Background

California’s resource adequacy (RA) program is a critical tool to ensure load-serving entities (LSEs) procure the resources that are needed to keep the lights on. A tightening market for RA supply in California has created problems for LSEs including community choice aggregators, resulting in increasing waivers and penalties. CalCCA believes near-term action is urgently needed to address possible market power in RA supply, and is offering the California Public Utilities Commission a platform to consider.

Problem

A confluence of factors is contributing to a tightening RA market, including a growing number of LSEs competing to buy the same resources and a shrinking pool of resources LSEs can procure due to the planned retirement dates of older natural gas plants. But outdated RA policies and practices might be the main culprit.

As customer load has migrated from investor-owned utilities to community choice aggregators and direct-access providers, the RA capacity that is no longer needed to serve the IOUs’ bundled customers is not flowing to market so the new energy providers may purchase it.

This is especially apparent in Pacific Gas & Electric’s territory, where 46 percent of the utility’s load has moved to CCAs. PG&E has stated it does not intend to sell RA for 2020 and beyond until this September—a mere 60 days prior to the California Public Utilities Commission’s RA compliance filing deadline. Similar RA issues are emerging in Southern California Edison and San Diego Gas & Electric territories.

It is impossible to ascertain the extent to which IOUs might be exercising market power, because RA capacity procurement is not transparent. Only the CPUC can determine whether IOUs have over-procured RA and whether they are withholding excess RA capacity from the market. What is known is that RA prices doubled between 2018 and 2019, and that some LSEs, including CCAs, have been forced to go to costly extremes to meet their RA requirements.

The California Independent System Operator’s Department of Market Monitoring has acknowledged a lack of competitiveness in local capacity areas, finding one pivotal supplier controlling a significant portion of the capacity needed to meet local requirements in the San Diego/Imperial Valley, Los Angeles Basin, Stockton, Sierra and North Coast/North Bay areas.“The market for capacity needed to meet local resource-adequacy requirements continues to be structurally uncompetitive in almost all local areas,” DMM notes in its 2018 Annual Report on Market Issues and Performance.

The CPUC has recognized that a tightening RA market may necessitate system and flexible RA waivers for circumstances beyond the control of an individual LSE – but currently only allows for waivers for local RA waivers. The Commission has assigned LSEs millions of dollars in penalties for failing to meet system/flexible RA requirements, even when supply is not readily available.

Ultimately it is electricity consumers who are paying the price for unresolved problems that are outside the control of RA purchasers. IOUs, meanwhile, enjoy guaranteed cost recovery and are not at risk when they over-procure.

Solution

The bottom line is that California has a bilateral RA market that lacks both transparency and a clearing function to efficiently match sellers and buyers. A long-term framework for the sale of excess utility resources is under consideration in CPUC docket R17-06-026, where a final decision is expected by mid-2020. LSEs cannot wait, however, for longer-term solutions and require timely solutions for the 2020 RA compliance year.

The CPUC and Legislature have thus far proposed market “fixes” that focus exclusively on the demand side of supply and demand. Central-buyer proposals fail to address the extent to which IOUs might be withholding their RA supplies from the market, and whether there is a need to mitigate market power.

The California Community Choice Association is recommending adoption of a near-term RA sales framework for excess IOU products, both to ensure efficient market operation and to provide greater transparency among LSEs. CalCCA has requested that the CPUC address five issues within the framework:

• Prescribe the volume of RA each IOU must make available to the market, including all RA capacity above 115 percent of the IOU’s coincident peak load forecast plus a limited IOU-specific “buffer” to permit resource substitution for unit outages.
• Require the IOUs to offer excess RA earlier in the year, beginning with a spring request for offers.
• Require the IOUs to offer excess RA products for up to a three-year term when feasible.
• Develop guidance on the use of price floors in IOU requests for offers to ensure the IOUs maximize the volume of RA that can be sold.
• Authorize penalty waivers for system and flexible capacity, in light of tightening market conditions, where the LSE can demonstrate commercially reasonable efforts to procure sufficient RA capacity to meet its compliance obligation. As it now stands, waivers are only available for local capacity.

Conclusion

Energy market failures, underscored by PG&E’s first bankruptcy in 2001, resulted in the creation of community choice aggregation to drive stability, affordability and sustainability in California’s electricity system. There are now 19 operational CCA programs serving approximately 10 million customers, and CCAs, not IOUs, are the main drivers of new renewables development in California.

The state’s integrated resource planning plan relies on CCAs to procure 10,000 MW to achieve California’s 2030 greenhouse gas emissions target, while IOUs and energy service providers combined propose to invest in about 1,000 MW. The plan shows CCAs are committed to advancing new, cost-effective, clean energy resources at the scale and speed California requires.

As PG&E is once again engulfed in bankruptcy and IOUs are increasingly consumed with serious issues related to wildfire liabilities, financial solvency and safety, not-for-profit CCAs are delivering bold, locally controlled solutions to improve reliability, increase clean-power delivery to customers, and reduce carbon emissions in transportation, buildings and the electric sector. Regulators should act now to facilitate the transition to a robust, efficient energy market that embraces local climate action and innovation.