A decision facing California regulators will show how deeply the state is committed to the energy transition for which Democrat Governor Jerry Brown claims national and global leadership.
The decision is whether to approve the second phase of the Southern California Edison (SCE) Preferred Resources Pilot (PRP). The PRP would ultimately be the largest scale test to date for the proposition that a portfolio of distributed energy resources (DER) can be as reliable as a natural gas plant in a transmission-constrained load pocket.
The smaller first phase of the pilot was approved by state regulators with little controversy in 2016. More than 100 MW of preferred resources from a group of SCE-led and private sector programs are expected to be operational in the pilot area by the end of this summer.
California’s leadership in renewable generation remains unchallenged. Q1 2018’s 1,019 MW of new solar capacity were more than twice second place Florida’s 482 MW. Its 5,686 MW of installed wind capacity make it the fourth leading state and the only one in the top five outside the Midwestern wind belt. At 2:12 pm on May 26, California served 73.9% of its load with renewables.
But the bulk of those numbers come from utility-scale generation on the transmission system. The California Public Utilities Commission's (CPUC) objective to reform utility distribution planning through the Distributed Energy Resources (DER) Action Plan is still a work in progress.
2013's Assembly Bill 327 ordered the CPUC to "minimize overall system cost and maximize ratepayer benefits from investments in preferred resources." In response, SCE initiated the PRP. It is "a multiyear study" to use "clean energy resources — including solar, wind, energy storage, energy efficiency, and energy conservation" to meet the utility’s growing load and defer the need for new natural gas generation.
At a proposed 238 MW, the SCE PRP would eventually be the biggest real world test of the DER portfolio concept that new Rocky Mountain Institute research shows can be as cost-effective and reliable as natural gas generation, according to SCE.
On February 23, Administrative Law Judge Patricia B. Miles denied SCE cost recovery on the 125 MW of executed contracts from the utility's second PRP solicitation. The decision provided a range of reasons for Judge Miles ruling. She found the utility "failed to adequately justify why these 19 contracts are needed" and she found SCE did not show they are "reasonable and cost-effective" in comparison to their "potential qualitative benefits."
Clean energy advocates respond
Supporting SCE’s proposal to use DER instead of natural gas "advances the state’s clean energy goals," State Senator Nancy Skinner wrote to the CPUC in response to Miles' decision.
Both Pacific Gas and Electric (PG&E) and San Diego Gas and Electric (SDG&E) also have PRP proposals. Rejecting SCE’s PRP could be understood as asserting that natural gas generation is necessary for reliability, Skinner wrote to the commission. It could "chill future interest" in utility solicitations from DER developers.
The SCE pilot is designed to drive "market transformation" and that requires "a clear regulatory path," according to Nancy Pfund, managing partner of DBL Investors, one of California’s most important venture capital firms. Not approving this PRP "would send the wrong signal to investors like me who count on consistent policy in making investment decisions," she told Utility Dive.
On May 30, CPUC President Michael Picker issued an Alternative Decision on the PRP, approving cost recovery for the 19 contracts.
"The record shows the pricing is consistent with earlier PRPs," Picker told Utility Dive. "That is the standard the contracts in this PRP should be held to."
The cost [of SCE's Preferred Resources Pilot] is "justified by the magnitude of their collective expected contribution to local system reliability, existing Commission programs, and larger state policy goals, such as grid modernization, DER penetration, and greenhouse gas reductions."
President, California Public Utilities Commission
The DER Action Plan is "the vision for DER policy in California," Picker wrote. "The PRP puts that vision into action, and the first justification for doing pilots like this is that practice makes perfect," he said.
In July, the full commission must choose between the two decisions (docket A.16-11-002). Support of Miles means DER will likely continue to take a back seat to natural gas. Support of Picker means California regulators have accepted his argument that Miles and the ORA have applied the wrong cost standard and have decided to begin building the future distribution system and the distributed energy marketplace, Pfund said.
The Miles decision
The Miles decision found 19 contracts ineligible for cost recovery through rates. Eight were for 55 MW of demand response using load reduction and battery energy storage. Due to the delay caused by the decision, two of the 19 contracts, for 10 MW, have since been canceled. Six contracts, for 60 MW, were front-of-the-meter battery storage. The last five of the 19 contracts, for 10 MW of behind-the-meter battery storage plus solar, have also been canceled.
Judge Miles concluded SCE did not show the 19 contracts, either as a PRP or to meet other policy objectives, are "in the best interests of SCE customers."
In her decision, Miles relied heavily on testimony from the Office of the Ratepayer Advocates (ORA). ORA’s "overarching argument" was that "the PRP concept itself is unnecessary and unauthorized," Miles wrote.
ORA spokesperson Matthew Marcus said the office was unable to accept Utility Dive’s request for an interview and did not respond to email questions.
Miles noted ORA’s complaint that SCE’s proposal was short on detail and metrics about how it would "support the Commission’s policies and programs." She also noted ORA’s complaint that SCE did not offer a cost forecast or show the contracts "are really necessary" or "whether they can be procured within the scope of existing, previously approved programs."
ORA’s detailed, data-based argument demonstrates the contracts are unnecessary to meet Local Capacity Requirements (LCR) in the LA Basin, Miles found. Because they do not meet this reliability need, they are "an unreasonable burden on ratepayers," she wrote.
Earlier LCR procurements by SCE that included preferred resources and storage were authorized "based on an actual, demonstrable local capacity need." Without this, it is not clear from the record that SCE’s claim the contracts are needed to meet load growth "is more than merely speculative."
Miles also concurred with ORA that the contracts would be "duplicative" of other procurements for state environmental policies. SCE’s "stated objective" to "use locally-sited preferred resources to manage load" can be approved in California’s ongoing grid modernization proceeding, she wrote.
The Picker reversal
Over "several years" and in "multiple decisions and actions," the CPUC has supported SCE’s PRP, President Picker wrote. An earlier ruling found the PRP "promising both as a way to meet LCR needs and as a laboratory for innovation regarding preferred resources." And the CPUC's DER Action Plan "lists the PRP as an existing DER sourcing mechanism," he added.
The record also shows the pricing is consistent with earlier PRPs and "that should be the standard used here," Picker stressed to Utility Dive.
There is "merit" in demonstrating that DER can be used to offset localized load growth, he wrote in his decision. "The PRP will help determine to what extent an integrated portfolio of preferred resources deployed at a high concentration can operate just as reliably as a traditional gas-fired power plant and meet future customer needs in a clean manner."
Picker told Utility Dive this is analogous to early utility-scale renewables procurements. "Those contracts had prices higher than natural gas generation," he said. "The commission approved them to support the state’s renewables mandate, to stimulate market competition, and to drive prices down. That is the hope and expectation here."
The PRP has "met its burden of proof" that it is "fair and reasonable" and meets "an existing procurement and local area need," his decision found.
SCE has also shown the cost "is reasonable in light of the objectives served and compared to similar projects in similar locations," Picker concluded. The cost is "justified by the magnitude of their collective expected contribution to local system reliability, existing Commission programs, and larger state policy goals, such as grid modernization, DER penetration, and greenhouse gas reductions."
ORA objected to the contracts' net present value (NPV) while SCE argued NPV "is not the sole measure of cost effectiveness," Picker noted. The contracts have "qualitative benefits" beyond their NPV, especially because SCE is asking only for cost recovery and not a rate increase, he decided.
"This pilot will help us answer a range of complex and crucial technical questions about the ability of this portfolio of preferred resources to show up where you need it, when you need it, for as long as you need it, instead of using a traditional infrastructure upgrade or natural gas generation."
Head of Innovation and Modernization, SCE
One of those benefits "goes back to the closure of the San Onofre nuclear plant," according to former Commissioner Mike Florio, who pioneered CPUC's DER efforts. The region where SCE would use the contracted resources was "the end of the line" for the nuclear plant’s generation, and load is growing in that part of the transmission-constrained LA Basin while it is flat in most of the region, he emailed Utility Dive.
SCE proposed the PRP to deal with that local need and to "test the ability of preferred resources on a fairly large scale to meet future load growth," Florio recalled. The results from earlier DER deployments "have been encouraging" and "stopping now would result in wasting all of the effort and money expended to date, and still leave the problem of how to serve that growing load."
It is not at all clear the Miles-ORA concern with cost is appropriate, Florio added. "What is the avoided cost in that specific area?" he asked. The competitive solicitation that produced the PRP contracts is the best way to know.
The big questions
The ORA-Miles emphasis on NPV is misguided, SCE VP of Energy Procurement and Management Colin Cushnie told Utility Dive.
"We ranked the bids into our solicitation by their total cost, operating cost and potential market revenues, and that resulted in an NPV," he said. "But it was intended only as a relative ranking of the bids."
The point of the pilot was to build a portfolio of alternative resources to meet reliability needs, he said. "New alternatives will typically have a negative NPV compared to the market price because the market will not cover the cost of the last resource procured to meet reliability needs for a once-in-ten-year event."
The utility did not "overpay" to meet its reliability and other mandates, he added. "It paid to have these resources available when they are needed."
The PRP contracts acquired in the competitive solicitation were the ones with the lowest bids that met the utility’s needs in the transmission-constrained LA Basin load pocket, Cushnie said. "If we had decided to build a natural gas plant to serve that area, it would also have had a net cost."
There is another non-cost factor for the commission to consider in choosing between the Miles and Picker decisions, he added. California has signaled to the energy industry, the nation, and its market participants that it is shifting its focus to DER where possible.
"Rejecting that would be a confusing signal about what California wants to accomplish," Cushnie said. "Adopting these contracts reinforces California's commitment to preferred resources and, especially, to distributed resources to decarbonize the electric sector."
SCE Senior Advisor for Integrated Innovation and Modernization Sergio Islas added that the PRP contracts offer a unique opportunity to test the ability of battery energy storage to expand demand response.
"They all have an energy storage component," he told Utility Dive. "This pilot will help us answer a range of complex and crucial technical questions about the ability of this portfolio of preferred resources to show up where you need it, when you need it, for as long as you need it, instead of using a traditional infrastructure upgrade or natural gas generation."
SCE intends to build a portfolio of preferred distributed resources to serve the 238 MW load in the target region, Islas said. "There's no data to show that we can do that and it will be no small feat if we show we can. That is why we are doing this."
DBL’s Pfund agreed it is "early days" for working with DER portfolios. "The PRP is a vital step forward," she said. "It represents the non-fossil fuel future and we can build it today."