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Its Not Easy Being Green: Californias 33% RPS Challenge

By Gary L Hunt

No one ever accused California of being timid, this state prides itself on embracing the new but achieving a 33% RPS standard as part of an overall AB32 strategy to reduce greenhouse gas emissions as proposed by Governor Arnold Swarzenegger is proving to be a daunting challenge. Whats new, you ask? Whats new is the subtle but growing pushback coming from some significant players and advocates of green energy who fear over-reaching especially in the current economy might hurt green energy more than help it--if California stumbles. Why do they fear California might stumble? Because achieving the AB32 goal of emissions reduction goes beyond what California can realize on its own. It requires financial and policy support from the Federal Government and other states. Boosting Californias renewable portfolio standard to 33% by 2020 is, by itself, a breathtaking goal for any state---even the sixth largest economy in the world. Attempting to do so when your state is co-dependent on others is a very daunting challenge. Realizing that 33% renewable energy goal means California must almost triple the amount of renewable electricity from 27 terawatt hours (TWh) today to about 75 TWh in 2020 and requires seven new transmission lines to deliver that additional 75 TWh of electricity just within the state. To realize Californias 33% RPS goal, Governor Swarzenegger is mobilizing California state government to get with the program. And two of the most important state players, the California Energy Commission and the California Public Utilities Commission have endorsed the goal. But because they must make decisions based upon the preponderance of the evidentiary record in the case of the CPUC to be sustained in any court challenge, these agencies work closely to build that record and perform the necessary due diligence in arriving at decisions. Accordingly, the CPUC just released a report outlining its preliminary analysis of efforts needed to implement the 33% RPS goal. It is a meaty, thoughtful and candid report stating that achieving the 33% goal will take longer---2024 not the 2020 desired---and cost more---as much as $12 billion in new capital investment mostly in new transmission lines just in California to get such large scale renewable energy to market; raise utility rates even higher----CPUC estimates that under its current 20% renewable portfolio standard the average residential electric bill will already increase 16.7% by 2020; and may not be cost effective---- because natural gas prices would have to be higher than $13.87/MMBtu and any proposed CO2 tax would have to be higher than $100 per ton for renewable energy to be an effective hedge against fossil fuel prices from todays typical utility portfolio. 1 Put that in perspective, in the most recent auction of emission allowances in the ten Northeastern states which are part of the Regional Greenhouse Gas Initiative (RGGI) the clearing price for the roughly 31 million CO2 emissions allowances that were just sold


dropped in the latest auction for the 2009 vintage to $3.23 per allowance. The RGGI auction for the second three-year control period beginning Jan. 1, 2012 saw 2.2 million allowances go for the 2012 vintage cleared at $2.06 per allowance. Achieving the full potential for renewable energy goes well beyond California borders here in the WECC as well. The Western Governors Association on June 15th joined forces with US DOE to release a report entitled Western Renewable Energy zones-Phase 1 mapping the high potential renewable energy resources throughout the West. 2 The report calls for $115 billion of investment in new high voltage transmission lines to connect renewable resources to markets. California is, of course, an active participant in this WREZ initiative and many expect this effort to feed into the US DOE Report to Congress in September 2009 on the National Interest Electric Transmission Corridor (NIETC) requirement of the Energy Policy Act of 2005. Meanwhile back on the front lines there are other issues being added to Californias punch list of potential problems by some influential players including: Lets Make Efficiency More Efficient. On May 28th, the California Division of Ratepayer Advocacy (DRA), part of the CPUC, released its analysis of the big three California investor owned utilities energy efficiency proposals to the CPUC concluding that the $4 billion request to double energy efficiency program spending would result in only 6 percent more in energy savings than previous programs that cost ratepayers 50% less.3 Does Doubling Down on Solar Roofs Make Sense? On June 18th the same DRA complained that state regulators were making a bad decision when they doubled the size of the SoCalEd solar rooftop program telling the Commission the program is not worth the estimated $2 billion utility customers may have to pay for it given cheaper alternatives available. Celebrate Achieving Net Metering Goals, Dont Raise them. A day later The San Jose Mercury News reported in its June 19th edition that PG&E went on record opposing Assembly Bill 560 which would increase the cap on net metering from 2.5% to 10%. PG&E is near the current 2.5% cap, ahead of other utilities, and argues that expanding the cap would be unfair non-solar customers who must subsidize rebates and credits for solar customers. AB 560 proponents say raising the 2.5% cap is necessary if California is to achieve its one million solar roofs goal by 2016, but Northern California interests want to see utilities in Southern California catch up to PG&E before they sign up for a 400% expansion of net metering. Solar Credit Rules are not Broken, Dont Fix Them. AB 920 requires utilities to rollover solar credits to the power grid or pay them out in cash at year end at a lower rate. PG&E also opposes this bill as well, according to news reports, saying the bill requires non-solar customers to further subsidize solar users. PG&E is ahead of other California utilities in reaching its solar use goals, but is under increasing pressure to raise those targets. Under current California rules, solar customers receive full retail rate credit on their monthly bill for surplus power provided to the grid and use those
http://www.westgov.org/wga/publicat/WREZ09.pdf http://www.dra.ca.gov/DRA/News/090528_ee.htm

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credits during the calendar year to offset their energy use when consuming power from the grid. Unused credits expire each year. CPUC Approach to 33% Implementation Analysis In producing its implementation assessment, the CPUC developed a base case using the current 20% RPS standard by 2020 and four alternative scenarios each representing an alternative strategy to reach the 33% RPS target. The report outlines key modeling assumptions and approaches which appear to be generally accepted analytics methods. It also evaluated the probable timelines for achieving the 33% goal based upon historic experience, current practice as well as with and without process improvements to speed things up. The CPUC reference case assumes Californias likely renewable energy mix in 2020 based upon current state law and existing RPS contracts. All other scenarios assumed current statutory and regulatory out-of-state deliverability requirements for renewables into California but that approach limits the analysis of inter-state approaches across the broader WECC market which might affect consideration of options such as out-of-state tradable renewable energy credits (REC). Below are the four scenarios and two additional sensitivities the CPUC developed: 33% RPS Reference Case: Assumes Californias current renewable procurement path, which depends on new technologies, like central station solar thermal. High Wind Case: This case adds more wind resources in California and the Mexico state of Baja California which are often less expensive than the solar thermal found in the scenario above. High Out-of-State Delivered Case: This scenario assumes more high voltage interstate transmission w i l l b e b u i l t connecting California utilities to large scale, lower cost wind and geothermal resources across the WECC, but does not include tradable RECs with no delivery requirement. High Distributed Generation (DG) Case: This scenario assumes a distributed generation system evolves connecting many small scale renewable resources closer to local distribution and transmission facilities and substations since few HVDC transmission corridors are built to enable access to remote renewable resources to meet the 33% RPS. All-Gas Sensitivity: This scenario modeled the supply mix in 2020 assuming no new renewables are added beyond 2007, and California meets its incremental electricity needs with gas-fired combined cycle generation. This is a very useful comparison of a traditional portfolio approach given California laws prohibition of new coal or new nuclear generation compared to the 33% RPS in 2020. This scenario essential becomes the price to beat in the competitive wholesale power market.

2008 Costs Sensitivity: This scenario models the current cost of electricity in California to enable comparisons of costs of portfolio options across the 2020 scenarios compared to todays costs. The CPUC 33% RPS Implementation Study Findings 1. Electricity prices will be higher in 2020 no matter what. Average California electricity costs per kilowatt-hour will go up 16.7% in 2020 because of current renewable procurement compared to 2008 in real terms even if no new renewable energy is added. Total California electricity expenditures will be 2.8% higher in 2020 because of the existing 20% RPS standard than they would be under the all-gas sensitivity analysis. In 2020, total California electricity expenditures will be 7.1% higher compared to the 20% RPS, and 10.2% higher compared to an all-gas scenario if California implements the 33% RPS standard.

2. Achieving the 33% RPS goal is likely to take longer than the 2020 target. 2024 is most likely. Using past practice as a guide and assuming no external risk of delay the most likely schedule for reaching the 33% target is 2024. 2021 is best case. The best case timeline is 2021 assuming no external risks, no resource constraints in processing numerous transmission and generation applications, and that CAISO successfully implements its planned new process to review and approves more than one major transmission application per year.

3. Weakest Link Failure Scenario is still plausible. The CPUC modeled Timeline 2B is instructive because it models the implication if two of the proposed renewable energy resource zones failing to resolve external constraints preventing renewable projects getting to market such as failure to get approval to build new high voltage transmission in a timely manner and other risks. It is instructive because some of these risks appear all too common causes for project delays. Congress is Retreating after Feeling the Heat The pressure to mitigate the costs and disruptive implications of new green energy policies is being hotly debates behind the scenes in Congress where pressure from constituents is reshaping the legislative action. So instead of joining California at the front lines, it looks more likely that Congress will reduce the proposed RPS standards and water down other provisions of both the Obama energy and emissions reduction plans in order to gain the votes needed for passage before the President goes to Copenhagen at the end of the year. The House Energy and Commerce Committee approved a reduced national RPS standard of just 6 percent to start with a gradual increase to 20% by 2020 down strikingly from the 25% advocates had sought. Chairman Waxman (D-CA) said the votes were not there to

pass a stronger measure even in his own Democrat party. US House Agriculture Committee Chairman Collin Petersen (D-MN) and about 40 Democrats have been holding talks with House Majority Leader Steny Hoyer (D-MD) trying to reach a compromise on energy and emissions legislation these rural Democrats fear with adversely affect their states interests. Over in the US Senate, the same pushback is happening, Senator Jeff Bingaman (D-NM) has been unable to get fellow Democrats to support RPS standards. The current Senate version of the bill has a reduced 15% RPS down from the 25% goal proposed by President Obama. Lead, Follow or Get Out of the Way Californias willingness to be a pacesetter and its ambitious 33% RPS goal and AB32 emissions reduction targets are applauded on all fronts. But even its biggest supporters are worried about whether these goals can be achieved at costs consumers will be willing to pay. Others worry about whether California is too far out front on these goals when Democrats in Congress looks like they are pulling back from the Presidents equally ambitious goals. Another camp worries that achieving Californias renewable energy aspirations requires that the other states making up the WECC interconnect join forces with California and the US Government to build the energy infrastructure---mostly transmission--to make it feasible. Californias tradition is to set the pace for the nation, beat the drum of progress and wait for the rest of the states and the Federal Government to catch up. But not even the Golden State has attempted such an ambitious policy feat with so little gold left in its coffers to carry it out if it has to go it alone. Some days, Sacramento feels like Californias friends and allies are behind it---way behind it!

Gary L. Hunt is a regular contributor to Green Edison offering analysis and insight about issues shaping the energy industry from his experience as a state utility regulator, utility executive, and trusted adviser on energy markets, strategy and risk as President, Global Energy Advisors and until recently as VP-Global Analytics at IHS/CERA. He can be reached at ghunt94526@gmail.com or network with him at http://linkedin.com/in/gh8431.