California Takes Action to Avoid Electricity Shortages and Reliability Challenges

As part of its Integrated Resource Plan and Long-Term Procurement Plan proceeding (IRP-LTPP R.16-02-007, or IRP Proceeding), the California Public Utilities Commission (CPUC) voted unanimously on November 7 to issue a decision, D. 19-11-016, (the Decision) to address anticipated electricity shortages and reliability challenges in California. The CPUC voted to authorize the procurement of 3,300 MW of energy by 2023, while seeking extensions for almost 4,800 MW of gas generation units due to retire by December 31, 2020. The CPUC’s action will result in near-term opportunities for clean energy resources to secure contracts with California load-serving entities (LSEs), including investor-owned utilities (IOUs), community choice aggregators (CCAs), and electric service providers (ESPs).

This Decision substantially adopts the original proposed decision in this proceeding issued on September 12, 2019, and the revised proposed decision issued on October 21, 2019. Notably, however, the procurement and extension amounts set forth in this Decision are higher than what was included in the initial September decision. The Decision was formally issued on November 13, 2019 and is subject to rehearing for a period of 30 days thereafter, after which it will become final and non-appealable.

Impending Shortages and Reliability Challenges

Under California law, the CPUC develops an Integrated Resource Plan (IRP) for the utilities subject to its jurisdiction, which it develops in its IRP Proceeding. The Decision is based on an analysis of system needs and party comments presented in the IRP Proceeding. An analysis by the CPUC staff and the California Independent System Operator (CAISO) shows that current electricity supplies are tight and that in the near future reliance on imports will be increased beyond historical levels, creating uncertainty in electricity supply until more in-state generation is built. The tight supply is driven by several market trends in the electric sector, including the growing penetration levels of wind and solar resources that require integration into the grid, time of day and time of year shifts of system peak loads, a decline in reliable imported electricity to meet peak demand as other states increase their renewable generation, and the retirement of aging natural gas plants. The situation is particularly acute for Southern California since several natural-gas-fired power plants along the coast are scheduled to retire soon because they use ocean water for so-called “once-through cooling” (OTC), which can have a detrimental impact on marine life.

Amount and Timing of Procurement Authorized

To avoid possible electric system reliability problems, the Decision orders LSEs to procure an incremental 3,300 MW of new electricity resources. At least 50% of the new resources must be online by August 1, 2021, with 75% by August 1, 2022, and the full amount on August 1, 2023. The Decision notes, however, that LSEs are encouraged to exceed these minimum requirements to help minimize or eliminate the need for OTC compliance extensions.

The Decision provides guidance concerning the baseline to be used to determine whether procurement of a new electricity resource will be considered “incremental.” As a general matter, the baseline will include the resources assumed for the year 2022 in the CPUC’s Preferred System Plan adopted by the CPUC in its IRP Proceeding.

The Decision sets forth the procurement obligations of all of the LSEs. Of particular note, the procurement obligations for the IOU’s are

• SCE: Bundled – 1184.7 MW; direct access – 140.3 MW;
• PG&E: Bundled – 716.9 MW; direct access – 114.0 MW;
• SDG&E: Bundled - 292.9; direct access – 42.7 MW.

Nineteen CCAs have procurement obligations, too. The CCA with the largest procurement obligation is the Clean Power Alliance of Southern California, which has a procurement obligation of 196.9 MW. The full table of procurement requirements is set forth below:

The Decision allows CCAs and ESPs to self-provide, but recognizes that some will elect not to self-provide. The CPUC requires the CCAs and ESPs that elect not to self-provide to notify the CPUC of their decision in their IRP progress reports due by February 15, 2020. For those that decide not to self-provide, the IOUs will be required to procure for them. The Decision indicates that that all costs incurred by the IOUs to undertake procurement on behalf of customers of other LSEs will be compensated.

Eligible Resources

The CPUC expects the LSEs to add incremental clean energy resources, which can help meet the system peak capacity needs. The Decision observes that as system peak capacity has shifted to later in the day, the contribution of solar resources without storage becomes less valuable and the need for other renewable integration resources is more acute. The types of clean energy resources that can address these needs include hybrid solar and storage, standalone storage systems, energy efficiency, and demand response.

The Decision finds that there may be some situations in which procurement contracts with natural-gas-fired generators may be necessary and can be counted toward the procurement target:

• New natural-gas-fired power plants coupled with storage are eligible to count towards the procurement target.
• With respect to existing natural-gas-fired power plants, if they have not been counted in the baseline, a new agreement can be counted toward the baseline. In addition, at existing power plants that are in the baseline, augmentation of capacity, including efficiency improvements or repowering, may also be counted if the additional capacity is incremental to the baseline.

The CPUC's order allows only 20% of the total obligations of each LSE to be imported power.

Finally, the CPUC encourages the LSEs to conduct their procurement with an eye toward grid resiliency, in light of the state’s recent experience with wildfires and power shutoffs.

Procurement Activities Already Underway

The Decision specifies that procurement must be conducted on an all-source basis, including both existing and new resources (except new gas-only resources), and may include LSE-owned resources when justified.

The LSEs must make procurement decisions quickly since the Decision specifies that at least 50% of the new resources must be online by August 1, 2021. Thus, several LSEs have already begun the procurement process. For example, in response to the CPUC’s issuance of the initial proposed decision authorizing procurement on September 12, 2019, SCE launched an all-source Request for Offers (RFO) on September 19, 2019. This solicitation has a fast track, i.e., projects that can be online by August 1, 2021, for which offers are due on November 22, 2019. There is also a standard track, i.e., for projects that can be online by August 1, 2022, or August 1, 2023, for which indicative offers are due on November 22, 2019, and final offers are due February 7, 2020.

Extensions of Compliance Deadlines for Certain Natural-Gas-Fired Power Plants with Once-Through Cooling

On May 4, 2010, the State Water Resources Control Board (Water Board) adopted a policy regulating the use of seawater for cooling purposes at power plants in California. The policy establishes technology-based standards to implement federal Clean Water Act section 316(b) and reduce the harmful effects associated with cooling water intake structures for power generating facilities on marine and estuarine life. The policy applies to 19 existing power plants. Of these, nine have ceased their OTC operations and the remaining 10 are planning to comply by retiring their existing OTC plants’ equipment. In some cases, plants will repower their locations with modern non-water-cooled systems. Most of the coastal power plants that still use OTC and are scheduled to retire or repower are located in Southern California.

In light of the state’s electric reliability challenges, the Decision indicates that it will request that the Water Board make schedule adjustments for certain power plants identified by stakeholders as essential to reliable electricity for California between 2021 and 2023. In particular, the Decision recommends that the Water Board extend the OTC compliance deadlines for the following units currently slated to retire by December 31, 2020, for the time periods specified:

• Alamitos Generating Station, Units 3-5, totaling approximately 1,200 MW, for up to three years
• Huntington Beach Generating Station, Unit 2, approximately 200 MW, for up to three years
• Redondo Beach Generating Station, Units 5, 6, and 8, approximately 850 MW, for up to two years
• Ormond Beach Generating Station, Units 1 and 2, approximately 1,500 MW, for up to one year

In addition, the Decision indicates that the CPUC intends to request a temporary extension for the Moss Landing power plant, which is in the process of upgrading to comply with OTC requirements. The CPUC intends to recommend that if the upgrades are not certified by the December 31, 2020, compliance deadline, the plant should still be allowed to operate until the upgrades have been certified by the Water Board.

The Decision makes it clear that the CPUC’s recommendation that the compliance deadlines be extended is only a bridge strategy to allow new clean energy capacity to come online and that the CPUC remains committed to compliance with the Water Board’s OTC policy. The CPUC has indicated that the OTC units are not a resource the state can continue to rely on going forward and expects the plants will close after the extension periods.

Although the CPUC intends to recommend extensions, the Water Board is not required to grant the extensions. There is likely to be opposition to granting extensions which, in some cases, will come from affected local governments. At this time it is not yet clear which, if any, of the extensions will be granted by the Water Board.

Additional Near Term Regulatory Actions Needed to Implement the Decision

Some additional regulatory actions will be needed in the near term to implement the Decision:

• The Decision sets up a process for coming up with a final list of the baseline resources to facilitate determining which will be considered incremental: The CPUC Energy Division is to publish a list no later than December 2, 2019, parties may provide comments by no later than December 9, 2019, and the ALJ in the IRP Proceeding will finalize the list thereafter.
• The Decision did not provide guidance regarding how hybrid resources (generation resources with storage) are to be counted for resource adequacy purposes. The CPUC indicated that this issue will be addressed in an ongoing CPUC rulemaking relating to the resource adequacy rules.

The Decision is a continued demonstration of the dynamic nature of California’s energy future as the state seeks to implement its environmental protection, renewable energy procurement, and greenhouse gas reduction objectives while ensuring safe and reliable electric service for its residents.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Los Angeles
Neeraj Arora

San Francisco
Monica Schwebs
Ella Foley Gannon
William Kissinger

Philadelphia
Ken Kulak

Washington, DC
Levi McAllister