Pioneers or Settlers?

Will Austin Energy lead the way to the new solar future or is it already outrunning the renewable curve?

Solar panels on the roof of Barton Elementary, one of 11 Pflugerville ISD buildings with solar installations
Solar panels on the roof of Barton Elementary, one of 11 Pflugerville ISD buildings with solar installations (Courtesy of Pflugerville ISD)

Last summer, the Austin Generation Resource Planning Task Force issued a bold recommendation to Austin Energy, the city's municipally owned utility. Charged with the task of translating stakeholder input into viable guidelines for meeting climate plan goals and updating AE's generation plan, the appointed citizen group concluded that solar power should be AE's "default new generation resource through 2024."

While ambitious, the recommendation was less audacious than it seemed. AE had just secured, to much fanfare, a 150-megawatt solar contract with Recurrent Energy at a record-low price – cheaper even than natural gas. Given the impending expiration of federal solar tax incentives at the end of 2016, solar looked to be a buyer's market. Moreover, AE was already set to meet its 35% renewable energy goal four years ahead of the 2020 target, and Council had just established a communitywide goal of reaching net-zero greenhouse gas emissions by 2050. Momentum seemed to be on the side of renewables.

Nonetheless, AE staff balked. Although supportive of solar, they insisted that much of the task force's vision was simply unaffordable. The ensuing discussions pushed a final decision to December 11, the last Coun­cil meeting of the year – and the very last meeting ever for the mayor and the five at-large Council members who would be concluding their terms on the dais. During the preceding months, Council had controversially passed a selection of task force recommendations, AE had made its own generation plan proposal, and a six-member team of the Sierra Club Lone Star Chapter (including conservation director Cyrus Reed, also a task force member), had negotiated directly with AE staff on yet another proposal – to the chagrin of those stakeholders now left out of the proceedings.

Surprisingly, as the debate moved to its close, the most salient question to emerge was not whether gambling on solar would be worth the risk. Instead, it was whether or not AE's proposal to build a new natural gas plant – historically a safe investment – might in fact be the bigger gamble, at a time when markets for new energy technologies are evolving rapidly and the utility business model is undergoing fundamental change.

Going forward, the big questions had become: How fast for solar is too fast? And have the historically "safe" choices – like natural gas – suddenly become as uncertain as renewables?

Filling the Gap With Gas

Ultimately, City Council approved a 2025 Generation Plan that says yes to both solar and, tentatively, natural gas. The plan aims to increase the share of renewables in AE's generation portfolio to 55% by 2025, in part through dramatically increasing solar capacity from the currently installed 52 MW to 950 MW. It also commits, "beginning in 2022," to retiring AE's share of the coal-fired Fayette Power Project, which currently provides roughly a quarter of AE's energy. As AE's largest emitter of carbon dioxide and as a significant water user (AE's share requires 1.3 billion gallons of water annually), the plant has been a major focal point of climate plan discussions. But this time around, Fayette was overshadowed by the Generation Plan's proposal – pending the results of a "third-party" study – to build a new 500-MW combined-cycle natural gas plant.

In contrast to the task force's recommendation that the utility "wean itself from natural gas as quickly as possible," AE staff insist that more gas will be the key to both more solar and greater affordability. According to Khalil Shalabi, AE's vice president of energy market operations and resource planning, a new gas plant "improves both sides of the ledger for AE and its customers, more income and less expense." On the expense side, because the gas plant would be built locally (within the Austin "load zone"), it would minimize costs associated with transmission and distribution of electricity. (Notably, the most likely location would be at the current East Austin site of the Decker Creek Power Station's soon-to-be-retired natural gas steam units – a potential point of contention for area residents who may be eager to see those units go and stay gone.) On the income side of the ledger, says Shalabi, the new plant would be among the most efficient – and therefore most competitive – on the Texas grid. By AE's calculus, an efficient new gas plant bidding competitive prices into the market would run often, allowing AE to sell abundant electrons into the grid – generating revenue that would help maintain affordability, in part by offsetting the costs of adding solar to AE's portfolio.

Khalil Shalabi
Khalil Shalabi (Photo by Jana Birchum)

Throughout the fall, AE argued for the gas plant's necessity, not just as a revenue source but as a replacement for capacity that would be lost with the retirements of Decker and AE's share of Fayette. In discussions with AE, the Sierra Club conceded to the plant only with the caveat that it be subjected to an independent third-party study. AE agreed to the study, but it became a major sticking point during the Dec. 11 Council meeting.

In hopes of avoiding any possibility of bias in the study's design, Council members sparred with AE staff over the plan's language. Trying to reframe the issue, Council Member Bill Spelman said, "The idea is ... we strip off the assumption that it's about a gas plant and say, no ... it's about a gap, and the way you want to fill that gap. The way you think is the right way to fill that gap is with a gas plant, and we're putting that to the test." Still getting resistance from AE staff fearful of backtracking on analyses they had already completed, he asked: If the independent review supported an alternative to the gas plant, would Shalabi be comfortable with this alternative? Joking, Shalabi responded, "I'd want another independent review."

Although he was kidding, Shalabi nonetheless remained unapologetic in his conviction that the study – given the results he'd seen in "multiple scenarios" analyzed by AE staff – would likely justify building a new gas plant. Although the day's agenda was a record 231 items long, Council members spent two and a half hours hearing comments on the plan, poring over its details, submitting amendments, and attempting detailed edits from the dais. At least one comparison was drawn between the gas plant and the controversial Water Treatment Plant 4, both being large capital expenditures unpopular among environmentalists.

The Future: Solar + Storage?

In contrast to most of his fellow Council members, Mayor Lee Leffingwell – ultimately the lone dissenting vote on the plan – spoke rarely but bluntly. The plan is subject to affordability metrics requiring that AE's rates remain among the bottom 50% of rates statewide, and that overall rate increases average at or below 2% per year. Given the new amendments added "on the fly," Leffingwell was skeptical that the plan would remain within those bounds.

"Austin Energy is in a deep hole," he said, "and the first rule of holes is, when you're in one, stop digging." Interviewed later, he suggested that AE rates may already be violating affordability metrics, but that it was difficult to know without the information, eagerly awaited, from a Federal Energy Regulatory Committee report that wouldn't be released until 2015. He also pointed to AE's budget proposal over the summer, which would have pushed rates over the 2% benchmark were it not for what he called "accounting gimmicks – deferring costs and so forth into future years, which is not really a good way to do business." Given the coming legislative session (and the fact that the state is one of AE's biggest customers) and the May expiration of several AE contracts with large energy users, Leffingwell insisted on the paramount importance of keeping rates competitive.

Underlying these issues is a fundamental uncertainty arising from concerns that a gas plant – a long-term investment with large up-front costs – might itself become a stranded asset, as the costs of new technologies become more competitive with traditional fossil fuels. A chorus of national headlines throughout 2014 stoked confidence in alternative sources of energy, with the Rockefeller Brothers Fund pledging to divest from its fossil fuel assets, and Warren Buffet announcing plans to double Berkshire Hathaway's $15 billion renewable investment.

Particularly notable was a series of finance sector reports making rosy predictions for renewables while issuing dire warnings for utilities. The year began with headlines announcing a Credit Suisse analysis projecting that roughly 85% of growth in U.S. demand for energy could be met by renewables in the next 10 years, and asserting that "old-line arguments against renewables – too expensive, too intermittent, too remote – will continue to fade." In March, news circulated of similar themes in Gold­man Sachs and Morgan Stanley reports. In May – a week after AE announced its unprecedented solar power contract with Recurrent – Barron's reported that Barclays had downgraded all electric utility bonds because "a confluence of declining cost trends in distributed solar photovoltaic (PV) power generation and residential-scale power storage is likely to disrupt the status quo." Barclays warned of "near-term risks to credit from regulators and utilities falling behind the solar + storage adoption curve and long-term risks from a comprehensive re-imagining of the role utilities play in providing electric power."

The task force's July recommendations were issued against this backdrop, and similar stories continued to appear as the year went on. In August, news circulated about a UBS Bank brief forecasting the end of "large-scale, centralized power stations" within two decades. Then in September, Citigroup issued a research brief estimating that "renewables with battery storage is due to reach grid parity in large parts of the world within 15 years, which is inside the typical 30-35-year economic lifecycle of utility assets."

Former AE executive Michael Osborne
Former AE executive Michael Osborne (Photo by Jana Birchum)

Shalabi is skeptical of such reports. "I really want to meet those analysts from those investment banks that really have no idea what they're talking about," he says. Applied to the utility sector, he says, the math they're using "is just false." However, former AE executive Michael Osborne, who chairs both the task force and the city's Electric Utility Commission, is equally critical of AE's math; he asserts that AE's methods for determining costs do not adequately consider factors that make the municipally owned utility – which is both a wholesale and retail utility – unique relative to other players in the Texas market.

None­the­less, both men acknowledge there is a fundamental transition taking place in the utility business as new technologies alter the relationship between energy suppliers and consumers. Distributed generation (e.g., rooftop solar panels) provides one example: As energy storage technologies advance and more customers generate their own electricity, utilities will lose money, not just because they're selling less of their product but because it will be harder to recoup the costs of maintaining the transmission and distribution systems upon which all energy sources rely. This problem is why utilities are exploring new avenues for generating revenue.

Creating Transitions

A commonly used analogy for describing the challenge utilities face compares the utility sector today to the telephone industry before the transition to cell phones. Shalabi is not a fan of the metaphor. Unlike in the telephone industry, he says, energy customers "can't even tolerate one second without electricity." Still, he acknowledges that "there is disruptive technology coming along, and in both the cell phone and the electric industry, the unknown was how quickly can disruptive technology really disrupt the business model?"

Ultimately, the disagreement between gas plant proponents and skeptics may boil down to timing. "Ideas that were kind of outside the bell curve of normal thought have now moved to the middle of the line," says Osborne. Now retired from AE, Osborne speaks to audiences around the world about AE's forward-looking achievements. He also talks about the grid's future, which he believes is fast approaching. In his talks, he likes to say that grid parity "is going to be next Tuesday." In the coming "unified energy system," the transportation and utility sectors will be intimately linked, with electric vehicles serving as an integral part of the energy storage network, he says. Alternative forms of generating revenue might include things like on-bill financing for electric vehicles. "That would be a major profit center," says Osborne, and such ideas aren't without precedent: "It wasn't that long ago that the old co-ops out in the countryside would do on-bill financing of your electric dishwasher."

For now, Shalabi says, there needs to be "some sort of transitional period where the old system and the new system can coexist." With this idea in mind, AE is investing in experimental new technologies, including a project combining 2 to 4 MW of community solar with energy storage. According to Deborah Kimberly, AE's VP of customer energy solutions, the project will be located at the Kingsbery Substation, a "funky-shaped little piece of land" just east of the intersection of Springdale Road and Airport Boulevard. AE has issued a Request for Proposals for the project and is currently in negotiations with a vendor, says Kimberly. Community solar installations make solar power available for purchase by customers unable to install solar at their own homes, opening the market to renters and homeowners who either can't afford the up-front costs of solar or whose homes aren't equipped for it (e.g., surrounded by too much shade). Meanwhile, advanced energy storage – often described as the "holy grail" of grid transformation because it complements intermittent sources of power such as wind and solar – is an important focus of study. "We need to start having some good penetration in our service territory," says Shalabi, "so that we're ready when it starts to push over from a technological point of view – we already know about it, we know how to do it, and we sort of become the enablers of that new utility."

Solar Austin President Kaiba White says that community solar projects are one way to help ensure equitable access to solar, and that locally sited solar projects are good for local jobs. She had hoped to see a more ambitious timeline for local solar goals in the Generation Plan, in line with goals recommended by the task force (200 MW by 2020) and passed in August by Council through Resolution 157 (specifying that half be customer-sited, as opposed to utility scale). The plan scales back that goal: 200 MW by 2025 (including 110 MW by 2020, 70 MW of which will be customer-sited).

The utility has traditionally encouraged local customer-sited solar through rebates (residential) and performance-based incentives (commercial). For example, 11 Pflug­er­ville ISD sites have been awarded 10-year PBIs worth between $25,000 and $50,000 each annually. The district anticipates saving roughly $1 million over the lifetime of the project, installed last June. Despite the popularity of these subsidies, the Generation Plan calls for a phase-down in favor of other "supportive policies" and "financing alternatives." Because of high up-front costs, financing instruments – such as leasing – are an important part of the solar puzzle.

With Council's recent passage of Reso­lution 157, residential customers who lease their solar systems are now, as of January 1, eligible to receive value-of-solar credits for offsetting their electric bill, just like customers who own their solar systems. "That's probably the biggest difference between Austin and the rest of the world, where there are more mature financing vehicles in place," says Stan Pipkin of Lighthouse Solar, a local company that performs engineering, procurement, and contracting services for solar projects. In other markets, he says, leasing instruments have expanded solar access by allowing customers "to essentially pay nothing up front and pay month to month."

Solar Austin President Kaiba White
Solar Austin President Kaiba White (Photo by Jana Birchum)

Although AE has been behind in some regards, it has been ahead in others, including the long-running program for rebates and PBIs. However, the program's annual funding cycle has created uncertainty for local solar companies, with some "strange effects on the market," says Pipkin. "My sense is that ... the year-to-year 'grab for the pot' ... has encouraged slightly different business models that are in some cases kind of short-lived." Essentially, in competing to keep short-term costs low, not all businesses have remained sustainable, a situation jeopardizing long-term abilities to honor warranties and maintain quality control. The upshot, however, is that the surviving businesses "are quite nimble and agile," he says, "and can operate at lower margins."

In fact, Austin has some of the cheapest solar in the world now, says Pipkin, particularly for residential customers. But after years of declining soft costs, further savings under the year-to-year time horizons are harder to find. That's why Pipkin is happy that the Generation Plan, which looks four years ahead, provides a slightly longer planning horizon. Like White, Pipkin had hoped for stronger local solar goals. "Our industry contends that we can make it affordable," he says, given the introduction of new financing models and through business-model innovation enabled by a slower, more consistent ramp-down of incentives. Nonetheless, he says he's excited about the significant role solar plays in the plan overall: "I think that, in itself, is pretty historic."

A Framework of Values

In a city generally overflowing with hometown pride, the notion that Austin should be a leader is often taken for granted. It has certainly played a prominent role in the city's efforts to address climate change, and the 2025 Generation Plan follows this tradition, endeavoring to "continue to be a leader" in wind energy, "to become a leader" in energy storage, and to continue its active "leadership role" in energy research partnerships. Still, it is not always clear why leadership is important to begin with. In fact, says Shalabi, "There's a cost to being a first mover." He points to Council's decision, in 2008, to invest in an East Texas biomass plant that quickly proved more costly than anticipated when natural gas prices dropped. A similar point can be made about AE's 30-MW Webberville solar plant: Although it began operations just two years ago, solar prices have already dropped well below the Webberville contract price AE will be paying for the remaining 22 years.

These examples explain the advice given to Kimberly shortly after she moved do Austin to work at AE: "Somebody told me that the pioneers got shot," she says, "and the settlers got the land." Nonetheless, she believes being the pioneer isn't always bad. "Almost 25 years ago, Austin Energy was the first to launch a green building initiative ... focused on helping develop ambitious energy codes and appliance standards," she recalls. Not only did that initiative ultimately become "the inspiration and the impetus for the U.S. Green Building Council and their LEED rating system," she says, but it has brought significant energy savings to ratepayers.

White says that Austin's leadership is important to the solar industry because local achievements reverberate beyond city limits. "Policies that have been enacted here have already influenced policies in other places," she says, pointing to solar-crediting strategies taken up in Minnesota and other states. Moreover, from an innovation diffusion perspective, solar – given high up-front costs – is the kind of product that is particularly dependent on influential first adopters. "One of the biggest drivers of whether or not somebody gets solar is if somebody they know or somebody they live near already has done it," says White. In this way, AE programs influence not just AE's service territory but neighboring areas as well. "In the past two years especially, installations in areas without rebates that are near to Austin have picked up," says White. "When you look at where ... installations have been, it really does kind of spread out from Austin."

When thinking about leadership, AE's fundamental concern is ensuring that benefits accrue appreciably to its customers. "It's important to be a leader not only in the sense of being the first person to do something but the first person to do something right," says Osborne. "I generally say I like to be about five to 10 years behind California, because that's worked very well for us. The first California wind farms were very expensive. When our wind industry took off here, it was at prices that no one had ever seen before."

The future of energy prices is, of course, the great unknown in the utility business. AE's affordability metrics are one tool it has for protecting customers from that risk, but they are imperfect. For instance, the 2% cap on rate increases does not necessarily apply specifically to any one customer class, be it industrial, commercial, or residential. Rates for one class could pierce the 2% cap while another's fall far below, technically meeting the 2% constraint overall while in fact imposing a greater burden on some than others. "Firming up" the metrics – a problem not addressed in the Generation Plan – is one of the things Shalabi hopes to see the new City Council address.

Also omitted from the Generation Plan are the task force recommendations – such as those pertaining to energy efficiency – that would benefit low-income ratepayers, says task force member Carol Biedrzycki, executive director of Texas Ratepayers' Organization to Save Energy. Biedrzycki serves on the Low Income Consumer Advis­ory Task Force, a new group formed by council last fall to make recommendations regarding programs to benefit low- and moderate-income ratepayers. With those recommendations due this summer, Biedrzycki hopes to see them folded into the plan.

"Everybody got really excited, upset, etc. about the Gen Plan, but it's a living breathing document that will change," says Reed. With little else guaranteed to happen under the plan in 2015 – aside from the issuance, likely this month, of an RFP for the gas plant study – there may be plenty of time for new rounds of dabbling, perhaps prompted by a brand new Council. Ulti­mate­ly, the plan is not so much about what's written in the document now, but how well it serves as a guidepost in the coming years. As Pipkin says, "It's really a framework of how we value and position energy as a part of our community ethos."

A previous version of this story referred to Cyrus Reed as the director of the Sierra Club Lone Star Chapter; he is the conservation director.

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Austin Energy, solar energy, Generation Plan 2025, Recurrent Energy, Fayette Power Project, Bill Spelman, Khalil Shalabi, Cyrus Reed, Lee Leffingwell, Michael Osborne, Deborah Kimberly, Solar Austin, Kaiba White, Stan Pipkin, Lighthouse Solar, Carol Biedrzycki

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