TOPIC #4
California's Energy Transition: It’s Complicated
As California pursues carbon neutrality by 2045, it faces a complicated implementation landscape.
A Long History of Climate-Focused Energy Regulation
- California has long been an early mover in decarbonizing its energy sector. It has pursued its climate targets through a series of related but separate statutes and initiatives.
- Energy and environmental policies are heavily intertwined and policy is executed through several governmental agencies and institutions, including the California Public Utilities Commission (CPUC), the California Energy Commission (CEC), and the California Air Resources Board.
- As policymaking has evolved and implementation has progressed, however, tensions are rising among various objectives for the energy system, specifically: achievability of infrastructure development at its proposed pace; resilience; resource adequacy, diversity, and flexibility; reliability; economic growth; cost and financeability; and affordability.
KEY TAKEAWAYS
California’s energy transition has driven significant structural changes in power supply and demand dynamics. However, during the transition, systems must focus on resource and energy adequacy and may have to retain dispatchable (some carbon-emitting) resources perhaps longer than planned.
Significant investment in the grid, including large, regional transmission, is necessary and anticipated in order to move new large-scale renewable energy across the region as well as modernize the grid.
Policymakers will closely monitor cost and affordability through the transition, especially as utilities have more fixed and less volumetric cost drivers.
Optionality is key and having many resource “arrows in the quiver” is important until deployment of demand-side options and of more nascent technologies, such as floating offshore wind and long-duration storage, grows.
California’s energy transition has driven significant structural changes in power supply and demand dynamics. However, during the transition, systems must focus on resource and energy adequacy and may have to retain dispatchable (some carbon-emitting) resources perhaps longer than planned.
Significant investment in the grid, including large, regional transmission, is necessary and anticipated in order to move new large-scale renewable energy across the region as well as modernize the grid.
Policymakers will closely monitor cost and affordability through the transition, especially as utilities have more fixed and less volumetric cost drivers.
Optionality is key and having many resource “arrows in the quiver” is important until deployment of demand-side options and of more nascent technologies, such as floating offshore wind and long-duration storage, grows.
Figure 4.1: Timeline of Selected California Climate-Related Regulation
Notes: *DRPs are distribution resource plans. **NEM means net energy metering.
Sources: ARUP; ScottMadden research
Shifts in the Resource Mix
- California has had a dramatic change in its resource mix over the past 20 years as it has moved toward renewable portfolio standard milestones (33% by 2020; 60% by 2030) and established a goal of 100% renewable and zero-carbon resources by 2045. As a result, the GWh energy mix, including imports, is approximately 50% non-carbon-emitting.
- In pursuing low-carbon resources, the state has seen the retirement of more than 11 GWs of dispatchable and baseload generation since 2013, including more than 9 GWs of natural gas-fired units. However, the baseload 2.3-GW San Onofre Nuclear Generating Station was retired during this time, as well.
- As of year-end 2021, net generation has trended downward for more than a decade. At the same time, California energy imports continue to supply approximately 30% of California’s electricity needs, more than any other U.S. state. This has sometimes proved problematic during drought years (with lower available Northwest hydropower) and periods with transmission capacity constraints, including wildfire-related line constraints.
- Moreover, solar PV and wind capacity continue to grow in the state. Periodically lower than expected performance of resources—e.g., wildfire smoke reducing solar output and unfavorable hydro conditions—in recent years has forced California to continue to lean on its gas-fired generation. This reliance on gas generation is particularly acute during late summer, as daylight hours grow shorter (less solar output) while cooling demand remains high.
Figure 4.2: California Installed Capacity by Fuel Type (2001–2021) (GWs)
Sources: CEC; ScottMadden analysis
Figure 4.3: California Net Imports and Net Generation by Fuel Type (2011–2021) (GWhs)
Sources: CEC; ScottMadden analysis
Unique Features of the California Energy Environment
- California is blessed with with several energy resources, which in theory should support transition to a 100% non-emitting power portfolio.
– It has abundant sunshine, which has supported the deployment of 10 GWdc of rooftop solar and nearly 20 GWdc of utility-scale solar, including community solar.
– Because of local seismic conditions and associated underground heat creation, California has long been a leader in geothermal resources. Those resources totaled about 2.7 GWs and comprised 6% of in-state GWh generation in 2020 and 2021. However, most facilities were put in place before 2000; only 326 MWs of geothermal resources have been added since then.
– California has the nation’s second-largest conventional hydroelectric-generating capacity after the state of Washington. However, hydropower’s contribution is highly variable and dependent on hydrological conditions, specifically rainfall and snowpack. California is prone to drought—2021 was the driest year in nearly a century—and in-state hydroelectric power supplied only about 6% of California’s utility-scale net generation, down from nearly 18% in 2017.
Note that two of the three resources above—solar and hydropower—are dependent upon environmental conditions.
- Other societal and policy preferences also play into California’s energy environment:
– Historically strong opposition to maintaining or expanding instate nuclear power
– Pursuit of community choice aggregation (CCA), which has allowed some communities to purchase renewable energy, has complicated the assurance of resource adequacy of CCA load serving entities
– Frequency of wildfires caused by seasonal winds, vegetation management, drought, and ignition sources (human actors and utility infrastructure)
- As a result, California's unique environment both promotes and complicates the state's energy transition.
Figure 4.4: California Balancing Authority Areas
Cost and Affordability Are Areas of Focus for Regulators
- The reconfiguration and expansion of utility facilities pursuant to a transition of energy infrastructure to high levels of non-emitting resources and distributed resources require significant levels of investment. Much of this will likely be recovered from customers through rates.
- The CPUC is required to report annually on costs of utility programs and activities. It is also charged with recommending actions over the next 12 months to limit utility cost and rate increases consistent with the state’s energy and environmental goals, including goals for reducing emissions of greenhouse gases.
- Some observations from the latest CPUC reviews:
– High rates, “average” bills: With flat to declining load growth as a result of distributed resources (encouraged by net energy metering (NEM)) and efficiency as well as effects of some customers leaving utility-bundled service for CCA, average residential rates for California’s investor-owned utilities (IOUs) are among the highest in the nation and have increased between 5% and 10% per year since 2013. However, Californians’ residential bills are not the highest in the nation. In 2020, residential average bills were 25th, 85th, and 87th for the three major IOUs in the state, respectively, compared with 200 U.S. IOUs (with a ranking of 1st having the highest bills).
Figure 4.5: Total System Average Electric Rates (2017–2021) (¢/kWh)
Source: CPUC
Figure 4.6: 2021 System Average Electric Rate Component Values (¢/kWh)
Source: CPUC
Cost and Affordability Are Areas of Focus for Regulators (Cont.)
– Increasing rates: Transmission and distribution infrastructure investments and operations costs are key drivers of increasing rates, and CPUC expects continued upward pressure on rates due to “climate change-driven” wildfire mitigation costs and electrification needs. In fact, as final payments on bonds that arose from the cost of electricity restructuring and the 2000-01 energy crisis are being made, new costs of the state’s wildfire fund are taking their place. The bottom line: adaptation costs—such as PG&E’s proposed 10,000-mile, $11 billion distribution undergrounding effort—will be incurred along with transition costs over the near to medium term.
– Rethinking volumetric rates: CPUC has expressed concern that increasing fixed costs, current rate design, and California’s current NEM framework and other distributed energy resource (DER) incentives may result in cost-shifting to low- and middle-income non-participants. CPUC is looking at revising NEM payments and has suggested potentially changing the current framework of cost allocation and rate design.
- One commentator recently suggested “insulating” electric rates from nearly $39 billion in wildfire-related costs to ensure “policy effectiveness, equity, and overall affordability,” which it characterizes as key for decarbonization acceptance. This commentator suggests recovering those costs through the state’s general fund or other mechanisms.
- Wildfire costs and extreme weather system impacts, as well as unusual demand-side effects of COVID restrictions, have been so significant that it has been difficult to discern the cost and affordability impacts of transition absent those factors. Industry and policymakers will pay close attention to power prices and system costs as California’s transition continues.
Figure 4.7: Forecasted Bundled Residential Average Rates (Nominal ¢/kWh)
Source: CPUC
“Average electricity bills for PG&E bundled residential customers are forecast to rise at an annual average rate of about 9 percent, about 4 percent for SCE customers, and about 8 percent for SDG&E between now and 2025, implying that these households’ energy bill will become less affordable if household incomes track the assumed inflation rate of 2.4 percent.”
-California PUC (May 2022)
Transmission Investment Is Required
- As mentioned earlier, California currently imports about 30% of its power. Significant imports and exports as well as intrastate transfers are expected as demand for non-carbon-emitting resources (including storage and behind-the-meter solar PV) continues to grow, vehicle electrification expands, and natural gas-fired generation declines by a projected 15 GWs by 2040.
- California’s Senate Bill 100 (SB 100), which requires energy from renewable and zero-carbon resources supply 60% of retail sales by 2030 and 100% of retail sales by 2045, has focused policymakers and system planners on long-term grid requirements. California planners have issued their first 20-year transmission outlook, seeking to establish a planning baseline and initiate development activities given that lead times for transmission of “eight to ten years are reasonable or even optimistic.”
- A joint agency report that analyzed SB 100 projects projected a 2040 statewide peak load of 82 GWs, compared with a current 2031 forecasted peak of 64 GWs (an increase of more than 28%). To meet that demand, California projects the need for more than 120 GWs of additional zero-emissions capacity, with more than 24 GWs of wind resources split between in-state and out-of-state resources. Interestingly, it anticipates about 10 GWs of offshore wind. However, because California’s continental shelf falls away quickly, such development would likely require more novel, expensive, and technically challenging floating wind technology.
- California ISO's (CAISO) planning outlook estimates that an incremental $30.5 billion in transmission development will be required to integrate these resources under its base case scenario. The estimated cost for upgrades to the existing CAISO footprint is $10.74 billion, while offshore wind integration is more than $8 billion and out-of-state wind integration is $11.65 billion. These incremental costs total approximately $15/MWh (1.5¢/kWh) phased in between 2030 and 2040.
Figure 4.8: CAISO 20-Year Transmission Plan Illustrative Diagram of Transmission Development
Source: CAISO
Growing Pains: Resource Adequacy, Energy Adequacy, and System Operations
- With the rapid incorporation of variable energy resources, particularly solar PV, into the resource mix, California’s grid operator has long observed issues of supply/demand imbalance in the form of the famous “duck curve,” going back to at least 2013.
- Traditional planning reserve margins (PRMs) have addressed resource availability at peak hours. But planners assume that adequate PRMs ensure adequacy at all hours of the year. California has experienced seasonal (especially late summer) peaks that have pushed further into evening hours just as solar output falls dramatically, causing system stress. This is exacerbated by rising net load (i.e., load net of solar PV, wind, and other distributed resources), which also ticks up during those late afternoon/early evening hours.
- California has also experienced “too much of a good thing”: overproduction by wind and solar resources, particularly in the spring months. CAISO has been forced to curtail output where there is systemwide or local oversupply. This has implications for solar developers, which are uncompensated during those hours.
- The Western Energy Imbalance Market, now beginning its eighth year, has been effective in transferring available energy across the market footprint. However, as noted by CAISO, it is not a substitute for in-area resource sufficiency—both for capacity and flexible ramping—and is not intended to allow balancing areas to “lean on” other member areas.
- The state’s resource and energy adequacy issues stem from the reliance on imports (discussed earlier), and the retirement of flexible dispatchable resources at a greater pace than clean dispatchable resources (battery storage, demand response) are coming into service. Grid-scale battery storage deployment in California, now at about 3.6 GWs, has been helpful in providing some flexible resources, but batteries may be inadequate for longer-duration events like heat waves.
Growing Pains (Cont.): Pursuing Flexibility
- Regulators, policymakers, and system operators are thus pursuing various (and some unexpected) strategies as described in Figure 4.9 below. All of these approaches illustrate that successful transition while preserving reliability requires a preservation of real options on flexible assets until there is more certainty of resource development and performance.
- Going forward, a remaining issue for California’s resource and energy adequacy will be the impact of resource mix changes (specifically decarbonization policies) and the correlation of weather phenomena (extreme weather, hydro availability, cooling water availability, etc.) across the West that might affect resource sharing and import capability into California.
Figure 4.9: Strategies That Policymakers and System Operators Can Pursue
IMPLICATIONS
Energy transition can be complex, especially as policymakers pull different levers on demand, supply, fuel choice, and regional power purchases. Weather (including extreme weather) and asset mix and characteristics will continue to be factors in energy system planning and operations regardless of transition aspirations and timelines.
As other states move toward energy transition, they, too, face challenges. California has demonstrated that deployment of batteries and other non-emitting resources needs to be strategic, and the market design, including wholesale product deployment, needs to support that.
Resource adequacy standards need to be clearly defined, and regulators and policymakers need a measured approach to avoid retiring reliable, dispatchable resources too quickly. ISOs and balancing authorities need to move on multiple fronts: resources, transmission, reliability standards, market design, battery deployment, ancillary services, interstate transfers, and more.
CONTACT OUR EXPERTS
On California's Energy Transition
RECENT INSIGHTS
Available at scottmadden.com
ScottMadden posts energy and utility industry-relevant content and publications on a regular basis. The list below is a sample of recent insights prepared by our consultants.
