Previous Energy Policy Reports

• 2007 Energy Policy Report
  
• 2006 IEPR Update
  
• 2005 IEPR
  
• 2004 Update to 2003 IEPR
  
• 2003 IEPR
  

2005 Integrated Energy Policy Report

2005 IEPR - Docket # 04-IEP-1, et. al.

Please note that the back-up materials, notices, and support documents for this proceeding have been moved to the Energy Commission's Archive website. That website is located at: www.energyarchive.ca.gov.

The 2004-2005 Integrated Energy Policy Report Committee that oversaw this proceeding is:

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 every two years.

This web section is for the 2005 Integrated Energy Policy Report, which was adopted by the Energy Commission on November 21, 2005. The Commission held more than 50 public workshops and hearings. It published 80 supporting reports, scores of presentations, and received hundreds of public comments. The final main reports can be downloaded below. Background materials and supporting documents can be found in the on our EnergyArchive site. The Executive Summary of the report is below.

2005 Integrated Energy Policy Report Commission Final Report Adopted November 21, 2005, Publication # CEC-100-2005-007-CMF. (PDF file, 208 pages, 2.2 megabytes) 2005 Integrated Energy Policy Report - (REVISED) EXECUTIVE SUMMARY, Publication # CEC-100-2005-007-ES, posted: November 21, 2005. (PDF file, 18 pages, 440 kilobytes)
Commission Final Transmittal of 2005 Energy Report Range of Need and Policy Recommendations to the California Public Utilities Commission - Commission Final Report, publication # CEC-100-2005-008-CMF. Posted: December 16, 2005. (PDF file, 300 pages, 1.0 megabytes)
Strategic Transmission Investment Plan, Commission Final Report, publication # CEC-100-2005-006-CMF (PDF file, 117, 2.0 megabytes)

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EXECUTIVE SUMMARY

California is the sixth largest economy in the world. To meet the needs of its growing population, California's economy depends upon affordable, reliable, and environmentally sound supplies of electricity, natural gas, and transportation fuels. The challenge for California's policy makers is to manage an energy sector that is increasingly dependent on oil and natural gas and may face spiraling energy prices, potential supply shortages, and an inadequate and aging energy delivery infrastructure.

Energy prices in California are higher than ever before. Gasoline prices reached record levels in September, consuming valuable dollars that could otherwise have been spent on goods and services to help bolster the state's recovering economy. With world oil prices topping $70 per barrel, it is unlikely that gasoline consumers will see any meaningful relief in the near future. Electricity rates, although not as erratic as they were during the state's 2000-2001 energy crisis, are still among the highest in the nation, forcing businesses to struggle to maintain profit margins as the cost of doing business in the state rises. California depends upon natural gas to generate about half of its electricity, so natural gas prices that have more than doubled since 2000 are likely to keep electricity rates high.

Energy demand in all sectors will continue to rise with California's rapidly growing population and strengthening business sector. Weather-adjusted electricity consumption in California increased an average of 2 percent over each of the last two years, and continues to rise. Meanwhile, state demand for transportation fuels has increased 48 percent over the last 20 years and continues to grow at an alarming rate despite record high gasoline and diesel prices. The state's dependence on natural gas to generate electricity is escalating along with the demand for natural gas in the residential and commercial sectors, with California's natural gas consumption second only to that of Texas.

Despite improvements in power plant licensing, enormously successful energy efficiency programs, and continued technological advances, development of new energy supplies is not keeping pace with the state's increasing demand. Construction of new power plants has lagged and the number of new plant permit applications has decreased. In addition, the development of new renewable resources has been slower than anticipated, due in part to the state's complex and cumbersome Renewable Portfolio Standard process. In the transportation sector, California's refineries cannot keep up with the mounting need for petroleum fuels and consequently depend upon increasing levels of imports to meet the state's needs. California also imports 87 percent of its natural gas supplies, which are increasingly threatened by declining production in most U.S. supply basins and growing demand in neighboring states.

California's energy infrastructure may be unable to meet the state's energy delivery needs in the near future. The most critical infrastructure issue is the state's electricity transmission system, which has become progressively stressed in recent years. The systematic under-investment in transmission infrastructure is reducing system reliability and increasing operational costs. Last year, transmission congestion and related reliability services cost California consumers over $1 billion. The state also experienced price spikes and several local outages over the past summer. California's petroleum import and refinery infrastructure also faces challenges including the inherent conflict between the need to expand import, refining, and storage facilities to meet transportation fuel demands and the environmental and social concerns of local communities affected by these needed expansions. In the natural gas sector, California has made infrastructure improvements that will increase the reliability and operational flexibility of the natural gas system, but must still address the need for additional pipeline capacity to meet peak demand.

In the 2003 Energy Report and the 2004 Energy Report Update, the California Energy Commission recommended a broad range of strategies to reduce energy demand, secure additional energy supplies, move toward more sustainable technologies and fuel types, and build the necessary infrastructure to protect California from future supply disruptions and high prices. The Energy Action Plan, adopted earlier this year by the Energy Commission and the California Public Utilities Commission, sets out a series of concrete actions for the state to undertake to meet these challenges. The state must reinforce its commitment to these efforts and take immediate action to address problems in the energy sector to meet the state's policy goal of ensuring adequate, affordable, reliable, and environmentally-sound energy services for its citizens.

Ensuring Adequate Electricity Supplies

As the state's demand for electricity increases, California could face severe shortages in the next few years. Of particular concern are the potential impacts of higher-than-average summer temperatures, which can drastically increase the state's electricity demand, as well as shortages resulting from decreased hydroelectric generation in lower-than-average precipitation years. Either of these situations could cause dangerously low reserve margins and potential supply disruptions, particularly in Southern California. Reserve margins could also be affected by the retirement of aging natural gas-fired power plants, which remain critical components of California's generation fleet despite strong policy directives to diversify the state's electricity supplies.

The 2005 Energy Report assessment of electricity supply and demand concludes that maintaining adequate electricity reserves will be difficult over the next few years. The state has made some progress toward resource adequacy for investor-owned utilities by requiring them to maintain year-round 15-17 percent reserve margins. Jurisdictional authority over other load serving entities is less clear. Until recently there was no formal mechanism to ensure resource adequacy for publicly owned utilities, which provide up to 30 percent of the state's electricity. In September 2005 the Legislature passed and the Governor signed AB 380 (Nunez), Chapter 367, Statutes of 2005, which extends jurisdiction over independent load serving entities and requires publicly owned utilities to report their respective supply circumstances to the Energy Commission so that their resource adequacy progress can be accurately assessed in future Energy Report proceedings.

California must also address its long-term electricity needs by aggressively bringing new generation online. The lack of long-term power contracts has stalled development and construction of more than 7,000 megawatts (MW) of permitted plants and sharply curtailed the number of new permit applications Utilities need to invest now for the long-term to avoid a repeat of the catastrophic mistakes made during the 2000-2001 energy crisis that Californians are still paying for today. California's dependence on natural gas to generate electricity is also increasing as utilities continue to purchase generation from the state's aging fleet of natural gas-fired power plants under short-term contracts. These issues are being addressed in the California Public Utilities Commission's (CPUC) 2006 long-term procurement proceeding. Through that proceeding investor-owned utilities should be encouraged to sign long-term contracts that will cover both the annual "net short" and allow for the orderly retirement or repowering of the aging power plants identified in the 2004 Energy Report Update.

The utility procurement process needs to be more open and transparent for all parties. The state's investor-owned utilities continue to claim that much of the data used in their resource planning and procurement are confidential. The Energy Commission, however, concludes that important benefits come from rigorous public scrutiny and debate about the data and planning assumptions the CPUC ultimately uses to develop its resource procurement decisions. The Energy Commission will participate in the CPUC's rulemaking to revise regulations regarding disclosure of data, and has initiated its own rulemaking to review data regulations for the next Energy Report cycle.

An important alternative to building large new power plants is distributed generation, which is electricity produced on site or close to load centers that is also connected to a utility's distribution system. The most efficient and cost-effective form of distributed generation is cogeneration or combined heat and power. By recycling waste heat, these systems are much more efficient than systems that separately serve thermal and electric loads. They are also considerably more efficient than almost all conventional gas-fired power plants. California has more than 9,000 MW of combined heat and power systems throughout the state, representing approximately 17 percent of statewide generation. Most of these systems are larger than 5 MW, suggesting that the state should focus its efforts on large-scale projects that could provide more than 5,000 MW of additional generating capacity over the next 15 years.

Current state policy must change for California to tap into this potential generation source and retain the existing pool of combined heat and power facilities so critical to reliable operation of the state grid. Developers of new combined heat and power facilities are struggling to find customers to purchase their excess power at the wholesale level, and the state's suspension of direct access hampers their ability to sell their excess power at the retail level. For existing facilities, the unwillingness of utilities to renew existing qualifying facility contracts has led some operators to remove their combined heat and power systems entirely and rely instead on less efficient boilers to meet their heating needs. There will be serious adverse consequences for electric reliability, natural gas demand, and air quality if this trend is allowed to continue.

A significant percentage of California's electricity supply comes from the in-state Diablo Canyon and San Onofre nuclear power plants. Operators at these nuclear plants face many issues involving the transportation and disposal of spent fuel, upcoming extensions of their operating licenses, and major capital expenditures to replace aging steam generators. New nuclear power plant construction in California was suspended in 1976 pending determination by the Energy Commission that a high-level federal nuclear waste disposal repository has been approved and built. The Energy Commission reaffirms its 1978 finding that a high-level nuclear waste repository has been neither approved nor built. Californians have contributed well over $1 billion to the federal waste disposal development effort, which remains plagued with licensing delays, increasing costs, technical challenges, public opposition, and managerial problems.

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Reducing Energy Demand Through Efficiency and Alternative Resources

Reducing the demand for energy is the most effective way to reduce energy costs and bolster California's economy. Reducing demand also reduces the likelihood of supply shortages that can cause costly price spikes and affect reliability. California will continue to depend upon petroleum fuels and natural gas to meet its energy needs for the foreseeable future. The state needs to act now to implement energy efficiency measures for petroleum fuels and increase its use of alternatives to reduce its reliance upon these increasingly volatile fuel supplies. Efficiency and renewable resources are top priorities in California's electricity loading order policy, and the state needs to extend these priorities to California's transportation sector by reducing demand for petroleum fuels through efficiency and alternative fuel use.

Electricity

California continues to be the national leader in efficiency. While energy use per person in the rest of the nation has increased by 45 percent over the last 30 years, California's per capita use has remained relatively flat as a result of the state's energy efficiency measures. In the 2003 Energy Report, the Energy Commission concluded that California could save an additional 30,000 gigawatt hours (GWh) of energy from energy efficiency programs over the coming decade. In 2004, the CPUC established aggressive energy savings goals and authorized a significant increase in energy efficiency funding. Meeting these goals will reduce the utilities' need for additional electricity supplies between 2004 and 2013 by more than half. The recent passage of SB 1037 (Kehoe) Chapter 366, Statutes of 2005, further reinforces the state's energy efficiency policies by requiring all utilities to meet their unmet resource needs first with energy efficiency and demand reduction resources that are cost-effective, reliable, and feasible.

The state's efficiency programs need to focus on peak savings as well as energy savings. Because California's electricity demand is driven by short summer peaks, reducing peak demand is essential for improving electricity reliability, reducing price volatility, and delaying the need for expensive power plants that operate only a few hours a year. The Energy Commission recommends renewed emphasis on energy efficiency programs that provide peak demand savings.

California's water infrastructure accounts for nearly 20 percent of the state's electricity consumption. If not coordinated and properly managed on a statewide basis, water-related electricity demand could ultimately affect the reliability of the electric system during peak load periods when reserve margins are low. Water and wastewater agencies would similarly be unable to meet the needs of their customers without adequate electricity supplies. More efficient water usage, coupled with energy efficiency improvements in the water infrastructure itself, could reduce electricity demand in this sector. The Energy Commission, the Department of Water Resources, the CPUC, local water agencies, and other stakeholders should explore and pursue cost-effective water efficiency opportunities that would save energy and decrease the energy intensity in the water sector.

Demand response programs are the most promising and cost-effective options for reducing peak demand on California's electricity system. The CPUC is currently considering proposals from the investor-owned utilities to purchase and install advanced meters for all their customers. New metering technology is the primary platform for future voluntary and mandatory demand response policies. Although the CPUC adopted demand reduction targets for investor-owned utilities in 2003, demand response programs have failed to deliver their savings targets for each of the last three years and appear unlikely to meet their targets for next year. Given the huge cost of serving California's peak loads, the state's policy makers must redouble their efforts to implement ambitious demand response programs, through tariffs and control technology, and install advanced meters for all customers as soon as practically possible.

Renewable Energy

California is also a national leader in the development of renewable resources. Over the past 30 years, California has built one of the largest and most diverse renewable generation portfolios in the world. In 2002, California established its Renewable Portfolio Standard program, with the goal of increasing the percentage of renewable energy in the state's electricity mix to 20 percent by 2017. The 2003 Energy Report recommended accelerating that goal to 2010, and the 2004 Energy Report Update further recommended increasing the target to 33 percent by 2020. The Energy Action Plan supported this goal. The current process for procuring renewable resources is overly complex and cumbersome, and, without improvement, could impede the state's ability to achieve its renewable goals.

The CPUC and the Energy Commission should work together to simplify, streamline, and expedite the state's Renewable Portfolio Standard process. The two agencies should also work together to establish simple rules for the Renewable Portfolio Standard program for both energy service providers and community choice aggregators. These rules should allow limited trading of renewable energy certificates, which would increase participation by these entities and help address the current transmission constraints that preclude access to promising renewable resource areas in the state. As the Western Renewable Energy Generation Information System begins operation, this compliance mechanism should be expanded to include the entire Western Electricity Coordinating Council.

There are several additional issues facing wind resource development in California. The state needs to focus on repowering aging wind facilities to increase the amount of renewable generation from these prime sites and reduce the number of bird deaths caused by wind turbines. The state also needs to conduct additional research and development at both the Energy Commission and the California Independent System Operator (CA ISO) to address current barriers to integrating intermittent wind resources into the state's transmission system.

California also has promising opportunities to increase energy production from renewable resources connected with the state's water system. In-conduit hydropower - turbines installed within conduits to generate electricity from flowing water in pipelines, canals and aqueducts - is an attractive possibility because it is relatively easy to permit and has fewer environmental impacts than large hydroelectric power plants. Anaerobic digesters installed at or near wastewater treatment facilities, dairies, or food processing facilities can also produce biogas, which can be used to either power on-site generation or be sold to the grid.

Many existing in-conduit facilities are facing the expiration of their standard offer power purchase contracts with the state's investor-owned utilities. Existing rules do not allow water or wastewater utilities to credit the electricity they generate to their energy bills. Therefore, if this electricity cannot be directly connected to an existing load, it must be sold into the wholesale bulk power market. The cost and complexity of selling into the wholesale bulk power and transmission markets are daunting, even for large generators, and can be prohibitive for very small generators. The Energy Commission recommends expediting and reducing the cost of utility interconnection, eliminating economic penalties including standby charges, removing size limitations for net metering, and allowing water and wastewater utilities to self-generate and wheel power within their own systems.

Transportation

The 2003 Energy Report concluded that by far the most cost-effective strategy to reduce petroleum demand in the transportation sector is to increase vehicle fuel economy. The Energy Commission recommended that the state take steps to influence the federal government to double the combined fuel economy standards for cars and light trucks. Governor Schwarzenegger has called on the federal government to do exactly that. Unfortunately, efforts to spur the federal government to significantly increase the Corporate Average Fuel Economy standards for passenger cars and light trucks have not been successful. The federal government has proposed only a very minor increase in the light-truck standard and completely ignored potentially far-reaching savings in the passenger car market. California needs to intensify its efforts to forge a coalition with other states and stakeholders to persuade the federal government to double the Corporate Average Fuel Economy standards.

The state can pursue other strategies to increase transportation efficiency, including increasing the number of hybrid-electric, plug-in-hybrid electric, light-duty diesel vehicles in California, more effective marketing of low-rolling resistance tires, implementing anti-idling regulations for trucks and truck stop electrification, and integrating transportation and land-use planning.

Increased efficiency in new cars and light trucks alone cannot maintain the state's overall petroleum reduction goals. California must also vigorously support the rapid development and availability of alternative fuels so that their air quality and petroleum replacement benefits can be realized. The 2003 Energy Report recommended a goal to increase the use of non-petroleum fuels to 20 percent of on-road demand by 2020 and to 30 percent by 2030. The Energy Commission continues to strongly support these goals, though meeting them will take considerable and concentrated effort given the current low penetration level of only 6 percent.

In his response to the Commission's previous Energy Reports, the Governor made clear that the state needs to promote the efficient use of petroleum products and promote reductions in the demand for petroleum. As directed by the Governor, the Energy Commission has assumed the lead in developing a long-term transportation plan by March 31, 2006, that will reduce gasoline and diesel use and increase alternative fuel use. This effort will be a prelude to a larger alternative fuel plan for the state required by AB 1007 (Pavley), Chapter 371, Statutes of 2005, that is due by June 30, 2007. The Energy Commission envisions that the alternative transportation fuel plan must bridge the gap between today's technologies and the transition to hydrogen fuels and vehicles called for in the Governor's Hydrogen Highway Network Blueprint Plan. California must pursue a diverse portfolio of fuels and advanced transportation technologies that address both current supply and demand problems and build a sustainable foundation for the future.

Natural Gas

The 2003 Energy Report recommended that the state reduce natural gas demand by increasing funding for natural gas efficiency programs. California has made progress in this area. In 2004, the CPUC increased 2005 funding for natural gas efficiency programs by $19.8 million and set aggressive goals intended to double annual gas savings by 2008 and triple them by 2013. The recently enacted SB 1037 also requires gas utilities to first meet their unmet resource needs with all available energy efficiency and demand reduction resources that are cost-effective, reliable, and feasible. The Energy Commission and the CPUC should rigorously evaluate, measure, and monitor these gas efficiency programs to ensure that they produce their intended savings and that public funds are being well spent.

Another way to increase natural gas efficiency is to increase the role of combined heat and power facilities as a way to meet California's rising electricity supply needs.

Natural gas efficiency is a priority in the Energy Commission's natural gas research, development and demonstration program. Approximately $1.3 million of the $12 million in available 2005 funding has been preliminarily earmarked for efficiency research. The Energy Commission should continue its efforts to incorporate the results of this critical research into the state's natural gas efficiency programs.

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Improving the Energy Infrastructure

Electricity Transmission Infrastructure

In both the 2003 Energy Report and the 2004 Energy Report Update, the Energy Commission identified existing problems with the state's transmission system and recommended improvements to the transmission planning and permitting processes that would speed up approvals of new transmission lines and upgrades to existing lines. However, the state still lacks a well-integrated transmission planning and permitting process that considers both generation and transmission needs, evaluates non-wires alternatives, plans for transmission corridors well in advance of need, and allows access to essential renewable resource areas in the state.

California policy makers must move aggressively to create a planning and permitting process that leverages the core responsibilities and strengths of the utilities, the Energy Commission, the CA ISO, and the CPUC. The Energy Commission reemphasizes its recommendation in the 2003 Energy Report that the Legislature transfer the siting functions for transmission lines from the CPUC to the Energy Commission. In the absence of that authority, the Energy Commission will continue to work with other agencies to improve the transmission permitting process.

California still lacks a formal process to effectively plan for transmission corridors well in advance of their need. The Energy Commission recommends a corridor planning process that would identify the corridor needs of transmission owners; establish corridor priorities; identify major permitting, environmental and land-use issues; and ensure full participation of all affected local, state and federal agencies and stakeholders. Further, the Legislature should authorize the Energy Commission to designate corridors so that utilities have a level of financial certainty that allows them to acquire land and easements, while also allowing the Energy Commission to proceed with the comprehensive environmental reviews that could significantly shorten overall planning and permitting lead times. The CPUC should also extend its current five-year limitation on investor-owned utility land banking for the cost of future transmission corridors within their rate bases.

California must urgently encourage major investments in the new transmission infrastructure needed to access remotely located renewable resources in the Tehachapi and Imperial Valley areas. Without this investment it will be difficult for California to meet its statewide Renewable Portfolio Standard goals. In March 2005, Southern California Edison (SCE) proposed to the Federal Energy Regulatory Commission (FERC) a new category of transmission facility, called a "renewable-resource trunk line," that would allow the interconnection of large concentrations of renewable generation resources located within a reasonable distance of the existing grid under operational control of the CA ISO. However, in July 2005, FERC denied SCE's request, thereby eliminating a valuable regulatory instrument that could have overcome renewable transmission constraints. This denial clearly underscores the need to examine all regulatory options, including changes to the CA ISO tariff so that this new category of transmission project can be recognized by FERC. This recommendation was also made in the 2004 Energy Report Update.

Petroleum Infrastructure

California urgently needs to expand its petroleum infrastructure. Despite recent and planned improvements, California still needs to expand its marine terminal capacity, marine storage, and the pipelines that connect marine facilities and refineries with main product pipelines. Most of the required expansion is needed in the Los Angeles Basin, which faces a number of barriers including scarcity of land, pressure to remove a portion of existing facilities in favor of container cargo facilities, and new standards for marine terminals. In Northern California, timely dredging of the Suisun Bay Channel, the Pinole Shoals, and other areas near refineries is critical to the efficient operation of petroleum infrastructure.

The 2003 Energy Report identified the continuing need for modifying and expanding the state's petroleum infrastructure facilities to meet the state's rising demand for petroleum fuels. A major barrier is the inefficient and often overlapping responsibilities of permitting bureaucracies which frequently result in unacceptably lengthy lead times. There is a general consensus among stakeholders that the Energy Commission should work with representatives of the petroleum industry and permitting agencies to develop "best permitting practice" guidelines to streamline and coordinate the permitting process for new petroleum infrastructure. The Energy Commission believes these guidelines should include: the description of the agencies involved and their relationships in agency processes; critical path permitting timelines; information requirements; standardized permitting timelines; requirements for expedited permitting; mitigation requirements; concurrent and coordinated permit review; procedures for categorical exemptions and ministerial permits; and streamlined appeal processes.