California: Moving Beyond the Elections

California: Moving Beyond the Elections

November 10, 2010

by Heather Mehta, Laura Norin and Brandon Charles, with MRW & Associates, LLC in Oakland, California 

California’s renewable energy industry can breathe a sigh of relief now that voters have rejected Proposition 23 and elected Jerry Brown, a strong supporter of renewable energy, as governor. Proposition 23, had it passed, would have placed an indefinite moratorium on implementing the state’s climate change law. Although the proposition did not specifically target a recently-approved increase by the California Air Resources Board in the state renewable energy target to 33% by 2020, climate change policy and the types of energy Californians consume are intrinsically linked, and passage of Proposition 23 would have put the 33% target at risk. The election of Jerry Brown is also widely seen as a very positive development by renewables developers. Jan Smutny-Jones, head of the Independent Energy Producers Association of California, a trade group for independent generators in the state, credits Brown with helping give birth to the renewable energy industry in California during his first term as governor in the 1970s. Californians sent a clear message that they continue to support the state’s clean energy and environmental objectives even during rough economic times. Despite the good news, there is still significant regulatory and market uncertainty at the implementation level for renewable energy developers. After the election dust settles, regulators, policymakers, and the industry will have to address the conflict between the 20%-by-2010 renewables portfolio standard set by statute and the 33%-by-2020 target set by administrative rule. There will be a push to get the state legislature to codify the 33% target. An effort to do so failed in the fall. Governor-elect Brown is expected to support the effort. (The outgoing governor, Arnold Schwarzenegger, did, too.) Any 33% target that emerges from the state legislature could differ in the implementing details from the administrative rule. A number of other issues are in play. Upcoming regulatory decisions on the use of renewable energy credits, a push to develop new energy storage, and efforts to streamline the siting and permitting of renewable energy facilities may also have large implications for the industry.

California RPS
The statutory RPS in California requires investor-owned utilities and power marketers to supply at least 20% of retail sales from renewable energy by 2010, although flexible compliance provisions allow for a three-year extension. California’s three largest investor-owned utilities -— PG&E, Southern California Edison and SDG&E —- served just over 15% of their combined load with renewable energy in 2009. Municipal utilities in California are permitted to develop their own renewable energy goals. In 2009, the California legislature passed a bill that would have increased the RPS requirement to 33% by 2020 for all California utilities and retail electricity suppliers. However, Governor Schwarzenegger did not endorse some aspects of the measure that passed and ended up vetoing it. Concurrently, he used his executive authority to direct the California Air Resources Board—called “CARB”—to implement a 33% standard, citing the need for such a standard under the state climate change law, AB 32. Observers have expressed mixed opinions as to whether AB 32 provides the legal authority to increase the RPS target. CARB approved the 33% target in September 2010. The 33% target requires all utilities and power marketers, including municipal utilities such as the Los Angeles Department of Water and Power, to meet renewable procurement targets of 20% for 2012-2014, 24% for 2015-2017, 28% for 2018-2019 and 33% by 2020. The CARB plan prescribes other elements –- for example, a target for cogeneration facilities –- that still need fleshing out. “There are some gaping holes in the CARB plan that need to be filled,” former California Energy Commissioner John Geesman said. “That is likely to be a real focus for the new administration.” Another challenge is that, in the absence of a statutory 33% RPS, the 33% RES—the term for the administrative standard— will coexist with the 20% RPS that is implemented by the California Public Utilities Commission. There will need to be some degree of linkage between the rules and structures of the two programs to provide the policy certainty needed. A further challenge is the uncertainty of whether the administrative 33% RES has the force of law. Leaders in both houses of the state legislature have opposed CARB’s 33% RES as being “contrary to law [and creating] economic uncertainty and potential job losses . . . [and an] inefficient and duplicative state bureaucracy.” The California legislature attempted again in 2010 to pass a bill to codify the 33% target and eliminate this uncertainty. Senate Bill 722 reached the Senate floor in the final hours of the 2010 legislative session, but it did not come up for a final vote. Without legislative underpinning, the 33% RES is in danger of repeal by a new governor or new California Air Resources Board at any time: since one administrative order can overturn another, an administrative ruling does not provide the stability and policy certainty of a legislative mandate. Efforts to pass SB 722 or a similar bill may move forward in a December special session. Alternatively, the bill may be held until the start of the 2011 legislative session or until Governor Brown’s January 3 inauguration. Laura Wisland of the Union of Concerned Scientists believes that given Governor Brown’s stated aspirations for renewable energy, it is likely that movement on a 33% RPS bill will begin once he takes office. It is still possible to pass legislation before the end of Governor Schwarzenegger’s term because both the Senate and the governor have expressed a desire to pass RPS legislation, but Democratic legislators may prefer to wait until their Democratic governor takes office in January. Jan Smutny-Jones told the NewsWire that the main factor in the failure to pass a 33% RPS was not lack of support from the current governor. Instead, the process was hamstrung by utility demands for off-ramps and other means to avoid penalties for non-compliance, union demands to limit the amount of renewable energy credits purchased from independent generators in other states that could be used to comply with the California targets, and other demands by members of the renewable power industry itself. How Governor-elect Brown handles these special interests will be worth watching. John Geesman suggested that Jerry Brown might sidestep SB 722 and seek passage of a simpler and more direct version of an RPS bill early in the new administration’s term. SB 722 in its final form differed from CARB’s 33% RES in significant ways. The 33% RES does not allow any exceptions or extensions for utilities and power marketers that are unable to meet the 33% procurement requirement. SB 722, on the other hand, made utilities and power marketers responsible for non-compliance only if the procurement barriers they faced were under their direct control. For example, a utility would not be responsible for missing the 33% target due to lack of transmission. The use of tradable renewable energy credits tied to renewable energy generated at projects in neighboring states—called “TRECs”—for RPS and RES compliance is another issue where significant differences exist. CARB’s 33% RES allows unlimited use of TRECs: all of the required renewable energy theoretically could be produced and consumed out of state. SB 722 allowed TRECs to be used for only a portion of compliance, with the amount varying by time period. For example, for the period after 2016, SB 722 would allow 25% of the RPS requirement to be met with TRECs, subject to the further constraint that no more than 10% of contracts executed after June 1, 2010 could be TREC contracts. The amount of TRECs that can be used for compliance under the 20% RPS has yet to be resolved by the California Public Utilities Commission. The CPUC released a decision in March that limited the use of TRECs to meet up to 25% of annual procurement obligations by the investor-owned utilities and imposed a price cap of $50 per TREC. It also determined that a TREC transaction is any transaction in which only a TREC is exchanged between a buyer and seller, and the generator’s first point of interconnection with the WECC transmission system is physically located outside of California and is not interconnected to the CAISO system or another California balancing authority’s system. In response to motions by various parties, the CPUC stayed the March decision pending resolution of petitions for changes to the decision. CPUC President Michael Peevey issued a revised proposed decision in October that would change the rules set out in the original TREC decision by increasing the TREC usage cap from 25% of the annual RPS procurement obligations to 30% and delaying expiration of the TREC usage cap and the $50 price cap until December 31, 2013. It would modify the grandfather provisions to provide that all contracts that were approved by the commission prior to the effective date of the original decision would be characterized as bundled contracts for RPS compliance purposes and would not count toward the TREC usage cap. It would also apply the same TREC usage caps to the smaller power marketers. Commissioner Grueneich subsequently issued an alternate proposed decision that would eliminate the expiration dates for the usage cap and the price cap, but it would otherwise maintain the 25% TREC cap and the other rules in the March decision. The CPUC has not yet voted on these proposed decisions, but may do so before the end of the year. Approval of either of these decisions would result in a much more limited TREC policy than authorized by CARB in the 33% RES. Given this conflict, CARB has announced that it will open a proceeding to harmonize its TREC policy with the CPUC’s once the CPUC has adopted a final decision on the matter. CARB did not say that it would adopt the CPUC’s policy, so the extent of the harmonizing remains to be seen. Should SB 722 pass, any legislative TRECs requirements included in the law would presumably take precedence over CARB’s ruling.

Brown’s Energy Goals
Governor-elect Brown is expected to keep up the pressure to increase use of renewable energy. He promised during his campaign to support AB 32 and CARB’s efforts to implement this legislation. He also supported the 33% RPS and the development of large-scale (8,000 megawatts) and distributed (12,000 megawatts) renewable power, transmission lines, energy storage, peaker plants and cogeneration facilities (6,500 megawatts). These goals are largely consistent —- at least at a qualitative level -— with the state’s current energy policy goals. The 33% RES, incentives for distributed renewable power and efforts to site new large-scale renewable power plants and transmission lines are already in place. The CPUC continues to evaluate the need for new peaker plants and other fossil-fueled power plants. Energy storage initiatives have also begun in recent months. AB 2514, which Governor Schwarzenegger signed on September 29, requires the CPUC to open a proceeding by March 1, 2012 to adopt energy storage system procurement targets for 2015 and 2020, and the large utilities have already begun to pursue energy storage projects. The CPUC approved PG&E’s request for funding for a 300-megawatt compressed air energy storage demonstration project in Kern County, California to be completed in 2015 and is studying PG&E’s request for funding for a study of a new 1,200-megawatt pumped storage hydroelectric facility, the Mokelumne pumped storage project, to be completed in 2020. The other investor-owned utilities in California are also engaged in energy storage projects, including projects to test advanced battery systems. Given the consistency of Brown’s objectives with the state’s existing goals and programs, the primary challenge that the new governor will face will not be at the policy level, but rather at the implementation level. In other words, the certainty and speed of regulatory processes may affect the feasibility of renewable energy development in California as much as the outcome of policy debates. Developers often complain about California’s siting and permitting processes, which can be long and contentious. This implementation bottleneck is widely seen as having prevented California from meeting its 20% RPS goal by 2010. The key California energy agencies have been working together to streamline their regulatory processes. The CPUC, the California Energy Commission, CARB, the California Environmental Protection Agency, and the California Independent System Operator recently developed a blueprint for jointly achieving the environmental and energy policy goals that were established by outgoing Governor Schwarzenegger. This document, California’s Clean Energy Future, designates agency responsibility for various aspects of the plan so that each agency is acting in a coordinated fashion with the others. These agencies demonstrated their ability to expedite their regulatory processes over this past year in the coordinated effort to accelerate development of a number of large-scale solar thermal projects. In recent months, the CEC has approved licenses for seven solar thermal plants totaling 3,500 megawatts. Five of these projects also required approval from the US Bureau of Land Management. In all, 4,150 megawatts of solar thermal capacity could receive regulatory approval from the CEC by the end of 2010 (see table 1). These approvals were expedited in order to assure project eligibility for federal cash grants covering up to 30% of the project cost. Governor-elect Brown will have the opportunity to further his energy agenda through appointments to fill upcoming vacancies. At the CPUC, he may have the opportunity to replace (or reconfirm) four of the five commissioners by the end of 2011: terms for two commissioners end in 2011, the CPUC president has said he will continue to serve only if the new governor retains him as president, and a third commissioner is serving without having been formally approved by the state Senate. (Commissioners have one year from their appointments to receive Senate confirmation. If not confirmed, they are removed from office.) A similar opportunity is found at the CEC: of the five commissioners, one has a term ending in January, two are serving without Senate confirmation, and one more has a term ending in January 2012. Finally, the 11 members of the California Air Resources Board serve at the pleasure of the governor and, therefore, could theoretically all be replaced.

The broad policy framework for renewable energy in California is well established. The election showed that climate change and environmental issues continue to resonate strongly with the California electorate. Public acceptance of renewable energy has been increasing among the business and non-business public in recent years. Renewable energy is seen by many, including the newly elected governor, as a path for the creation of green jobs in the state. Others promote renewable development for environmental, public health and environmental justice reasons. Many important implementation decisions have not been made or must be harmonized across multiple agencies. Passage of 33% RPS legislation could be months away or it could languish far longer. John Geesman said the incoming administration faces real challenges aside from energy policy. “Codifying a renewable energy standard is something the new governor supports, but he is going to face tremendous budget and economic problems that are likely to be priority number one for his administration,” he said. This need not hamstring the industry. Jan Smutny-Jones, head of the independent energy trade association, said the renewables industry in California does not depend solely on passage of a 33% RPS bill. The utilities are already “pregnant” in that they rely on renewables to provide needed diversity to their supply portfolios. Smutny-Jones said that without additional renewables, new natural gas-fired generation would dominate the utilities’ future resource portfolios -— an outcome that is contrary to sound resource planning -— given that incremental nuclear and coal purchases are effectively barred and there are no opportunities for large hydro. Under the “business as usual” scenario, CARB and the utilities will move forward with implementation of the 33% RES, and the CEC and other agencies will continue to push for a more streamlined process for the siting and permitting of renewable energy projects. Laura Wisland of the Union of Concerned Scientists summed up the situation as follows: “Renewable energy policy is more insulated in California than some of the other [environmental] issues because it’s very tangible, has clear economic benefits, we know we have the resources, and there’s been so much work that’s been done already.” The authors acknowledge the contributions of colleagues Steve McClary, David Howarth, and Bill Monsen to this article. The authors also wish to thank John Geesman, Laura Wisland and Jan Smutny-Jones for both their time and their willingness to share their views on the election and the future of the renewable energy industry in California.