2006 Integrated Energy Policy Report Update

Docket # 06-IEP-1

The 2006 Integrated Energy Policy Report Update Committee that oversaw this proceeding:

Jackalyne Pfannenstiel
Chairmain and Presiding Member

John L. Geesman
Commissioner and Associated Member

Please Note: the 2006 Update was handled under the 2007 IEPR proceeding.

Senate Bill 1389 (SB 1389, Bowen and Sher, Chapter 568, Statutes of 2002) requires the California Energy Commission to "conduct assessments and forecasts of all aspects of energy industry supply, production, transportation, delivery and distribution, demand, and prices. The Energy Commission shall use these assessments and forecasts to develop energy policies that conserve resources, protect the environment, ensure energy reliability, enhance the state's economy, and protect public health and safety." (Pub. Res. Code § 25301(a)) the California Energy Commission adopts this Integrated Energy Policy Report (IEPR) every two years and an update every other year.Cover of 2006 IEPR Update

The 2006 Integrated Energy Policy Report Update was approved by the Energy Commission at its January 3, 2007, business meeting. The executive summary of the is available below, or download the PDF version of the report.

2006 IEPR Update
Publication # CEC-100-2006-001-CMF.
(PDF file, 122 pages, 1.9 mb)

Executive Summary

Senate Bill 1389 (Bowen and Sher), Chapter 568, Statutes of 2002, requires the California Energy Commission (Energy Commission) to conduct "assessments and forecasts of all aspects of energy industry supply, production, transportation, delivery and distribution, demand, and prices." The Energy Commission reports the results of these assessments and forecasts every two years to the Governor, the Legislature, and the California public in the Integrated Energy Policy Report. In the alternate years, the Energy Commission prepares the Integrated Energy Policy Report Update to discuss the status of energy issues identified in the previous Integrated Energy Policy Report and to identify energy issues that may have emerged since that report was completed. This 2006 Integrated Energy Policy Report Update fulfills the update requirement for 2006.

In the 2005 Integrated Energy Policy Report, adopted on November 12, 2005, the Energy Commission recommended policies and actions to ensure adequate energy resources, reduce energy demand, develop a broad range of alternative energy resources, and improve the state's infrastructure.

The 2007 Integrated Energy Policy Report Committee (Committee) held a hearing on May 12, 2006, to receive comments on the proposed scope of the 2007 Integrated Energy Policy Report proceeding. At the hearing, parties provided the Committee with thoughtful oral and written input on the proposed scope. The Committee has considered these comments in revising the scope of the 2007 Integrated Energy Policy Report proceeding.

As an interim part of the 2007 Integrated Energy Policy Report proceeding, the 2006 Integrated Energy Policy Report Update focuses on two topics:

  1. The status of progress to meet Renewable Portfolio Standards goals to generate 20 percent of the state's electricity from renewable resources by 2010 and 33 percent by 2020; and

  2. Clean energy development and energy-saving opportunities arising from sustainable land-use planning.

Achieving the state's Renewable Portfolio Standard goals is an essential component of California's greenhouse gas emission reduction targets. The 2005 Integrated Energy Policy Report concluded that statewide renewable procurement is not occurring at a pace that will reach Renewable Portfolio Standard goals by 2010 and, as a result, the process is in need of review and correction.

Land use decisions have a significant and long-lasting impact on California's energy use and infrastructure and, consequently, on its ability to achieve greenhouse gas emission reduction targets. The state should undertake an examination of current land use practices and potential policies to take advantage of the energy saving opportunities of sustainable land use planning.

Both of these topics address strategies to achieve California's greenhouse gas emission reduction targets, established by the Governor in Executive Order #S-3-05 and codified in Assembly Bill 32 (Nuñez), Chapter 488, Statutes of 2006. The Executive Order and Assembly Bill 32 commit the state to reduce greenhouse gas emissions to 2000 levels by 2010 and to 1990 levels by 2020.

A third key strategy for achieving the state's greenhouse gas emission reduction targets is increasing the penetration of alternative fuels in the transportation sector. The Energy Commission is currently working on a companion report, required by Assembly Bill 1007 (Pavley), Chapter 371, Statutes of 2005, that will examine the potential for greater use of alternative fuels in the state and recommend actions to achieve that potential. The results of this work will be incorporated in the 2007 Integrated Energy Policy Report.

Midcourse Review of the Renewable Portfolio Standard

The Energy Commission initiated a midcourse review of the Renewable Portfolio Standard program because the state did not appear to be on a trajectory to achieve the near-term goal of supplying 20 percent of the state's electricity needs with renewable energy by 2010 and the longer-term goal of 33 percent by 2020. California has achieved only minimal increases in renewable generation. Between 2002, the year in which the Renewable Portfolio Standard took effect, and 2005, the percentage of renewable energy in California's generation mix has remained nearly constant rather than increasing by at least 1 percent per year as required under the statute.

Slow Progress in Achieving Renewable Portfolio Standard Goals

The investor-owned utilities, including Pacific Gas and Electric, Southern California Edison, and San Diego Gas and Electric, continue to affirm their commitment to the Renewable Portfolio Standard. They claim progress in achieving Renewable Portfolio Standard goals based on contracts they have entered into over the last few years for as much as 3,936 megawatts of renewable capacity. However, only 242 megawatts of those renewable contracts represent new facilities that are on line and delivering electricity today. To meet the goal of 20 percent by 2010, the investor-owned utilities, collectively, will need to add as much as 1,500 megawatts of eligible renewable generating capacity over the next four years beyond what is already under contract.

Unlike the Renewable Portfolio Standard program for investor-owned utilities, which is overseen by the California Public Utilities Commission and the Energy Commission, publicly owned utilities-which include municipal utilities and irrigation districts-are responsible for implementing and enforcing their own renewable standards. As a result, the progress of the state's publicly owned utilities toward achieving statewide Renewable Portfolio Standard goals is less clear. The state's two largest publicly owned utilities, the Los Angeles Department of Water and Power and the Sacramento Municipal Utility District, have established targets of 20 percent by 2010 and 23 percent by 2011, respectively. To meet their share of the statewide goal of 20 percent by 2010, publicly owned utilities will need to increase the percentage of eligible renewables in their system mix more than two percentage points per year between now and 2010.

Barriers to Achieving Renewable Portfolio Standard Goals

The Committee found five primary barriers to achieving the state's Renewable Portfolio Standard goals:

  1. Inadequate transmission infrastructure to connect remotely-located renewable resources.

  2. Uncertainty regarding whether projects with supplemental energy payment awards will be able to obtain project financing.

  3. Complexity and lack of transparency in the Renewable Portfolio Standard program implementation for investor-owned utilities.

  4. Insufficient attention to the possibility for contract failure and delay.

  5. Lack of progress in repowering aging wind facilities.

Achieving Renewable Portfolio Standard goals is hampered by the lack of adequate transmission to access important renewable resources in Tehachapi and the Imperial Valley. Several near-term transmission projects in the permitting process are experiencing delays. Disputes over the best plan for configuring transmission projects to allow the full build-out of Tehachapi resources have delayed progress in moving additional transmission projects into permitting. Finally, cost allocation issues have created uncertainty about cost recovery, delaying additional investments in renewable transmission.

Many stakeholders have raised concerns that supplemental energy payment awards under the current Renewable Portfolio Standard structure do not represent a financeable revenue stream, making it difficult for projects that require these funds to obtain the financing needed to move forward. While a significant amount of supplemental energy payment funding is available today, these funds are held in accounts from which the state has borrowed in the past for other purposes. Uncertainty about the availability of supplemental energy payments may make projects needing these awards unfinanceable. Because utilities are only required to pay up to the market price referent, insufficient or uncertain supplemental energy payment funding will reduce available renewables.

Program complexity and lack of transparency also remain significant barriers to the development of renewable resources in California. Investor-owned utilities select projects based on individual "least-cost, best-fit" methodologies that are not well understood by project bidders or by decision makers and may not adequately reflect state economic and environmental policy considerations. In addition, the process for setting the market price referent-used to determine the above-market costs of meeting the Renewable Portfolio Standard-is unclear, undermining public confidence in the awarding of public funds to further Renewable Portfolio Standard goals.

Utility procurement strategies have not yet sufficiently factored in the risk of contract erosion, creating additional uncertainty about the attainment of Renewable Portfolio Standard goals. Many projects with Renewable Portfolio Standard contracts have been delayed, and a number of them have been cancelled. In addition, several of the largest contracts rely on technologies not yet commercially proven at the scale envisioned, raising concerns about these contracts staying on course.

Finally, over the last several years utilities have made little progress in pursuing repowering of aging wind facilities that are already connected to the grid and that could provide additional renewable energy through the use of more modern and efficient technologies. This issue was discussed in more detail in the 2004 Integrated Energy Policy Report Update and the 2005 Integrated Energy Policy Report but is being revisited here because of the lack of progress.

Recommendations to Achieve the Near-Term Renewable Portfolio Standard Goal

Although stakeholders acknowledge that problems exist with the Renewable Portfolio Standard structure, most parties recommend that the state not make wholesale changes to the program structure at this time. The Energy Commission, therefore, reluctantly recommends making no major changes to this structure now, but rather, working within the current protocols to meet the 2010 goals. However, the Energy Commission recommends that the state adopt revisions within this program structure to accelerate progress toward reaching the 2010 target and commit itself to less-inhibited evaluation of program designs to achieve the 2020 goal.

To address ongoing transmission barriers to renewable development, the Energy Commission recommends:

  • The California Public Utilities Commission should expedite processing of Certification of Public Convenience and Necessity applications for renewable transmission projects including the Antelope Transmission Project and Sunrise Powerlink project.

  • The state's energy agencies and municipal utilities should actively support the California Independent System Operator's proposal to the Federal Energy Regulatory Commission to develop a third category of transmission projects to accommodate renewable resource development.

To address problems with supplemental energy payment uncertainty and financeability in the Renewable Portfolio Standard program, the Energy Commission recommends:

  • The Energy Commission and the California Public Utilities Commission should jointly alter the supplemental energy payment procedures to reduce the contracting complexity of projects requiring supplemental energy payments.

To address problems in complexity and transparency in the Renewable Portfolio Standard program, the Energy Commission recommends:

  • The state should maintain the per-kilowatt-hour penalties for investor-owned utility non-compliance with Renewable Portfolio Standard goals consistent with California Public Utilities Decision 06-05-039, and eliminate the current per-utility cap on those penalties.

  • The California Public Utilities Commission, working with the Energy Commission, should continue its efforts to make the Renewable Portfolio Standard process more open and transparent, requiring investor-owned utilities to clarify least-cost, best-fit criteria and their application in selecting projects.

  • The natural gas price forecast used in determining the market price referent should be consistent with forecasts used in other procurement-related activities, including those used for energy efficiency programs. In addition, investor-owned utility methodologies for time of delivery factors should be standardized.

  • The state should move away from stand-alone engineering calculations currently used in the market price referent to a portfolio approach. Also, the market price referent calculation should explicitly recognize the important value of renewable resources as both a hedge against future natural gas price volatility and a vital component of the state's greenhouse gas reduction strategy.

  • Investor-owned utilities should be required either to accept all bilateral Renewable Portfolio Standard offers under the market price referent or document why such offers were not accepted. Such documentation is already required by California Public Utilities Commission Decision 06-05-039 for Renewable Portfolio Standard solicitations but it is not clear whether this requirement also applies to bilateral Renewable Portfolio Standard offers.

  • The state should evaluate the ramifications of providing a higher rate of return for renewable energy facilities to make them more financially attractive.

To address contract failure risk and ensure timely completion of projects with Renewable Portfolio Standard contracts, the Energy Commission recommends:

  • Utilities should be required to procure a contract risk reserve margin of 30 percent or more beyond what is needed to meet the 20 percent by 2010 renewable goals, and the state should more clearly define how penalties will be applied in the case of contract failure.

  • In the semi-annual compliance reports already required by the California Public Utilities Commission under Decision 06-05-039, utilities should report on project development milestones consistent with those required by the Energy Commission for projects receiving supplemental energy payments.

  • The Energy Commission should provide project assistance for renewable developers similar to the "Green Team" approach established during the electricity crisis.

To address lack of progress in wind repowering, the Energy Commission recommends:

  • The state's energy agencies should evaluate possible incentives to encourage repowering of aging wind facilities to boost renewable generation from these prime sites while reducing avian impacts.

Recommendation to Achieve Long-Term Renewable Portfolio Standard Goals

California must accelerate its pace of renewable development if it is to meet its long-term Renewable Portfolio Standard goal of generating 33 percent of the state's electricity from renewable resources by 2020, as recommended by Governor Schwarzenegger, the Energy Commission, and the California Public Utilities Commission. This long-term goal is essential to meeting the state's greenhouse gas emission reduction goals and to achieve other benefits associated with the use of renewable energy.

The Energy Commission recommends that the following issues be further analyzed to help shape the achievement of post-2010 Renewable Portfolio Standard goals:

  • The relationship between renewable energy, renewable energy certificates, and carbon emission trading in implementing greenhouse gas reductions called for in Assembly Bill 32.

  • Alternative structures to meet 2020 Renewable Portfolio Standard goals, including whether revised system benefit charge mechanisms or feed-in tariffs would spur additional renewable development.

  • Changing or eliminating the market price referent/supplemental energy payment award structure.

The Relationship Between Energy and Land Use

Experts expect California's population to grow by 20 million people between 2000 and 2050. Such growth will severely tax already constrained energy resources and the associated infrastructure and challenge the state's ability to provide the energy that new communities, homes, schools, industry, and other workplaces will require. This rapidly advancing scenario shines a spotlight on a relationship that until now has received little attention: the profound impact of land use decisions on every aspect of energy.

The burden that a burgeoning population will place on energy supply and infrastructure suggests a need for a fundamental shift in approaches to land use and development. The state needs to investigate approaches that go beyond decreasing transportation fuel use and relieving congestion to approaches that can serve as a nexus for developing distributed renewable generation and efficient transportation in communities to help California meet its statewide energy and climate change goals.

Probably the single largest opportunity to meet those goals resides with "smart growth." Smart growth refers to the application of specific development principles to make prudent use of resources and create genial, low-impact communities through enlightened design and layout. Assuming that all new U.S. housing is smart growth, the total nationwide savings after 10 years, based on a projected level of 24.3 million housing starts from 2005 to 2020, would be in the range of 977 trillion miles of travel reduced; 5.69 trillion Btu saved; 49.5 billion gallons of gasoline saved; 1.18 billion barrels of oil saved; 595 million metric tons of CO2 emissions reduced; and $2.18 trillion savings.

The Governor's Climate Action Team identified smart land use and intelligent transportation systems as major elements of a unified program to meet the goals of Assembly Bill 32. In the Climate Action Report, smart land use and intelligent transportation systems are projected to result in reductions of 1.77 million metric tons CO2 equivalent by 2010 and 14.5 million metric tons by 2020. These projected reductions represent a major portion of the total greenhouse gas reduction goal.

Current Land Use Planning and Development Practices Fail to Address Energy

Organized land use planning is largely a relic of post-World War II sprawl to accommodate the "baby boom" and a healthy post-war economy. State laws outline the framework within which land use authority is to be exercised; however, local government is the entity primarily charged with land use decisions. As the official planning document for a community, the general plan is a statement of development policies that sets forth objectives, principles, standards, and proposals. The plan is required by law to have seven elements: land use, circulation, housing, conservation, open space, noise, and safety. No specific state mandate requires that a general plan include an energy element, and only some 10 percent of California's general plans do so.

The lack of energy consideration on the part of land use decision-making authorities and developers in their planning processes today is apparent. Although some exceptions exist, most energy considerations of current land use planning practices relate exclusively to transportation issues: reducing the number of vehicle miles traveled, thus reducing fuel consumption, air pollution, and roadway congestion. Specifically, planners tend to focus on increasing density, changing zoning to allow for mixed use development, and building near transit stations to achieve these aims. The host of related support services and infrastructure-fueling stations, transmission lines, power plants and pipelines-and the potential for distributed renewable generation and energy efficient design are rarely considered in planning uses for land parcels.

Land use practices are slowly changing as a result of new efforts to create smart growth and include energy considerations in land use. The state took a major step toward smart growth with the passage of Assembly Bill 857 (Wiggins), Chapter 1016, Statutes of 2002, which laid out three planning priorities: promote infill development and social equity in existing communities; protect and conserve environmental and agricultural resources; and achieve more efficient use of land, transportation, energy, and public resources outside the infill areas. In response, the Governor's Office of Planning and Research updated its Environmental Goals and Policy Report to make it consistent with the planning priorities in Assembly Bill 857. This document is to be the basis for judgments about the design, location, and priority of major public programs, capital projects, and other actions, including the allocation of state resources through the budget and appropriation process. All state departments and agencies must comply.

Some local communities have begun to consider energy issues in land use and have included energy considerations in their general plans. The cities of Chula Vista, Pasadena, Pleasanton, and Santa Monica; the counties and cities of San Francisco and San Luis Obispo; the County of Humboldt; and the San Diego Association of Governments and Southern California Association of Governments are some of the local governments that have taken significant action in furthering smart growth.

Land use practices have been identified as a significant element of the state's plan to achieve the goals of Assembly Bill 32. Some California cities have signed the U.S. Mayors Climate Protection Agreement, committing their cities to aggressive emission reduction targets.

Further Action Is Needed to Integrate Land Use Planning and Energy

In spite of all of the state and local government and non-governmental efforts, much more can and should be done to couple land use and energy. The following recommendations focus on the central role smart growth can play in meeting many of the state's energy goals. Supporting local government as the pivotal players in land use planning, giving local governments responsibility to develop their own greenhouse gas emission reduction plans, involving utilities, expanding the repertoire of smart growth tools available to local governments, and pursuing further research are actions that the state and its partners must take if California is to realize the benefits of integrating land use and energy.

Require Local Governments to Adopt Greenhouse Gas Emission Reduction Plans

Local government action is key to achieving the state's energy policy goals and the aggressive greenhouse gas emission reductions contained in the Climate Action Team report.

  • The state's Assembly Bill 32 plan should require local governments to develop greenhouse gas reduction plans and finance such efforts through the Assembly Bill 32 administrative fee at a level commensurate with the greenhouse gas savings expected from improved land use planning.

Promote and Facilitate Efficient Land Use Practices That Save Energy and Reduce Greenhouse Gas Emissions

Helping local governments develop and implement energy efficient land use practices and greenhouse gas reduction plans will require input from many sources, including local, regional, and state agencies; developers; utilities; homebuyers; lenders; community groups; non-profit organizations; and other interested stakeholders.

  • The Energy Commission should invite stakeholders to participate in an ongoing land use/energy working group that would convene on a regular basis to guide the state's land use and energy research and program development.

Many of California's communities are beginning to address energy use in their land use planning but need help in understanding the options available to them, the available tools they can use, and the benefits that would accrue to both local government and the public.

  • Working with their partners, the Energy Commission should establish a central repository for efficient land use information resources. The Energy Commission should produce case studies and best practices guides that describe the successes of local government land use efforts that reduce energy needs and greenhouse gas emissions.

The general plan is the single most important planning document in a community. As a statement of development policies for a locality, the general plan sets forth objectives, principles, standards, and proposals.

  • The Legislature should pass legislation that would require local governments to include an energy element in their general plans.

Utilities should play a more influential role in the state's movement toward better land use practices.

  • The Public Utilities Commission should require investor-owned utilities to partner with local governments to incentivize energy efficient smart growth in their service territories. The Public Utilities Commission should allow investor-owned utilities to recover the cost of the partnerships.

  • Under the authority granted to it by Assembly Bill 2021 (Levine), Chapter 734, Statutes of 2006, the Energy Commission should assist municipal utilities in partnering with local governments to incentivize smart growth in their service territories.

Growth, development and planning are multi-disciplinary activities that involve a wide variety of state agencies and authorities. A state agency working group for efficient land use would enable the state to direct its resources and activities in a coordinated manner.

  • The state should form a state agency working group to develop and implement an Efficient Land Use Action Plan for the state. The working group should include, but not be limited to, the Energy Commission, the Governor's Office of Planning and Research, the California Department of Housing and Community Development, the California Air Resources Board and the California Department of Transportation.

Provide New Tools and Conduct Research to Assist Local Government's Energy and Greenhouse Gas Reduction Planning Efforts

Over the next several years, the Energy Commission will fund research projects that bolster local and regional governmental energy and greenhouse gas emission reduction planning efforts. Direction for research and tool development will come, in part, from the stakeholder group described above and should provide the scientific and technological background to inform sound decision and policy making in California.

  • The Energy Commission should complete the update of the Internet-based version of the Planning for Community Energy, Economic, Environmental Sustainability energy module and then continue to provide research and analytical tool development that will allow the state and its partners the ability to:

    • Better understand the relationships, processes, and outcomes that underlie smart growth and energy.

    • Identify, quantify, evaluate, and verify sustainable energy planning practices and designs.

    • Understand the associated complex energy relationships, interdependencies, efficiency, and environmental enhancement opportunities of these practices and designs.

    • Develop tools and methods to identify and set energy sustainability goals, as well as to verify that these goals are met.

    • Take a comprehensive approach, using life cycle studies or system analyses, to identify the costs, benefits, and trade offs of achieving these goals and to allow for more informed decision and policy making.

Analyze the Role of the State's Infrastructure Planning and Financing Activities in Promoting Smart Growth

Additional analytical research is necessary for the state to examine its own appropriate role in encouraging efficient land use practices. The Energy Commission expects to examine this in the 2007 Integrated Energy Policy Report.

The state took a major step toward smart growth with the passage of Assembly Bill 857. This legislation established planning and development priorities for the state's infrastructure development and financing.

  • The state should assess compliance with Assembly Bill 857 and provide an assessment of successes and barriers to action.

With the passage of Propositions 1B-E and 84 (Highway Safety, Traffic Reduction, Air Quality, and Port Security; Housing and Emergency Shelter Trust Fund Act of 2006; Kindergarten-University Public Education Facilities; Disaster Preparedness and Flood Prevention; and Supply. Flood Control. Natural Resource Protection. Park Improvements. Bonds. Initiative Statute, respectively), the state will be able to make a significant impact in addressing deficiencies in and planning for the future of California's transportation, education, shelter, flood and "green" infrastructure.

The investment of the public's funds must support land use that avoids or mitigates increased energy usage and greenhouse gas emissions. Other states, such as Maryland and New Jersey, have implemented programs that direct state infrastructure funds toward projects that incorporate good land use practices and withhold it from projects that do not. The Energy Commission believes that California should explore adopting a similar program.

  • The state should develop criteria for smart growth development and prioritize infrastructure funding toward development that meets the criteria.