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Home My WebLink About2020-12-17; Clean Energy Alliance JPA; ; Clean Energy Alliance Pro Forma UpdateClean Energy Alliance JOINT POWERS AUTHORITY Staff Report DATE: December 17, 2020 TO: Clean Energy Alliance Board of Directors FROM: Barbara Boswell, Interim Chief Executive Officer ITEM 6: Clean Energy Alliance Pro Forma Update RECOMMENDATION Receive presentation on the updated Clean Energy Alliance Pro Forma. BACKGROUND AND DISCUSSION The financial pro forma uses forecasted customer energy usage, current market information related to energy prices, projected San Diego Gas & Electric (SDG&E) electric generation and Power Charge Indifference Adjustment (PCIA) rates to develop annual financial forecasts. In essence it reflects, what Clean Energy Alliance's (CEA) financial picture would look like if we were to contract for all our energy needs today and set rates today. While best practices recommend not contracting for all energy needs at one point in time, rather to ladder purchases to mitigate risks related to energy price volatility, it does provide a snapshot to gauge CEA's financial outlook. Changes in Market & Other Conditions affecting CEA Pro Forma The CEA Board received a presentation on the financial pro forma at its July 16, 2020 meeting. Since July, there have been significant changes in market conditions that are affecting CEA's pro forma. These include projected SDG&E generation and PCIA rates, forward price curve for energy prices and CEA's load projection has been adjusted based on SDG&E's enrollment list and phasing. SDG&E Generation and PCIA Rate Proiections Since CEA will be directly competing with SDG&E for customers, SDG&E's rates are a key indicator in developing CEA's pro forma. In addition, CEA's Joint Power's Authority Agreement has set a target 2% discount when compared to SDG&E for generation costs. SDG&E sets its generation (SDG&E's "Commodity" rate) in its annual Energy Resource Recovery Account (ERRA) Rate Proceeding. As the Board is aware, in its November update, SDG&E used load forecasts that did not take into account the significant impact to load of the launch of CEA and San Diego Community Power. This error in its rate calculation methodology results in an artificially low per kWh generation rate for 2021. These unrealistically low rates would result in SDG&E not recovering its true energy costs, and the undercollection would need to be collected in the following year. This is a disservice to customers in that they would not be able to have accurate rates comparisons between CEA and SDG&E upon which to select their energy provider. The rates would be so low that CEA could not set its rates to provide customers cost parity and recover its energy costs. CEA has been actively participating in the rate proceeding and urging the California Public Utilities Commission (CPUC) to direct SDG&E to correctly reflect the departing load in its rate setting methodology. The Proposed Decision (PD) in the rate proceeding, issued on December 2, supports CEA's position and directs SDG&E to update its rates to properly account for the departing load. When the CPUC commissioners consider SDG&E's ERRA at its December 17 meeting, it is not guaranteed they will adopt the December 17, 2020 Pro Forma Update Page 2 of 6 PD. CEA is remaining diligent in its efforts to encourage the CPUC to direct SDG&E to set rates at appropriate levels. In addition to generation rates being set in the ERRA proceeding the PCIA fee is also established as part of the ERRA. The PCIA is a fee charged to customers who leave SDG&E to take the energy generation from another provider such as CEA. The purpose of the fee is to pay for losses that SDG&E may incur in liquidating energy contracts entered into for customers that have now left their service. Overtime, as these contracts expire, the PCIA should diminish. In reviewing PCIA rates throughout the state, those CCAs that are reaching about 10 years are seeing the PCIA decreasing. It is a fee that is billed and collected by SDG&E and which CEA has no control over, however, it directly impacts the overall energy costs its customers pay. Customers in SDG&E territory who choose to take theirenergy from another provider, such as CEA, are charged some of the highest PCIA rates in the state. In setting its rates, CEA needs to take into account the PCIA that SDG&E will be assessing its customers. Energy Forward Price Curve Nearly 90% of CEA's operating expenditures are related to energy supply costs, which include not only the cost of procuring conventional energy, but also the added costs of mandatory and voluntary renewable energy products and resource adequacy. Until CEA enters into actual contracts, which provides price certainty, the pro forma is subject to fluctuations in the energy cost assumptions in the pro forma results. Energy assumptions in the pro forma are based on the forward price curve. It looks at what the price would be today if CEA were to enter into contracts for all its energy needs. Since May 2021, the price curve has seen a significant increase in the 2021 forward prices coming out of the summer when grid vulnerabilities were exposed (impact of August heat wave on energy pricing). The current forward curve is up 23% since May as demonstrated in the chart below, which provides a comparison of the SP15 shared energy curve in May and today. Southern California Energy Prices (SP 15)) S50,C.C.) CA) s3o.co S10.13.3 S. May December 17, 2020 Pro Forma Update Page 3 of 6 The significant increase in energy pricing for the summer months is evident, from just under $50/MWh to over $60/MWh. Since we are not currently actively soliciting or procuring energy to serve our customers, we have the opportunity to monitor the market as we plan for CEA's energy solicitations and procurements. CEA Customer Usage Through the process of developing the implementation phasing list with SDG&E, CEA became aware that the Poseidon Desalination Plant had entered into a special billing arrangement whereby credits are earned related to energy generated by the Rancho Peliasquitos Hydroelectric Facility. Should the accounts receiving the benefit of the credits enroll with CEA, they would lose the credits. In recognition of this, CEA staff has begun working with, and continues to with, San Diego County Water Authority (SDCWA) staff to identify opportunities for the two agencies to work together related to Poseidon taking service from CEA without losing the benefits. Since no agreement has yet been reached, it is prudent to adjust pro forma scenarios to exclude the related load. CEA Pro Forma The base pro forma presented to the Board in July was based on the following assumptions: •50% Renewable Energy Default increasing to 100% by 2035 •Renewable Energy sourced from PCC1 and PCC2 at allowable levels •Contributing 5% to operating reserve to achieve 20% reserve by 2025 •90% participation rate •Cost parity with SDG&E (CEA rates set so customers pay same for generation as they would as SDG&E customer, taking into account SDG&E PCIA fees) The resulting base pro forma from July 2020 is reflected below: Annual DRAFT Pro Forma Projections for a Corinnuredy Chyme Aggregation Program - Parity; 505 Renewable Default to t00%Renevrable by 5035 Clean Energy Alliance Fiscal Year Ending: 2020 2021 2022 2023 2024 2025 I.Revenue - 9913.235 69,767,349 71 127,161 72,508,987 73,913,166 II.Operating Expenses Power Supply 8988,017 60.975876 59,978,716 61,512,028 62.261,087 Staff 50,000 120,000 600,000 618.800 636,540 655,636 Administrative Costs* 253,000 1,223.938 2,4.59,148 2,497,813 2,558,347 2,616,275 Subtotal Operating Expenses 303,000 10,331,956 64,036,023 63,094,529 64,705,915 65,532,998 Operating Margin (303,000) (418,721) 5,731,326 8,032,632 7,802,071 8,380,167 III.Financing Interest - 123,333 146,250 116,038 69,822 22,280 Principal - 450.000 500,000 1,287,015 1,332,791 1,380,194 Subtotal financing - 573,333 646,250 1,403,053 1,402,613 1,402,474 Operating Margin Less Enancing (303,000) (992,054) 5,085,076 6,629,579 6,399,458 6,977,693 IV.Ca sh From Financing 450,000 4,500,000 - - - V.Other Uses CPUC and CAl SO Deposits 147,000 500,000 - - - Collateral Deposits 0 2,500,000 Reserve AdAtions 495,662 3,488,367 3,556,358 3,625,449 3.695,658 Subtotal Other Uses 147,000 3,495,662 3,488,367 3,556,358 3,625,449 3,695,658 VI.Net Surplus/(Deficit) 12,284 1,596,708 3,073,221 2,774,009 3,282,035 VII.Cumulative Reserve 495,562 3 984 029 7 540 387 11,165,837 14,861,495 VIII.Cumit ative Net Surplus - 12,284 1,608.993 4,682,213 7,456,222 10,738,257 VI. Combined Cumulative Reserve &Cumulative NetSurplus 507,946 5,593,022 12,222,601 18.622,059 25,599,752 . Comprised of Technical and Legal Services, Customer OutreachandCommunications, Utility Services Fees, Data Management Senirces,Uncollectibles December 17, 2020 Pro Forma Update Page 4 of 6 The following updated pro forma reflects current market conditions for energy forward price curve, SDG&E rates and PCIA, and excludes Poseidon load, with the base assumptions of: •50% Renewable Energy Default increasing to 100% by 2035 •Renewable Energy sourced from PCC1 and PCC2 at allowable levels •Contributing 5% to operating reserve to achieve 20% reserve by 2025 •90% participation rate •Cost parity with SDG&E (CEA rates set so customers pay same for generation as they would as SDG&E customer, taking into account SDG&E PCIA fees) Annual Pro Forma Projections for a Community Choice Aggregation Program -Panty Clean Energy Alliance 10-Dec-20 Fiscal Year Ending: 2020 2021 2022 2023 2024 2025 I.Revenue 4,714,374 38,398,225 39,056,596 39,730,718 40,538,324 Revenue -Voluntary 100% Green Subtotal Revenue 4,714,374 38,398,225 39,056,596 39,730,718 40,538,324 II.Operating Expenses Power Supply 6,060,081 40,424,629 39,774,066 38,517,680 38,152,022 Staff 41,900 120,000 300,000 309,000 318,270 327,818 Administrative Costs 237,460 997,707 2,321,597 2,357,115 2,397,955 2,447,281 Subtotal Operating Expenses 279,360 7,177,788 43,046,227 42,440,181 41,233,905 40,927,122 Operating Margin (279,360) (2,463,414) (4,648,002) (3,383,585) (1,503,188) (388,797) III.Financing Interest 81,594 168,787 133,327 96,515 58,298 Principal 650,000 926,553 961,902 1,532,400 1,036,697 Reserve Contribution 235,719 - - Subtotal Financing 967,312 1,095,340 1,095,229 1,628,914 1,094,995 Operating Margin Less Financing (279,360) (3,430,726) (5,743,341) (4,478,815) (3,132,102) (1,483,793) IV.Cash From Financing 450,000 5,650,000 V.Other Uses CPUC and CAISO Deposits 147,000 500,000 Collateral 1,000,000 Subtotal Other Uses 147,000 1,500,000 VI.Net Surplus/(Deficit) 23,640 719,274 (5,743,341) (4,478,815) (3,132,102) (1,483,793) VII.Cumulative Reserve 235,719 235,719 235,719 235,719 235,719 VIII.Cumulative Net Surplus 23,640 719,274 (5,024,068) (9,502,882) (12,634,984) (14,118,777) Based on best information available today, CEA would not be able to set its generation rates to provide customers with cost parity (paying the same for electricity as they would as an SDG&E bundled customer) and cover its operating costs. December 17, 2020 Pro Forma Update Page 5 of 6 If CEA were to set rates today, and purchase all its energy today, CEA would need to set rates that would be lower than SDG&E's generation rates, however, when PCIA is accounted for, the customer's overall bill would be above those of SDG&E. The resulting pro forma is shown below: Annual Pro Forma Projectionsfor a Community Choice Aggregation Program -Premium Clean Energy Alliance 10-Dec-20 Fiscal Year Ending: 2020 2021 2022 2023 2024 2025 I.Revenue 5,620,321 46,177,213 46,926,067 47,695,336 48,622,810 Revenue -Voluntary 100% Green Subtotal Revenue 5,620,321 46,177,213 46,926,067 47,695,336 48,622,810 II.Operating Expenses Power Supply - 6,060,081 40,424,629 39,774,066 38,517,680 38,152,022 Staff 41,900 120,000 300,000 309,000 318,270 327,818 Administrative Costs 237,460 997,707 2,321,597 2,357,115 2,397,955 2,447,281 Subtotal Operating Expenses 279,360 7,177,788 43,046,227 42,440,181 41,233,905 40,927,122 Operating Margin ill. Financing (279,360) (1,557,467) 3,130,987 4,485,886 6,461,431 7,695,689 Interest 81,594 168,787 133,327 96,515 58,298 Principal 650,000 926,553 961,902 1,532,400 1,036,697 Reserve Contribution 281,016 2,035,647 2,346,303 2,384,767 2,431,141 Subtotal Financing 1,012,610 3,130,986 3,441,533 4,013,681 3,526,136 Operating Margin Less Financing (279,360) (2,570,076) 1,044,354 2,447,750 4,169,553 V. Cash From Financing 450,000 5,650,000 V.Other Uses CPUC and CAISO Deposits 147,000 500,000 Collateral 1,000,000 Subtotal Other Uses 147,000 1,500,000 VI.Net Surplus/(Deficit) 23,640 1,579,924 0 1,044,354 2,4-47,750 4,169,553 VII.Cumulative Reserve 281,016 2,316,663 4,662,966 7,047,733 9,478,873 VIII.Cumulative NetSurplus 23,640 1,579,924 1,579,924 2,624,278 5,072,027 9,241,580 With this rate assumption, CEA would raise sufficient revenue to cover its costs, establish reserves to meet it's 25% operating reserve target and repay its financing in 5 years. The premium to SDG&E in the above pro forma is estimated at 3.6%, or an average $3.50 for residential customers. To be conservative, based on the cost premium, staff has adjusted opt out rates in the above pro forma to reflect: 10% residential and 20% non-residential opt out rate. It's important to note: •CEA is NOT setting its rates today; CEA will consider rates at its February meeting. •CEA is NOT procuring power today; CEA will be procuring power in spring 2021. •SDG&E's rates for 2021 have NOT been approved by CPUC; anticipated end of December. December 17, 2020 Pro Forma Update Page 6 of 6 This pro forma scenario reflects a touchpoint for today, it can and will change over the next several months and will be updated as there is more clarity on these issues. In the past, the CEA Board has requested other pro forma scenarios that consider: •Achieving 100% PCC1 renewable energy at launch •Achieving 100% PCC1 renewable energy by 2025 For purposes of today's review, the costs of achieving these goals were not included in the pro forma presented. These scenarios will be included in future scenarios for Board consideration when setting rates in February. FISCAL IMPACT No fiscal impact as a result of this item. ATTACHMENTS None