Tag Archives: electrification

How to increase renewables? Change the PCIA

California is pushing for an increase in renewable generation to power its electrification of buildings and the transportation sector. Yet the state maintains a policy that will impede reaching that goal–the power cost indifference adjustment (PCIA) rate discourages the rapidly growing community choice aggregators (CCAs) from investing directly in new renewable generation.

As I wrote recently, California’s PCIA rate charged as an exit fee on departed customers is distorting the electricity markets in a way that increases the risk of another energy crisis similar to the debacle in 2000 to 2001. An analysis of the California Independent System Operator markets shows that market manipulations similar to those that created that crisis likely led to the rolling blackouts last August. Unfortunately, the state’s energy agencies have chosen to look elsewhere for causes.

The even bigger problem of reaching clean energy goals is created by the current structure of the PCIA. The PCIA varies inversely with the market prices in the market–as market prices rise, the PCIA charged to CCAs and direct access (DA) customers decreases. For these customers, their overall retail rate is largely hedged against variation and risk through this inverse relationship.

The portfolios of the incumbent utilities, i.e., Pacific Gas and Electric, Southern California Edison and San Diego Gas and Electric, are dominated by long-term contracts with renewables and capital-intensive utility-owned generation. For example, PG&E is paying a risk premium of nearly 2 cents per kilowatt-hour for its investment in these resources. These portfolios are largely impervious to market price swings now, but at a significant cost. The PCIA passes along this hedge through the PCIA to CCAs and DA customers which discourages those latter customers from making their own long term investments. (I wrote earlier about how this mechanism discouraged investment in new capacity for reliability purposes to provide resource adequacy.)

The legacy utilities are not in a position to acquire new renewables–they are forecasting falling loads and decreasing customers as CCAs grow. So the state cannot look to those utilities to meet California’s ambitious goals–it must incentivize CCAs with that task. The CCAs are already game, with many of them offering much more aggressive “green power” options to their customers than PG&E, SCE or SDG&E.

But CCAs place themselves at greater financial risk under the current rules if they sign more long-term contracts. If market prices fall, they must bear the risk of overpaying for both the legacy utility’s portfolio and their own.

The best solution is to offer CCAs the opportunity to make a fixed or lump sum exit fee payment based on the market value of the legacy utility’s portfolio at the moment of departure. This would untie the PCIA from variations in the future market prices and CCAs would then be constructing a portfolio that hedges their own risks rather than relying on the implicit hedge embedded in the legacy utility’s portfolio. The legacy utilities also would have to manage their bundled customers’ portfolio without relying on the cross subsidy from departed customers to mitigate that risk.