Publication Number: 100-03-019F
Adopted by Energy Commission: November 12, 2003

At a Special Business Meeting on November 12, 2003, the Energy Commission adopted the 2003 Integrated Energy Policy Report. The Executive Summary is available below.

Note: The 2004 Update to the 2003 Integrated Energy Policy Report is located in another section.

IEPR Subsidiary Volumes

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Transportation Fuels Technologies and Infrastructure Assessment

Public Interest Energy Strategies (PIES) Assessment

Electricity and Natural Gas Assessment

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EXECUTIVE SUMMARY
2003 Integrated Energy Policy Report

Streamlined permitting procedures encouraged new power plant construction, and more than 9,500 megawatts of generation capacity were added in just three years- the largest expansion of the power plant fleet in California history.

Natural gas prices also rose at the height of the energy crisis to nearly $60 per million British thermal units, or Btus, more than 10 times the average price at that time. Working together, utilities and regulators increased the state's natural gas pipeline capacity by 25 percent and its total storage capacity by nearly 10 percent. These improvements allowed more natural gas to flow where needed, helping to moderate prices.

In contrast to price increases in the electricity and natural gas markets, price increases in the gasoline and diesel fuel markets are felt immediately at the pump. A refinery outage or pipeline failure, as happened this past August in Arizona, can quickly translate into high prices for gasoline and diesel fuel. This event left Californians paying an average of $2.10 for a gallon of gasoline. In past years, prices have spiked frequently, and twice this year, fuel prices have reached record levels. Typically, retail fuel prices rise rapidly, but drop slowly. With few viable alternatives, consumers wait for prices to settle.

Despite the current calm in the state's energy system, California's demand for energy is growing, fueled by an expanding population and a growing business sector. State government must act now to reduce demand, secure additional energy supplies, give consumers more energy choices, and build needed infrastructure improvements to protect California from future supply disruptions and high prices.

Electricity

Although electricity markets appear relatively stable for now, Californians still pay, on average, the third highest rates in the nation. Under average conditions, the state's electricity generation system has adequate supplies to meet demand for at least the next six years. Hot weather, coupled with other factors, however, could reduce reserves to very low levels as early as 2006.

To meet electricity demand, the state is taking steps to help ensure that preferred resources are available by implementing new efficiency standards and programs, evaluating the benefits of dynamic pricing, and aggressively developing renewable energy resources, as required under California's Renewables Portfolio Standard. The Energy Commission believes that additional electricity resources should be procured using an integrated process that accounts for electricity demand and supply variations, efficiency gains, renewable energy potential, dependence on natural gas, and local reliability problems as in San Francisco and San Diego. The process must also account for expansions and upgrades of the bulk transmission system; strategies for retiring or modernizing older, less-efficient natural gas-fired power plants; as well as the benefits to the electric system of allowing consumers to choose their own electricity supplier and develop their own supply through distributed generation and cogeneration.

Natural Gas

Even though prices are currently stable, Californians now pay $5 per million Btus, roughly double the price consumers paid in the 1990s. California competes with other states for natural gas and depends on out-of-state resources for 85 percent of its supply. With the state located at the end of the interstate natural gas pipelines, California businesses and consumers are vulnerable to further natural gas supply disruptions and price volatility.

To help moderate demand, the state is increasing its energy efficiency programs, evaluating targeted retirements of less efficient power plants, and diversifying its fuel mix by accelerating the Renewables Portfolio Standard. Looking forward, California must actively encourage infrastructure enhancements such as additional pipeline capacity, incentives for increased operation and use of in-state storage, in-state productive capacity, and nontraditional supply sources such as liquefied natural gas.

Transportation Energy

Even more pressing than the difficulties in the electricity and natural gas markets, tight supplies and volatility characterize California's gasoline and diesel market. In-state refineries operate near maximum capacity. Compounding the problem, California refiners must now use ethanol as an oxygenate to replace methyl tertiary butyl-ether (MTBE), which will further reduce in-state gasoline production. In addition, California's import and storage systems have little, if any, excess capacity, and as demand for gasoline and diesel continues to grow, so will California's reliance on imports of crude oil, blending components, and refined petroleum products, further exacerbating California's tight gasoline and petroleum market.

In the short-term, the state must act to expand its petroleum infrastructure facilities, removing the barriers for industry to obtain needed permits in a timely manner, without jeopardizing environmental quality. But in the long-term, unless the state acts aggressively to change these emerging energy trends, California could face further supply disruptions and price volatility. In July 2003 the Energy Commission and California Air Resources Board approved a joint strategy to reduce California's near total reliance on petroleum for transportation. This strategy depends primarily on raising new vehicle fuel economy standards and, to a lesser extent, increasing the use of alternative fuels and advanced vehicle technologies.

Recommended Actions for the Governor

The Energy Commission believes that state energy policies should capture the best features of both prudent and effective regulation and vigorous, open, competitive transparent procurement processes, and energy markets that provide adequate investment opportunities. These policies should promote affordable energy supplies; improve energy reliability; and enhance public health, economic well-being, and environmental quality.

The Energy Commission also believes that targeted research, development, and commercialization is a necessary means of introducing new, more efficient, and cleaner technologies into the market.

The following energy policy recommendations, highlighted from the body of this report, reflect these principles. Please note that various state government entities are currently undertaking or plan to conduct numerous actions that do not appear below as policy recommendations. However, these actions are critical to the formation of state energy policy and are discussed throughout this report.

Electricity

The state should:

• Incorporate the forecasts, resource assessments, and policy preferences of the Energy Report into an explicit resource adequacy requirement for all retail electricity suppliers to guide resource procurement.


• Ramp up public funding for cost-effective energy efficiency programs above current levels to achieve at least an additional 1,700 megawatts of peak electricity demand reduction and 6,000 gigawatt-hours of electricity savings by 2008.


• Rapidly deploy advanced metering systems if analyses show the results are favorable to the customer and will effectively decrease peak electricity use.


• Enact legislation to require that all retail suppliers of electricity meet the Renewables Portfolio Standard's goal of 20 percent of retail electricity sales and accelerate the target date for reaching the goal from 2017 to 2010.


• Explore through a collaboration between the California Public Utilities Commission and the Energy Commission the implications of a core/noncore market structure for electricity, with the goal of making recommendations in 2004.


• Create a transparent electricity distribution system planning process that addresses the benefits of distributed generation, including cogeneration.


• Consolidate the permitting process for all new bulk electricity transmission lines within the Energy Commission, using the Energy Commission's power plant siting process at the Energy Commission as the model.

Natural Gas

The state should:

• Increase funding for natural gas efficiency programs to achieve an additional 100 million therms of reduction in natural gas demand by 2013.


• Encourage the construction of liquefied natural gas facilities and infrastructure and coordinate permit reviews with all entities to facilitate their development on the West Coast.


• Ensure that existing natural gas storage capacity is appropriately used to provide adequate supplies and protect prices.


• Initiate legislative hearings that will:


1. Examine the issue of gas quality and gas gathering as it relates to California gas production and


2. Determine whether additional legislative action is warranted to resolve the issues.

Transportation Energy

The state should:

• Adopt a goal of reducing demand for on-road gasoline and diesel to 15 percent below 2003 levels by 2020 based on identified strategies that are achievable and cost-beneficial.


• Build a coalition with other states and stakeholders to influence Congress and the U.S. Department of Transportation to double the combined fuel economy of new passenger cars and light trucks by 2020. If the federal government fails to revise corporate average fuel economy standards, California must reassess its petroleum reduction strategy.


• Increase the use of nonpetroleum fuels to 20 percent of on-road fuel consumption by 2020 and 30 percent by 2030 based on identified strategies that are achievable and cost-beneficial.


• Establish a one-stop licensing process for petroleum infrastructure, including refineries, import and storage facilities, and pipelines that would expedite permits to increase supplies of transportation energy products available to California while maintaining environmental quality.

Environment

The state should:

• Require reporting of greenhouse gas emissions as a condition of state licensing of new electric generating facilities.


• Account for the cost of greenhouse gas emission reductions in utility resource procurement decisions.


• Use sustainable energy and environmental designs in all state buildings.


• Require all state agencies to incorporate climate change mitigation and adaptation strategies in planning and policy documents.

Some Guiding Thoughts

This Energy Report establishes a real-time, dynamic process for continuing dialogue on California's energy issues. The recommendations in this report represent an aggressive, wide ranging agenda for decision makers, businesses, and individuals. The Energy Commission believes that this report, along with its subsidiary volumes, lays the proper foundation for future action.

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