Tag Archives: community choice aggregation

Microgrids could cost 10% of undergrounding PG&E’s wires

One proposed solution to reducing wildfire risk is for PG&E to put its grid underground. There are a number of problems with undergrounding including increased maintenance costs, seismic and flooding risks, and problems with excessive heat (including exploding underground vaults). But ignoring those issues, the costs could be exorbitant-greater than anyone has really considered. An alternative is shifting rural service to microgrids. A high-level estimate shows that using microgrids instead could cost less than 10% of undergrounding the lines in regions at risk. The CPUC is considering a policy shift to promote this type of solution and has new rulemaking on promoting microgrids.

We can put this in context by estimating costs from PG&E’s data provided in its 2020 General Rate Case, and comparing that to its total revenue requirements. That will give us an estimate of the rate increase needed to fund this effort.

PG&E has about 107,000 miles of distribution voltage wires and 18,500 in transmission lines. PG&E listed 25,000 miles of distribution lines being in wildfire risk zones. The the risk is proportionate for transmission this is another 4,300 miles. PG&E has estimated that it would cost $3 million per mile to underground (and ignoring the higher maintenance and replacement costs). And undergrounding transmission can cost as much as $80 million per mile. Using estimates provided to the CAISO and picking the midpoint cost adder of four to ten times for undergrounding, we can estimate $25 million per mile for transmission is reasonable. Based on these estimates it would cost $75 billion to underground distribution and $108 billion for transmission, for a total cost of $183 billion. Using PG&E’s current cost of capital, that translates into annual revenue requirement of $9.1 billion.

PG&E’s overall annual revenue requirement are currently about $14 billion and PG&E has asked for increases that could add another $3 billion. Adding $9.1 billion would add two-thirds (~67%) to PG&E’s overall rates that include both distribution and generation. It would double distribution rates.

This begs two questions:

  1. Is this worth doing to protect properties in the affected urban-wildlands interface (UWI)?
  2. Is there a less expensive option that can achieve the same objective?

On the first question, if we look the assessed property value in the 15 counties most likely to be at risk (which includes substantial amounts of land outside the UWI), the total assessed value is $462 billion. In other words, we would be spending 16% of the value of the property being protected. The annual revenue required would increase property taxed by over 250%, going from 0.77% to 2.0%.

Which turns us to the second question. If we assume that the load share is proportionate to the share of lines at risk, PG&E serves about 18,500 GWh in those areas. The equivalent cost per unit for undergrounding would be $480 per MWh.

The average cost for a microgrid in California based on a 2018 CEC study is $3.5 million per megawatt. That translates to $60 per MWh for a typical load factor. In other words a microgrid could cost one-eighth of undergrounding. The total equivalent cost compared to the undergrounding scenario would be $13 billion. This translates to an 8% increase in PG&E rates.

To what extent should we pursue undergrounding lines versus shifting to microgrid alternatives in the WUI areas? Should we encourage energy independence for these customers if they are on microgrids? How should we share these costs–should locals pay or should they be spread over the entire customer base? Who should own these microgrids: PG&E or CCAs or a local government?

 

 

 

 

End the fiction of regulatory oversight of California’s generation

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M.Cubed is the only firm willing to sign the non-disclosure agreements (NDA) that allow us to review the investor-owned utilities’ (IOUs) generation portfolio data on behalf of outside intervenors, such as the community choice aggregators (CCAs). Even the direct access (DA) customers who constitute about a quarter of California’s industrial load are represented by a firm that is unwilling to sign the NDAs. This situation places departed load customers, and in fact all customers, at a distinct disadvantage when trying to regulate the actions of the IOUs. It is simply impossible for a single small firm to scrutinize all of the filings and data from the IOUs. (Not to mention that one, SDG&E, gets a complete free pass for now as that it has no CCAs.)

This situation has arisen because the NDAs require that the “reviewing representatives” not be in a position to advise market participants, such as CCAs or energy service providers (ESPs) that sell to DA customers, on procurement decisions. This is an outgrowth of AB 57 in 2002, a state law passed to bring IOUs back into the generation market after the collapse of restructuring in 2001. That law was intended to the balance of power to the IOUs away from generators for procurement purposes. Now it puts the IOUs at a competitive advantage against other load serving entities (LSEs) such as CCAs and ESPs, and even bundled customers.

This imbalance has arisen for several insurmountable reasons:

  • No firm can build its business on serving only to review IOU filings without offering other procurement consulting services to clients.
  • It is difficult to build expertise for reviewing IOU filings without participating in procurement services for other LSEs or resource providers. (I am uniquely situated by the consulting work I did for the CEC on assessing generation technology costs for over a decade.)
  • CPUC staff similarly lacks the expertise for many of the same reasons, and are relatively ineffective at these reviews. The CPUC is further limited by its ability to recruit sufficient qualified staff for a variety of reasons.

If California wants to rein in the misbehavior by IOUs (such as what I’ve documented on past procurement and shareholder returns earlier), then we have two options to address this problem going forward:

  1. Transform at least the power generation management side of the IOUs into publicly owned entities with more transparent management review.
  2. End the annual review and setting of PCIA and CTC rates by establishing one-time prepayment amounts. By prepaying or setting a fixed annual amount, the impact of accounting maneuvers are diminished substantially, and since IOUs can no longer shift portfolio management risks to departed load customers, the IOUs more directly face the competitive pressures that should make them more efficient managers.

Non-Profit Utilities Could Cure What Ails California Electricity

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Severin Borenstein at the Energy Institute at Haas, asks “Would Non-Profit Utilities Cure What Ails California Electricity?” I am posting my response here as that I find his post overlooks several important points and distinctions.

I’ll start by saying I wrote an op-ed in the Sacramento Bee in the early 2000s noting that creating a new municipal utility was not going to deliver the same low rates as existing munis and I’m still aware that such a transfer is unlikely to reduce rates much. But it does change the governance structure in a way that is likely to be more accountable and less influenced by the private interests of utility shareholders. Communities are joining together to push for acquisition of PG&E by a cooperative, which would have a similar governance structure to a municipal utility.

First, the complaint about government is largely about agencies that I will call “ministerial” or “administrative”. These agencies issue permits and licenses or provide social services. In contrast, the government agencies that deliver utility services, which are “enterprises” largely deliver service with few complaints. About 80% of water utilities and almost all wastewater utilities are publicly owned. I work in the water arena as well, and the only utility that I hear complaints about from customers is LADWP (both water and power sides). (The SDCWA-MWD fight is between agencies’ managements, not from customers). On the other hand, all three or California’s electric IOUs are the target of customers’ ire. And the IOU staffs (which I have frequent contact with) are no better than government employees in their responsiveness or competence. One advantage the enterprise agencies have over the ministerial/administrative ones is that they generally pay a higher salary so employees are motivated in much the same way as those in the private sector. Moving from oversight by a ministerial/administrative agency (CPUC) to management by an enterprise utility should overcome the problem of recruiting competent motivated staff.

Second, shareholders shoulder very little risk now, particularly in California. I testified in the IOUs’ rate of return case and we asked for the amount of disallowances that shareholders had to bear over the last two decades. Other than SDG&E’s 2007 wildfire costs due to negligence on the utility’s part, they came pack with amounts that were in the tens of millions, which amounts to less than a 0.1% of their revenues collected over that period. Utilities’ generation investment is now so protected that the CPUC reversed itself last year and removed the 10 year recovery cap from exit fees for generation that the utilities built knowing the cap existed. They are now getting bonus dollars! (Same thing happened with Diablo Canyon in 1996.) Yet the utilities are claiming in that rate case that the return on equity should be increased even further! I have a blog post about how the current return is already too high. (Part 2 is the next day.)  Public ownership in contrast can reduce the return on capital from close to 10% (before tax) to 5% or less, which can cut rates substantially.

We can see how PG&E in particular has been incompetently managed for decades. I posted about its many foibles since the 1960s as well. The supposed incentives and efficiencies of the private sector have failed to materialize for California utilities, and meanwhile we pay higher costs for capital with no real risk mitigation. (Ratepayers still had to pay for PG&E’s debts after the 2000-01 energy crisis, and it looks like the same may happen again.)

Finally, the question arises as to whether municipalizing piecemeal would create inequities. The premise of the statement is that the current economic distribution is equitable. But the fact is that rural residential customers in the wildland/urban interface (WUI) have not been paying their full share of their costs and have been heavily subsidized by urban customers. Those customers in the WUI tend to be better off than average (poor rural customers are more likely to live in agricultural communities that are not subject to the same fire risks and for whom service costs are lower), so we already have an adverse wealth transfer in place. And those subsidies have facilitated expansion of housing into those high risk areas that also encourage longer commutes with more GHG emissions.

The better question is how can the rural service areas be better served in the future without relying on the traditional utility structure? Moving toward microgrids and other DER solutions to improve reliability while reducing fire risk is one solution. Spending a $100 billion on undergrounding lines to be paid for by everyone else is NOT a good solution.

Exit fee market benchmarks threaten CCAs abilities to meet long term obligations

Capacity Net Revenue Adequacy 2001-2018CCAs may have to choose between complying with the long-term commitments specified in Senate Bill 350 and continuing to operate because they cannot acquire resources at the specified market price benchmarks that value the entire utility portfolio according to the CPUC.

The chart above compares the revenue shortfalls that need to be made up from other capacity sales products to finance resource additions. The CAISO has reported for every year since 2001 that its short-run market clearing prices that were adopted as the market price benchmark in the PCIA have been insufficient to support new conventional generation investment. The chart above shows the results of the CAISO Annual Report on Market Issues and Performance compiled from 2012 to 2018, separated by north (NP15 RRQ) and south (SP15 RRQ) revenue requirements for new resources. (The historic data shows that CAISO revenues have never been sufficient to finance a resource addition.) The CAISO signs capacity procurement (CPM) agreements to meet near-term reliability shortfalls which is one revenue source for a limited number of generators. The other short run price is the resource adequacy credits transacted by load serving entities (LSE) such as the utilities and CCAs. This revenue source is available to a broader set of resources. However, neither of revenues come close to closing the cost shortfall for new capacity.

The CPUC and the CAISO have deliberately suppressed these market prices to avoid the price spikes and reliability problems that occurred during the 2000-2001 energy crisis. By explicit state policy, these market prices are not to be used for assessing resource acquisition benchmarks. Yet, the CPUC adopted in its PCIA OIR decision (D.18-10-019) exactly this stance by asserting that the CCAs must be able to acquire new resources at less than these prices to beat the benchmarks used to calculate the PCIA. The CPUC used the CAISO energy prices plus the average RA prices as the base for the market value benchmark that represents the CCA threshold.

In a functioning market, the relevant market prices should indicate the relative supply-demand balance–if supply is short then prices should rise sufficiently to cover the cost of new entrants. Based on the relative price balance in the chart, no new capacity resources should be needed for some time.

Yet the CPUC recently issued a decision (D.19-04-040) that ordered procurement of 2,000 MW of capacity for resource adequacy. And now the CPUC proposes to up that target to 4,000 MW by 2021. All of this runs counter to the price signals that CPUC claims represent the “market value” of the assets held by the utilities.

If the CCAs purchase resources that cost more than the PCIA benchmarks then they will be losing money for their ratepayers (note that CCAs have no shareholders). Most often long-term power purchase agreements (PPA) have prices above the short-term prices because those short-term prices do not cover all of the values transacted in the market place. (More on that in the near future.) The CPUC should either align its market value benchmarks with its resource acquisition directives or acknowledge that their directives are incorrect.

PG&E has cost California over $3 billion by mismanaging its RPS portfolio

CCA Savings

When community choice aggregators take up serving PG&E customers, PG&E saves the cost of having to procure power for the departed load. Instead the CCAs bear that cost for that power. The savings to PG&E’s bundled customers are not fully reflected when calculating the exit fee (known as the power charge indifference adjustment or PCIA) for those CCAs. As a result, the exit fee does not reflect the true value that CCAs provide to PG&E and its bundled customers.

The chart above shows the realized and potential savings to PG&E from the departure of CCA customers. The realized part is the avoided costs of procuring resources to meet that load, shown in yellow. The second part is the foregone sales opportunity if PG&E had sold a portion of its portfolio to the CCAs at the going price when they departed. In 2019, these combined savings could have reached $3.2 billion if PG&E had acted prudently.

Many local governments launched CCAs to address their climate goals, and CCAs issued multiple requests for offers of RPS energy.  However, PG&E failed to respond to this opportunity to sell excess renewable energy no longer needed to serve their customers.  By deciding to hold these unneeded resources in a declining market, PG&E accumulated additional losses every year.  Indeed, the assigned Judge on the exit-fee proceeding at the CPUC concluded that PG&E must benefit from “holding back the RECs [renewable energy credits] for some reason.”

This willingness to hold onto an unneeded resource that loses value every year is contrary to prudent management.  However, shareholders, are shielded entirely from contract that are too costly, and only pay penalties for failing to meet RPS targets.  Instead, ratepayers—both bundled and CCA—pay all of the excessive costs, and shareholders only have a strong incentive to over-procure using those ratepayer dollars to avoid any possibility of reduced shareholder profits.  Holding these contracts also inflates the exit-fee departed customers must pay, making it harder for alternatives like public power and distributed generation to PG&E to thrive.

When Sonoma Clean Power launched in 2014, the average price of RPS energy was $128/MWh.  It has declined every year, and now sits at $57/MWh.  PG&E’s decision to not sell excess energy at 2014 prices, and to protect shareholders at the expense of ratepayers has cost customers over $3 billion dollars in the last 6 years as shown in the green columns below.  As RPS prices continue to decline, and the amount of customer departing increases, this figure will continue to increase every year.  Indeed, it surpassed $1.1 billion for 2019 alone.

PGAE Mismanagement Costs

Further, the hedging value of the RPS resources that PG&E listed as key attribute of holding these PPAs instead of disposing of them has diminished dramatically since PG&E pushed that as its strategy in its 2014 Bundled Procurement Plan. As shown in the chart above, the hedge value fell $1.3 billion from 2014 to 2019, from a high of $961 million to a burden of $343 million. PG&E’s hedge now adds $33/MWH to the cost of its renewables portfolio.

In comparison, Southern California Edison’s renewables portfolio costs just under $20/MWH less than PG&E’s. SCE did not rush into signing PPAs like PG&E and did not sign them for as long of terms as PG&E.

 

VCEA offers PG&E $300 million for Yolo County

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Valley Clean Energy Alliance made its official offer to PG&E to acquire the Yolo County distribution system for $300 million. The offer is being submitted in PG&E’s bankruptcy proceeding. This offer is substantially higher than the $108 million that Sacramento Municipal Utility District (SMUD) offered in 2005, and not far below the $400 million that PG&E countered with.

San Francisco offered $2.5 billion for PG&E’s system, and San Jose announced that it also will make a bid. Municipalities believe that the bankruptcy court will be more receptive to accepting the offers as a means of raising cash for the bankrupt utility.

Study shows RPS spillover positive to other states

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A study in the Journal of the Association of Environmental and Resource Economics entitled “External Impacts of Local Energy Policy: The Case of Renewable Portfolio Standards” finds that increasing the renewable portfolio standard (RPS) in one state reduces coal generation in neighboring states through trading of renewable energy credits (RECs). This contrasts with findings on greenhouse gas emission “leakage” under California’s cap and trade program put forth by the authors at the Energy Institute at Haas at the University of California here and here.

These latter set of findings has been used California Public Utilities Commissioners to argue against the use of RECs and implication that community choice aggregators (CCAs) are not moving forward increased renewables generation. This new study appears to land on the side of the CCAs which have argued that even relying on RECs in the short run have a positive effect reducing GHG emissions in the West.

Reverse auctions for storage gaining favor

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Two recent reports highlight the benefits of using “reverse auctions”. In a reverse auction, the buyer specifies a quantity to be purchased, and sellers bid to provide a portion of that quantity.  An article in Utility Dive summarizes some of the experiences with renewable market auctions.  A separate report in the Review of Environmental Economics and Policy goes further to lay out five guidelines:

  1. Encourage a Large Number of Auction Participants
  2. Limit the Amount of Auctioned Capacity
  3. Leverage Policy Frameworks and Market Structures
  4. Earmark a Portion of Auctioned Capacity for Less-mature Technologies
  5. Balance Penalizing Delivery Failures and Fostering Competition

This policy prescription requires well-informed policy makers balancing different factors–not a task that is well suited to a state legislature. How to develop such a coherent policy can done in two ways. The first is to let the a state commission work through a proceeding to set an overall target and structure. But perhaps a more fruitful approach would be to let local utilities, such as California’s community choice aggregators (CCAs) to set up individual auctions, maybe even setting their own storage targets and then experimenting with different approaches.

California has repeatedly made errors by overly relying on centralized market structures that overcommit or mismatch resource acquisition. This arises because a mistake by a single central buyer is multiplied across all load while a mistake by one buyer within a decentralized market is largely isolated to the load of that one buyer. Without perfect foresight and a distinct lack of mechanisms to appropriately share risk between buyers and sellers, we should be designing an electricity market that mitigates risks to consumers rather than trying to achieve a mythological “optimal” result.

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.

 

 

 

 

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.