Let me begin briefly explaining Ohio Bills Senate Bill 221 and Senate Bill 310.

SB 221 is a bill focused on increasing the state diversity of energy to cleaner and potentially game changing technology while focusing the state’s consumers on becoming more efficient with its use of energy.  The bill mandates that a certain percentage of the generation come from advance energy resources as defined by the State Commission NOT the utilities.  This is important to understand. Examples of these sources can come from carbon neutral technology (e.g. modular nuclear, wind, solar, etc..) or technologies that improve how efficiently energy is consumed (e.g. combined heat and power, distributed technology, etc..).  Of the advanced energy resources, the legislation calls for half of the targets to be me using traditional renewable sources (mainly wind and solar).  The bill also set efficiency targets that electric utilities drive to consumers by implanting programs like CFL light subsidies programs which can be evaluated, measured, and verified by an approved vendor. The targets contained in SB 221 specific to development of advanced energy resources had price caps to protect against significant price increases to the consumer.  The efficiency targets did not contain any price caps.

SB 310 is a bill focused on delaying and cutting back on SB 221 mandates.  In other words, SB 310 waters down SB 221.  SB 310 is designed for the utilities because it eliminates the portions of SB 221 that threatens the utility business model (more on this later). Everyone seems to focus on SB 310’s 2 year delay of the targets outlined in SB 221 while further study of its ramifications are conducted.   However, it is important to know that SB 310 also eliminates the advance energy resource requirement except for the traditional renewable requirement. As an enduser, the advanced energy portion of the bill could have enabled End-users to identify and pursue energy savings opportunities at their facilities within the state. The only advance energy resource which was spared in SB 310 are the traditional renewable target (solar, wind). The efficiency targets remain the same, but are affected by the two year delay.

As the dust settles on the controversial Ohio senate bill 310, critics and supporters must reassess the situation.  Regardless of what your position is, the bills bottom line impact needs to be understood in dollars for both actual value and potential value so that an informed decision can be made on the bill and its potential changes going forward.   As noted above, the bills intent is for diversity of energy and the development of new technology.  This comes at additional cost that does not always show value right away.

I had previously spent time reviewing Senate Bill 221 while I was the Managing Director Strategic Planning at American Electric Power.  SB 221 was passed in 2008 by a 132-1 margin (Republican-controlled House and Senate, combined) and signed into law by former Democratic Governor Ted Strickland.  Senate Bill 221 was initially proposed under good intentions of increasing the state diversity of energy and moving towards cleaner and potentially game changing technology while moving Ohio’s energy consumers towards becoming more efficient.   It would be hard to vote against that, hence the 132-1 margin that passed the bill.   However, the bill really did not have a chance to be successful given how the bill was designed and the current design of the utilities and public utility commission.

SB 221 bill only attempts to change the utility, not the commission.  The bill adds more responsibility and oversight to the commission, but does not offer any additional budget or road path to the commission.   The utilities are compelled to change by the bill offering some rewards/incentives and penalties.  The utility largely sees penalties as they typically cannot take it upon themselves to innovate to turn a change into opportunity.  “Where there is change there is opportunity” applies to many, but not those who do not want to see change.  The utilities need to be nudged into acting more pro-actively given their history of regulation.   Therefore bills such as SB221 were needed.  However, the commission, who is responsible for the nudging, is ill-equipped.

To understand why the utility culture is not designed to capture opportunities of change, one needs to understand the history of regulation.  (For more details read Regulation vs. Deregulation Utilities).  The utility and Public Utility Commission capabilities are not designed for the new technological world of competitive advance energy resources and energy efficiency.  The utilities failure to innovate largely stems from their incentive structures and historical legacy.   The typical consumer wanted reliable power at a reasonable price and was not really interested in the details beyond that.  The end-user just wanted to turn on the switch and when the electric bill arrived, they didn’t want to be surprised.   Utilities have therefore worked hard to maintain strong relationship with the Public Utilities Commission since they regulates and approve all utility rate structures passed through to customers.  It is no surprise why utilities remain friends with the commission since this keeps the cash flowing to their bottom line.   However, when enough consumers react to poor service, the commission could be forced to make changes at the utility.   This creates a strong incentive for utilities to maintain status quo rather than shake things up and innovate.  Innovation requires some trial and error which results in increase cost and potential disruptions.  In fact, innovation has traditionally resulted in zero reward to the utility given they don’t get additional rewards for bringing innovation because of their cost based structure.  The cost based structure is when the utility charges its cost plus a certain return which is all approved by the Public Utility Commission.  This mechanism focuses on reliability and reasonable costs not innovation. This scenario has played out mostly unchallenged for decades, but a shift began to occur as a growing group of society started to become more aware of the environment and vocal about repairing and improving it.  The utilities and public utilities commissions were caught somewhat off guard with this movement.    Policy makers have gotten ahead of the utility and the commissions by implementing policies such as SB 221.

The commission’s existing knowledge base was enough to understand and oversee utility reliability while minimizing cost.  However the commission is unequipped to overseeing an energy industry with new challenges and technology.  The mandates are asking for advance energy resources and energy efficiency to be implemented in Ohio’s competitive/unbundled shopping marketplace.  Now, there is a tug-a-war between the consumer, marketplace, and the commission with the utility stuck in the middle.   SB 221 is pushing for change which is at odds with the commission skill sets.  The commission is now required to manage and think beyond the current experience it possesses.  If the commission is to acquire the new needed knowledge and experience, the budget at the commission will likely require an increase so that they can recruit and retain the right talent to oversee Ohio’s new energy marketplace. Larger utility management teams are making nearly twice as much as commission senior staff, but the commission is expected to be able to comprehend the multiple utilities plans cooked up by well-staffed teams of experts whose goal is to limit disruptions of the current utility business model.  The commission will likely not succeed in effectively regulating policies requiring utilities to change from their current form.   Any legislation is only as good as the regulation and enforcement of the bill.

There are many issues with SB 221.  However these concerns could have been fixed without the drastic change in SB 310.  As noted, SB 310 eliminates the advance energy resources initiative, but leaves the renewable requirements.

The better option would have been to open up all advance technology and renewables under one category.   This would have allowed the market place to pick the winners of future advance technology.  By eliminating advance technology, which cover the following :  Distributed generation consisting of cogeneration, clean coal technology, fuel cell, solid water conversions, and few others, SB 310 seriously erodes the good intention of the bill.   One of the reasons discussed for eliminating advance energy resource portion of the bill is because of the lack of progress made by utilities in this effort.  However the lack of progress is largely due to the lack of effort, capabilities at the commission, and the desire of the utility to not disrupt the business model.

The utilities only targeted and developed the renewable portion since SB221 was enacted.  The utilities would have you believe there was no advance technology that was a cost effective option relative to traditional renewables.   I don’t believe this to be the case.  The better reason was because there were no transparent medium to offer projects that would supply portions of the advance resource category.   Advance technology is very broad covering distributed generation to co-generation.  The real issue for no advance technology development was because there were no incentive for utilities to look for these advance technology given they understand the traditional renewables and those projects are less likely to hamper some of the utilities current business operation.  Distributed generation projects and co-generation options are smaller in scale and directly alter a customer class, potentially causing havoc in tariff structures.  The large renewable projects can be uniformly spread across classes.   If it was solicited to end-users that the utility would purchase/subsidize a combine heat and power initiative at their site thereby lowering their price of power by 20+% plus reduce their environmental foot print by over 20+%, I am sure there would be plenty of projects.   Advance technology given its very nature will require a change of historical business operations.

Many deals in the power industry are taken behind closed doors as they at times offer competitive advantages.  However, given a case where there is a regulated enforcement for certain projects, it would be reasonable to create a transparent pricing platform.  The commission could have done an initial pre-screen to qualify the projects as advance technology (this still can include traditional renewables) – SB 221 gave them this power.   The state is acting prudently and wise through a shotgun approach by allowing commission to approve new “advance technology” source.  Due diligence is still required from the utility no different than any other project.   Creating a platform will prevent the excuse that there are no cost effective advance technology projects available compared to traditional renewable projects.   At the same time, it will give commercial and industrial clients plus developers an ability to propose innovative projects that could transform a portion of the energy use in the state towards the intentions of the original goals of SB 221.

The abuse of the system is limited given the price caps and volume requirement in the bill.  End-users should realize prices would not climb any more than the explicit price caps – “An electric distribution utility or an electric services company need not comply with a benchmark under division (B)(1) or (2) of this section to the extent that its reasonably expected cost of that compliance exceeds its reasonably expected cost of otherwise producing or acquiring the requisite electricity by three per cent or more.”   Utilities should realize their business is not required to transform quickly and drastically given the initial volumes are slowly being ramped up plus the cost limits should mitigate some of the rise.  Inside the platform, vendors and developers can submit their project information.  They can also submit a minimum subsidy value needed to have the project go forward.  The various utilities can then bid on the various projects.  A sample screen of the platform I have in mind is shown below.

The platform will enable the commission to have a market price to observe the cost of advance technology relative to traditional renewable.  This will also enable the utilities to find projects quicker and develop a portfolio for achieving the requirements while staying under the restrictions of the bill.   The end-users and developers can have ways to participate in the future of Ohio energy mix.

The other big propaganda for SB 310 was that SB 221 would be too costly.   Too costly is questionable given the advance energy resource requirements had price caps as noted above.  If the targets would be too costly the utilities did not have to achieve those targets.  The overarching cost rise was limited to 3 percent.

There were also cost limits, specifically, on renewables:

“The compliance payment pertaining to the renewable energy resource benchmarks under division (B)(2) of this section shall equal the number of additional renewable energy credits that the electric distribution utility or electric services company would have needed to comply with the applicable benchmark in the period under review times an amount that shall begin at forty-five dollars and shall be adjusted annually by the commission to reflect any change in the consumer price index as defined in section 101.27 of the Revised Code, but shall not be less than forty-five dollars.”

In addition, there were limits on the solar piece:

“The compliance payment pertaining to the solar energy resource benchmarks under division (B)(2) of this section shall be an amount per megawatt hour of undercompliance or noncompliance in the period under review, starting at four hundred fifty dollars for 2009, four hundred dollars for 2010 and 2011, and similarly reduced every two years thereafter through 2024 by fifty dollars, to a minimum of fifty dollars”

However, there was a disclaimer that made it quite troublesome to use these price caps – “The compliance payment shall not be passed through by the electric distribution utility or electric services company to consumers. The compliance payment shall be remitted to the commission, for deposit to the credit of the advanced energy fund created under section 4928.61 of the Revised Code. Payment of the compliance payment shall be subject to such collection and enforcement procedures as apply to the collection of a forfeiture under sections 4905.55 to 4905.60 and 4905.64 of the Revised Code.”  This basically directs the utility to implement more expensive programs to avoid the compliance penalty since this was not a legitimate bridge.

Those supporting SB310 for cost reason could have asked to adjust the above cost numbers versus throwing the entire advance energy out of the equation.  A simple rewrite of the compliance payment could have also assured the utility never spent any more than allowed.   The one area which was left open to unlimited cost was the Energy Efficiency and Demand Side Management (EE/DSM) programs.  As done in the alternative energy requirement, a price cap should have been established in terms of rate increases from EE/DSM programs.  SB310 still does nothing to address future cost of EE/DSM programs.

The EE/DSM arena is a scary place given its spectacular growth.  As noted in my Clean Power Plan review paper #3 , the industry has grown significantly from $1.6 billion in 2006 to $5.9 billion in 2011 and projected to be over $8 billion per the American Council for an Energy-Efficient Economy.  With that much money in the system in such short time and the fact that the industry depends on estimates, there is bound to be “corruption” unless there are good checks and balances.   EPA notes this in their discussion of EE/DSM – ““Regardless of how the energy savings of an energy efficiency measure are determined, all energy savings values are estimates of savings and not directly measured”.

I am a supporter of energy efficiency and conservation programs having seen some fantastic data and work while assisting the Northwest Power & Conservation Council.   However, I have also seen the darker side while assisting a utility in Indiana and reviewing some of the AEP plans while I was there.   The companies who are in charge of evaluating, measuring, and verification are typically working in all three spaces.   I have seen an evaluator in one state who acted as a measurer in another state.   This cannot be allowed.  The utilities are somewhat indifferent in this discussion given many get shared savings.  Shared savings is an incentive mechanism created to align the utilities with wanting to reduce energy usage.   In the traditional regulated format, the utility is incentivize by growing energy usage as the utility only gets a return on capital investment.  If demand is falling there is less likely any need for capital investment.   Shared savings therefore allows a utility to share in the reduce savings of an efficiency program by collecting a certain percentage from the reduction of energy usage.   Therefore, when an evaluator approves a plan the utility proposed, and the measurer and verifier support  it, the utility would not oppose the assumed large savings in kWh, even though it may not be real, because the cost difference and savings is shared with the utility.  The bigger the saving, the more the utility gets back.   The only consequence is the load forecast will typically be too low and the rate payer is stuck paying more for plans that really add no savings.  Most of the time, the commission is not equipped to understand the nuances in the EE/DSM program, so the utilities can bring in their expensive lawyers and impressive EMV.  And, before you know it, the programs get approved.  The last leg of defense in an overwhelmed commission is the consumer protection council.  But, they have been cut down in half by Kasich in 2011, even though they received their pay from the utilities, not the state budget.   This was in the year they saved the rate payers significant amounts of money and was a true thorn in the utility.  “The Supreme Court of Ohio ruled 7-0 in its April 19 decision that the PUCO improperly allowed AEP to charge customers unlawful and unreasonable rates. The Court ruled in favor of the OCC in agreeing that AEP’s 2009-2011 rate plan was unlawful by including $63 million in retroactive rates, $456 million in costs to potentially provide default service for customers who shop for an alternative supplier and $330 million in carrying charges for environmental investments.”

The energy efficiency cost you are currently paying can be easily computed from your bill if you belong to AEP.   They post the calculation of your rate.  Download the excel file and enter your information and review the corresponding sheet that represents your profile.  In my case, I am paying $5/month or a total of $60/a year to pay for energy efficiency program.   The residential energy efficiency program is essentially lighting subsidies with a little portion of it for O-Power.  O-Power is a report, telling me how much more I consume relative to my supposed comparable house.   Is it truly worth $60/a year to subsidize light bulbs and a report to tell me my consumption relative to other houses?  What alternative light bulb would I buy if it wasn’t for the subsidy?  Does it achieve the value that the measurer and verification company is stating?  In this case, my rate is being impacted nearly 4% for this program.

Better oversight is needed in the EMV space for EE/DSM.  There are worthwhile programs that can be found in the data.  The worthwhile programs are likely somewhere around 50-70% of the total programs.  Many other programs are generally number tricks, enabling the EE/DSM industry to support itself and grow.  SB 310 should have addressed price caps and better oversight EE/DSM.

SB 310 still carved out a solar requirement in one of the cloudiest states in the country.   I think, in large part, the belief was if you had a solar mandate, solar manufacturers would come here.   There is enough solar demand in the US market that if the state of Ohio could create a supply chain and manufacturing advantage, they would come here and manufacture and export the product to other states.   China is a leading manufacturer of solar not because they placed a solar mandate.

SB 310 also ended a requirement that utilities purchase half of their renewable energy from within the state.  This, in effect, produces a subsidy to other states.  The purpose of the renewable program for many was to stimulate economic development.  As I noted in the solar argument, you don’t have to have mandates to stimulate manufacturing, but if you are going to have a mandate, you might as well force some of the development in the state – or don’t have the mandate to begin with.  One cannot criticize too much on cost given the price caps for cost for renewable compliance.

SB 310 does create a committee – “There is hereby created the Energy Mandates Study Committee to study Ohio’s renewable energy, energy efficiency, and peak demand reduction mandates.”  The study will cover 8 objectives which I will give my precursory guess to the results:

(1) A cost-benefit analysis of the renewable energy, energy efficiency, and peak demand reduction mandates, including the projected costs on electric customers if the mandates were to remain at the percentage levels required under sections 4928.64 and 4928.66 of the Revised Code, as amended by this act;

DKB: Cost for the renewable piece will not rise any greater than 3% per the bills requirement.   EE/DSM mandates are questionable in cost and delivery of actual kWh savings.   The current system over accounts 10-40% energy savings, better checks and balances will be need in the EE/DSM arena.  Recommend putting a cost rise limit with EE/DSM as with the renewable goals.

(2) A recommendation of the best, evidence-based standard for reviewing the mandates in the future, including an examination of readily available technology to attain such a standard;

DKB: Having qualified commission staff/consultants with significant experience in the region along with some power modeling experience will help in analyzing future mandates.

(3) The potential benefits of an opt-in system for the mandates, in contrast to an opt-out system for the mandates, and a recommendation as to whether an opt-in system should apply to all electric customers, whether an opt-out system should apply to only certain customers, or whether a hybrid of these two systems is recommended;

DKB: If the commission wants to guarantee savings from current structure an opt-in is applicable.   However education is the key for consumer actions.

(4) A recommendation on whether costs incurred by an electric distribution utility or an electric services company pursuant to any contract, which may be entered into by the utility or company on or after the effective date of S.B. 310 of the 130th General Assembly for the purpose of procuring renewable energy resources or renewable energy credits and complying with the requirements of section 4928.64 of the Revised Code, may be passed through to any consumer, if such costs could have been avoided with the inclusion of a change of law provision in the contract;

DKB: This is a very slippery slope.  Adding contracts with change of law adds significant risk premiums.   Creating sustainable laws is a better answer.

(5) A review of the risk of increased grid congestion due to the anticipated retirement of coal-fired generation capacity and other factors; the ability of distributed generation, including combined heat and power and waste energy recovery, to reduce electric grid congestion; and the potential benefit to all energy consumers resulting from reduced grid congestion;

DKB:  Depending on how much influence the committee will have from the utilities will be reflective of the conclusion.   Based on my experience, CHP and distributed generation can play a significant part of the future.  Not only do they offer energy savings by being close to the demand source and using the heat, which is not used at all at centralized plants, they offer resiliency to the grid and can be used to support the grid in times of need.

(6) An analysis of whether there are alternatives for the development of advanced energy resources as that term is defined in section 4928.01 of the Revised Code;

DKB: There is always room for alternatives and innovation – this is the USA.   Governments can play a role in nudging development without overly committing by using price caps such as in SB 310 and SB 221.   The fear of transformation only comes from the incumbent who does not want change.  A marketplace / Ebay platform could offer market transparency and a place for end-users and developers to participate in the evolution of the energy industry.

(7) An assessment of the environmental impact of the renewable energy, energy efficiency, and peak demand reduction mandates on reductions of greenhouse gas and fossil fuel emissions;

DKB:  A ball park estimate should be doable.  One should use a dispatch model to produce these figures since the commitment of the units will likely change particularly if the load curves flattens out.   A flat load curve is actually to the benefit of the coal units.  The question is what about bordering states programs and their influence.  Ohio is a net exporter of electricity.

(8) A review of payments made by electric distribution utilities to third-party administrators to promote energy efficiency and peak demand reduction programs under the terms of the utilities’ portfolio plans. The review shall include, but shall not be limited to, a complete analysis of all fixed and variable payments made to those administrators since the effective date of S.B. 221 of the 127th General Assembly, jobs created, retained, and impacted, whether those payments outweigh the benefits to ratepayers, and whether those payments should no longer be recovered from ratepayers. The review also shall include a recommendation regarding whether the administrators should submit periodic reports to the Commission documenting the payments received from utilities.

DKB:  If they really audited this, I think they will uncover quite a bit of dirt.  Once again this is not due to the efficacy of the mission of energy efficiency, but to the fact the industry has grown so rapidly and there is just so much money now.

Lastly, I want to address the politics of SB 310.   Many insiders deem SB 310 as the First Energy Corporation bill.   There were rumors there was a concern that some of these programs were causing a drop in capacity prices in this region.  Given that First Energy coal fleet is deregulated, this was a big concern for them.  Mathematically, this would occur, but the volumes from SB 221 at this time are too small to have a significant impact.   The real drop in capacity prices was a function of the aggregators in other parts in the PJM markets, the MISO imports, and stagnating demand which drove the capacity price down.  Dropping of advance technology resource requirements would have only threatened the utilities.  No one else would have been detrimentally impacted by having the advance energy resource option given the price caps – unless you think 3 percent is too much to pay for diversification – perhaps 2 percent?  I believe Distributed Generation and Cogeneration incentive mechanism provided a threat to the utility that they did not want to risk taking on.   SB 310 is a bill to leave no utility behind, but at the cost of potentially stagnating advancement.   Keyword is potential – it could be very possible that nothing would have changed, but a cost of 3 percent may have been worth the risk.  A positive, I see from SB 310 relative to SB 221 is the commission responsibility dropped.   They don’t have to understand the potential advance technology.   They lose a key oversight piece “For the purpose of this section and as it considers appropriate, the public utilities commission may classify any new technology as such an advanced energy resource or a qualifying renewable energy resource”

In conclusion, the major weaknesses of SB 221 were not improved and the intent of the bill weakened in SB 310.   I regret I did not have time or was asked to review SB 310 before the bill was signed.   The impacts of SB 310 will benefit a few.  The few are mainly the utilities.   It is possible End-users may save some money with SB 310 relative to SB 221, but the savings are likely not amount to much given the potential gains of transforming the energy mix Ohio to be more resilient and environmentally friendly.  The next adaptation to Ohio energy bill needs to re-include the advance technology portion found in SB 221 and create a mechanism for success by increasing the commission’s budget and suggesting the development of a platform clearinghouse for advance technology.  Other adaptions include adding a price cap on EE/DSM similar to the alternative energy source option, greater oversight of EE/DSM programs,  and fine-tuning the compliance cost to give more flexibility for the commission to modify and utilities to be able to recover some of the alternative compliance payment.

End-users are still left with many other uncertainties including the recent EPA Clean Power Plan to mitigate CO2 emissions.  If you are an end-user trying to understand the future of power, I can and will be able to help you navigate through the storm of uncertainty.   I have many years of experience in forecasting and developing risk mitigation strategies in the energy industry.   I am always up to date in current markets and offer a daily forecast of all N. America power hubs.  This product is being used by hedge funds and utilities.

Your Enthused and Optimistic Energy Consultant,

David