Tag Archives: exit fee

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

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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

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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.

 

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.

Why the CPUC has it wrong on the PCIA

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Nick Chaset is the CEO of East Bay Community Energy which is a community choice aggregator (CCA) that serves Alameda County. He also was Commission President Michael Picker’s chief advisor until last year when he left for EBCE. He explains in this article how two proposed decisions that the CPUC is considering are fundamentally wrong and will shift cost onto CCA customers. (I testified on behalf of CalCCA in this proceeding. I’ll have more on this before the Commission’s scheduled vote October 11.)

Figure 1 – CPUC’s Proposed Resource Adequacy Value vs. True Market Values

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Figure 2 – GHG Premium Value Missing from CPUC Proposed Decision

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Figure 3 – Falling Utility Rates as Customers Depart Filed in Their ERRA Rate Applications

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