The Future of Electrical Utility in Ohio
/Ohio Energy: State of Confusion and Opportunity
The state of Ohio electric energy production and distribution is one of both great challenge and also considerable opportunity.
Electrical Marketplace Confusion
It is obvious that Ohio electric power is in a state of flux. In 1999 Senate Bill 3 was signed into law. This law sought to establish in Ohio a competitive marketplace for electrical energy sales. In the transition period, it provided for a five-year market development period lasting from Jan. 1, 2001 to Dec. 31, 2005. During that time, rates were frozen in order to allow a competitive wholesale market to take shape.
The competitive market did not develop as expected. As the end of the market development period neared, the Public Utilities Commission of Ohio (PUCO) became concerned about the limited number of competitive electric suppliers and the low degree of market activity. They feared that this response was an indication that an immediate shift to market-based rates in 2006 would not be in the best interest of customers.
They set out to minimize the effects of rate “sticker shock” upon the unsuspecting electrical customers by gradually transitioning customers to market-based rates. The PUCO required Ohio’s electric utilities to develop rate stabilization plans (RSPs). These plans were intended to eliminate market uncertainty and provide customers with stable, predictable rates. For the most part, the Rate Stabilization Plans were initiated Jan. 1, 2006 for a three year period and are due to come to an end on Dec. 31, 2008 (The RSP of Dayton Power & Light ends in 2010).
Throughout this period, the shift toward competitive marketplace for electricity supply has struggled. There appears to be a marked lack of enthusiasm on the part of the electric utilities to embrace the competitive concept. AEP Ohio commented in a 7/6/2006 news release, “We believe that a move to competitively bid market-based rates would be detrimental to our customers.” Indeed, on the PUCO’s own website there is a very telling notice, “No Competitive Retail Electric Service providers are currently enrolling customers in Ohio.”
Even as the shift to competitive market based electricity sales has caused uncertainty ANOTHER Senate Bill has compounded the problem. On May 1, 2008 S.B. 221 was signed into law. The impact of S.B 221 is in several areas. First, it is in many ways a backing away from a strict market-based electrical sales. It establishes a kind of hybrid system with both regulated rates and market-based rates.
Secondly, S.B. 221 is intended to provide PUCO with the power to stabilize rates after the official Rate Stabilization Program draws to conclusion in December 31, 2008.
Thirdly, it establishes a powerful impetus for utility usage of renewable energy resources. S.B. 221 requires that by 2025 25% of electricity sold by electric distribution utilities and electric services companies be from “alternative energy sources”. Alternate energy sources include renewable energy resources and advanced energy sources. Renewable resources are electrical energy generated through wind, solar, and hydroelectric power. Advanced energy sources are sources of recovered energy such as usage of waste heat for electric generation, improvements to real and reactive power, and peak demand reductions.
These goals will be gradually phased in beginning in 2009 continuing through 2025. The utility company’s progress will be monitored by the PUCO and financial penalties will be assessed if it is determined that a utility has not made sufficient progress. Funds from these penalties will be deposited in the “advanced energy fund” to provide financing for alternative energy projects.
Alternative Energy Resource Opportunities
Electrical rates can be expected to rise in a predictable manner. Ohio utilities AEP Ohio, Duke Energy and FirstEnergy have filed Electric Security Plans. These plans, when accepted by PUCO, establish their rates for the next three years. AEP Ohio, for example, forecast an approximate 15% raise in rates per year over three years.
Although the rates will be predictable over the next three years, S.B. 221 puts considerable pressure upon the utilities to find adequate sources of Renewable and Advanced Energy Sources. Some of those sources may be found from the utility customers themselves. Opportunities exist for customers to capitalize on these opportunities. As the pressure on the utilities increases as the years close on 2025 we can expect the opportunities in the area of renewable resources to multiply. The following advanced energy resources will be worth monitoring.
Distributed Generation. - Net metering is a scheme of distributed generation where a customer has their own small renewable generating equipment to provide a part of their own electrical needs. The generating equipment is hooked to the system and metered in such a way that the customer pays the net cost of the difference between total electrical consumption and the customer supplied power. During times of low electrical consumption the excess power is fed back into the grid and at that point the customer essentially “sells” power back to the utility. Before S.B. 221 the tariffs set by the utility for net metering schemes were limited to 1% of customer’s peak electrical usage. That cap has been eliminated by the new law.
Cogeneration is an energy thermodynamic efficiency scheme where a heat engine or power station simultaneously provides both heat and electrical power. A boiler that produces heating may be tapped so that the excess heat provides power for small electrical generating equipment.
Power Factor Correction provides increased power efficiency by correcting an imbalance between the real and reactive power.
Peak Demand Reduction programs must be implemented by distribution utilities beginning in 2009.
The significance of these Alternative Energy Resources may not be immediately apparent. Any improvement in the area of alternate energy resources on the part of a utility customer reflect back upon the utility. The utility may be able to use these improvements as part of the utility improvement programs.
Government Incentives
Currently incentives by the utilities themselves to invest in these Alternate Energy Resources are largely non-existent. This should change as the implementation of S.B. 221 rolls forward. As pressure on the utilities to meet their established quotas of alternative energy resources grows, we can also expect incentives by the utilities to expand as well. In the mean time, companies should consider investigating governmental incentives for involvement in alternate and renewable energy resources. Proactive preparation in these areas should position forward-looking companies for the increasingly “green” industrial environment.
State of Ohio Incentives: Companies who are interested in investing in alternate or renewable energy technologies should look to the Advanced Energy Fund for assistance. Currently the Ohio Department of Development (www.odod.state.oh.us) has three programs to assist in development of alternative energy projects.
The Distributed Energy Resources Notice of Funding Available seeks applications for grants to cover a portion of costs of projects in the area of distributed energy resources such as: industrial heat recovery, biomass or landfill methane for electric generation.
The Manufacturing Facilities’ Energy Efficiency Notice of Funding Available seeks applications for grants to cover a portion of projects in the area of improving manufacturing efficiency in areas of lighting, HVAC, geothermal, motor efficiency, power factor correction and cogeneration.
The Renewable Energy Program Notice of Funding Available seeks applications for grants to cover a portion of projects in the area of implementing renewable energy projects in the area of solar electric, wind electric, and solar thermal systems for commercial, industrial, institutional and governmental entities.
The Advance Energy Job Stimulus Fund T his bond-funded program creates an Advanced Energy Job Stimulus Fund that is administered through a public process managed by the Ohio Air Quality Development Authority (OAQDA). The Fund will award grants and loans to a portfolio of advanced energy projects that serve to attract new investment to Ohio, build upon Ohio's manufacturing strength, advance energy technology development toward commercialization and prepare Ohio's workforce for the future.
The fund will consist of $150 million advanced energy money (over three years) seeking to increase the development, production and use of advanced energy technologies in the state, and is divided in the following manner:
- $66 million for clean coal technology projects administered through OAQDA’s Ohio Coal Development Office (OCDO) (reviewed by the Technical Advisory Committee and approved by OAQDA); and
- $84 million for non-coal-related projects in three $28 million annual appropriations administered by OAQDA (reviewed by the Development Finance Advisory Council, approved by the OAQDA and brought before Controlling Board for final approval).
As a general guideline, grants may range from approximately $50,000 to $250,000 based on the size and scope of the entire project and the jobs, investment and other. Projects presenting outstanding value propositions for Ohio may be considered for significantly higher awards.
- Additionally, five percent of the fund may be set aside for small grant awards (generally in the range of $50,000) to support disruptive technologies with significant potential for success, even if they are in earlier stages of development.
Loans may range from approximately $1 million to $2 million. For highly qualified applicants, loans could be structured a number of ways including below market rates, subordinate collateralized positions with participating financial institutions and/or varying principal payments for a specified period of time.
Tax Exemption. Ohio has other incentives such as certain tax exemptions. The State of Ohio exempts certain property from real and personal property taxation, sales tax and use tax. The exemption applies to property used in renewable energy conversion, thermal efficiency, waste heat recovery, and the conversion of solid waste to energy. See http://www.odod.state.oh.us/taxreform.htm.
Federal Incentives: The Federal government offers substantial incentives for projects involved in alternate or renewable energy.
Federal Loan Guarantee Program. The Federal government offers loan guarantees for large projects that employ advanced technologies that avoid, reduce or sequester emissions of air pollutants or greenhouse gases in the area of coal-based power generation, industrial gasification, and advanced coal gasification facilities. See http://www.lgprogram.energy.gov/press/092208.pdf.
Tax Incentive Assistance Project. On October 2, 2008 President Bush signed into law legislation that extended the Energy Efficiency Tax Incentives that had expired in 2007. Tax incentives exist that support a variety of alternative energy resource development projects. See http://www.energystar.gov/index.cfm?c=products.pr_tax_credits.
It may be too soon to jump onto the alternative or renewable energy resource bandwagon. The regulations from S.B. 221 have barely had time to implemented. The time is coming, however, and it may be very soon that action will be required. In the meantime the prudent businessperson will carefully investigate his/her opportunities and be prepared to join the wave before it washes over us.
Update 1/12/2009: The PUCO has failed at this point to approve AEP Ohio's Electrical Security Plan (ESP). Consequently, the anticipated rate hikes have not taken effect and the 2008 rates will continue into 2009 probably through February.
