New data shows Xcel Energy Colorado’s 2016-2017 all-source competitive solicitation (ASCS) secured even lower costs than power sector leaders previously thought, adding momentum to interest in this emerging approach to procurement.
Xcel’s ASCS returned a $0.017/kWh bid for wind, a $0.023/kWh bid for solar, and a $0.03/kWh bid for solar-plus-storage, according to a February 2021 Xcel presentation to Michigan regulators. These prices, compared to Colorado’s average January 2021 residential electricity price of $0.126/kWh, have other utilities asking how they can use this procurement approach.
ASCSs identify "market-based portfolios that meet utility needs on both cost and risk from the full range of options," said 3rdRail Managing Partner Fredrich Kahrl, lead author of a March 2021 Lawrence Berkeley National Laboratory (LBNL) ASCS study. The study outlines 11 ASCS proceedings from investor-owned utilities from 2011-2019, including Xcel Colorado and Northern Indiana Public Service Company (NIPSCO).
This resource-neutral approach, which can include utility self-build proposals, can be "a valuable strategy for utilities to address uncertainty in a time of rapid technological change," Kahrl said.
Unlike single resource requests for proposals (RFPs) to meet planning needs, ASCSs consider all offers that meet a utility’s criteria from all bidders, representatives of Xcel Colorado and NIPSCO said.
Single resource RFPs were the norm when utilities typically chose between hydropower, fossil fuels and nuclear generation and prices were well-known. In the last decade, ASCSs are gaining in use because of the price and availability feedback they provide on emerging technologies like wind and solar.
Xcel Colorado's ASCS showed regulators "carefully regulated competitive planning and solicitations drive quality up and prices down and benefit consumers," added former Colorado Public Utilities Commission (COPUC) Chair Ron Lehr.
However, regulators must ensure ASCSs’ "fairness and transparency," beginning with oversight of utility planning, LBNL’s paper emphasized. It described regulators' critical role in keeping valuation of the benefits and risks of traditional and renewable generation, distributed energy resources (DERs), energy storage and utility-owned resources open and equitable to protect the process.
The competitive solicitation process
Competitive solicitations allow utilities to compare prices of new power resource technologies with traditional generation options, LBNL reported. They also allow utilities to compare the value of integrated portfolios of complementary resources, like renewables and battery storage or renewables and natural gas, in meeting cost, risk and policy parameters.
The process begins with the utility identifying its resource needs through integrated resource plans (IRP) and describing those needs in a public RFP, LBNL said. After the utility evaluates the responses to its request, it selects resources that best meet its needs, settles terms with bidders, and submits its selections and the negotiated contracts for regulatory approval.
This tends to be a time-consuming process. But the roughly two years Xcel Colorado’s ASCS took from the release of the RFP to the signing of contracts "is relatively fast on the utility timescale," Xcel Vice President for Strategic Resource and Business Planning Jonathan Adelman said. It could be accelerated, but a major addition of resources can be "a big transition where reliability is critical."
Time is needed during planning to scrutinize a wide variety of resource value factors, LBNL agreed.
The "first and foremost" value factor in NIPSCO’s 2018 IRP was cost, NIPSCO Director of Regulatory Support and Planning Andy Campbell said. But performance reliability, transmission access, a project’s risks, environmental and economic impacts were also important, he added.
A solar-plus-storage project might cost more than another proposed resource but might have higher reliability value or be more certain to be completed and interconnected, he said.
"Each asset is scored, and the IRP picks the best portfolio," NIPSCO Director of Strategy and Risk Integration Fred Gomos said. "In the RFP, the best projects in each resource category are selected to meet the optimized portfolio’s requirements. That leads to contract negotiations."
Xcel’s similar ASCS process begins with "an open stakeholder-driven" planning process, Adelman said. It is "completely linked" with the final selection of resources in the RFP, in which projects are evaluated, "not just on cost but on their net value to the system overall."
Net value is "market value and other benefits minus costs," LBNL reported. It is "the appropriate metric for economic comparison," but it is challenging because resources "have diverse operating characteristics," it added.
Xcel’s complex computer planning models "millions of combinations of resources," Adelman said. "But the heart of Xcel’s selection process is identifying the resources that bring the most net value to the system."
The two-phase process helps developers deliver their most current and competitive bids because RFP bids come after IRP debates with testimony and discovery complete, Adelman said.
In its 2016 ASCS, Xcel Colorado received over 400 developer bids from a "very active and engaged bidder community" that responded favorably to "the openness, the transparency and ease of bidding," Adelman added. NextEra Energy, AES and Avangrid, which were among the bidders for Xcel Colorado's ASCS in 2016, did not respond to Utility Dive's requests for input on the process.
The LBNL study of multiple ASCSs found there is an almost circular interaction between the IRP and the RFP processes because "expected values and costs for the technologies change" as things like technology advances and marketplace factors impact prices, Kahrl said.
But providing that flexibility makes oversight by regulators "critical" to ensure that both bidders and buyers have "confidence in the fairness and integrity of the solicitation process."
LBNL's numbers show interest in ASCSs is growing. Of the 16 ASCSs between 2011 and 2019, 11 were in 2017 or after, and results are now publicly available for only four.
Public Service of New Mexico received 345 bids for its 456 MW 2017 all-source RFP, LBNL reported. The bids PNM selected have not been made public. But PNM has issued three still incomplete ASCSs since 2017, awaits responses to its 2021 ASCS, and "expects most, if not all, future RFPs to be all-source," NM spokesperson Kelly-Renae Huber said. It continues to look for ways to reduce the timeline and costs for the process, she added.
NIPSCO intended to use its IRP process to retire two of its coal units, NIPSCO’s Gomos said. But "we saw other utilities with all-source RFP bids, particularly on renewables, lower than any we had seen, and we decided to do a competitive solicitation to understand pricing in our territory."
From responses to NIPSCO’s 2018 RFP, the utility decided to retire all its coal generation by 2028 and replace it with solar, solar-plus-storage, wind, market capacity and demand-side resources, he added. The new resource mix will reduce the cost of the original plan, which would have kept the utility's resource mix at 40% coal, by $1.1 billion.
After the NIPSCO 2018 ASCS, the American Wind Energy Association, the trade association representing the biggest U.S. wind developers, "called for more regular all-source solicitations," Kahrl said.
Bids and prices in Xcel Colorado’s 2016-17 ASCS influenced NIPSCO’s decision-making, Gomos said.
The total of 417 bids to Xcel led to the selection of 1,131 MW of wind generation, 707 MW of solar generation, 275 MW of storage and 383 MW of existing natural gas generation, according to updated January 2021 Xcel data reported in February by COPUC Staff Engineer Bob Bergman.
NextEra Energy’s 300 MW Bronco Plains Wind project, which went into service in 2020, was bid at $0.0107/kWh, Bergman’s data showed. Coronal’s 75 MW Owl Canyon PV project, scheduled for service in 2022, was bid at $0.023/kWh. And NextEra’s 200 MW PV plus 100 MW four-hour battery storage Thunder Wolf project, scheduled for service in 2022, was bid at $0.0303.
Until the release of Bergman's data, 2018 reports of median bid prices were recognized by power system analysts as exciting indications of what is possible, former COPUC Chair Lehr said. "The actual 2018 contracts were even lower and suggest there could be more surprises from the March 2021 Xcel planning and procurement cycle."
The Xcel results show the potential of ASCSs, but challenges to executing them remain, Bergman said in his presentation.
Challenges and solutions
Linking planning and procurement, increasing transparency for bidders and stakeholders, and improving stakeholder engagement are "foundational" pieces of "next generation procurement," according to a February 2021 Rocky Mountain Institute (RMI) and Regulatory Assistance Project paper.
This matches LBNL’s description of the ASCS process, and both identify needed improvements in regulatory oversight of bid evaluation and selection.
"Non-price considerations are critical for managing risk and selecting viable projects, but they also increase utility discretion," LBNL said. Regulators must compare utility self-build proposals with competitive offers, especially in their "debt equivalence, development and performance risks, and contract length."
With technologies changing in value rapidly, regulators may be caught between "keeping utilities solvent" and "meeting state policy goals," LBNL’s Kahrl said. However, a well-regulated technology-neutral solicitation "is not intended to supersede state energy goals" but to "complement state energy policies" and support compliance, he said.
Commissioners must, however, realize "the utility is the only buyer" in a utility solicitation and must "make sure they don’t use that power to disadvantage bidders," Lehr said. "Utilities may favor capital investments with guaranteed returns from assets they can own, but contracts for renewables without that financial incentive to the utility may be better for their customers."
The value of DERs in a utility resource mix introduces complications that need to be addressed, the papers said.
DER participation has "generally been low" and utilities are working to identify the DER technologies best suited for ASCSs, LBNL reported. DER capacity and flexibility value, integration costs, the value of deferring investments in transmission and distribution infrastructure, and the comparative economics of DERs and natural gas remain unanswered valuation questions.
DERs were not part of NIPSCO’s 2018 RFP because markets offer no compensation for using them to meet capacity needs, NIPSCO’s Campbell and Gomos said. "If the market allowed DERs to demonstrate capacity value, they would be evaluated like any other resource," Gomos added.
Resources must be similar to compete with each other, and Colorado found DERs are too different from bulk power resources to participate, Lehr agreed. "Including them is a good but aspirational idea."
Energy storage raises similar questions, about how it will be compensated in capacity markets. But regulators are increasingly requiring it in distribution system non-wires alternatives competitive procurements, LBNL said. "There are also questions about what the minimum size of a non-wires resource should be and whether the bidder or the utility should be the storage aggregator and manage the operational complexities," Kahrl added.
The regulatory role to protect quality
While ASCSs are newer, their usefulness in obtaining the best value resource mix has already attracted increasing interest and is likely to attract more, LBNL's Kahrl said. This was verified by the fact that utilities like PNM, NIPSCO and Xcel are already using them again. ASCSs would be required as part of the controversial new energy rules being considered by the Arizona Corporation Commission.
But a regulatory push for this process must take into account the trade-offs, compared to the simplicity of single-source RFP proceedings, the LBNL and RMI papers said.
For instance, independent evaluators can protect the quality of the solicitation while streamlining the process, they agreed.
Having a third-party evaluator was "critical" in the NIPSCO 2018 ASCS, Campbell said. It showed regulators "there was no effort by the utility to preordain an outcome." Independent evaluators are "key" to successful ASCSs, COPUC’s Bergman added in his February presentation to Michigan regulators.
Independent evaluators protect transparency, clarity, and high standards, Guidehouse Energy, Sustainability and Infrastructure Director Dean Koujak told Michigan regulators in February. They can be an "Administrator" or a "Monitor/Observer." The Administrator is more involved in defining and managing both the solicitation and the evaluation. If engaged only after the RFP, the person is a "Monitor/Observer" and helps manage the solicitation.
Quality outcomes for competitive procurements is the objective of Independent Evaluators, the LBNL and RMI papers agreed.
The power sector may invest from $300 billion to $750 billion or more in the next decade on electricity resources, said RMI Principal and co-author of the RMI paper on next generation procurement Mark Dyson. "Legacy processes and tools will result in procurement decisions that reflect the past," but there is "a once-in-a-generation opportunity" to use competitive procurements to avoid "squandering capital and locking in customer costs and carbon for decades to come."
ASCSs "can get the benefits of the competitive process faster and the transition to cleaner energy sooner," Lehr agreed. "But they have to be done without compromising the quality of the solicitation."