California's March to 50% Renewable Energy

Publication November 12, 2015

by David Howarth and Mark Fulmer, with MRW & Associates, LLC in Oakland, California

California Governor Jerry Brown signed a bill — SB 350 — in early October committing the state to generate 50% of its electricity from renewable energy by 2030.

There are so many moving pieces in California with energy efficiency and rooftop solar soaking up load growth, net metering and rate design proceedings before the California Public Utilities Commission potentially changing the calculus for distributed solar, solicitations by the three main electric utilities for large amounts of energy storage, and fears from independent power producers and the California grid operator, CAISO, about how the grid will be able to adjust to more renewables.

It can be hard for outsiders to unpack the new 50% renewables target. Is it as simple as it looks: another 17% in renewable energy generation will be needed?

The short answer is no.

SB 350 adds to the moving pieces for project developers trying to identify opportunities.

In addition to increasing the state renewable portfolio standard, SB 350 contains provisions calling for the state to double energy efficiency savings in electricity and natural gas use by 2030. Since the RPS is calculated as a percentage of sales, reductions in electricity consumption will offset the potential increase in renewable energy demand from the higher targets. The bill originally set a goal to reduce petroleum usage in the state by 50%, but that provision was removed just before the assembly vote at the end of the legislative session. However, as discussed below, SB 350 still promotes transportation electrification, which would increase demand for renewable electricity.

The 50% renewable portfolio target applies to utilities, community choice aggregators and electric service providers regulated by the California Public Utilities Commission, as well as independently-governed municipal utilities and irrigation districts.

The 17 percentage point increase in the state renewable portfolio standard is phased in over time, with the existing 33% RPS in 2020 increasing to 40% in 2025, 45% in 2027, and 50% in 2030. SB 350 requires that 65% of RPS procurement be from contracts of at least 10 years or supplied from eligible resources owned by the utility or other load-serving entity. Category 1 resources, which are delivered to points on the California grid, can be banked without limit beginning in 2021. (For background about how the different types of renewable electricity are classified under the state RPS program, see California Rules Worry Out-of-State Generators in the May 2012 Project Finance NewsWire.)

According to the most recent RPS report from the CPUC to the California legislature, the three major California investor-owned utilities anticipate meeting nearly 31% of their retail sales with qualifying renewables by 2016. Thus, the utilities are well positioned to begin the march to meeting a 50% target over the next 15 years.

Because the utilities are ahead of schedule for meeting the existing 33% target by 2020, and there are still mandates requiring utility purchases of smaller-scale renewables that also count towards the RPS, there will probably be a pause in RPS procurement in the near term. For example, PG&E has indicated it will not hold a 2015 RPS solicitation. SDG&E last held an RPS solicitation in 2013 and does not foresee holding another one in the next several years. However, thanks to SB 350, annual RPS solicitations should pick up again to meet the new targets within a few years.

Community Choice Aggregators

There has been a lot of interest recently in community choice aggregators. These are entities that buy power for local communities. For example, both Marin and Sonoma have community choice aggregators that were the offtakers for the 100-megawatt Mustang solar project whose financing closed in August. Many of these community choice aggregators have set their own goals to exceed 50% renewables in their communities. This growing market sector may help fill some of the slack in demand for new RPS procurement in the short term.

All of the San Francisco Bay area counties either have, or are seriously considering, forming community choice aggregators. (Serious consideration can be seen among the counties that have funded feasibility studies.) In southern California, Los Angeles County (outside of the City of Los Angeles, which is served by LADWP), San Diego County and the City of Santa Monica are also expected to form community choice aggregators.

Thus, renewable energy developers may have opportunities to respond to more, albeit smaller, renewable energy solicitations, from purchasers with little or no track-record of power purchasing or portfolio management.

In addition to SB 350, the California legislature also considered a companion bill (SB 32) during 2015 that would have set mid-term greenhouse gas targets and codified the state’s 2050 goal of reducing carbon emissions to 80% below 1990 levels by 2050. Although SB 32 was ultimately withdrawn, SB 350 contains language reiterating the 2050 greenhouse gas goal, as well as setting a mid-term goal of reducing GHG emissions to 40% below 1990 levels by 2030.

SB 350 says that reaching the GHG goals will require “widespread transportation electrification” and directs the CPUC to require utilities to file applications for multi-year programs and investments to accelerate electrification of the transportation sector.

SB 350 also directs the California Public Utilities Commission to require utilities and other load-serving entities to file integrated resource plans to ensure that the entities meet the state’s GHG and RPS targets while minimizing the effects on customer bills, maintaining reliability and satisfying other related goals.

Extensive modeling by the California grid operator, CAISO, and others suggests that increasing the supply of renewable energy much beyond current levels will present operational challenges and probably lead to higher levels of renewable curtailment without policy changes designed to address these challenges. (For background about the risk of increasing curtailments and negative prices for renewable electricity, see Renewables Face Daytime Curtailments in California in the November 2014 Project Finance NewsWire.)

SB 350 directs the CPUC, where feasible and cost effective, to authorize procurement that minimizes reliance on system power and fossil fuel for maintaining grid reliability and instead to focus on large- and small-scale energy storage, targeted energy efficiency, demand response and renewable resources.

Regional Grid?

One way to integrate higher levels of renewables is to make it easier to sell excess renewable electricity from California to its neighbors and to be able to do this on a sub-hourly basis, although perhaps at zero or negative prices.

The CAISO has established an energy imbalance market to allow multiple balancing areas to dispatch least-cost resources automatically on a five-minute basis, thereby sharing reserves and helping to respond to changes in renewable energy generation. PacifiCorp became the first participant in November 2014. NV Energy is set to join the energy imbalance market as soon as final authorization is received from the Federal Energy Regulatory Commission and could be participating as early as December 1. Puget Sound Energy and Arizona Public Service will join in October 2016, and other utilities in the west are also considering this option.

The CAISO is in the process of establishing a new five-member governing body for the energy imbalance market with independent, regional representation to oversee and approve EIM market rules before they are presented to the CAISO board of governors for approval.

Even with the benefits provided by the EIM, the challenge of integrating up to 50% renewable energy supply will require greater levels of regional coordination.

The CAISO and PacifiCorp entered into a memorandum of understanding in April 2015 to explore the feasibility, costs and benefits of PacifiCorp joining as a participating transmission owner. A regional independent system operator would allow for day-ahead and hour-ahead scheduling of generation and transmission resources, which provides much greater opportunity to benefit from regional diversity in the integration of intermittent renewable resources.

Becoming a regional organization would represent a significant change for the CAISO, which, as its name implies, has been strictly a California grid operator since its inception. In fact, the law allowing for the establishment of the CAISO specifically prohibits the CAISO from entering into a regional organization without approval from the state Electricity Oversight Board. The CAISO governing board is appointed by the California governor and confirmed by the California Senate.

SB 350 provides a process for lifting restrictions on the CAISO entering into agreements with grid operators in other states and transitioning to a governing structure that is not subject to the parochial selection and confirmation requirements of the current CAISO board. By providing a process for the CAISO to explore becoming a regional entity and to help develop more integrated electric and transmission markets throughout the west, SB 350 addresses one of the significant challenges of extending the RPS to higher and higher levels of renewable penetration.

The process involves the CAISO developing a revised governance structure and studying the impacts of a regional market on ratepayers, the California economy, the environment, disadvantaged communities, GHG emissions, reliability and integration of renewable energy resources. The governor must then submit the revised governance and studies to the legislature by December 31, 2017. The revised governance structure would not become effective until after the legislature enacts a statute implementing the changes. There are many moving pieces, but they have a way eventually of falling into place.


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