Ohio utilities seek middle ground on renewable energy standards

By Philip de Oliveira and Eric Weaver

Renewable energy benchmarks for Ohio’s public utilities will continue to rise in 2017 after a two-year standstill. The debate among policymakers and industry leaders over what is best for businesses, consumers, and the environment will likely be fueled, in part, by Gov. John Kasich’s surprising veto of a proposed extension of the renewable energy standards freeze.

Some GOP lawmakers have promised to act on what they see as government overreach into the private sector. So far, the reaction from Ohio’s largest utility companies has been fairly neutral.

Before 1999, Ohio’s electric utilities controlled all aspects of energy production, from generation to transmission and distribution to homes and businesses. The Public Utilities Commission (PUCO) set prices for everything, including the cost to generate power. Competition was virtually nonexistent.

That year, the Ohio legislature deregulated electric utilities. Among other things, this meant the price of fuel would be determined in a competitive market.

[pullquote]”A lot of customers are willing to support renewable energy for the greater good.”[/pullquote] Now, utilities are no longer fully integrated. Generation is carried out by independent or affiliated companies. Suppliers like Ohio Edison, Toledo Edison, and Cleveland Electric Illuminating distribute the energy, and a non-profit, FERC-certified company manages the regional transmission grid for Ohio and 13 other states.

“The easiest way to describe them is they’re basically the air traffic controllers of the high-voltage power grid,” said PUCO spokesman Matt Schilling.

Electric utility suppliers and PUCO have separate spheres of control when it comes to energy production.

“We are, in fact, two separate entities,” said Mark Gundelfinger, Manager of Alternative Energy for American Electric Power.

“The wires companies,” meaning the grid operators and distributors, “are still fully regulated by the Public Utilities Commission, but the generation companies sell their generation based on market price.”

Renewable Energy Credits
[pullquote]“We never stopped buying renewable energy for our customers.”[/pullquote]For each megawatt hour the generator produces, regional grid operators such as PJM Interconnection issue a paper certificate called a Renewable Energy Credit. The generator sells those credits to utility companies on an open market.

Since 2009, Ohio’s electric utilities have been required to buy a certain percentage of their energy in the form of REC’s. That percentage went up incrementally each year, until June of 2014, when Senate Bill 310 froze that standard at 2.5 percent, and established a committee to study the efficacy of the renewable energy mandate.

Late last year, Gov. Kasich vetoed House Bill 554, which proposed an extension of the freeze. With the freeze no longer in place, the renewable energy benchmark will resume its incremental rise. In 2017, utilities will need to buy 3.5 percent of the energy they sell in renewable sources, and 0.15 percent of that must be solar energy.

Source: Public Utilities Commission of Ohio

Utilities demonstrate their compliance with the standard by submitting a yearly report to the PUCO. The report includes all of the REC’s purchased by the utility. Each REC has a serial number which is stored in the grid operator’s database. PUCO checks the serial numbers in the report against that database to verify that companies have met the standard. However, as Schilling notes, PUCO’s role is to implement the standards. The standards themselves are set by the Ohio General Assembly.

According to Schilling, a competitive market makes the generation side of the energy equation less attractive to utilities. Instead, they form “spinoff” affiliates, or contract independent companies, to generate power.

FirstEnergy, in addition to its electric distribution utilities, has a competitive affiliate called FirstEnergy Solutions, which handles both generation and retail sale of power. The latter still operates under FirstEnergy umbrella, but it cannot share resources as freely as it could if it were fully integrated.

The end of the freeze
FirstEnergy spokesman Doug Colafella doesn’t expect much to change as an immediate result of Gov. Kasich’s veto of House Bill 554.

“We never stopped buying renewable energy for our customers,” he said. Because the freeze was just that—a freeze—the requirement that utilities buy a certain amount of REC’s never went away. “There was still an amount of renewable energy that we had to buy for our customers.”

[pullquote]“When your energy decisions are driven primarily by cost, [they don’t] take environmental factors into consideration.”[/pullquote]Ohio Rep. Bill Seitz, who supported continuing the freeze, has argued that requiring utilities to buy a certain amount of renewable energy each year under threat of heavy fines is unfair to customers who see compliance costs reflected in their monthly bills. In a Cincinnati Enquirer op-ed, Seitz asked, “Why … do renewable energy advocates seek mandates that utilities buy their product and pass the higher cost on to unsuspecting ratepayers?”

Where consumers are concerned, Colafella said “a lot of customers are willing to support renewable energy for the greater good.”

But one aspect of the renewable energy mandate is less popular among FirstEnergy’s larger customers. “Most of the pushback we’ve seen is on the energy efficiency side,” Colafella said.

Since 2009, Ohio’s utilities have been required to make energy efficiency programs available to their customers under Section 4928.66 of the Ohio Revised Code. The cost of those programs is passed to the customer in the form of a monthly surcharge based on their energy usage.

Colafella said residential customers typically pay an extra $2 to $3 a month for those programs. But some of FirstEnergy’s largest industrial customers “have objected to the energy efficiency charges on their bills.” Some of those charges exceeded $1 million in a single year.

In September 2014, Senate Bill 310 allowed businesses to implement their own efficiency programs—typically consisting of retrofitting lighting and equipment—and opting out of the utility’s program. Section 4928.611 of the Ohio Revised Code stipulates that in order to be eligible to opt out, industrial customers must receive “a quantity that exceeds 45 million kilowatt hours of electricity for the preceding calendar year.” They must also submit a written plan for reducing energy consumption to PUCO.

 

Who should pay
Between the cost of efficiency programs and purchasing REC’s, some of the debate over energy policy in Ohio centers on whether mandated renewable energy standards are unfair to customers.

Schilling said some policymakers have suggested the free market could support the cost of renewable energy so customers don’t have to bear the burden of compliance costs.

Given the abundance of natural gas in Ohio, that seems unlikely.

Colafella said in the last couple of years, “the REC market has been pretty low. We may expect it to go up in the next couple of years, but we’re not expecting a big spike.”

As with other fuel sources, the price of REC’s is determined through a competitive bid process. And the impact of cheap natural gas extends beyond lowering how much renewables can fetch in a competitive market.

“The decline in coal-fired generation in recent years is primarily driven by the low cost of natural gas,” said Colafella.

Colafella said moving “toward a single source for generating electricity” is risky for utilities and consumers. Instead, he said, “it’s important that Ohio preserve various types of fuels for producing electricity” to hedge the industry—and customers’ electric bills—against the rise and fall of fuel prices.

“When your energy decisions are driven primarily by cost, [they don’t] take environmental factors into consideration,” he said. “That model does favor renewable energy at certain times of the day. For example, overnight, wind energy is a highly competitive fuel source.”

When it comes to factors besides cost, Colafella said the market is not well-equipped to address environmental needs, jobs, and long-term economic development. “We believe that the current model really does not give the state the flexibility to look at those factors,” he said.

Colafella said FirstEnergy and AEP are talking with Ohio lawmakers about making energy decisions based on a broader range of considerations.