Distributed Renewable Energy Operating Impacts and Valuation Study

Appendix N
N.3 Economic Value of Capacity Savings from Solar DE Deployment
Capacity savings are more difficult and complicated to estimate as these savings represent an
annual portion of avoided or reduced investment or capital costs in future test years. This
includes the savings from an investment change in a specific year plus remaining investment
savings from prior years.
Engineering economic analysis often represents these savings with the use of a carrying charge
approach. Carrying charges are utility annual obligations associated with distribution,
transmission, and generation plant investments placed in service and include annual obligations
from prior plant investments during the economic life of investments. To accurately represent a
utility’s projected investment costs, the income taxes (both actual and deferred) must be included
in the identification of carrying charges. Separate carrying charges are calculated for
distribution, transmission, and generation facilities as these typically have different economic
lives. The appropriate carrying charge for a facility is multiplied by the investment cost of the
plant facility to estimate the annual revenue requirement cost of that plant facility.
In equation form the carrying charge can be expressed as follows:
CC tf = DC t + EC t + IT tf + CF tf
where CC tf = Carrying Charge for each facility type in year t, expressed as a
percentage
DC t = APS’ debt cost in year t, expressed as a percentage
EC t = APS’ after tax equity cost in year t, expressed as a percentage
IT tf = APS’ effective income tax cost for each facility type f in year t,
expressed as a percentage
CF tf = APS’ capital recovery via depreciation rate for each facility type f
in year t, expressed as a percentage
Components of the carrying charge calculation can be expressed as follows:
DC f = DB * COD
where DB = Percent of capitalization provided by debt, expressed as a
percentage
COD = APS’ cost of debt cost, expressed as a percentage
EC f = EB * COE
where EB = Percent of capitalization provided by equity, expressed as a
percentage
COE = APS’ cost of debt equity on an after-tax basis, expressed as a
percentage
It is the product of the carrying charge for a specific facility type (i.e., distribution, transmission,
or generation) times the investment cost of a facility that provides an estimate of the annual
N-2 | R. W. Beck, Inc Arizona Public Service