The following is a contributed article by managing partner Ray Gifford and partner Matt Larson at the Denver office of Wilkinson Barker Knauer LLP.
Resource adequacy, or “RA” in power business parlance, is everywhere you turn right now. The Wall Street Journal’s Katherine Blunt has twice recently captured the essence of the problem. With all due respect to Ms. Blunt and her deeply reported pieces on February 18 and May 8, and while we anxiously await her book on California energy issues this summer, it was another California icon that originally put his finger on the core resource adequacy issue back in early 1994: the Doggfather himself. In Gin and Juice, a song you know whether you like hip hop or not because it has been covered by artists across genres, Snoop Dogg famously rhymed “[n]ow, that, I got me some Seagram's gin, everybody got they cups, but they ain't chipped in” (emphasis added). And that, folks, is the Doggfather summarizing the issue succinctly.
Snoop Dogg is not the only key player in California that has put his finger on the issue — Governor Gavin Newsom has brought forward $5.2 billion as part of a “strategic electricity reliability reserve” to pull together 5,000 MW of existing and new generation to support resource adequacy. But RA is not a single-state issue, and it is not a partisan issue. It is a power business fundamentals issue. Across the country, resource adequacy issues are becoming an acute crisis. Operators are concerned, as Ms. Blunt highlights. The North American Electric Reliability Corporation (NERC) is concerned — just look at its recent 2022 Summer Reliability Assessment. The Western Electric Coordinating Council (WECC) is concerned. The bottom line is we have a problem. The other bottom line is there is not a clear mandate for anyone to address it; to the contrary, there are some bad incentive structures to not address the issue.
Resource insufficiency arises from a confluence of problems. First, RTO structures are not charged with comprehensive resource adequacy assurance – that is primarily left to the states. And even within those RTOs where there is a stronger RA role (for example, PJM, with its capacity construct), the RTOs themselves struggle to deliver on their responsibility given the proliferation of subsidies and ‘around market’ actions that undercut the RTOs themselves. Second, many states do not have clear reporting or aggregating functions in place to do a true assessment of resource adequacy across the footprint for which they are responsible. These two factors taken together result in a round-robin finger-pointing exercise where no entity has the mandate to serve this important function. Initiatives like the Western Resource Adequacy Program (WRAP) are welcome and essential developments. Structures like the WRAP are voluntary, however – not a slight on the program, as they have no ability to mandate participation. Accordingly, there remains an RA black hole. Into this void, players that would rather sidestep the burden and expense of a resource adequacy obligation can hide.
States can and should mandate reporting by jurisdictional and non-jurisdictional entities alike. This should not be confused with full-blown regulation or a change in jurisdictional status. We are on record again and again in support of the proposition that the regulated utility model is the best model to advance safe, reliable, and affordable decarbonization. And while we know unregulated retail energy providers like NRG tend to, shall we say, disagree, we do not abandon that here.
But one proposition on which regulated utility proponents like us and retail choice advocates can agree, however, is that resource adequacy is important, and every load-serving entity should bring capacity to the table with an adequate planning reserve margin to ensure reliable and adequate service. The last thing that the clean energy transition needs is one or a series of events on the grid. A modest regulatory requirement that avoids resource adequacy free-riding and makes RA part of the package for which players must account is crucial to avert the looming RA crisis.
In states that still regulate their utilities, attention to this detail should be taken as part of the regular regulatory order but the state needs a complete RA picture. In retail choice states, on the other hand, there will likely be more significant reform needed. The consolidation trend is significant in this industry. It is little wonder that in a state like Texas, for example, the residential retail market has largely consolidated into the hands of only two firms. It strikes us as particularly concerning that an unregulated load-serving retail entity with significant market power could contract with its own unregulated generators that also share a large wholesale market presence. Perhaps forced divestitures could solve for this problem, but it is something regulators will need to address should this reform gain traction.
A reliable grid by virtue of resource adequacy is Snoop’s Seagram’s gin, so how do we all chip in? In the form of accredited capacity, that’s how.
Accredited capacity based on credible and system-specific effective load carrying capability analysis is vital to assure resource adequacy. Likewise, we need to avoid conflating an RTO overlay with somehow magically remedying the real and legitimate RA deficiencies that have been chronicled by Governor Newsom, Ms. Blunt, NERC, WECC, Snoop, and numerous other intrepid energy reporters just about daily. RTOs do not solve resource adequacy issues – load serving entities do. For load-serving entities that go through robust integrated resource planning (IRP) processes, this issue is addressed so long as the generation procured through these processes is actually developed — and so long as we embrace the fact, unpopular in certain quarters, that natural gas, nuclear, and other zero- and low-emission dispatchable technologies have to be part of the solution. But community choice aggregators and other retail power suppliers that do not do IRPs to the same extent as investor-owned utilities, if at all, need to do more to bring accredited capacity to the table as well. To be sure, there is flexibility in what that looks like — this is not a “regulate them all” proposition. Resource adequacy is business- and regulatory-model agnostic with appropriate evaluation structures.
We find ourselves today, however, without such appropriate evaluation structures because everyone is looking to somebody else. Curing that deficiency, recognizing that the RTO cannot do it, understanding that variable generation resources alone cannot get us there, and being real that there are entities out there that are not chipping in are the first steps to solving the mushrooming problem that is a widespread resource adequacy deficiency across the country. The "D-O-double-G" does not mess around when it comes to USC Trojans football, cannabis consumption, or pretty much everything else in his life from our outsider’s perch. Neither should we as we face a real, challenging, and growing resource adequacy problem as part of the energy transition.
Clarification: The authors have updated their description of the role community choice aggregators and retail suppliers play with respect to integrated resource plans.