Implications of a “Green Tariff” for the University of Hawai‘i, Hawaiian Electric Company, and other Customers

From UHERO, November 17, 2020

Introduction

In June 2015 the State passed a law setting a goal for the University of Hawai‘i (UH) to produce as much renewable energy as the total energy it consumes; that is, to become net-zero. The great bulk of the University’s energy use occurs on the Mānoa campus, which has the most students and by far the most energy-intensive research labs. The scale of electricity use at Mānoa, which averages about 12 megawatts an hour, is unlikely to be met by on-campus renewable generation. As a result, the University is looking for ways to use land resources in an off-site location to generate renewable energy that can compensate for required energy use on the Mānoa campus.

At the same time, the University is looking for ways to reduce its high energy bills, which average over two million dollars per month. Options for self-generation, improvements in energy efficiency, and strategic investment in batteries to reduce its peak load and associated demand charges have been employed to save money, improve efficiency, and reduce emissions.

These decisions also have implications for Hawaiian Electric Company (HECO) and its other customers. To the extent that the University’s reduced purchases of electricity from HECO are not offset by lower costs, the University’s savings will push costs onto other customers. This possible transference of costs to other customers, rather than to the bottom line of HECO’s shareholders, results from the way electricity is priced and regulated. In particular, a revenue decoupling rule that allows the utility to recover a certain amount of revenue regardless of how much electricity HECO actually sells implies that any reduction in revenue from the University of Hawai‘i that is not offset by explicit cost reduction will cause prices to increase for everyone else.

To help address the shared interests of the University and HECO, HECO has proposed a “Green Tariff” (officially proposed as “Rider Z”) that would, in effect, allow the Mānoa campus to receive credit for solar installed at one of its off-site properties. Under this tariff, HECO would obtain a purchase power agreement (PPA) for solar to be installed on its land elsewhere on the island. For analysis in this report, we consider a parcel in West Oahu, but Rider Z could pertain to any offsite installation. The cost of the PPA would be added to the Mānoa campus bill, and the University would receive a credit for energy provided by the solar installation. If the off-site solar installation and associated PPA were to include batteries, making the site dispatchable like a traditional power plant, then the University would receive additional credit under a “Virtual Rider M” that would act to reduce demand charges associated with the Mānoa campus peak load.

This report considers the implications of the proposed Rider Z on the University’s energy costs as well as its implications for HECO and its other customers. The impacts of this tariff depend on other decisions the University makes in managing its energy use over the coming decades, as well as on highly uncertain factors that are outside the control of the University. Most significantly, the value of Rider Z to the University, as well as its impact on other customers, depends on the path of future oil prices and how quickly HECO transitions away from fossil fuels. These factors matter because, under Rider Z, the credit provided to the University for off-site solar is tied to island-wide fuel costs as a share of total generation costs. Thus, the higher are oil prices, and the more slowly the island transitions from fossil fuels, the greater the credit to University.

An overarching concern with the structure of the Rider Z credit is that it is not tied to HECO’s avoided costs. Thus, the credit provided for the solar installation may exceed or fall short of its broader value to the system. Similarly, we find that the credit associated with the Virtual Rider M would generally exceed the value of the battery to HECO. On balance, we find that nearly all of the scenarios where the University would save money relative to the status quo imply an even larger indirect cost to other customers. In a typical mid-line scenario, we find that for every dollar the University saves with Rider Z and Virtual Rider M, other customers will collectively pay about $1.14 more.

We consider how a range of additional on-campus investments by the university could change its energy costs, both with and without an off-campus solar installation associated with Rider Z. Under current pricing structures, the University is incentivized to install as much solar as possible on campus, as well as batteries or other devices to flatten its demand profile and thereby reduce its peak demand, which tends to occur midday, coinciding with peak solar production. Given the high assumed cost of on-campus solar installations, solar tends to save more if installed later. While this flattening is costly to the university, it is unlikely to reduce HECO’s costs, since midday loads are becoming less costly to serve amid ample supply from growing solar production; thus, while these investments would save the University money, they would shift more costs onto other customers than the University would save. In a typical mid-line scenario, we find that for every dollar the University saves with on-campus investments, other customers will pay $1.15 more.

In addition to using batteries in conjunction with on-campus solar to shave its peak, the University can save even more in the near term by installing batteries to reduce its evening load (coincident with the island-wide system peak) using the existing Rider M. The net savings would again serve mainly as a cost transference to other customers.

In the end, we recommend that Rider Z be revised such that it credits the University (or any other large customer) for solar installations in accordance with the avoided costs to the utility. Tariffs that credit distributed generation according to avoided cost have many precedents. Such a tariff would be simpler and fairer, as it would ensure a reasonable credit to the University and other large customers, even if the rest of the grid were to rapidly transition to renewables and thereby eliminate fuel costs. It would also ensure that other customers would not be negatively impacted by the agreement.

We also recommend that demand charges be reconsidered or eliminated. Most commercial customers with demand charges, like the University of Hawai‘i, tend to have electricity demand that peaks in the early afternoon. Some of these customers, including the University, can and perhaps already have made efforts to reshape their demand to reduce their peaks and/or evening demand. While historically the mid-afternoon peaks were most difficult to serve, today they are among the cheapest loads to serve. Thus, these investments in peak shaving are not only wasteful; they actually increase costs to the island-wide electricity system, and thus can be especially hurtful to other customers via the revenue decoupling rule. Rider Z and Virtual Rider M would make unraveling of these perverse incentives considerably more difficult and thereby complicate anticipated future regulatory efforts associated with Hawai’i’s renewable energy transition….

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