PS Fixed Cost Recovery Charge

PowerSouth Energy Solar Fixed Cost Recovery Charge

Escambia River Electric Cooperative, through its Power Supply Agent, PowerSouth Energy has 2 primary responsibilities:

1. Maintain sufficient generation capacity to serve the PowerSouth system’s annual peak load plus reasonable reserves
2. Provide electric energy to serve its instantaneous load at 60HZ every second of the year.

Those principles dictate the actions and operations of every electric utility in the country.

The variable cost of energy production and purchased power from purchased firm capacity or from economy energy purchases are charged to and recovered from PowerSouth’s members on a dollar per (MWH) basis. That charge is very straightforward and has no impact on any customer’s solar array nor involved in the Solar Demand Rate. Variable costs make up about one-half of PowerSouth’s total costs.

Escambia River’s annual peak load, like most of PowerSouth’s members, is between 6 a.m and 7 a.m. on a cold winter morning. Most years the peak is in January. In 2021 it was in February. PowerSouth’s winter peak is currently in the 2,500 MW range and its summer peak is in the 1,900 MW range, and the system is becoming more winter peaking. PowerSouth, on behalf of its members, must have sufficient generation resources in either owned generation plants or firm purchases of capacity to serve its peak load, plus a 25% winter reserve and a 15% summer reserve. Therefore, PowerSouth must build and operate or purchase firm capacity equal to approximately 3,200 MW of generation capacity.

The cost of that capacity is a fixed cost in that capacity resources such as PowerSouth’s Vann Plant, McIntosh Plant, new Lowman Energy Center, and other generation assets must be paid for regardless of how much they operate. Likewise, firm capacity purchases are similar to house rent: a renter must pay rent regardless of how often he uses the house. Costs associated with generation capacity are the largest of PowerSouth’s fixed costs. However, PowerSouth incurs many other fixed costs. Fixed costs such as transmission, substation, and system reliability assets are also dictated by peak utilization, and other fixed costs such as administrative salaries, vehicle fleets, computers, and many other assets are not influenced by peak loads. All fixed costs are pooled and recovered by a monthly demand charge that is calculated by dividing the total of those fixed costs by the number of total peak demand units for each member for each month of the year. The level of monthly demand charges for each member is also dictated by a 75% ratchet (each month’s charge is the lesser of the actual demand charge based upon the actual monthly peak or 75% of the member’s highest monthly peak over the past 11 months).

PowerSouth’s monthly demand charge is based upon a typical retail customer’s usage pattern that recovers costs from the parties that cause PowerSouth to incur those costs to the greatest degree possible. It is far from simple, but I believe it is successful in that regard. However, it is not successful in recovering costs incurred by customers whose usage patterns differ greatly from the norm, in particular customers that own their own and operate their own solar arrays.

A solar customer places the burden on PowerSouth to meet their annual winter peak in the same fashion as the typical (non-solar) customer. Like other retail customers, the solar customer’s peak usage period is also between 6 a.m. and 7 a.m. The sun is not up at that time, his solar generation is not operating, and he calls on the Escambia River and PowerSouth systems to keep his house warm, heat water for a shower, and cook breakfast. PowerSouth must plan for that load in projecting the required generation capacity and sizing transmission lines, substation capacity, and other loading devices. Escambia River must also project that load in designing the size of distribution facilities. Accordingly, a solar customer places a cost burden on Escambia River and PowerSouth.

That fixed cost is recovered through the Demand Charge discussed above. However, in the late spring, summer, and fall customer patterns change and peak loads are in the afternoons instead of early morning. During those peak periods, the solar customer’s arrays are producing electricity and his demand on a peak is reduced. That is good for the system; however, the base for the year’s fixed costs was established on the winter mornings. With the winter costs spread across the entire year, PowerSouth does not recover the fixed costs incurred on behalf of a solar customer in the afternoon peaking month. The fixed costs avoided by a solar system are not absorbed by PowerSouth or Escambia River but instead are shifted to other non-solar customers. Therefore, a portion of a solar customer’s fixed costs is actually paid by his neighbors, not the utility that serves them.

The Solar Demand charge assumes the attributes of a typical customer and the irradiation of solar panels at the center of PowerSouth’s service area for each month to arrive at the amount of demand avoided in each month. That avoided demand is then reduced by Escambia River’s ratchet demand so there is no double charging. The remaining number is then multiplied by PowerSouth’s average demand rate. The result of the calculation produces a cost per KW/Month avoided which is the same base as PowerSouth’s Demand Charge. The math has been vetted by numerous financial and industry professionals and is correct. Again, any disagreement will not be on the calculation but on the concept in general.

The California Grid Independent System Operator (CAISO) estimates more than $2 billion dollars in costs are shifted from solar customers to nonsolar customers each year. Arizona has found similar cost-shifting from solar customers to nonsolar customers. Other Western states have similar rate structures that correctly assign the recovery of fixed costs. There is plenty of information on the internet about challenges in those states. We are merely trying to get our rate structure correct before being overwhelmed by a large amount of shifted costs.

A lot of thought and study has gone into the Solar Demand Charge to get it right. The calculation and mechanics make it difficult to understand. However, the concept is fairly simple: all customers’ winter usage requires Escambia River and PowerSouth to incur costs. Those costs are recovered on a monthly peak usage basis spread across the year (because charging them all in January would cause a very high monthly January spike). Typical customers use power on peak and pay their fixed costs. Solar customers whose spring, summer, and fall usage is reduced because of their solar generation avoid paying their cost in afternoon peaking months.

Additional Notes

• Escambia River Electric Cooperative (EREC) is a not-for-profit electric cooperative, owned by the people we serve. Our mission is to safely provide reliable and affordable electricity to our members. We are committed to helping our members make smart choices about how they use electricity. We are also committed to ensuring that all members pay their share of the costs committed to providing the service.
• We support renewable energy resources that make sense and are reliable and affordable. We support solar energy. We have invested in solar demonstration projects. PowerSouth Energy, our wholesale power supplier, is investing in a utility-scale solar project that will serve our members.
• We support members installing solar at their homes and businesses as long as all members pay their share of all costs associated with their energy choices.
• Providing electricity whenever and wherever it is needed is a complex process. Generation, transmission, substations, and distribution assets must be in place to provide service whenever a member needs electricity. Maintenance teams and equipment must be in place to restore power if the system is damaged. A large portion of the costs required to provide electric service are fixed, regardless of how much energy is used.
• Our time of highest usage, the system peak, is early on a cold winter’s morning, between 6 and 7 a.m. The sun is not shining, and solar generation provides no electric support for the peak load. At that time, the generation and grid assets are required to provide the service to meet our members’ needs, regardless of whether or not they have solar generation at their homes or businesses.
• Electric rates are designed to recover the costs associated with providing service during the peak hour and all other hours throughout the year. A member that installs solar generation substitutes his or her electricity for ours in the spring and summer months and avoids some of the costs incurred to serve his or her needs.
• The Solar Fixed Cost Recovery Charge ensures each customer pays his or her share of the infrastructure costs required to serve them at the peak hour and all the hours in the year. Without the charge, members that install solar generation avoid paying all of the costs incurred to serve them, and those costs are passed on to other members.
• The Solar Fixed Cost Recovery Charge is a precise, calculated fee that recovers the amount of fixed costs a member avoids paying by installing solar generation.
• Without the Solar Fixed Cost Recovery Charge, some of the fixed costs associated with serving the members that install solar generation are shifted to those members who do not or cannot install solar generation.
• Members that install solar generation will experience a reduction in their electric bills, even with the Solar Fixed Cost Recovery Charge. However, they will also have the responsibility to pay for their solar system.
• EREC’s goal is to provide reliable and affordable electricity to all members and for all members to pay their share of the costs to provide that service. The Solar Fixed Cost Recovery Charge accomplishes that goal.