A counter to UC’s skepticism about CCAs

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Kevin Novan from UC Davis wrote an article in the University of California Giannini Foundation’s Agriculture and Resource Economics Update entitled “Should Communities Get into the Power Marketing Business?” Novan was skeptical of the gains from community choice aggregation (CCA), concluding that continued centrally planned procurement was preferable. Other UC-affiliated energy economists have also expressed skepticism, including Catherine Wolfram, Severin Borenstein, and Maximilian Auffhammer.

At the heart of this issue is the question of whether the gains of “perfect” coordination outweigh the losses from rent-seeking and increased risks from centralized decision making. I don’t consider myself an Austrian economist, but I’m becoming a fan of the principle that the overall outcomes of many decentralized decisions is likely to be better than a single “all eggs in one basket” decision. We pretend that the “central” planner is somehow omniscient and prudently minimizes risks. But after three decades of regulatory practice, I see that the regulators are not particularly competent at choosing the best course of action and have difficulty understanding key concepts in risk mitigation.By distributing decision making, we better capture a range of risk tolerances and bring more information to the market place. There are further social gains from dispersed political decision making that brings accountability much closer to home and increases transparency. Of course, there’s a limit on how far decentralization should go–each household can’t effectively negotiate separate power contracts. But we gain much more information by adding a number of generation service providers or “load serving entities” (LSE) to the market.

I found several shortcomings with with Novan’s article that would change the tenor. I take each in turn:

  • He wrote “it remains to be seen whether local governments will make prudent decisions…” However, he did not provide the background which explains at least in part why the CCAs have arisen in the first place. Largely over the last 40 years, the utilities have made imprudent procurement and planning decisions. Whether those have been pushed on the utilities by the CPUC and Legislature or whether the IOUs have some responsibility, the fact is that neither institution sees real consequences for these decisions, neither financially or politically. In fact, the one time that a CPUC commissioner attempted to deliver consequences to the IOUs, she was fired and replaced by a former utility CEO. The appropriate comparison for local government decision making is to the current baseline record, not an academic hypothetical that will never exist. And by the way, government enterprise agencies, including municipal utilities, have a relatively good record as demonstrated as by lower electricity rates and relatively well managed, almost invisible capital intensive water and sanitation utilities. The current CCAs have a more extensive portfolio risk management system than PG&E—my calculation of PG&E’s implicit risk hedge in its renewables portfolio is an astounding 3.3 cents per kilowatt-hour.
  • Novan complains that CCAs have “dual objectives.” In fact they have “triple objectives,” the added one to encourage local economic development (sometimes through lower rates). I suggest reading the mission statements of the CCAs that have been created, including the local Valley Clean Energy Authority .
  • It’s not clear that “purchasing locally produced renewable energy will likely lead to more expensive renewable output” for at least two reasons. The first is that local power can avoid further transmission investment. The current CAISO transmission access charges range from $11 to $39 per megawatt-hour and is forecasted to continue to rise significantly (indicating transmission marginal costs are much above average costs). In a commentary on a UC Energy Institute blog, it was revealed that the Sunrise line may have cost as much as $80 per MWH for power from the desert. This wipes out much of the difference between utility scale and DG solar power. Building locally avoids yet more expensive transmission investment to the southeast desert. [I worked on the DRECP for the CEC.] In addition, local power can avoid distribution investment and will be reflected in the IOU’s distribution resource plans (DRP). And second, the scale economies for solar PV plants largely disappears after about 10 MW. So larger plants don’t necessarily mean cheaper, (especially if they have to implement more extensive environmental mitigation.) [I prepared the Cost of Generation model and report for the CEC from 2001-2013.]
  • It’s not necessary that more renewable capacity is needed for local generation. The average line losses in the CAISO system are about 6%, and those are greater from the far desert region. Whether increased productivity overcomes that difference is an empirical question that I haven’t seen answered satisfactorily yet.
  • Novan left unstated his premise defining “greener” renewables, but I presume that it’s based almost entirely on GHG emissions. However, local power is likely “greener” because it avoids other environmental impacts as well. Local renewables are much more likely to be built on brownfields and even rooftops so there’s not added footprints. In contrast there is growing opposition to new plants in the desert region. The second advantage is the avoidance of added transmission corridors. One only needs to look at the Sunrise and Tehachipi lines to see how those consequences can slow down the process. Local DG can avoid distribution investment that has consequences as well. Further, local power provides local system support that can displace local natural gas generation. In fact, one of the key issues for Southern California is the need to maintain in-basin generation to support imports of renewables across the LA Basin interface. [I assessed the need for local generation in the LA Basin in the face of various environmental regulations for the CEC.]

I was on the City of Davis Community Choice Energy Advisory Committee, and I am testifying on behalf of the California CCAs on the setting of the PCIA in several dockets. I have a Ph.D. from Berkeley’s ARE program and have worked on energy, environmental and water issues for about 30 years.

 

 

 

 

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CCAs add renewables while utilities stand pat

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California’s community choice aggegrators (CCAs) are on track to meet their state-mandated renewable portfolio standard obligations. PG&E, SCE and SDG&E have not signed significant new renewable power capacity since 2015, while CCAs have been building new projects. To achieve zero carbon electricity by 2050 will require aggressive plans to procure new renewables soon.

Will Amazon’s HQ2 pay off for New York?

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Even though I have conducted regional economic impact studies, I’m always a bit skeptical when a project is touted as a huge payoff for taxpayer investment. Amazon’s HQ2 is a case in point. New York is claiming a $24 billion net return over 25 years from the $3.6 billion in tax breaks, based on impact analysis done with the REMI economic model. I would be interested in a retrospective analysis on the impact of Amazon’s HQ1 in Seattle. The campus is fairly self contained and it should be fairly straightforward to track the growth of Amazon employment in Seattle since the last 1990s. Clearly, there would be uncertainty about how to attribute regional economic activity to Amazon activity, but we could see bounds on various factors such as jobs and tax revenues. We could then see a comparison against the estimates for New York City.

California already paid for utility assets once: Why do we have to do it again?

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Rather than focus on CCA procurement, the CPUC would better serve the state to use the provisions of AB 57 (e.g., PUC Section 454.5(b)(6)) and its other authorities, including those still in force from AB 1890 (1996). PG&E and SCE already collected $7 billion on an accelerated basis during the “competitive transition period” from 1998 to 2001 towards their legacy utility-owned generation resources such as Diablo Canyon, San Onofre and their hydropower generation.  SDG&E completely paid off its generation portfolio in 1999 this way. Further, PG&E had already recovered its entire investment in Diablo Canyon by December 31, 1997 prior to the start of the opening of the restructured market. (I tracked the CTC accounts throughout the period, reporting to the CEC in 2001, and calculated the return on investment in Diablo Canyon for settlement discussions in 1996.) If the Commission wanted to repay the debts incurred during the 2000-01 energy crisis, the better solution, which it did in part with SCE, would have been to simply establish a “regulatory asset” with no connection to the generating facilities which had already been paid off. As it is, customers-bundled and departed–are paying twice (and THREE times in the case of Diablo Canyon) for the same power plants.

The IOUs currently lack any real incentives to control their portfolio costs, as evidenced by their bundled portfolio plans for PG&E and SCE. Those plans say nothing about minimizing costs or managing risks except to avoid incurring shareholder penalties for missing the RPS mandates. In fact, PG&E has accrued a 3.3 cents per kilowatt-hour premium above the market value of its RPS portfolio to protect against a potential “price spike” between now and 2027. It is no wonder that customers have become unhappy with how the IOUs have managed their generation portfolios.

CCAs reach RPS targets with long-term PPAs

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As I listen to the opening of the joint California Customer Choice En Banc held by the CPUC and CEC, I hear Commissioners and speakers claiming that community choice aggregators (CCAs) are taking advantage of the current market and shirking their responsibilities for developing a responsible, resilient resource portfolio.

The CPUC’s view has two problems. The first is an unreasonable expectation that CCAs can start immediately as a full-grown organization with a complete procurement organization, and more importantly, a rock solid credit history. The second is how the CPUC has ignored the fact that the CCAs have already surpassed the state’s RPS targets  in most cases and that they have significant shares of long-term power purchase agreements (PPAs).

State law in fact penalizes excess procurement of RPS-eligible power by requiring that 65% of that specific portfolio be locked into long-term PPAs, regardless of the prudency of that policy. PG&E has already demonstrated that they have been unable to prudently manage its long-term portfolio, incurring a 3.3 cents per kilowatt-hour risk hedge premium on its RPS portfolio. (Admittedly, that provision could be interpreted to be 65% of the RPS target, e.g., 21.5% of a portfolio that has met the 33% RPS target, but that is not clear from the statute.)

 

Make “Sustainable Food” the Economic Engine of Downtown Davis

 

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Many communities around the region, such as Sacramento and Woodland, have jumped on the “farm to fork” bandwagon to promote their relationships with agriculture. Davis can distinguish itself from the crowd by taking this a step further to promote itself as the center of “sustainable food.” In doing this, Davis can develop placemaking that is the key to economic development and vitality.

Davis is home to one of the top-rated food production research universities in the world in UC Davis. The City of Davis should leverage this position and strengthen its relationship to reinvigorate the downtown. The City has an opportunity as part of its Downtown Davis or Core Area Specific Plan to define a vision to achieve that goal.

Sustainable food minimizes damages to the planet in its cultivation, production, preparation, consumption and disposal. It is largely plant-based because this is the most direct way to deliver calories and protein to our diets. Animal production has much higher waste products, resource consumption, greenhouse gas emissions, and tainted food per calorie or gram of protein. For example, based on U.S. Department of Agriculture statistics, beef production emits four times as much greenhouse gases (GHGs) per calorie than soybeans or wheat and twice as much GHGs per gram of protein. Given California’s goal to be a “net carbon zero” emitter by 2045, the state will need to take a wide range of steps to cut emissions across the board, including in food production and consumption. Sustainable food is also more ethically consistent and healthful than our current food production and consumption patterns.

Sustainable food has been in the press frequently of late, with numerous stories in the Bay Area media. San Francisco has become the venture capital center of the world—especially for sustainable food–but real estate is becoming too expensive there to allow an industry that focuses on physical products sufficient space. Davis is close enough to that center for easy communication, but still has comparatively inexpensive land.

Creating a sustainable food ecology in Davis would have five aspects:

  1. Supporting innovation in sustainable food production and distribution
  2. Providing sustainable infrastructure to support companies that are innovating
  3. Serving and delivering sustainable food locally
  4. Preparing food that is consumed locally in a sustainable manner
  5. Attracting sustainable food-oriented tourism

The City can focus development of a sustainable food industry hub in the “Flex District” proposed for the G Street Corridor in the Downtown Plan. This area could house a wider range of facilities, such as test labs, within easy access distance of the UCD campus and the Capitol Corridor train to the Bay Area. Larger research facilities can be housed in other parts of the City where larger, industrial facilities are more appropriate.

Part of the attraction to companies locating here could be a sustainable infrastructure configuration starting in this district, with a district energy network and electric microgrid supporting fully electrified space conditioning and water heating systems. The other sustainability attributes identified in the Downtown Davis Plan should be incorporated and highlighted.

We can also encourage existing restaurants to serve more sustainable food on their menus, and attract new restaurants to cater to the new sustainable food businesses and their employees. The investors and workers at these companies are much more likely to follow their ethical beliefs in their consumption choices. The City could provide incentives through reduced fees to existing businesses, and evaluate how to speed the start up of new businesses.

As part of establishing a sustainable environment, the City should facilitate switching restaurants to more sustainable preparation practices. This includes switching from natural gas to induction cooktops and convection ovens, district water heating and space conditioning, and better management of waste. (Yes, we may need to recruit chefs for this new challenge.)

Finally, Davis can become a sustainable food destination. Less than 20% of our downtown visitors are from out of town according to analysis by consultants to City working on the Downtown Davis Plan. Given our location on the Capitol Corridor train route and Interstate 80, the community has much room for growth in tourism to boost our economy beyond UCD students’ parents visiting in September and June.

Davis already has a core attraction in its world-famous Farmers’ Market. With the addition of plant-based oriented restaurants and closer integration with the Mondavi Center entertainment area, a visitor could easily spend a whole day in Davis with a quick trip on the train from the Bay Area. Implementing this vision just needs closer coordination with UCD to bring events to Mondavi and the new Shrem Art Museum on Saturdays and setting up an electric bus shuttle between there and downtown.

UCD’s Robert Mondavi Institute for Wine and Food Sciences provides an example of how local development can be both sustainable and invigorating. That locale now has a microgrid that relies on renewable power. Both UCD and the City could benefit from a closer relationship centered around sustainable food in several dimensions.

Implementing all of this vision requires going beyond the form-based zoning codes that will come out of the Core Area Specific Plan. The City needs a comprehensive economic development plan, direction and resources for its economic development staff, and a willingness to focus on removing the barriers to bringing and supporting these businesses in Davis.

(with Anya McCann, COOL Cuisine)

Why the CPUC’s RA Market Report gives the wrong reliability price metric

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In its annual report on resource adequacy (RA) transactions, the CPUC reports the wrong result for the market price to be used for valuing capacity from the RA market data. The Commission’s decision issued in the PCIA rulemaking on establishing the CCA’s “exit fee” uses this value in error. In the CAISO energy and ancillary services markets, the market clearing price used to set the value of the energy portfolio is determined by the highest accepted bid in a single hour, and then averaged across all hours. In contrast, the average reported RA price in The 2017 Resource Adequacy Report incorrectly reports the average of all transactions. This would be equivalent to the CAISO reporting the average of all accepted bids, including those at zero or even negative, as the market clearing price.

The appropriate RA price metric is the highest RA transaction price for each month. This price represents the market equilibrium point at which a consumer is willing to pay the highest price given how low a price a supplier is willing to provide that quantity of the resource. (The other transactions are called “inframarginal” and such transactions are common in many markets.) In a full auction market, all transactions would clear at this single price, which is why the CAISO reports a single market clearing price for all transactions in a single hour. That should also be the case for the RA market price, except the time unit is a month.

Due to a lack of an auction for the moment, it is possible to manipulate the highest apparent price through a bilateral transaction. Instead, the Commission could choose a price near the highest point, but with sufficient market depth to mitigate potential manipulation. Using the 90th percentile transaction is one metric commonly used based on a quick survey of market price reports.