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On Oct. 7, Gov. Edmund G. Brown Jr.,
D-Calif., signed S.B.350, the Clean Energy and Pollution Reduction Act of
2015, into law. This landmark bill makes a number of significant changes to
California's energy policy, including raising California’s renewable
portfolio standard (RPS) to 50% by 2030.
In addition to raising the RPS threshold for both public utilities and
investor-owned utilities alike, the Clean Energy Act lays some of the groundwork
for how California will achieve the legislature's ambitious renewable energy
goals by requiring that utilities procure renewable energy pursuant to
long-term power purchase contracts, mandating improvements in energy
efficiency, and pursuing the development of a regional independent system
operator (ISO).
Higher RPS
Thus far, California’s utilities have been largely successful in implementing
the existing RPS. Remarkably, the percentage of electricity retail sales
served by renewable energy resources that have been procured and are now
under contract for 2020 is 31.3% for Pacific Gas & Electric, 23.5% for
Southern California Edison and 38.8% for San Diego Gas & Electric.
The California Energy Commission (CEC) and the California Public Utilities
Commission (CPUC) share responsibilities for implementing the RPS. The
original RPS legislation required the CEC to certify renewable energy
facilities and implement a tracking and verification system, and charged the
CPUC with implementing and enforcing the RPS for the state’s investor owned
utilities. Subsequent amendments to the original legislation expanded the
CEC's role by requiring the CEC to adopt enforcement procedures for publicly
owned utilities.
The Clean Energy Act builds on this success by raising the bar yet again. The
Clean Energy Act includes six three-year compliance periods and raises the
renewable procurement requirement for publicly owned utilities and
investor-owned utilities to 40% by Dec. 31, 2024; 45% by Dec. 31, 2027; and
50% by Dec. 31, 2030.
In addition, the Clean Energy Act extends the preference for in-state
renewable energy sources by maintaining the existing law's portfolio content
requirements: After 2020, a minimum of 75% of renewable products must be
bundled energy and renewable energy credits (RECs) delivered into the
California balancing authority without substituting electricity from another
source (Bucket 1); up to 25% of renewable energy products may be energy and
RECs that cannot be delivered to the California balancing authority without
substituting electricity from another source (i.e., firmed and shaped energy)
(Bucket 2); and up to 10% may be unbundled RECs only (Bucket 3).
Long-term contracting requirements
The Clean Energy Act also adds a significant long-term contracting
requirement to California's RPS law. Beginning Jan. 1, 2021, at least 65% of
the renewable energy procurement of a retail seller must be from contracts of
10 years or more in duration or from direct ownership (or ownership
arrangements) of eligible renewable resources.
The long-term contracting requirement has significant implications for new
renewable energy development, which generally requires high upfront capital
costs. Long-term contracts provide revenue certainty and security for
investors and financing parties. Such certainty can lower project capital
costs, utility costs to procure power and associated environmental
attributes, and, thus, retail rates. By mandating that at least 65% of
renewable energy procurement be from long-term contracts, the Clean Energy
Act demonstrates a commitment to the ongoing, stable development of renewable
energy resources in California.
Energy efficiency
The Clean Energy Act prioritizes energy efficiency and demand reduction and
charges the California Energy Commission (CEC) with the task of establishing
annual targets in order to double statewide energy efficiency savings in
electricity and natural-gas consumption by retail customers by Jan. 1, 2030.
Energy-efficiency measures (and the state’s relatively mild climate) are
cited by the Energy Information Administration as contributing factors
leading to the state’s low per capita energy consumption rate; only two
states have lower energy usage per capita than California.
The Clean Energy Act requires the California Independent System Operator
(CAISO) to undertake a study of an expansion of the CAISO. The possibility of
a regional grid operator could have a significant impact on California's
ability to integrate renewable energy resources, as a larger geographic area
could help alleviate overgeneration conditions and address other issues
associated with the intermittency of renewable energy assets.
Proponents of an expansion of the geographic footprint for CAISO believe a
larger ISO will have two principal benefits: a greater diversity of resources
can result in a "smoothing" of variable resources across production
patterns; and an expansion of the pool of traditional balancing energy assets
can help alleviate short-term fluctuations. The energy imbalance market has
already been expanded to include PacifiCorp.
Implementing the Clean Energy Act's higher RPS will have significant impacts
on a variety of markets. After several years of declines, prices for
renewable energy products, particularly in-state resources, may rise as
utilities compete in order to comply with the state’s higher mandate and
contracting requirements.
In addition, flexible resources and demand responsiveness will be important
as the system operator integrates a larger share of renewable energy resources.
Achieving this ambitious goal will present economic, operational, and
technical challenges for California’s utilities and the CAISO. In particular,
increased solar and wind electricity generation can be expected to further
change net load shape and accentuate the need for the system operator to
accommodate late afternoon upward ramps by drawing upon an increasingly more
flexible resource base.
There are other drivers for new capacity in California. New renewable energy
resources (as well as gas-fired power plants) will play an important role in
replacing lost capacity from the earlier-than-anticipated retirement of the
San Onofre Nuclear Generating Station (SONGS) after the failure of
replacement steam generators led to the decision to not extend the facility's
operating license. SONGS, which permanently ceased operations on June 7, 2013
and is being decommissioned, was capable of generating more than 2.2 GW of
electricity - enough power to serve 1.4 million average homes, according to
Southern California Edison.
The anticipated electrification of the transportation sector also may
increase demand for new generating capacity, including from renewable power.
The impact of electric cars remains to be seen. Electric vehicle consumption
during midday hours may alleviate some overgeneration conditions, as charging
of electric vehicles during peak solar production hours can provide an
efficient way to use energy delivered to the grid. The electric vehicle fleet
may provide battery storage opportunities that could further smooth the
impact of intermittent resources.
Achieving California's ambitious RPS goals will present both opportunities
and challenges for the various stakeholders in the project finance arena.
Regardless of the future of federal tax credits and other incentives for
renewable energy, state RPS requirements remain a primary driver of new
investment in renewable energy. With expanded goals like those in the new
California law, procurement for new clean energy capacity (including both
utility-scale facilities and distributed generation) should continue to grow.
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