2004-2005 Integrated Energy Policy Report Committee Overseeing This Proceeding:

John L. Geesman, Commissioner and Presiding Member
James D. Boyd, Commissioner and Associate Member

Senate Bill 1389 (SB 1389, Bowen and Sher, Chapter 568, Statutes of 2002) requires the California Energy Commission to adopt an Integrated Energy Policy Report (IEPR) every two years and an update every other year. The 2004 Update was adopted by the Energy Commission on November 3, 2004.

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EXECUTIVE SUMMARY

Over the next several years, California faces significant challenges in ensuring adequate electricity supplies to keep California's lights on during critical peak demand periods. This challenge is especially evident in Southern California, which also faces regional and local reliability challenges. To address these, California must step up its efforts to achieve the goals already established for demand response programs, make better use of its existing fleet of power plants, and move aggressively to bring new resources on-line.

California consumers are up to the task ahead; they know how to conserve energy and reduce demand during times of short supplies. As recently as the 2000-2001 electricity crisis, Californians embraced energy efficiency and demand response programs, reducing state demand by approximately 6,000 megawatts (MW), more than 10 percent of peak demand. To meet the coming challenge, however, consumers must be armed with the tools necessary to shift their energy use away from critical peak periods when supplies are especially tight.

California must also act now to ensure that its long-term energy strategy - the Energy Action Plan's loading order - is realized.^[1] California's principal energy agencies have been meeting regularly to coordinate activities, programs, and proceedings in critical energy areas, and have made major strides to implement the loading order strategy.^[2] But more must be done.

California's systematic under-investment in transmission has left the state's transmission lines congested, increasing the cost of electricity to consumers and reducing reliability. In addition, inadequate transmission presents a significant barrier to accessing renewable energy resources critical to diversifying fuel sources, which increases California's dependence on natural gas, and slows progress in meeting California's environmental goals. The state must significantly alter its approach to transmission planning, not only to keep the lights on and hold down energy costs, but also to advance critical state energy, environmental, and economic policy goals.

In 2003, the California Energy Commission adopted its first Integrated Energy Policy Report (2003 Energy Report), which provided an assessment of the major energy trends and issues facing California along with recommended energy policies. These recommendations were based on extensive technical assessments that were captured in three subsidiary volumes on electricity and natural gas; transportation fuels, technologies, and infrastructure; and public interest energy strategies.

In this 2004 update, the Integrated Energy Policy Report Committee focused on three areas:

• Reliability issues with aging power plants
• Transmission planning
• Accelerated renewable energy development

In addition, the report also assesses the progress California has made on the 2003 Energy Report recommendations.

Near-term Supply and Reliability Concerns

In the 2003 Energy Report, the California Energy Commission concluded that under average weather conditions, California is likely to have adequate electricity supplies through 2009. However, if hot weather conditions occur in 2006 and beyond, then operating reserve margins could fall below the seven percent needed to maintain system reliability.^[3]

Additional analysis undertaken for this 2004 Energy Report Update indicates that if significant numbers of aging power plants continue to retire between now and 2008, reserve margins in the state could become dangerously thin, primarily in Southern California.^[4] Aging power plant owners may choose to retire these units because they are unable to recover their costs fully during the relatively few hours of the year that they can operate. Keeping this capacity available over the next few years will prove a daunting challenge while California transitions away from reliance on electricity generated under Department of Water Resources (DWR) contracts to newly constructed plants.

This summer, California saw the emergence of regional reliability problems, especially in Southern California, associated with increasing congestion on the transmission system. Currently, aging power plants appear to be an important element in addressing congestion on the southern portions of the California Independent System Operator (CA ISO) system and ensuring that supplies from outside the greater Los Angeles basin can be reliably delivered to load centers. In the longer run, those aging plants that prove critical for local or regional reliability should be repowered, refurbished, or replaced, which may be beneficial in reducing local environmental impacts in highly populated load centers. However, each aging unit has a unique set of operating characteristics, each must meet different environmental rules and regulations, and each faces differing levels of public opposition or support. Thus, repowering, refurbishment, or replacement decisions must be assessed on a site-specific basis.

As many as 9,000 MW of aging power plants are considered to be at risk for retirement by 2008. While it is doubtful that all of these aging power plants will retire, because retiring just a portion of them would likely improve the financial prospects for those remaining on-line, additional steps must be taken to ensure that California has adequate supplies over the next few years. The consequences of not taking actions to address potential supply shortfalls from possible retirements would expose consumers and businesses to unacceptable risks.

2004 Update Proposed Recommendations

The Energy Commission believes that a combination of actions on the demand and supply sides are necessary to stave off another electricity crisis in the near term. The state must accelerate its implementation of demand response programs that signal the actual price of electricity to customers during peak demand periods. Peak hours, while they occur for only 50 to 100 hours a year, pose one of California's most significant challenges to ensuring reliable electricity supplies. Rapidly deploying demand response programs in the state is the most effective approach to address peak demand for the summers of 2005-2008. The first order of business should be the adoption of dynamic pricing tariffs for large customers and the roll-out of advanced metering for small customers, ensuring that utilities attain the demand response program goals the California Public Utilities Commission (CPUC) and Energy Commission have already established.

Simultaneously, the state needs to shore up its electricity supplies for 2005 through 2008, including generation from aging power plants, to maintain adequate reserve margins for peak demand periods and provide regional and local reliability services. The Energy Commission recommends developing a capacity market in a phased fashion, which would provide flexibility for both utilities and generators in complying with the state's proposed resource adequacy requirements and deliverability standards.^[5] In addition, California must maximize its ability to share resources, both inside the state between the investor-owned utilities (IOUs) and adjoining municipal utilities and with out-of-state suppliers.

While pressing for short-term solutions, California must not lose sight of its longterm goals for planning transmission and developing renewable energy supplies. Transmission upgrades and expansions are critical to ensuring a robust and reliable electricity system. The state must design a comprehensive transmission planning process that is based on a proactive expansion policy that recognizes the long useful life of transmission assets and their increasingly "public goods" nature. California must also establish a process to plan effectively for and designate transmission corridors well in advance of their need. This process will ensure that government land use plans identify land necessary for future transmission lines and allow utilities to acquire the necessary rights of way. Finally, to meet state policy goals, California's transmission planning process must address the need for transmission to access renewable resources.

California must develop and codify ambitious long-term renewable goals to continue the flow of investments in renewable resources in the state, drive down the costs and push for continued innovation in renewable technologies. Significant progress has been made to achieve the accelerated goal of meeting 20 percent of California's retail electricity sales with renewables by 2010. However, unless the state sets out longer-term renewables targets for 2020, important momentum could be lost in achieving the maximum fuel diversity and environmental benefits renewables offer.

In addition, solar photovoltaic (PV) systems hold promise to enable consumers to help address our peak demand challenges by combining PV with enhanced energy efficiency measures and price-responsive demand programs. The Governor plans to move forward with a "million solar roofs," providing California with a unique opportunity to leverage investments in PV for important economic, environmental, and fuel diversity goals.

The following summarizes the Energy Commission's recommendations, which are addressed in more detail in the remainder of the 2004 Energy Report Update.

Attaining Demand Response Goals

All investor-owned and municipal utilities should work aggressively to implement demand response programs to attain the 2007 statewide goal of reducing peak demand by five percent. In this vein, to address supply adequacy concerns for the summer of 2005, the CPUC should immediately require dynamic pricing tariffs for large electricity customers who already have advanced metering capability. In addition, by January 2005, the CPUC should approve IOU proposals to modify the current tariff design that could expand program eligibility and attractiveness for the summer of 2005 and beyond.

The CPUC should also begin implementing a large-scale rollout of advanced metering systems for smaller customers, targeted first to areas of the state with the highest peak demand. Dynamic rate offerings and load control options should then be developed for customers as the metering systems become operational.

The Energy Commission should work with DWR, the CPUC, the CA ISO, and other water agencies to investigate and pursue all cost-effective load management and demand response programs on these water systems.

Shoring Up Electricity Supplies

While aggressively pursuing demand response goals, California must simultaneously shore up its electricity supplies. The Energy Commission should work with the CPUC and other parties to develop a capacity market to allow utilities and generators flexibility in meeting proposed resource adequacy requirements, including a capacity "tagging" mechanism and tradeable capacity rights or obligations.

California should also re-examine the link between the CA ISO transmission expansion process and local area reliability assessment to stimulate adequate investment in a more robust transmission system, allowing California to more rapidly transition away from dependence on reliability must-run contracts. The CPUC should also support the pending petition to allow the utilities to enter into one- to five-year power purchase contracts, as long as they do not replace the long-term procurement necessary to construct new power plants already licensed.

The CPUC, the IOUs, and municipal utilities should consider allowing cold standby plants to contribute to reserve margins, providing insurance against low hydro conditions and system contingencies such as the extended outage of nuclear plants or transmission lines.

Enhancing Supply Management

California should also take steps to enhance its supply management. To this end, the Energy Commission, CPUC, and all utilities should:

• Establish more closely coordinated planning and reserve sharing among California's IOUs and municipal utility service areas, allowing greater sharing of generating resources.


• Pursue all cost-effective seasonal energy exchanges with the Pacific Northwest to satisfy California's summer peak demand, including needed transmission upgrades to take advantage of seasonal generation surpluses.


• Explore opportunities to use existing pumped-storage facilities more fully, which provide both a more stable base load for existing power plants and valuable peaking power generation during high demand.

Designing a Comprehensive Transmission Planning Process

The Energy Commission, pursuant to its new responsibility to develop a strategic transmission plan in its 2005 Energy Report proceeding, should establish a comprehensive statewide transmission planning process with the CPUC, CA ISO, other key state and federal agencies, local and regional planning agencies, investor-owned and municipal utilities, generation owners and developers, stakeholders and interest groups, and the public. This statewide planning process should:

• Assess statewide transmission needs for reliability and economic projects as well as transmission to support Renewables Portfolio Standard (RPS) goals;


• Examine non-wires alternatives to transmission (demand response, energy efficiency, generation, etc.);


• Approve beneficial transmission infrastructure investments that can move into permitting;


• Examine the right-of-way needs for future transmission projects, designate and conduct environmental reviews of needed corridors, and allow utilities to set aside or bank necessary land for longer periods of time;


• Assess transmission costs and benefits that recognize the 30-50 year useful life of transmission assets, incorporate methods (quantitative and qualitative) to assess the long-term strategic benefits of transmission, and use an appropriate social discount rate.

To facilitate transmission for renewables projects, the Energy Commission should step up its participation in the Joint Transmission Study Group on the Tehachapi wind resources area, including initiating corridor planning to facilitate permitting of needed upgrades, and establish a Joint Transmission Study Group for the

Imperial County geothermal area. In addition, the Energy Commission, CPUC, and CA ISO should investigate whether changes to the CA ISO tariff are needed to encourage transmission projects necessary to commercialize renewable resources.

Achieving Ambitious Renewable Energy Goals

More ambitious renewable energy goals, supported by the Governor and a large majority of Californians, are needed to meet critical state policy goals. The state should enact legislation to require all retail suppliers of electricity, including large publicly-owned electric utilities, to meet the accelerated 20 percent eligible renewable goal by 2010 and a longer-term goal of 33 percent by 2020, using common definitions of eligible renewable energy. In addition, the state should enact legislation that allows the CPUC to require Southern California Edison (SCE) to purchase at least one percent of additional renewable energy per year between 2006 and 2020, reaching 25 percent by 2010, 30 percent by 2015, and 35 percent by 2020.

To help meet renewables goals, California's older wind sites should be repowered to harness wind resources more efficiently and reduce bird deaths; the CPUC should also require IOUs to facilitate such repowerings in its pending effort to develop renegotiated Qualifying Facilities contracts. Local permitting agencies for wind repowering projects should implement actions similar to those identified in the Energy Commission's recent study on wind energy and bird deaths.

In terms of the Governor's million solar roofs proposal, the Energy Commission recommends the following principles to guide its development:

• Establishing a comprehensive solar program that includes new and existing homes and businesses.


• Leveraging energy efficiency improvements for new and existing buildings.


• Addressing peak demand challenges by linking PV installations with price responsive tariffs and advanced metering.


• Targeting PV deployment to climate zones with high peak demands and where they can provide distribution system benefits.


• Providing long-term declining incentives to promote a sustainable, competitive PV market.


• Exploring a business role in PV deployment for utilities and developing a professional inspection capability.

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END NOTES

1. The Energy Commission, the California Public Utilities Commission and the California Consumer Power and Conservation Financing Authority, adopted the Energy Action Plan in the spring of 2003.


2. The 2003 Energy Report relied on the loading order in laying the foundation for energy policies and decisions affecting the state required under SB 1389 (Bowen, Statutes of 2002).


3. 2003 Integrated Energy Policy Report, California Energy Commission, publication # 100-03-019F, Sacramento, CA, December 2003.


4. Resource, Reliability, and Environmental Concerns of Aging Power Plants.


5. A capacity market would allow buyers and sellers to bifurcate the payment stream associated with electricity between a capacity component (which represents the rated continuous load-carrying ability of generation expressed in megawatts) from the energy component (which represents the generation or use of electric power over a given time period, expressed in megawatt-hours). For example, a utility could purchase capacity necessary to meet a possible future peak need without having to purchase the underlying energy. In this way the utility can ensure that the generation capacity will be available if needed, but will not have to take delivery of the energy if the peak is lower than anticipated.

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For more info about the 2004 UPDATE to the 2003 Integrated Energy Policy Report, please contact:

Kevin Kennedy
California Energy Commission
1516 Ninth Street, MS-39
Sacramento, CA 95818
Phone: 916-651-8836
E-mail: Kkennedy@energy.state.ca.us

Sandra Fromm
Assistant Project Manager
California Energy Commission
1516 Ninth Street, MS-39
Sacramento, CA 95818
Phone: 916-654-4651
E-mail: Sfromm@energy.state.ca.us

News media please contact Claudia Chandler 916-654-4989.