Utility Incentives Roadmap

California continues to move forward towards a more diverse and cleaner future.

California continues to be at the forefront of transformation in shifting towards a clean energy future. This future will focus on a power grid that is comprised of opportunities for innovation and choices, along with barriers that will need to be overcome.

The water sector can benefit from the energy sector's experiences with the key focus recognizing that the future is "distributed." Customers now have choices in how they can manage their water and energy, which includes adopting distributed energy resources and distributed water resources. There are many drought resilient technologies that can produce substantial resource, environmental and economic benefits for the State when implemented by customers.

Distributed Water Resources

The energy industry refers to customer-side energy resources – energy efficiency, electric demand response, customer production of clean and/or renewable distributed electric generation, and battery energy storage – as distributed energy resources.

Customer-side water projects – water conservation and efficiency, changes in quantity and timing of water demand, customer production of water resources (surface water, groundwater, on-site production and reuse of recycled water), and water storage – are similarly “distributed.”

Customer investments in distributed water resources (e.g. water conservation and efficiency, on-site wastewater treatment, and on-site production and use of recycled water) are pivotal to building a drought-resilient future. These resources reduce pressure on centralized municipal water and wastewater treatment systems. Over time, less municipal water and wastewater treatment capacity will be needed, reducing the capital and operating costs of these centralized systems. In many cases, customer-side actions also reduce electric consumption and associated greenhouse gas emissions from water and wastewater utility systems and operations.

The key issue is that customers NEED to make the investment. Accelerating drought resilience will require customers to take the risk in investing and will also require new business models that enable optimizing State investments on a comprehensive basis--water, energy and climate.

Benefits to Investing in Distributed Water Resources

Barriers

Current Water and Energy Programs Allocate Incentives on Basis of Single Resource, Single Site

Current energy efficiency programs determine eligibility for incentives on the basis of site-specific impacts. This single resource focus ignores substantial public benefits that could have been achieved by reducing demand for valuable potable water supplies, and reducing loading on aged water and wastewater infrastructure. Although many new water treatment technologies are also energy efficient, thereby producing high quality recycled water at a fraction of the energy needed for conventional wastewater treatment, present energy incentives become inaccessible because energy use increases at the customer’s site, even though total energy consumption to produce this high quality water is actually reduced.

This single resource, single-site impact model ignores the true benefits to the State:

A water user makes an investment to treat, recycle, and reuse its own wastewater, substantially reducing its potable water demand and reducing municipal wastewater treatment.
- The water utility reduces its energy use by reducing the amount of water it needs to supply, treat and deliver.
- The wastewater utility reduces its energy use by reducing wastewater collection and treatment; and, where applicable, also reduces energy associated with production and delivery of recycled water.
Greenhouse gas emissions are reduced by the amount of statewide electric savings.

The net impacts for the State are thus positive.

Water Sector has little Investment in Customer Programs

The electric sector invests billions of dollars in customer demand side management programs and the State also invests billions of dollars in greenhouse gas reductions. There is no comparable statewide program for customer-side water programs and the actual amount of water sector investment is not know.

The largest urban water supplier in the state, Metropolitan Water District of Southern California (MWD), provides useful benchmarks. Specifically, MWD collects and administers a Conservation Credits program that provides funding for water demand side management to its member agencies that collectively serve about 19 million residents in southern California. At the height of the drought, Conservation, outreach and education totaled $289 million (FY2016) and $175.5 million (FY2015) for MWD and its member agencies. Annual MWD and member agencies’ investments during the prior five years (FY2010-2014) ranged from $22 million to $45.5 million – averaging $31 million per year.

MWD’s level of investments during the height of the drought were clearly unusual, primarily to fund removal of 160 million square feet of turf.[1] For that reason, MWD’s FY2017 investment of $56 million was used to estimate “typical” annual water customer-side financial support from MWD and its member agencies. If other water agencies invest comparable amounts in customer-side water efficiency programs, statewide water sector investments would be about $112 million per year - 9.5% of the level of investments made by electric utilities for comparable customer-side DSM programs during CY2017.[2]

[1] Electric utilities investments in customer energy efficiency and efficient new electric technologies totaled $1.184 billion during calendar year 2017. Using MWD’s 2017 budget for water conservation and efficiency as a proxy for the level of water sector investments statewide, water investments were about 9.5% of the amount invested by electric utilities.

[2] Changing the landscape of Southern California: A conservation success story, Metropolitan Water District of Southern California brochure (January 2017): http://mwdh2o.com/PDF_Newsroom/Turf_Removal_Program.pdf.

Recommendations

New Comprehensive Multi-Benefit Framework for Evaluating Benefits and Determining Incetives

“Water utilities only value the cost of treating and delivering water. Wastewater utilities only value the cost of collection, treatment, and disposal. Electric utilities only value saved electricity. Natural gas utilities only value saved natural gas. This single focus causes underinvestment in programs that would increase the energy efﬁciency of the water use cycle, agricultural and urban water use efﬁciency, and generation from renewable resources by water and wastewater utilities.”

Source: 2005 Integrated Energy Policy Report, Energy Commission, Publication Number: CEC-100-2005-007CMF, p.150.

Development of a Statewide Distributed Water Resources Program

Having access to programs and funds that support customer-side drought resilient actions has considerable appeal; and given the fact that water year 2018 is once again dry (questioning whether California really ever left the 2012 drought), could be a very important mechanism for investing in drought resilient strategies and technologies. Given the two new bills signed by Governor Brown on May 31, 2018 that implement mandatory urban water use reductions over time, this issue is extremely timely – water agencies now have a statutory need to substantially reduce urban water use, and neither Senate Bill 606 [Hertzberg 2018] nor Assembly Bill 1668 [Friedman 2018] provide any financial assistance to help water agencies achieve the unprecedented requirement to establish and achieve stipulated water use efficiency goals. In short, the new “California Statutes on Making Conservation A California Way of Life” are an unfunded mandate.

Since it will likely take years to develop and implement a public investment program in drought resilience, it is not too soon to commence an exploration of options and to develop and implement pilot programs to test different program theories and funding mechanisms. The dialogue will be more successful if it could be made perfectly clear that it need not result in regulating public water and wastewater agencies. Several potential approaches appear viable if the risks of regulation perceived by the water sector can be appropriately addressed.

Potential Source	Potential Opportunity
General Obligation Bonds. California Proposition 1 stipulated that “Special consideration will be given to projects that employ new or innovative technology or practices, including decision support tools that support the integration of multiple jurisdictions, including, but not limited to, water supply, flood control, land use, and sanitation.” While technology was considered, the funds were designated for public water agency improvements – no grants, incentives or loans were made available to customers (water users).	Award preference points to water infrastructure grants to public agencies that establish programs that help their customers implement distributed water resources and systems. Grant applications should adjust demand projections for water use reductions and customer-side wastewater treatment, recycle, and reuse. Public funds could be used to directly fund distributed water resources, provided that private use restrictions can be satisfactorily addressed. One way that might be accomplished is by procuring the distributed water resources created.
Create a Multi-Benefit Public Purpose Fund. Current programs with prescribed regulatory purposes often result in sub-optimal investment decisions. The Energy Commission noted in its 2005 IEPR that “… single focus [public investments] causes underinvestment in programs that would increase the energy efﬁciency of the water use cycle, agricultural and urban water use efﬁciency, and generation from renewable resources by water and wastewater utilities.”[1]	A pilot investment program could combine funds from electric, gas, water, wastewater, and greenhouse gas emissions reduction programs to compensate projects for the multiple resource, environmental, and economic benefits that they achieve. A composite statewide metric that computes incentives on the basis of the multiple benefits achieved would help to determine the amount of compensation (incentives) that should be provided to “cross-cutting,” multiple benefit projects.
Create a California Water, Energy and Climate Investment Fund that mutual fund managers can include in retirement plan options. Californians could then select plans that invest a portion of their retirement funds in projects and activities that build drought resilience, energy sustainability, and environmental quality.	A fund of this kind would need to be investment-grade and appropriately risk-managed. Such a fund could be used to “procure” water and energy savings, and greenhouse gas reductions, as a public benefit. It could also potentially be used to provide low interest loans to local businesses that achieve the State’s water, energy, and climate vision.[3]^,[4]

[1] 2005 Integrated Energy Policy Report. Energy Commission. Publication Number: CEC-100-2005-007CMF, p.150.

[3] In July 2018, a small food processing company in southern California advised that its planned purchase of a packaged wastewater treatment and recycled water plant has been deferred indefinitely due to the company’s inability to obtain a small business loan. Had it proceeded, this project would have reduced the food processor’s potable water demand by 80%.

[4] See Access to Capital prepared by the California Financial Opportunities Roundtable with assistance of a grant from the U.S. Department of Agriculture Rural Development, August 2012. Retrievable at http://www.indianaglink.com/wp-content/uploads/2013/09/USDA_Publication_ACCESS_TO_CAPITAL.pdf.

Combine Water, Energy and GHG Funds for Customer Investments that Produce MultiBenefits

Most state programs are presently managed from a single perspective, whether it’s the water, wastewater or energy utility, or the California Climate Plan developed and administered by the Air Resources Board (ARB). The current single agency perspective results in sub-optimal decisions from the perspective of statewide benefits.

In order to assure that public investments are optimized to the greatest possible extent, a comprehensive statewide metric is needed that can be applied consistently by all state programs. The metric should recognize the multiple resources produced by any strategy or technology. Adjustments may still need to be made if there are specific legislative restrictions on authorized purposes for which certain public funds can be applied. That could potentially be addressed by allocating preference percentages; e.g., if public funds are specifically designated for “drought resilience”, water benefits could account for 70% of the score, leaving the remaining 30% for recognition of additional important state benefits.

Example: An ice cream manufacturer installs equipment to treat process wastewater on-site for direct recycle/reuse.