convenient measurement of the economic characteristics

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 14 EXHIBIT 7. Unsubsidized National Levelized Cost of Electricity for New Generation Resources Levelized Cost ($/ MWh)

Midpoint Operating Cost for Fully Depreciated Plant

Note: C—Commercial, I—Industrial, PV—Photovoltaic Source: Lazard 2018.

15 While LCOE is useful for comparing different source, time of day, and season. Solar output in a generating sources based on price, relying solely state like Michigan varies from season to season on LCOE to draw conclusions could result in as the number of hours change, peaking incomplete or misleading findings (Wiser et al. during summer months when demand for energy 2017). Consideration must be given to the right is highest. While solar energy peaks during mix of resources based on their dispatchability and summer months, wind energy production is at capacity they provide, among other factors. its peak during the winter, when wind speeds are highest, which does not align with summer peak Dispatchable and Nondispatchable Resources load (U.S. EIA February 2015).

There are several key differences between generating sources that must be accounted for when deciding which resources to invest in. The The ratio of a resource’s variable output and its primary difference between conventional, baseload maximum capable output is commonly expressed generating resources, such as coal, nuclear, or as a resource’s capacity factor, which is articulated natural gas facilities, is that they are dispatchable, as a percentage of the maximum generating meaning they can respond to changes in capability. This factor can be influenced by the energy demand by reducing or increasing their variability of the resource’s fuel source, as is the production as soon as necessary.2 Renewable case with many renewable energy technologies, energy technologies, such as wind and solar are and by the economics of a given generator, such nondispatchable, meaning they cannot increase or as fuel costs, age of a resource, location, and decrease production enough to respond to shifting local energy demand. Historically, nuclear power demand because they depend on the variability plants have high capacity factors because they of wind speeds or sunlight. It is , to some have relatively low fuel costs. However, other extent, to reduce output from nondispatchable generating resources are designed to only operate resources, but increasing output when demanded for short periods when demand peaks—they can is limited to the extent to which wind and solar respond quickly, but may have an added caveat of radiance are occurring. higher variable costs. Capacity factors for utility- scale generating resources are shown in Exhibit 8. Beyond whether a resource is dispatchable or not, all generating resources have advantages and Capacity factors will also vary by the location of limitations. While certain baseload generation may the resource. For example, areas of the country have higher capacity ratings, it may not respond with a strong wind energy resource will have wind quickly to sudden changes in demand. On the energy developments with higher capacity factors other hand, many renewable energy resources than areas where the resource is not as favorable. have variable output respective to their power The average output from Michigan’s wind facilities in 2016 was 33 percent of the maximum capable

2 Not all conventional dispatchable resources have the same characteristics. Technologies have different ramp rates that indicate the rate at which they can increase or decrease output. The ramping characteristics of power plants also have different economic implications. For example, nuclear power plants take much longer to ramp up and down than other conventional resources; as such, nuclear power plants provide baseload power as they run continually. Other fossil fuel-fired generators have greater ability to ramp up quickly in response to changing energy demands.

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 16 EXHIBIT 8. Utility-scale Capacity Factor, Nationwide

100%

80%

60%

40% Capacity Factor

20%

0% (3) System (2) Nuclear (6) Natural Gas Natural Gas (7) Geothermal, Scrubbed (5) Concentrating Biopower (53) Unscrubbed (0) (11) Solar Power (37) Blind Geothermal Hydrothermal (24) System (EGS) (12) Wind, Offshore (24) Wind, Offshore Wind, Onshore (35) Combined Cycle (5) Combined Cycle (20) Small Hydropower (4) Coal, Pulverized Coal, Pulverized Enhanced Geothermal Solar, Photovoltaic (53) Solar, Combustion Turbine (17) Combustion Turbine Distributed Generation (13) Coal, Integrated Technology (number of values)

DOE Program Estimate NREL ATB Other Estimate (Annual Technology Baseline) (insufficient data to show box and whisker)

Source: National Renewable Energy Laboratory n.d.b.

17 “Only in the last two decades have resources like renewable energy increasingly gained shares of new generation. This is due to substantial price drops resulting from technological innovations, improved manufacturing, and policy support.” output.3 The capacity factor nationwide was Wind resources from the Dakotas and Minnesota 34.5 percent. Capacity factors for solar resources have the highest ELCCs of 18.3 percent, while exhibit similar locational variations to wind ELCCs across Indiana are only at 7.4 percent. resources. The average capacity factor for solar Michigan’s Lower Peninsula has an expected nationally in 2016 was 25.1 percent; however, the capacity credit of 11.2 percent (MISO December actual capacity factor of Michigan’s utility-scale 2017). Actual output from Michigan’s wind solar facilities was only 13.3 percent (U.S. EIA May resources tends to be higher than the capacity 24, 2018).4 credit these facilities are given.

In addition to variances in capacity factors, Trends in New Generating Capacity resource types also vary in the capacity credit they receive when planning for reliability. The Downward price trends for wind and solar have Midcontinent Independent System Operator, the spurred new investment across the globe and in regional body that governs electric power supplies the U.S. The U.S. added 10.6 GW of new solar for most of Michigan and all or parts of 14 other generation in 2017, representing 30 percent of all states across the Midwest, sets reliability rules to capacity additions in 2017, trailing only natural gas ensure that load-serving entities have sufficient (Wood Mackenzie n.d.). Wind continues to be a resources to meet anticipated plus major source of new generation in the U.S., adding an appropriate reserve margin. These rules seven GW of new wind capacity in 2017, taking the determine the capacity credit granted for each nation’s total installed capacity to just under 90 type of resource. Nonintermittent, often baseload, GW (AWEA n.d.). Exhibit 9 shows the cumulative resources are credited based on average historic utility-scale capacity additions for solar, wind, 5 performance over all hours in a calendar year geothermal, and woody biomass since 1980. while intermittent resources (such as wind and Industry experts anticipate that renewable energy solar) are credited based on historic performance deployment will continue as long as resources offer over specific peak summer hours. The capacity competitive economics, help companies hedge credit applied to intermittent resources is referred against variable fuel supply costs, maintain strong to as the effective load carrying capability (ELCC), customer support, and provide environmental which is an estimate of how much wind and solar benefits, including reduced water use, local air output that resources can be expected to produce. pollution, and emissions (Stark et al. 2015). Wind and solar are expected to remain leaders in renewable energy deployment, 3 Michigan’s average wind capacity was calculated using EIA Form 923 and Form 860 data for the 21 utility-scale wind according to U.S. EIA projections, representing facilities in operation for all of 2016. These facilities include 64 percent of all new electric generation added Bay Windpower I, Big Turtle LLC, Harvest, Stoney Corners Wind Farm, Michigan Wind 1, Echo Wind through 2050. Utility-scale wind capacity is Park, Gratiot Wind Park, Lake Energy Park, Gratiot expected to add 20 GW from 2020 to 2050. County Wind LLC, Heritage Garden Wind Farm LLC, Beebe 1B Wind Farm, Tuscola Bay Wind Farm, Tuscola Wind II During the same period, the U.S. EIA projects LLC, Cross Winds Energy Park, Brookfield Renewable, utility-scale solar capacity will increase by 127 GW. Minden Wind Park, Harvest II Wind Farm, Pheasant Run Wind LLC, McKinley Wind Park, Sigel Wind Park, and Storage capacity is also expected to grow in order Michigan Wind 2. to respond to the increase in variable resources 4 Michigan’s average solar capacity was calculated using EIA Form 923 and Form 860 data for the three utility-scale solar facilities in operation for all of 2016—Ford World Headquarters, Domino’s Farms Solar, and Greenwood 5 Electric power plants with of one Solar Farm. megawatt or greater.

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 19 EXHIBIT 9. Nonhydroelectric Renewable Energy Capacity by Operating Year, Pre-1980–2016

120,000

100,000

80,000

60,000 MWs

40,000

20,000

0

Wind Solar Geothermal Municipal solid waste Wood

Source: U.S. EIA March 23, 2018.

20 from nondispatchable renewable sources. As The storage technology anticipated to provide the technology becomes cost effective, utility-scale greatest transformative opportunity for the electric storage will grow by 34 GW (U.S. EIA February 6, power sector is battery storage. Battery storage 2018). can provide a variety of benefits to the grid and to customers, including:

ADVANCING ENERGY STORAGE • Balancing supply and demand through TECHNOLOGY frequency and voltage control • Shifting peak consumption by charging during The ability to store energy has long been a times of low demand and discharging during limiting factor in the electric power industry. As high consumption periods such, electricity production and consumption • Storing excess generation from renewable must be kept in balance at all times. energy to reduce the need to curtail production have developed several ways to effectively or mitigate overproduction during periods of store electricity, such as hydroelectric pumped low demand storage, where water is pumped uphill, stored in a , and then subsequently released • Alleviating the need for large infrastructure downhill through a turbine to generate electricity investments, such as upgraded substations or when needed. The U.S. has nearly 23 GW of distribution capacity hydroelectric pumped storage capacity. The • Providing backup power to customers during earliest pumped storage facility still in operation outages came online during the 1920s (U.S. EIA June • Enabling customers to reduce demand charges 2018). While it is a well-developed technology, by supplying a portion of their energy needs other forms of storage have only been brought (U.S. EIA January 2018) online in recent years. Battery storage has historically been cost The other types of energy storage deployed prohibitive for utility-scale installations. With the at utility scale in the U.S. are compressed air, general advancement of technology, costs have flywheels, and battery storage. Compressed air started declining in recent years, and starting energy storage systems operate by pumping in 2003, prices reached a point where energy air into storage tanks or underground geologic providers in the U.S. began investing in utility- formations when electricity is plentiful; the air scale battery storage projects. Since then, energy is stored under high pressure until generation companies have added nearly 700 megawatts is needed and then released to drive a turbine (MW) of battery storage capacity to the . Flywheels have the same essential grid, with over 70 percent of this capacity coming function as a traditional battery, except that online from 2015 to 2018 (U.S. EIA January 8, they store mechanically instead 2018). of through chemical reactions. To charge the flywheel, energy is used to wind up a rotor that These investments have been spurred by price stores energy, which is released when needed. trends similar to those witnessed with renewable Flywheels have the lowest installed capacity of energy capacity. New advances in battery storage utility-scale storage technologies (U.S. EIA May technology are driving costs down. The price per 25, 2017). kilowatt hour (kWh) of battery storage was more than $1,000 per kWh before 2010, but in just the

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 21 last seven years, prices have dropped 77 percent (Luo et al. 2015). Another challenge facing grid- to around $230 per kWh. Analysts predict that scale storage is how long batteries will last without battery storage costs will continue to decline in significant efficiency loss, as batteries degrade with coming years, promoting greater deployment each charging cycle. While some emerging battery (Frankel and Wagner 2017). storage technologies show potential for longer life and degradation can be managed by the way a Despite favorable price trends over recent battery is used, current technologies have a useful years, there are still economic and technical life of approximately ten years (Luo et al. 2015). characteristics of battery energy storage systems that limit system application at the utility scale. Until some of these limitations are overcome, One of those limitations is the length of time large-scale battery storage applications will energy can be stored. The suitable storage be limited in both their installed capacity and duration for different battery technologies varies the functions they provide to the grid. New by the technology type. The second factor that investments in battery storage technology, in must be considered when evaluating battery places like and , are on the energy storage is how long the technology can leading edge of this technology, but to date, large- provide energy output on a single charge. As with scale adoption has been highly site specific as high storage duration, the amount of time a battery costs restrain battery use to areas that present can produce energy varies by technology, but, to unique challenges to which batteries are well date, most commercial battery energy storage suited e.g, frequency regulation and renewables applications can provide energy output at their integration. In the Annual Energy Outlook 2018, power rating for up to ten hours on a single charge the U.S. EIA projects utility-scale battery storage

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 22 will grow to 34 GWs by 2050; however, the storage in transmission infrastructure. In 2016, energy industry seeks to outpace these projections and companies spent more than $35 billion on the has the goal of adding 35 GWs of new battery transmission system alone to make necessary storage by as early as 2025 (U.S. EIA February 6, system upgrades and replacements, integrate new 2018; Silverstein 2018). renewable energy, and integrate system hardening and resiliency (U.S. EIA February 2018). A survey REINVESTMENT IN THE ELECTRIC of investor-owned electric energy companies suggests that the rate of investment will continue GRID to be high over the coming years, with $91 billion expected to be spent on transmission construction The changes occurring in the electric power sector between 2017 and 2020 (EEI 2016). have not been limited to generation. Investment in the transmission and distribution side of Even with the recent rise of investment in the energy companies’ systems has risen over the transmission and distribution systems, current past two decades as energy companies enter a estimates indicate that a full upgrade of the period of reinvestment and system modernization. nation’s transmission and distribution system Historical spending on the transmission and could require $2.3 trillion in new investment distribution system peaked between the 1960s and (Rhodes 2017). 1980s, when energy companies were adding new generation to accommodate increasing demand and expanding their systems to serve growing communities (U.S. EIA October 24, 2014).

A number of factors is driving reinvestment in the distribution system—among them is the fact that much of the existing utility infrastructure was deployed during the 20th century and is now reaching the end of its expected life. However, it is more than just the age of these assets driving accelerated replacement. The infrastructure deployed in the 20th century is not equipped to handle the demands of a 21st century electric grid, illustrated by energy company investment in technologies, such as advanced metering infrastructure, which allows more granular energy- use data, time-based pricing, and enhanced user experience opportunities (U.S. EIA October 2014). Energy companies expect to continue investing in their distribution systems over the coming years to integrate new technology, accommodate more distributed generation resources, and increase reliability of their systems.

Similar trends are occurring with investment

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 23 RENEWABLE ENERGY POLICIES

While the trends discussed in the previous section have done a great deal to spur investment in renewable energy, the primary driver of market development for renewable energy in the U.S. has been state and federal policy. Dating back to the 1970s, U.S. energy policy has promoted renewable energy as a way to diversify the nation’s electricity supply and, in recent years, to promote environmental benefits.

Renewable energy policies have come in many different forms. This section provides an overview of key policies used to promote renewable energy, with specific attention paid to how these policies have been implemented in Michigan, including:

• Tax credits, direct support, and investment subsidies • Renewable energy portfolio standards • Net energy metering • PURPA

TAX CREDITS, DIRECT SUPPORT, AND INVESTMENT SUBSIDIES

Throughout the years, policymakers have sought to achieve different energy goals through federal funding for energy resources. Early federal support was targeted at national security and through support for domestic energy resources (i.e., the oil and gas industry). Later, policy goals shifted to diversifying the country’s energy system and responding to environmental concerns by supporting conservation and renewable energy (Sherlock May 2011). Support has taken different forms over time but has broadly fallen into the following four categories: federal tax expenditures through tax credits, direct expenditures paid to producers and consumers, research and development funding, and loan guarantees (U.S. EIA April 26, 2018b).

History of Federal Funding for Renewable Energy

Prior to 1978, federal that supported energy technologies focused predominately on nuclear and fossil fuels—with nearly $63 billion spent on research and development between fiscal years 1948 and 1978. During that time frame, less than $1 billion was spent on renewable energy research. Spurred by the of the 1970s, the federal government and the newly established DOE made new investments in renewable energy technologies, like solar, wind, biomass, and geothermal, totaling in $14.2 billion in research and development from 1978 to 2005 (Clark 2018).

Like the experience during the 1970s, rising oil prices during the 2000s led to renewed efforts by the federal government to promote energy independence through domestic energy production, alternative fuels, conservation, and renewable energy technologies. The Energy Policy Act of 2005 greatly expanded federal tax subsidies for renewable resources. Federal support for renewable energy, energy efficiency, and clean fuels was later expanded through stimulus programs—the Emergency Economic Stabilization Act of 2008 and The American Recovery and Reinvestment Act (ARRA) of 2009—in response to the nation’s economic recession (Sherlock May 2011).

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 24 EXHIBIT 10. Electric Renewable Energy-related Subsidies and Support by Type (Millions of 2016 Dollars)

Source: U.S. EIA April 26, 2018b.

EXHIBIT 11. Business Energy Investment Tax Credit Phase-out Timeline

Future Technology 2016 2017 2018 2019 2020 2021 2022 Years PV, Solar Water 30% 30% 30% 30% 26% 22% 10% 10% Heating, Solar Space Heating/ Cooling, Solar Process Hybrid Solar 30% 30% 30% 30% 26% 22% 22% N/A , Fuel Cells, Small Wind Geothermal 10% 10% 10% 10% 10% 10% N/A N/A Heat Pumps, Microturbines, Combined Heat and Power Systems Geothermal 10% 10% 10% 10% 10% 10% 10% 10% Electric Large Wind 30% 24% 18% 12% N/A N/A N/A N/A

Source: NC Clean Energy March 1, 2018.

25 Federal support for energy resources overall has While there is to show that federal declined since fiscal year 2010, as temporary support for renewable energy has led to greater ARRA-authorized measures have expired. From deployment of renewable energy technologies, fiscal year 2013 to fiscal year 2016, federal energy these policies are not the only driver responsible subsidies for renewable electric energy declined by for this increase. Other drivers include fluctuating more than 70 percent, dropping from $13.3 billion natural gas prices, declining cost of renewable to just $3.8 billion. While total spending declined, energy equipment, and other renewable energy the share of federal funding for renewable energy policies mostly at the state and local level (Mai accounted for 45 percent of all federal energy February 2016). subsidies in fiscal year 2016 (U.S. EIA April 26, 2018b). A breakdown of federal subsidies for RENEWABLE PORTFOLIO electric renewable energy is available in Exhibit 10. STANDARDS Support for most forms of renewable energy development through federal tax expenditures RPSs have been the preferred tool for will continue through 2022. In 2015, Congress policymakers to promote deployment of extended the Business Energy Investment Tax renewables and address environmental Credit (ITC) to support the development of from energy production such as renewable energy, and amendments added in air emissions production and their associated 2018 expanded the list of technologies eligible for environmental and societal costs. These standards this support. The current iteration of the ITC will were intended to address cost barriers and market decrease until 2022 and phase out all together for failures that limited deployment of renewable certain technologies in that year, see Exhibit 11. energy generation. The policies were not meant to provide the ongoing solution for renewable energy need to be built to meet upcoming compliance development, instead they were meant to spur timelines. Projections estimate that, by 2030, technological investment by creating a market states will have to add 55 GW of total new capacity for products, despite initial cost barriers. The nationwide to meet RPS requirements (Barbose absence of comprehensive federal energy policy 2017). that supports renewable energy development has transferred responsibility to states to drive RPSs in Michigan renewable energy production and local economic Michigan introduced its first RPS in 2008 with development (Rabe 2007). Public Act 295 of 2008 (PA 295). This standard History of RPSs required the state’s electric providers to get 10 percent of their electricity from renewable sources Iowa established the first state RPS in 1983. From by 2015. Electric providers exceeded the state’s RPS 1983 to 2003, 12 more states enacted their own target, generating renewable energy credits equal and by 2017, 29 states and the District of Columbia to 10.8 percent of Michigan’s electric load (MPSC had an RPS in place. While individual designs February 15, 2018). The success of Michigan’s varied from state to state, all policies shared the RPS led policymakers to increase the goal when same essential feature—an established minimum they enacted new energy policies in 2016. Public level of generation or capacity that electric Act 342 of 2016 (PA 342) established the new 15 providers must get from renewable sources by a percent RPS by 2021. The legislation also included target date. States’ targets range from the relatively interim targets of 12.5 percent in both 2019 and conservative, like the state of Washington’s 15 2020. Michigan’s RPS supports the legislation’s percent by 2020, Pennsylvania’s 8.5 percent by broader objective of ensuring not less than 35 2020, and Wisconsin’s 10 percent by 2015, to percent of the state’s electric needs are met through aggressive, like California’s 50 percent by 2030, a combination of energy waste reduction and Minnesota’s 26.5 percent by 2025, or ’s renewable energy by 2025 (MCL December 2016). 40 percent by 2017. Through 2017, 29 states and Washington, D.C. have enacted an RPS (Barbose Michigan’s RPS has resulted in significant 2017). development of new renewable energy resources. Through 2016, Michigan added 1,670 MW of new States’ experiences with RPSs have largely renewable energy capacity in response to the RPS. been successful in advancing the deployment of The average price for this new capacity was $72.60 renewable energy resources. Approximately half per MWh, which is lower than original estimates have already met their RPS requirements, and and 45 percent less than the guidepost cost of more than half of those with an RPS have moved generation used by the MPSC to determine cost to expand their initial targets in recent years. From effectiveness. The most recent for wind 2000 to 2016, the electric power sector added 120 energy approved under PA 295 have come in much GW of renewable capacity, with more than half lower than original contracts. They range from driven, at least in part, by the need to meet RPS $45–$69 per MWh. Meanwhile, the levelized cost requirements. As technologies have matured and of the latest 48 MW solar array approved by the costs have come down in recent years, more and MPSC came in at $113.52 MWh. Though nearly more renewable energy capacity is being added twice the price of current wind projects, this solar outside of RPS requirements. However, there is project is still less than the MPSC for still a significant amount of new capacity that will comparison (MPSC February 15, 2018).

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 27 CUSTOMER-OWNED DISTRIBUTED Net metering policies were established to address GENERATION the fundamental issue that the actual electricity generated by a customer-owned system rarely Net energy metering—more commonly referred matches customer energy demand and the to as net metering—policies were created to inevitability that they will have to rely on the enable customers to install and own distributed electric grid. There are elements of household electric generation (in particular, rooftop solar) that require support from that supplies their onsite energy needs and to the energy grid even if a household is producing govern the flow of energy between a customer and its own energy. For example, when a refrigerator energy company by establishing a compensation or unit cycles on, there is an mechanism for customers’ electricity production. instantaneous burst of energy demand—called Under the net metering policy framework, energy inrush current—that is required to support the companies are required to purchase the excess momentary spike in demand and not diminish energy from customers owning distributed power quality to the rest of the system (Basso generation, who then receive credits to offset 2009). the cost of the energy they consume. While net When net metering programs were first metering policies vary from state to state, allowing introduced, the available technology was limited to for different technologies, system sizes, and analog meters designed to measure one-way flow compensation mechanisms, in general they were of electricity and record consumption. While these designed to promote customer-owned distributed meters were intended to only measure energy generation as an alternative to the energy provided consumption, they were also capable of measuring through the bulk . electricity that flowed in the opposite direction— History of Net Metering from the customer to the grid—essentially erasing prior consumption. This reality formed The aim of net metering policies—to allow the fundamental structure for net metering. customers to generate the electricity they need Customers pay for the electricity they consume at and sell only excess power back to the utility—is the same rate as any other customer and receive reflected in the fact that distributed generation credit for the energy they produced at that rate systems are generally designed to match because it effectively reduced their monthly customers’ household energy consumption. When consumption by rewinding the meter. a customer consumes more than the output of their system, however, the grid supplies them The inability of traditional analog meters to with power. Any excess energy put out onto differentiate and separately track production and the grid is a result of the inability of customers’ consumption left little choice for policymakers self-generation to consistently match their and regulators for how to govern customer-owned consumption needs throughout the day. While generation and led to the earliest versions of net these system inefficiencies can be better managed metering policies. Minnesota became the first through technology such as battery storage, most state to establish a net metering policy in 1983. customers depend on the grid to take excess Other early adopters during the 1980s included generation when their system produces more than , , and (Wan 1996). they can consume and to supply generation when Net metering was codified into federal law by they consume more than they produce. the Energy Policy Act of 2005, which required all energy companies to offer net metering to

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 28 customers upon request, which had the effect installations is only 0.024 percent of Michigan’s of catalyzing state adoption of net metering total retail (MPSC December programs. Currently, there are net metering 2017).1 policies of some form in 42 states; Washington, D.C.; and several American territories (NC Clean Evolution of Net Metering Policies Energy n.d.). Net metering policies were designed to encourage Net Metering in Michigan the growth of customer-owned distributed generation, by providing attractive compensation Michigan established its statewide net metering to customers for their participation, and, on program in 2008 with the passage of PA 295, the whole, the policies have proven successful. and the program was officially implemented by Through 2017, energy companies reported 16 state regulators the following year (MPSC May GW of solar capacity enrolled in net metering 2009). The state created two different types programs, representing 96 percent of all net of net metering programs: true net metering, metering capacity (U.S. EIA April 27, 2018).2 for customers generating 20 kilowatts (kW) or While net metering programs have been successful less, and modified net metering, for customers in promoting growth in customer-owned generating 20–150kW. True net metering refers distributed renewable generation, the expansion to when customers’ consumption and production of these programs has raised concerns regarding are valued at the full retail rate, meaning that how the policy compensates customers and the if a customer generates more power than they potential unintended consequences for energy consume during a given month, then they would providers, the electric grid, and other customers. be credited for their net production at the standard retail rate. Customers enrolled in modified net As explained above, customers’ onsite generation metering pay the full retail rate for electricity they does not always meet their energy demands, purchase from their energy company, but only making them reliant on the grid (e.g., during times receive credit equal to the generation portion of of day when the is not shining). Advances the retail rate or the wholesale rate for energy they in battery technology offer the potential to supply back to the grid. Participation in energy mitigate this reliance, but, to date, installations companies’ net metering programs was capped of distributed generation systems, paired with at 1 percent of their in-state peak load from the battery storage, have been limited, though previous year (MCL October 2008). advances in battery storage will likely drive greater deployment. Because customers depend on the Through 2016, there were 2,582 customers grid throughout the day to provide energy when participating in Michigan’s net metering program, their system does not meet their needs or to take representing a total capacity of 21,888 kW. While the excess power they produce, there are costs the program grew more than 28 percent from associated with their use of the grid even when 2015 to 2016, the total capacity of net metering their solar installation is producing power.

1 As of 2016, only one utility, the Upper Peninsula Power Company, had reached the cap for enrollment in their net metering program (MPSC December 2017).

2 The U.S. EIA’s data related to net metering is not fully reported by all monthly respondents and are incomplete for some states.

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 29 “While net metering programs have been successful in promoting growth in customer-owned distributed renewable generation, the expansion of these programs has raised concerns regarding how the policy compensates customers and the potential unintended consequences for energy providers, the electric grid, and other customers.” Traditionally, energy companies have recovered credits (Proudlove et al. 2018).4 the majority of their costs through a single volumetric charge or rate based on the amount Net Metering Across the Country of electricity a customer consumes. These rates During 2017, the majority of states undertook include the energy company’s bundled costs to policy changes for distributed generation and/ serve customers, such as generation, transmission, or renewable energy, and the actions taken and distribution services. By compensating net varied widely from state to state. States pursued metering customers for the power produced three primary policy options to update their using the retail rate, customers can potentially net metering tariffs: upholding traditional net erase most monthly charges by producing more metering; instituting a net billing program; and energy than they consume in a given month. This using the buy-all, sell-all approach. The examples essentially allows customers to avoid paying their in the following section were selected to highlight full share of the cost and transfers the cost to other states that recently made changes to their customers.3 distributed generation policies and the variety Recognizing that traditional net metering policies of approaches available to implementing net have resulted in cost shifting to other customers metering successor tariffs. has prompted many states to update their Nevada policies. Policy activity related to customer-owned distributed generation has risen sharply in recent Nevada was one of the states with the most years—up 17 percent in 2017 compared to 2016 publicized net metering debates in the country and 30 percent from 2015 (Trabish February over the past couple of years. Like many other 2018). There were nearly 250 actions taken on net state utility commissions, Nevada’s Public Utilities metering policies in 45 states and in Washington, Commission chose to adopt a net billing approach D.C. during 2017. Of these actions, 84 dealt where customers receive credit for excess with fixed charges for residential customers and generation at the wholesale rate (Shallenberger minimum bill increases, 66 changed compensation December 2015). After outcry from the solar structures for distributed generation, and 30 industry and public backlash, the state assembly addressed community solar policies. To date, the passed Assembly Bill 405 to restore net metering most common reform approach taken by states has and establish new program rates. Under the been to adopt net billing policies, which differ from revised rules, customers with rooftop solar receive net metering by crediting the energy exported to 95 percent of the retail rate for their energy output. the grid at a rate other than retail. These rates have That credit declines as more solar is brought taken a variety of forms, including using an energy online, with a 75 percent floor of the retail rate company’s avoided cost rate or other value-based (Walton June 2017).

3 There is ongoing debate about whether net metering customers are subsidized by the rest of the electric system or if they provide net benefits to the system. The Michigan Public Service Commission has established that true net 4 Avoided costs means the incremental costs to an electric metering rates, set at the retail level, result in net metering utility of electric energy or capacity or both which, but for the customers avoiding paying their fair share of the grid costs. purchase from a qualifying facility, a utility would generate More discussion related to subsidies is available in Section itself or purchase from another source (Code of Federal IV. §292.101(6)).

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 31 North Carolina solar generation. Like net billing arrangements, Minnesota’s VOS tariff was designed as a successor North Carolina enacted sweeping energy policy to net metering, but unlike net metering, the changes in 2017. House Bill 589, signed into law VOS tariff explicitly values attributes of solar in July 2017, made modifications to the state’s net energy systems by accounting for the following metering program as well as PURPA, community nine components: avoided fuel cost, avoided solar programs, and solar leasing options. The plant operating and maintenance costs, avoided new law requires energy companies in the state generation capacity costs, avoided reserve capacity to investigate the costs and benefits provided by costs, avoided transmission capacity costs, avoided customer-owned distributed generation to ensure distribution capacity costs, avoided environmental customers are paying their full, fixed cost of costs, voltage control, and integration cost service and may include fixed monthly energy and (Minnesota Department of Commerce April 2014). demand charges. The state’s current net metering Minnesota regulators determined that the value policies stay in effect until new rates can be of solar generation was $0.135 per kWh. This is established in response to the state’s findings on higher than the state’s retail electricity rate of the costs and benefits (Shallenberger July 2017). $0.131 per kWh (Revesz and Unel 2017).

New York Maine

Following a prolonged stakeholder engagement Maine is the only other state to have undertaken process, the New York Public Service Commission a VOS study, and, like in Minnesota, the study introduced the state’s new compensation policy suggested that solar distributed generation is as a successor to net metering. The new value more valuable than the current retail rate (Trabish of distributed energy resources (VDER) tariffs March 2015). Instead of implementing the state’s will be different for each energy company and be VOS study, like Minnesota, Maine adopted a rolled out in two phases. The goal of the VDER much different approach to replace their net tariff is to more accurately reflect the locational, metering policy. In March 2017, the state’s public environmental, and temporal values of distributed utilities commission instituted a buy-all, sell-all generation projects. The first phase will define the framework for distributed generation. Unlike new compensation structure or value stack. The net metering or net billing where customers can state’s current net metering policy will remain in sell their excess generation back to the grid, this place through 2020 as VDER tariffs are developed framework requires customers to purchase all of (NC Clean Energy April 2017). their electricity from the grid, even when their onsite generation is producing electricity, and Minnesota sell all their production to the grid at a set rate. Customers receive a credit for all their production The shift to net billing for distributed generation against their energy bill (NC Clean Energy May 30, has generally resulted in lower compensation 2017a). rates for consumers, but there have been examples of states adopting new definitions for the value Arizona generation from distributed solar that are higher than rates under net metering. In 2014, Minnesota In 2016, the Arizona Corporation Commission became the first state to adopt a value of solar moved away from the state’s net metering to a net (VOS) approach to compensating customers with billing policy. The net billing policy still enables

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 32 customers to consume energy produced onsite, rate designs and new technologies, such as battery but sets the compensation rate for energy exported storage (MPSC February 21, 2018). to the grid at energy companies’ avoided cost (NC Clean Energy May 30, 2017b). The MPSC adopted a tariff based on staff’s recommended inflow/outflow model and directed Changes to Net Metering in Michigan energy companies to include the tariff in rate cases filed after June 1, 2018.5 The actual distributed Michigan overhauled its energy policies in 2016 generation tariff and compensation rates will be with the passage of Public Acts 341 and 342. determined on a company-by-company basis. Among a host of other changes, this legislation The state’s current net metering program will directed the MPSC to undertake a study to remain in place until new distribution generation develop a successor program to net metering compensation mechanisms are established. that reflects “equitable cost of service for energy company revenue requirements for customers who participate in a net metering program” PUBLIC UTILITY REGULATORY (MCL December 2016). At the direction of the POLICIES ACT commission, MPSC staff engaged stakeholders to participate in the development of a new In the earliest days of the electric power system, distributed generation tariff and review cost-of- energy companies owned and operated the entire service considerations. electric system from generation and transmission to distribution. These firms were able to restrict Citing “a critical deficiency of [net metering] who could access the grid and what resources were that distribution system infrastructure and built because they controlled the entirety of the maintenance costs are inappropriately shifted to system. The system operated this way for most of non-[distributed generation] customers,” MPSC the 20th century—until PURPA. PURPA wrested staff recommended that the state move to a net vertically integrated energy companies’ ability to billing arrangement for distributed generation, control the electric grid by promoting independent referred to as an inflow/outflow billing mechanism power producers and nonutility generators, (MPSC February 21, 2018). Essentially, the initiating a trend toward greater federal influence recommended approach separates the energy a and increased competition in the electric grid that customer consumes from the grid and the energy is still evolving to this day. they produce, assigning each a different price. This “creates a more complete picture of a customer’s History of PURPA energy usage and excess generation and is PURPA was one of several federal enacted better equipped to reflect distributed generation in response to the energy crisis of the early 1970s. customers’ cost of service” (MPSC April 18, 2018). Its fundamental purpose was to promote energy The MPSC determined that not only will the conservation and efficiency while fostering greater recommended inflow/outflow model provide use of domestic and renewable energy resources. transparent price signals and better reflect To accomplish this, PURPA established a new class customers’ cost of service, but also new solar of generating facilities called qualifying facilities projects will continue to have favorable economics under this compensation structure. Additionally, this model will be flexible to incorporate future 5 Energy companies can include other distributed generation tariffs in their rate cases as well.

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 33 “This current era is characterized by relative energy abundance, rather than scarcity and crisis, and the U.S. is far less dependent on foreign energy sources and oil-fired generation, one of the original drivers of PURPA.” (QFs), which fell into one of two categories: (1) Michigan’s PURPA QFs also include the Midland small, independent power production facilities (80 Venture (MCV), a natural gas- MW or less) using hydro, wind, solar, biomass, fired power plant completed in 1990 through the waste, or geothermal and (2) cogeneration conversion of the abandoned Midland nuclear facilities that produce electricity and useful steam energy project, the construction of which was heat. halted in the early 1980s. This facility qualifies as a PURPA QF by virtue of the fact that it is a PURPA also mandated energy companies to cogeneration project, producing electricity and purchase the power from these QFs at their steam. avoided cost. The purpose of using avoided cost was to ensure that customers will not have to pay The contracts to purchase the power generated more than they otherwise would. Another element by these 90 projects are divided among four of PURPA, aimed at helping smaller providers, was Michigan energy companies: the requirement for standard offer contracts. The (with 61 projects of varying types); DTE required these contracts for all providers, up (24 projects of varying types); Indiana Michigan to 100 kW, as an effort to help smaller providers Power (four hydro projects); and the Upper who might not have the capacity to negotiate Michigan Energy Resources Corporation (one contracts with energy companies to gain QF . biomass project, with wood being the principal State regulators can allow the use of standard fuel). Together, these 90 projects provide a total of offer contracts for facilities larger than 100 kW; 2,467 MW of capacity with the MCV contributing however, facilities that do not meet provisions for 1,400 MW. standard offer contracts must negotiate directly with the energy company. Despite PURPA QFs making up 7.7 percent of Michigan’s overall generating capacity, PURPA Although a federal law, PURPA was, and continues contracts contribute relatively little of the to be, implemented at the state level, with state renewable energy generated in Michigan. Less utility regulators making key decisions, such than half of the PURPA projects in Michigan as establishing the avoided cost, addressing are from renewable energy sources and energy interconnection issues, establishing companies can only count a portion of these terms and length, as well as making other critical PURPA contracts toward their annual renewable decisions that impact the viability of PURPA energy goals (MPSC April 20, 2018).6 Renewable projects. energy in Michigan is now responsible for about 10 percent of the electricity generated in the state, PURPA in Michigan and this capacity has been built over the past several years, largely as a result of the state’s RPS PURPA’s history in Michigan began on March as well as improving technology and declining 17, 1981, when the MPSC initiated proceedings to costs for renewable energy (MPSC April 20, 2018). begin implementation. The first PURPA QFs began operating in the early 1980s, with most coming online shortly thereafter and through the 1990s.

Michigan now has 90 QFs, with a majority of these 6 Energy companies with PURPA contracts in place prior to being a variety of small renewable energy projects, the establishment of Michigan’s RPS in 2008 were granted four out of every five renewable energy credits from facilities such as hydro, landfill gas, biomass, and municipal through the life of their contract. Renewable energy credit waste-to-energy (MPSC April 20, 2018). ownership for any new PURPA contracts is specified in a company’s contract with a QF.

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 35 Evolution of PURPA standard offer contracts, and issues related to capacity. To date, activity has been limited to A relatively obscure law for many years, PURPA is a handful of states, but their actions inform a receiving renewed attention and generating debate general trend toward ensuring that PURPA is at both the state and federal levels. One of the balanced with other state policy objectives. biggest changes to PURPA came at the federal level with the modification of the mandatory power North Carolina purchase obligation—commonly referred to as the “PURPA put”—included in the Energy Policy Act Over the past decade, North Carolina experienced of 2005. The change was based on the recognition rapid growth of renewable energy projects as a that, due to the creation of independent result of PURPA. In just five years, from 2012 transmission operators and competitive markets to 2017, the state added over 2,000 MW of new for energy capacity, independent power producers renewable energy, mostly solar, with an additional can access the bulk power grid without needing 7,000 MW proposed (NUCC 2017). The growth in to contract with an electric energy company. The solar power was due to its improving economics, Federal Energy Regulatory Commission (FERC)— state and federal tax credits, and favorable the entity with authority over PURPA—later found standard offer contracts for solar energy systems that all seven of the nation’s independent system set by state regulators. operators met these conditions. The change only applied to QFs larger than 20 MW (FERC October The rapid growth in solar contracts prompted 2006). North Carolina to review its PURPA policies over concerns that the proliferation of solar capacity Recent trends have made utilities more reluctant due to PURPA was imposing higher costs on to commit to new, long-term PURPA contracts, customers and adversely impacting the electric since energy prices are falling, particularly for system overall (Fionn 2016). According to Duke renewables, and the market is generally more Energy, the 621 PURPA projects added between dynamic than when these contracts were initially 2010 and 2015 were responsible for over $1 billion established. In addition, there is a new push from in additional costs for North Carolina customers renewable energy companies that are attempting (Bowman 2016). to use PURPA as a way to develop new projects in a number of states around the country, including In 2017, the state adopted sweeping energy policy Michigan. Such proposed projects are causing changes that revised the standard offer contracts controversy, however, regarding the ability of available to PURPA providers. The changes these projects to live up to the intent of key PURPA included reducing the size of contracts eligible provisions and if the projects can provide the for standard offer contracts from five MW to one necessary capacity. MW, shortening the contract length to ten years, and requiring utilities to make capacity payments PURPA in Other States if their integrated resource plan identified a need for new capacity (Maloney February 2018). Solar In response to growing concern about how PURPA advocates decried the change as hitting the brakes fits in with today’s energy markets and state policy on the industry’s development in North Carolina, goals, state regulators have begun reviewing how but the state’s utilities have cited that, because PURPA is implemented. Major topics of debate of the incurred additional costs for customers have been setting avoided cost rates, terms for associated with solar PURPA contracts, the

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 36 changes are necessary (NUCC October 2017). (OPUC) to reduce standard contract terms to two years and project size to 100 kW. Unlike in Idaho, Montana OPUC upheld more favorable standard contract terms for PURPA facilities, requiring utilities to In 2017, Montana regulators moved to limit offer standard contracts with fixed prices for the contract terms for PURPA facilities from 25 to five first 15 years and then to offer market prices for years and adjusted the avoided cost rate, which the last five years. The commission also reduced reduced compensation by up to 40 percent. This the size for eligible solar projects from ten MW to followed a ruling by FERC, regarding the Montana three MW, stopping short of utilities’ requested Public Service Commission’s suspension of caps (OPUC 2016). This decision was applauded payments to solar facilities under PURPA, which by solar industry advocates (Shallenberger March violated the law, forcing regulators to reevaluate 2016). Similar actions to revise PURPA in a way implementation of PURPA (Maloney October favorable to renewable energy development has 2017). also taken place in Utah (Shallenberger January Idaho 2016).

Regulators in Idaho trimmed the length of National Push to Update PURPA PURPA contracts from 20 years to two years The debate surrounding PURPA is occurring after determining that PURPA contracts led to in a dramatically different context than that of higher prices for customers. In their order, the 1978 when it was first enacted. This current era Idaho Public Utilities Commission (IPUC) noted is characterized by relative energy abundance, they made changes “to maintain a more accurate rather than scarcity and crisis, and the U.S. is far reflection of the actual costs avoided by the energy less dependent on foreign energy sources and company over the long term” (IPUC 2015). The oil-fired generation, one of the original drivers of commission specifically noted that the state’s PURPA. Another change since 1978 is that much largest utilities projected sufficient capacity into of the U.S. now has a mature independent power the future and that additional capacity from QFs production sector and competitive markets for would extend capacity surpluses by more than ten energy and capacity. Improvements in technology years. have lowered the cost of installing wind and solar This decision to reduce contract lengths to two energy, and the number of renewables in the years was not made to disadvantage potential QFs country is only expected to grow as states pursue but instead the IPUC determined that matching renewable energy and environmental goals. We the length of PURPA contracts to the state’s also live in an era of energy efficiency where integrated resource planning cycle offers a more energy use is flat or declining, despite economic accurate accounting for avoided costs, reduces growth. price , and increases certainty in forecasting The change in energy markets and controversy (IPUC 2015.). over how some are attempting to use PURPA Oregon to bring large-scale solar projects online has invited the introduction of House Resolution A similar approach to what was adopted in 4476 (HR 4476) in the U.S. Congress—the Idaho was proposed by utilities in Oregon, who PURPA Modernization Act of 2017—by Michigan petitioned the Oregon Public Utility Commission congressman Tim Walberg. The changes to

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 37 PURPA contained in HR 4476 have been generally requirement that the MPSC conduct a proceeding supported by those who believe that current at least every five years to ensure that procedures PURPA prices and contract lengths have been and rate schedules, including avoided cost rates, overly generous but opposed by interests who are just and reasonable based on PURPA want to bring utility-scale solar projects online as well as FERC regulations and orders. The MPSC and others who would benefit from those projects must, therefore, address the difficult issues of (Brooks 2018). FERC has also recently undertaken scale, capacity need, contract duration, price, and review of PURPA to investigate potential abuses whether to treat long-standing PURPA projects with how the law is being implemented (Bade differently than new ones. 2018). The MPSC’s efforts to update the state’s Changes to PURPA in Michigan implementation of PURPA are already underway. The MPSC initiated separate documents for the To date, major changes to PURPA have not been each of the state’s rate-regulated electric utilities. made, so the MPSC is faced with implementing Only two utilities have completed the process PURPA in its current form. Many of Michigan’s of updating their avoided cost provisions. Both existing PURPA contracts are now expiring, which Alpena Power Company and Upper Peninsula creates the opportunity to establish updated Power Company reached settlement agreements, avoided cost rates and make other modifications which were approved by the MPSC (MPSC 2018). to contract terms and lengths. In fact, Michigan’s new energy law—PA 341 of 2016—included the

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 38 IMPLICATIONS FOR

The convergence of favorable economics for renewable energy technology and other trends in the electric power sector have highlighted the need to reexamine policies and programs that have—to date—been the primary factor in promoting renewable energy. If Michigan simply retains old policies, customers will miss out on the full potential offered by renewable energy technologies and set the state back in achieving a more sustainable, advanced energy grid.

This section summarizes the implications of Michigan’s current renewable energy policies and potential policy solutions for ensuring the state achieves its goals of a reliable electric system by ensuring all customers have the energy they need, maintaining affordable cost-of-service principles and ensuring prudent investment, accommodating emerging technologies and opportunities to engage consumers, and protecting the environment through the replacement of older coal-fired power plants with cleaner technologies.

SUCCESS OF THE RENEWABLE ENERGY PORTFOLIO STANDARD

The progress made on renewable energy deployment in Michigan over the past decades has been largely in response to federal support for renewable energy through tax credits; state requirements of the RPS; declining costs driven by improving technology; and, more recently, greater procurement commitments from major corporations. PURPA and customer-owned distributed generation have played a limited role in promoting the growth of renewable energy in terms of Michigan’s installed renewable energy capacity.

Michigan achieved its goal of getting 10 percent of its electricity from renewable sources while holding costs in check for consumers and protecting reliability. The MPSC’s annual report on the implementation of the state’s RPS demonstrates that utilities met the state’s renewable energy goal and that costs for renewable energy have declined steadily since the inception of the state’s RPS. And, except for a small fraction of projects, new renewable energy has been less expensive than the benchmark plant used for comparison.

While Michigan chose to expand its RPS with the passage of PAs 341 and 342 in 2016, its largest utilities have already demonstrated that the policy is not the only factor pushing them to invest in new renewables. In response to efforts to raise the state’s RPS, Consumers Energy and DTE Energy—collectively responsible for 90 percent of the state’s electric customers—announced their commitment to generating or acquiring 25 percent of their energy from renewable sources by 2030 (Oosting 2018). The commitment comes from the recognition that Michigan can have all of the above energy strategies and that affordability and reliability do not have to take a backseat to environmental protection.

Given the announced progress of renewable energy in Michigan, there is no reason to reevaluate Michigan’s current RPS statute, but this success raises questions about whether the state should pursue subsequent RPSs. Another central provision of Michigan’s new energy policy was the requirement that utilities undergo integrated resource planning processes, where stakeholders can debate the merits of various technologies and other assumptions with state regulators’ input. Renewable energy’s ability

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 39 to compete with conventional technologies dramatic changes have occurred since PURPA’s from an economic perspective suggests that the enactment 40 years ago, and it may not be the appropriate place to evaluate how much and when most effective tool to achieve current objectives. the state adds new renewable energy capacity is during a comprehensive planning process. This This raises the question of whether PURPA has will ensure that the future of renewable energy a place in the energy sector of the 21st century. A development will be based on achieving all of the liberalized power sector, driven by federal policies state’s energy policy goals. for more than 20 years, has increased access to the electric grid for independent producers and led to the development of energy and capacity markets.1 THE RIGHT ROLE FOR PURPA The renewable energy industry is thriving, as is the domestic natural gas industry, which not only PURPA’s original purpose was to encourage energy helps insulate the U.S. from global supply shocks, security and offer a diverse through but has also greatly increased the diversity of the advancement of renewable energy, energy the electric power sector. These realities beg the efficiency, and independent power production. question of what is left to accomplish of PURPA’s However, PURPA has not yet been responsible for and if the policy is still necessary in the large growth in the deployment of renewables. the modern electric power system. Its definition of energy efficiency, focused on cogeneration, is outdated, and independent power production is alive and well autonomous of 1 For certain states that are still traditionally regulated, not a part of an independent system operator or regional PURPA. This does not, however, mean that these transmission operator, and are lacking competitive energy are the wrong goals. It simply demonstrates that markets, independent power providers would have limited ability to access the grid without PURPA. In recent years, PURPA has begun to take on a environmental protection (MAE 2017). These new role, serving as the regulatory tool of choice principles were central to crafting Michigan’s for renewable energy developers nationwide. new energy policy and should remain a focus Declining module costs and the extension of tax in determining the right path for distributed credits for solar energy, combined with favorable generation policy in Michigan. Beyond these broad standard contract terms, have led to a boom objectives, there are a few key principles, specific in solar development through PURPA. This to customer-owned distributed generation, that expansion has taken many states by surprise, and are essential for designing an equitable policy: utilities that are not in the position of needing new providing fair compensation for the value these capacity have been forced to take on new contracts customers supply to the grid, ensuring customers’ for as long as 20 years. ability to choose to self-supply, and requiring that customers pay for their share of fixed The potential that the MPSC will adopt new, infrastructure investment in the grid. It is possible more favorable standard offer contract terms to balance these principles at the same time, but for solar in Michigan has raised concern over it requires taking stock of the full benefits and whether PURPA is in step with the state’s broader drawbacks of distributed resources. energy policy goals. While the goal of diversifying Michigan’s fuel supply and the principle that The debate over the future of net metering projects would only be able to charge the utilities’ is playing out across the country as state avoided cost rate may seem like good reasons to policymakers and regulators determine how promote PURPA projects, making decisions about to design compensation for customer-owned the state’s resource mix, apart from the newly distributed generation in an equitable way. The established integrated resource planning process, stakeholder process and subsequent discussion runs counter to the goal of planning investment in of the MPSC’s April 18, 2018, order regarding a way that minimizes cost and negative impacts for the state’s new distributed generation tariff, consumers. PURPA’s objectives may not directly have exposed a deep divide among Michigan contradict those that Michigan is trying to achieve, stakeholders about the future direction of but PURPA’s structure is not complementary to distributed generation programs. Comments from Michigan’s energy policy, putting the state at risk energy company participants suggest that the state of bearing long-term, unvetted costs. Ultimately, could have gone further in addressing subsidies it is customers who will bear any cost increases for distributed generation customers. Others, due to PURPA, and it is the responsibility of state including solar industry advocates, have decried regulators and policymakers to ensure PURPA the commission’s order as not appropriately serves a purpose in the 21st century while also valuing the contributions of distributed allowing states to achieve their own unique policy generation, like mitigating transmission line goals. losses, offsetting costly peak generation, and considering environmental benefits. Already, ACCOMODATING CUSTOMER-OWNED legislators in Michigan’s House of Representatives have moved to scrap the new distributed energy DISTRIBUTED GENERATION program in favor of going back to net metering (Samilton 2018). Michigan already has a fundamental framework for making policy decisions based on promoting reliability, affordability, adaptability, and

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 41 Need for New Rate Designs Environmental Benefits

The debate over net metering centers on the Net metering supporters often point to a diverse disagreement over whether net metering set of benefits provided by distributed energy customers receive a subsidy or whether they systems to back up their claim that there is no provide net benefits to the grid. Despite ongoing subsidy for net metering customers. One of these debate, the emerging national trend is to move benefits is that distributed generation, particularly away from true net metering programs in favor solar, provides societal benefits through emissions of net billing with new, more accurate rates. reduction of local air pollutants and greenhouse Underpinning state efforts to reform net metering . While there is an established history of policies has been a consistent effort to study and allowing energy companies to recover costs due to quantify the costs and benefits of customer-owned required environmental compliance regulations, distributed generation to design a compensation there is no such authority to compensate mechanism that appropriately compensates distributed generation for its environmental customers (Proudlove et al. 2018). performance characteristics in Michigan. Both Maine and Minnesota’s VOSs include avoided Decisions from state regulators are reflective of the emissions as a value of distributed solar reality that net metering is a tool that has outlived generation, but that is because they have explicit its original purpose. Net metering was borne statutory requirements to include them. It is in out of a time with limited options for regulators the purview of policymakers and regulators to due to technological limitations. Today’s redesign energy company compensation structures advanced metering infrastructure has expanded and/or explore new options for regulation, regulators’ ability to develop rate structures but with an absence of specific legislative that accurately reflect the actual time of use and authority to place a value on societal benefits, production. While net metering may have been such as emissions reductions, the MPSC cannot the easy or only way to enable customer-owned consider these benefits in the development of a distributed generation in years past, maintaining distributed generation tariff. Additionally, it would this structure may overlook better options for fundamentally undermine Michigan statute to appropriately valuing these resources and getting allow distributed energy to count noneconomic price signals right for both customers and utilities. values, such as reduced emissions, while not allowing other renewable developments to claim While the state has taken the step to move away the same benefits. If Michigan decides that from the net metering compensation structure reducing emissions is a goal, it should do so by for customer-owned generation, MPSC staff has evaluating all policy options to determine the most suggested that using utilities’ avoided cost set economically efficient approach, using this goal through PURPA proceedings could be a suitable to support additional payments for distributed way to value the energy that distributed generation generation. pushes back to the grid. This approach, despite capitalizing on cost determination already Equity underway, would conflict with the approach explicitly outlined in Michigan’s new energy policy While there is truth to the argument that the (PA 342 Section 177(4)). cost of customer-owned distributed generation is not born by other customers in that an individual customer takes on the investment,

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 42 not the energy company, this argument does not Comprehensive Planning consider that there are system costs associated If deployed in the right places, distributed with net metering customers receiving the retail generation can have real economic benefits. rate for their energy production. These currently Theoretically, it could help defer investment unaccounted for system costs end up being borne in new generation sources or defer additional by all customers to maintain and modernize our investment in transmission and distribution. state’s electric system. Further, by promoting Deployed strategically, distributed resources net metering policies, stakeholders may not see can enhance the resilience of the electric grid, that the ability to invest in distributed generation especially when paired with battery storage, is only available to a select group of customers , and/or smart inverters. When who have the motivation and the resources. The distributed technology, like solar, is incorporated risk associated with continued promotion of net into energy company planning processes, it can metering is that Michigan will have a disparate yield benefits in the range of $0.01 to $0.02 per system—between those who have access to kWh (Bird et al. 2013). To fully realize these distributed generation and those who do not. For benefits, Michigan must strategically deploy new those who lack access, they will be left to maintain generation and other technologies, which will only a system abandoned by those of the highest means. occur if resources can be sited through robust The challenge of creating inequity in the system systems planning. is not entirely overcome by shared solar projects The current deployment of distributed generation where multiple subscribers can purchase shares is almost entirely driven by individual customer of an installation and have the output credited desire. And while customers should have the against their monthly energy consumption. While option to self-generate, this gradual deployment there has been growing interest in these types of approach makes the touted benefits of distributed programs because they expand access to solar to generation harder to quantify and limits any more customers, if the compensation structure benefits that could be accrued through the is not properly designed, these facilities present deployment of resources. Instead, customer- many of the same risks of traditional net metering owned distributed generation creates additional systems, like allowing a subset of customers to variables that utilities must consider as they avoid costs associated with their access to the grid manage the rest of their system without regard and shifting costs to other consumers. to whether installation of customer-owned If the state wants to promote clean and affordable generations is appropriately placed to yield energy for all customers, it must recognize that systemwide benefits. utility-scale generation can be provided at a much Advocates who focus on net metering, to the lower levelized cost than residential, commercial, exclusion of other policy options, run the risk and even industrial solar energy projects. The state of overlooking other lower-cost pathways to should also consider that utility-scale projects the same outcomes. Therefore, it is important do not have the same effect of shifting costs to to look at the big picture and carefully plan for customers who cannot afford to invest in their own how to reach Michigan’s goals. If the desire is distributed generation (Brown and Bunyan 2014). greater distributed resources, then there are ways to ensure that these resources are being sited where they will actually defer energy company

PUBLICSECTORCONSULTANTS.COM Responsible Policies for Renewable Energy Development 43 investment; if the goal is more renewable energy, planning in designing the right system and the then there are other lower-cost options to be right resource mix. Michigan has never truly had pursued. an integrated approach to developing its electric power sector, and, because of that, has relied on Utilities are now investing in renewables because a fragmented mix of subsidies, mandates, and of the changing economics of renewables and laissez-faire strategies. However, Michigan’s customer expectations. In many cases, these adoption of the integrated resource plan as part of changes are happening regardless of government PA 341 in 2016 provides an opportunity to finally mandates, policies, and subsidies, which raises put all of the state’s goals into perspective and the question of how or if government should play define a comprehensive approach to achieve them. a role in supporting renewable energy, given the The integrated resource planning process will changing dynamics outlined in this paper. Instead help inform decision makers of the implications of advancing renewable energy policies that of their choices and better prepare them to apply various supports for different technologies make judgments in a dramatically changing and resources, policymakers should be looking environment. The process does not resolve issues for more holistic, inclusive ways to ensure that related to distributed generation, PURPA, or renewable energy and the greening of the electric government mandates to everyone’s satisfaction, power sector are undertaken in a way that ensures but, at minimum, will contextualize decisions on optimal reliability, affordability, and fairness for these issues and allow decision makers to weigh all users of the system. the economics with other goals to make the right choice for all Michigan customers. The one key theme emphasized throughout this white paper is the importance of comprehensive

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