Hot testimony has wrapped up at the PUCO regarding AEP Ohio’s plan to develop 400 MW of solar and 500 MW of wind generation through 20-year power off-take agreements. Why the debate when Ohio’s generation market is deregulated? The issue debated is not whether or not it can be built but rather, who will pay for it.
Since power generation is deregulated in Ohio, the risk and expense of electricity generation development is born by independent power plant (IPP) developers. The overarching goal of this structure is to allow for innovation, lower costs and shifting of financial risks from captive rate payers to investors. Regulated utilities like AEP can build new generation and charge rate payers for the investment IF they can demonstrate that the generation is needed based on resource planning projections. There are definitions of “need” in Ohio’s rules and this is at the heart of the debate. There is nothing stopping AEP from building the generation using its own balance sheet, but the utility would like its rate base to pay for it. A PUCO ruling on whether AEP Ohio will prevail and make the rate base foot the bill is expected to be issued in the next month.
So what precedent is set if the PUCO allows regulated generation in a “deregulated” market and what impacts could this have on the future of renewables in Ohio?
Stakeholders on both sides are in the process of introducing testimony regarding the case. The PUCO staff is one of the stakeholders. After looking at the evidence provided by AEP they have concluded that AEP has not demonstrated a need for this generation citing that the current deregulated market provides opportunities for customers to buy 100% of their energy from renewables if they desire and the amount of installed generation is over the peak demand by a reserve margin of over 20%, when the target is only 15.8%.
All that being said, the PUCO Commissioners still could rule that AEP has demonstrated a “need” for this generation. If that becomes a reality, then the game has changed for all the utilities. There are five other Investor Owned Utilities in the state that would love to demonstrate the same need if given the opportunity. Why? Because they can make a guaranteed rate of return on the projects. For every dollar that a rate payer spends, utilities keep a portion for their bottom line. If a precedent is established in this case, then expect all the other utilities to follow suit with the same ask which means another charge on everyone’s electricity bill.
Impact on the Renewable Market
Renewable energy in Ohio has been growing year over year but at a slow pace. These projects are owned and operated by IPPs using their own balance sheets. What is contemplated in this case is providing one player with the capital to finance the project. This is not preferred project financing (e.g. borrowing at low rates); this is gifting the capital. That is certainly a market advantage that current and future independent renewable developers find disturbing.
The Ohio General Assembly has developed Renewable Portfolio Standards which require a percentage of the electricity supplied to Ohio consumers to come from renewable sources. This statute creates an artificial demand for renewables that, to date has “efficiently” been satisfied through IPPs in the renewables market. “Efficiently” meaning when the demand for renewables is greater than supply then the value of renewable energy credits increases creating more incentive for development. Conversely, when the renewable supply outpaces demand then the prices for renewables fall, slowing development.
AEP Ohio’s proposed 900 MW of renewable generation will double the amount of renewables in Ohio. It is a very likely outcome that flooding the market with renewables paid by rate payers will choke if not kill future development by investors willing to make renewable investments in Ohio. Those who are risking their own capital may see this as an attack on their viability to achieve returns and, consequently, take their projects elsewhere.
Nothing kills a fair market like providing unique benefits to a select few.