As California pushes forward with aggressive climate-change mitigation efforts, local governments are afforded a way to accelerate renewable energy generation and usage through community choice aggregation. The Community Choice Aggregation law (AB 117) was passed in 2002. It allows cities and counties to provide electricity to homes and businesses in its jurisdiction as an alternative to the incumbent investor owned utility (IOU). There are a number of compelling reasons why local governments are turning to CCA. According to the Local Government Commission (Community Choice Aggregation Fact Sheet, funded by the California Energy Commission and Department of Energy prepared by the Local Government Commission. these include:
- Increase use of renewable generation
- Exert control over rate setting
- Stimulate economic growth
- Lower rates
State IOUs are not happy about CCA – and for good reason. As of this writing (December 2017), there are 9 CCAs serving load in California, with as many as eighty cities either engaged in or currently considering community choice energy. A recent white paper published by the California Public Utilities Commission noted that cities and counties with more than 15 million people are now considering CCAs. More than 85% of retail load could be served by “sources other than IOUs” by the middle of the 2020s. This is a threat to the IOU business model because it deprives the utilities of revenue from the sale of power while at the same time requiring them to continue to upgrade and maintain a reliable transmission and distribution network.
Under CA law outlining the statewide Renewable Portfolio Standard (RPS), CCA programs, like all so-called Load Serving Entities (LSEs), are required to procure at least 33% renewable energy resources for their customers by 2020 and 50% by 2030. However, unlike CCA programs that can unilaterally set higher RPC targets, IOUs require CPUC approval to exceed minimum RPS levels, unless such resources offer the lowest cost generation option. There have been several attempts in the California state legislature to pass laws that would constrain or place limits on CCAs. Most recently, AB 726 and AB 813 sought to limit CCA formation by increasing exit fees and/or freezing CCA expansion. While these bills were defeated in the California legislature, the possibility of similar legislation being introduced in the future is a downside risk that could hinder formation of new CCAs or place limits on existing CCAs in their procurement of renewables.
The question arises, how exactly do CCAs provide more power to its members from renewable resources than the local IOU? The IOU owns and manages the transmission and distribution systems that bring power to homes and businesses. Electricity is unique in that it must serve a load instantaneously as soon as it is generated. It is difficult to store and therefore must be used immediately – and electrons are fungible, they cannot be identified by their source of generation. So how does a CCA increase the use of renewable generation? The answer is that CCAs buy and build a cleaner electricity supply for the entire electric grid. They do this through careful and strict accounting through contracts and renewable energy certificates. CCAs report power purchases to the California Energy Commission and the California Public Utilities Commission, and so the amount of clean energy generation can be accurately accounted for.
Once a CCA is established, it needs to ascertain two things with fairly strict accuracy: the estimated load in its jurisdiction (i.e., electricity usage, including time of day and peak usage and capacity resource adequacy) and how to procure enough energy to supply that load, including margins to meet full capacity demand. As noted above, CCA programs, like all so-called Load Serving Entities (LSEs), are required to procure at least 33% renewable energy resources for their customers by 2020 and 50% by 2030. CCAs, however, are almost always designed to exceed the state RPS.
To ensure reliable grid operation, all LSEs (including CCAs) must meet the reserve capacity requirements of the state reserve adequacy (RA) program. RA requirements are set equal to a minimum of 115% of forecasted monthly peak demand, 90% of which must be contracted one year ahead of time and the balance within one month prior. RA requirements and associated costs must be taken into account when making CCA procurement decisions.
LSEs (including IOUs) have energy supply portfolios comprised of three sources:
- Self-supplied generation;
- Generation procured through bilateral contracts or Power Purchase Agreements (PPAs) with independent power producers (including convention fossil fuel generation as well as renewables generation); and
- California Independent System Operator (CAISO) market purchases
(Source: San Diego CCA Feasibility Study)
CCAs generally do not provide self-supplied generation. That is, they do not own power generation facilities themselves, but rather contract with third parties for supply to electrical energy. The reason for this is that CCAs, as tax-exempt public entities, cannot take advantage of the tax benefits of owning and operating generation facilities. For primarily financial reasons, CCAs do not provide self-supplied generation.
The PPA lends itself well to CCA procurement. The PPA financing model is a “third-party” ownership model wherein a separate, taxable entity (“system owner”) procures, installs and operates the generation facility (solar PV or wind for renewable generation). Federal tax incentives can account for approximately 50% of the project’s financial return. (See Power Purchase Agreement Checklist for State and Local Governments). PPA financing provides important advantages to CCAs, including the following:
- No/low up-front cost;
- Ability for tax-exempt entity to enjoy lower electricity prices thanks to savings passed on from federal tax incentives;
- A predictable cost of electricity over 15-25 years;
- No need to deal with complex system design and permitting process; and
- No operating and maintenance responsibilities.
(Source: Power Purchase Agreement Checklist for State and Local Governments)
It should be noted that, at present, the federal Investment Tax Credit is set to step down in 2020, 2021, and 2022 (falling from 30% to 26%, then to 22%, and finally to 10%). This could drive near-term procurement for CCA PPA projects.
PPAs are typically used to lock in pricing and supply sufficient to cover approximately 80% to 90% of anticipated load. The remaining 10%-20% is purchased through the CAISO markets. CAISO maintains a wholesale energy market wherein pre-qualified entities are authorized to transact energy purchases in two distinct markets: the day-ahead market and the real-time market. In the day-ahead market CAISO analyzes the active transmission and generation resources to find the least cost energy to serve demand. The day-ahead market opens for bids and schedules seven days before and closes the day prior to the trade date. The real-time market is a spot market in which utilities can buy power to meet the last few increments of demand not covered in their day ahead schedules.
More and more, cities and communities are taking advantage of the community choice aggregation law in California and moving to procure more renewable energy for their constituents. While this threatens the entrenched IOU utility monopolies in the state, it allows residents to accelerate renewable energy generation even beyond the aggressive state Renewable Portfolio Standard. As CCAs grow in popularity, procurement strategies may change the solar PV development landscape by increasing demand for bankable solar PV projects. It will be interesting to watch as this alternative market develops and how the California Public Utilities Commission and the incumbent IOUs respond.
© David Niebauer 2017