Another Potential Offtaker: Community Choice Aggregators

Another potential offtaker: Community choice aggregators

August 11, 2016

Community choice aggregation is a growing trend in US energy procurement that could increase demand for renewable energy.

Under this model, a municipality or a group of municipalities forms a new entity known as a community choice aggregator or “CCA” that procures electricity in bulk to cover the combined load of interested residents and businesses within the municipalities’ political boundaries. Much of the electricity comes from independent power producers that provide renewable energy to the CCA under a long-term power purchase agreement. The local utility, which no longer provides the electricity, remains responsible for transmission and distribution of the power, as well as for billing, collections and other customer services.

Most CCAs offer customers the option of buying electricity that has a higher renewable energy content than what is available from utilities. Customers are typically given two or three energy mix options to choose from, ranging from 30% renewable energy up to 100% renewable energy. The sources of renewable energy vary from program to program, but typically include solar, wind, biomass, geothermal and small hydropower, with a strong preference for locally generated energy.

The goal of a CCA is to negotiate lower rates than individual households or businesses purchasing electricity can obtain on their own from utilities or other retail suppliers within the service territory.

The nation’s largest CCA, the Northeast Ohio Public Energy Council or “NOPEC,” has reportedly saved its 500,000 customers a total of $218 million since its inception in 2000. In 2012, Chicago launched a CCA program that provided average customer rate savings of 25% to 30% over the utility benchmark, but the program was discontinued in 2015 when potential savings were eliminated after the utility dropped its rates. Local officials say the program may be brought back if market conditions change.

Growth of CCAs

CCAs are legislatively enabled in California, Illinois, Massachusetts, New Jersey, New York, Ohio and Rhode Island. CCA laws were passed in these states as part of electricity restructuring in the late 1990s and early 2000s. Now, state and local climate change policies are causing more counties, cities and towns to take advantage of the structure.

CCAs have seen the most traction in California. The state went from having one CCA serving 6,000 customers in 2010 to four CCAs serving more than 400,000 customers today. The two most populous counties in the state, Los Angeles and San Diego, are actively considering proposals to start aggregation programs for their residents. In June, PG&E said the potential loss of retail electric customers to CCA programs, which compete with the incumbent utility for business, contributed to its decision to shut down the Diablo Canyon nuclear power plant, which it plans to phase out by 2025.

San Francisco is the latest municipality in California to launch a CCA program. On May 1, CleanPowerSF, as the program is known, rolled out initial service to 7,800 residential and commercial customers, with plans to add another 48,000 residential customers by the end of 2016 and 300,000 more accounts by 2022. Regulatory and political setbacks delayed plans to launch in 2014, but now the program enjoys strong backing from both the San Francisco Public Utilities Commission and the city’s mayor. Both have identified the CCA program as an important step toward achieving the city’s ambitious goal of 100% renewable energy use by 2020.

Most of the electricity will initially come from wind. In February 2016, CleanPowerSF signed a power purchase agreement with Iberdrola Renewables for 25 megawatts from the Shiloh I wind project.

May 1 was also the start date for the first New York CCA program, which won regulatory approval from the state Public Service Commission in February 2016. The program is run by Sustainable Westchester, Inc., a local non-profit consortium of 20 towns in Westchester County. It started off with a customer base of 113,600 residents and small businesses and is offering a 100% renewable energy option at a rate that is about 5% cheaper than the 2015 utility rate for energy with a 23% renewable content. Two thirds of the participating towns voted to enroll their residents in the 100% renewable energy option by default. As in the case of San Francisco, the Westchester program is considered a key strategy for achieving local and state clean energy objectives, among them, New York’s goal of 50% renewable energy consumption by 2030.

In April 2016, Sustainable Westchester, Inc. negotiated an energy supply contract with ConEdison Solutions, the deregulated arm of the distribution utility Consolidated Edison Company. Under the contract, ConEd will sell electricity to 90,000 homes and businesses at a fixed rate over a term of two years. ConEd can purchase renewable energy certificates as validation that the electricity it is supplying is from renewable sources. (By contrast, the San Francisco CCA does not allow the use of RECs separate from the electricity.) However, the contract allows Sustainable Westchester, Inc. to replace some of ConEd-sourced energy with new, local generation. If this happens, then ConEd can increase rates to make up for any electricity it ends up selling at a loss as a result of the displacement.

Opt out

Where CCAs exist, they are the default energy provider for electricity customers in the applicable service area, meaning once a CCA begins to provide service, residents and businesses are automatically switched over from the utility to the CCA.

Customers then have the ability to “opt out” and go back to utility service at any time, although some CCAs are allowed to charge an exit fee for doing so after a grace period, typically 60 days after the start of service. As an exception to the opt-out model, in deregulated markets like New York, Massachusetts and Illinois, consumers who are receiving service from a competitive supplier rather than the local utility are not automatically enrolled in the CCA. They must specifically request enrollment after the contract with their current supplier has ended.

Opt out is a key feature behind the success of CCAs. The lowest participation rate for opt-out programs that offer renewable energy is around 75%, whereas the highest participation rate for opt-in programs (those that require affirmative consent for participation) is around 25%. Moreover, the national average opt-out rate is only 3% to 5%. The success of the program depends on the ability of the CCA to charge rates that remain competitive with the local utility.

Financeable PPA?

A PPA entered into with a CCA can provide the basis for securing project financing for a new project.

In September 2015, Recurrent Energy was able to finance the 100-megawatt Mustang solar project in California on the basis of long-term PPAs signed with Sonoma Clean Power and Marin Clean Energy.

The key issue is that CCAs generally do not have a credit rating from nationally recognized rating agencies, such as Moody’s, Standard & Poor’s or Fitch. In order for a PPA to be financeable, lenders typically require the offtaker to have an investment grade credit rating. The absence of a credit rating in the case of CCAs makes financings based on PPAs with CCAs challenging.

In at least one recent deal, in order to overcome the absence of a credit rating for the CCAs, the lenders analyzed the metrics used by rating agencies in rating utilities and included cash sweeps that were triggered if the CCA did not meet similar metrics. However, such provisions are not easy to implement since the borrower may not have access to information that is needed to determine whether the CCA is in compliance with such metrics. As financings involving CCAs become more common, provisions of this type are likely to evolve.