October 5, 2018

How a New California Law Will Expand the State’s Competitive Energy Market

Commercial and institutional customers can now buy more power from competitive retail providers, while regulators are set to explore further program expansion.

California has put multiple major energy policies into law this year: SB 100 and its new 100 percent clean energy mandate, SB 700 and its extension of behind-the-meter energy storage incentives, and wildfire utility relief bill AB 901. So it was easy to overlook another piece of legislation, signed into law last week, that will expand the state’s competitive energy market, known as direct access. 

To be sure, SB 237 only slightly increases the cap in place since the state’s 2001 energy crisis on how much energy big commercial, industrial, government or institutional customers can buy from competitive energy providers, instead of their local investor-owned utility. 

But it also sets a course for the California Public Utilities Commission (CPUC) to start a proceeding on whether to expand the direct access program. This will bring it under the direct focus of regulators like CPUC President Michael Picker, who has identified direct access (DA), along with the burgeoning community-choice aggregation (CCA) movement, as key challenges facing the state. 

Expanding DA is also unpopular with some environmental groups that opposed SB 237, on the grounds that it could actually undermine CCAs with another non-utility option that merely meets the state’s renewable energy and carbon reduction goals, rather than pushing to exceed them, as most CCAs are. 

But for its supporters, SB 237 is a logical and conservative step forward for customer choice in how they procure energy.

“Direct access really gives our customers both access and control over their energy choices,” said Caitlin Marquis, federal and state policy manager for Advanced Energy Economy (AEE), which represents major corporations and energy companies. “Whether that’s renewable energy, energy storage or other pieces, every customer is different, and direct access gives them the flexibility to meet their goals on their own timeframe. That’s the primary appeal.”

SB 237 actually started out with language that would have completely opened up the DA market, she noted. That was a politically improbable proposal, but one that was able to be scaled down to a level that earned the support of labor groups as well as large energy buyers, she said. 

Most critically, investor-owned utilities have opposed DA and CCA expansion in the past didn’t put their lobbying energy behind opposing SB 237 this year, said Amisha Rai, AEE’s senior director of California policy. “The utilities had their eye on wildfires, wildfires, wildfires, so they were not weighing in on this bill,” she said. “That’s a change — in previous years, this was a very difficult conversation to have with IOUs.”   

“The constraints on DA in California stem from historic concerns around the energy crisis,” Rai noted. The program was suspended in 2001, and was only reopened on a limited basis with the 2009 passage of SB 695. “There’s always been concern at the Capitol and amongst the regulatory community that there have to be some restraints on DA, and if it’s opened, it has to be narrow and measured.”

That’s a good description of SB 237’s immediate increase in the current DA cap. The bill will add 4,000 gigawatt-hours to an existing 24,000 gigawatt-hours of load that can be served by electric service providers (ESPs), a move that will increase the share of statewide load in the DA market from about 13 percent today to about 15.5 percent. That’s a slow growth rate compared to CCAs, which account for about 10 percent of statewide load today but added nearly 1 million customer accounts over the past year, and are projected to reach 16 percent of the state by 2020, including large swaths of Pacific Gas & Electric territory.  

But for the big energy buyers represented by AEE’s Advanced Energy Buyers Group, any increase is welcome, Marquis said. As of March 2018, the waitlist for DA was about 8,000 gigawatt-hours of load, all waiting for an existing DA customer to leave the program before they could get in, Rai said. While an additional 4,000 gigawatt-hours is a small increase, “certainly for some companies or customers on the waiting list, this will get them off it.” 

The more lasting effect of SB 237 will be its directive to the CPUC to submit to the legislature by July 2020 a report on whether it should consider a reopening of the DA program, she said. That’s where the potential conflict between expanding DA, maintaining a reliable and financially stable utility sector, and meeting the state’s wide-ranging energy and environmental policies will come into play, according to Rai. 

ESPs already have to comply with the state’s renewable portfolio standard, which has now been boosted to 60 percent by 2030 under SB 100, Marquis noted. The companies making up AEE’s membership are interested in DA largely to seek out competitive offers that can increase their share of renewable and low-carbon energy, and “there are definitely companies that are using direct access to sign long-term renewable contracts and to make purchases like that through direct access.” 

ESPs providing energy under DA also have to procure resource adequacy (RA) to meet peaking capacity, usually by contracting with natural-gas-fired power plants, just as investor-owned utilities, municipal utilities and CCAs do. Arguably, the energy companies contracting with C&I customers under DA are well equipped to handle this — a factor that may stand in contrast to the struggle some CCAs have had in meeting RA requirements. 

SB 237 sets several additional requirements for the CPUC to consider in making its recommendations on reopening DA. Those include assuring that it’s consistent with the state’s greenhouse gas emission reduction goals, doesn’t increase air pollution, ensures electric system reliability, and doesn’t cause undue shifting of costs to “bundled service customers,” or those customers who remain with investor-owned utilities. 

These are the same concerns that CPUC President Picker has expressed about CCAs, which along with DA are expected to serve a stunning 80 percent of the state’s load by 2030, according to CPUC projections. As Rai noted, AEE’s members “do business with [investor-owned utilities], they do business with CCAs. We don’t have a ball in either court. But it’s our job to figure out how this will all work, and how it fits into our members’ energy futures.”

That includes addressing the concerns of SB 237 opponents that expanding DA will increase the share of energy supplied by companies that aren’t as closely regulated as IOUs, potentially leading to an erosion of the state’s ability to meet its long-range energy and carbon goals, she said. “How do we ensure that the state standards are met across the board, whether it’s a direct access provider or a CCA? How do we maintain transparency and accountability and all the other metrics that are important to the ratepayers?”

“All of these issues, I think, are coming to a head,” Rai said. “For the next governor, this is going to be probably the biggest issue they’re going to have to figure out. It hits on every side of the energy debate.” 

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