CPUC HISTORY OF TREATING DISTRIBUTED ENERGY RESOURCES AS A HIGH COST RESOURCE
INTRODUCTION
This shift appears to be driven in part by the politics surrounding the two most recent electric-related crises in California: the reliability crisis and the affordability crisis. While California energy policy has four main goals – safe, reliable, clean, affordable, and equitable – the political dynamics of a given point in time will result in more emphasis on some goals over others. While distributed energy resources (DERs) can meet all four of California’s energy goals, the history of some DER programs is driving a narrative that most DERs do not support the reliability and affordability goals compared to utility-scale procurement.
While the CPUC continues to consider procurement programs outside of a competitive procurement process, they have also made it clear that these tests are intended to be information-only tests and that the new programs are focused exclusively on low-income communities.
What is a Distributed Energy Resource (DER)?
Barriers to DER Deployment
Since the term DER includes many different technologies and many different business models a single list of barriers will never encompass all the challenges faced by each DER type. However, some general themes can be applied to most DER types.
Access to customers and interaction between customers and LSE – for most behind the meter DERs the DER provider needs to work with the customer, the local distribution utility, and the LSE. The interactions with the distribution utility can often be complicated, confusing, and time consuming. The confusion and timelines make customer acquisition challenging for most DER providers.
Value Stacking – Many DER types provide multiple benefits to the end use customer and to the grid, but market mechanism does not exist to compensate the DER provider for all the values the technology provides. Additionally, there has been a long history of the DER providers, the utilities, and the CPUC disagreeing over the value each resource provides and there is no settled mechanism to determine the full value of each resource.
Interaction with Resource Adequacy Requirements – While there is general agreement that many DER resources will help provide some level of additional reliability to the electric grid, the current processes of determining how different DER resource types would contribute to reliability focuses heavily on past performance in a way that limits the ability to new resources to execute PPAs with LSEs.
Interconnection Challenges – The challenges may be different for behind the meter and in front of the meter DERs but long and uncertain timelines for interconnection projects to the distribution grid increases costs of projects and reduces the value the project can provide to the grid when the developer looks for alternative ways to interconnect that then reduce the ability of the projects to provide reliability benefits.
Background on the Integrated Resource Plan
The Legislature first mandated an integrated approach to resource planning in 2015 as part of SB 350 (De Leon), which required the CPUC to develop a process for each load serving entity (LSE) under its jurisdiction to submit an individual Integrated Resource Plan (IRP) that showed how the Load Serving Entities (LSE) would meet their portion of California clean energy goals and maintain reliability at just and reasonable rates. The intent of the statutory mandate for an IRP process was to move California’s electricity planning process away from separate programs that mandated renewable procurement, energy efficiency, and demand response procurement based on random numbers (a 33% procurement target) and maximum potential studies for each resource to a process that was based on analyzing the cost of each resource type and choosing a portfolio that was based on how all the resources complement each other and led to the least cost resource mix.
The legislation also allowed for the CPUC to direct LSEs to conduct “all source” procurements that would result in supply side and demand side resources competing to meet the LSE needs.
The IRP legislation did anticipate the need for market transformation programs where a resource type may not be the most cost-effective approach, but with ongoing programmatic support could help lower procurement costs and benefit ratepayers over the longer term.
The CPUC’s IPR process starts by inputting publicly vetted assumptions about cost and availability of current and existing resources into a computer model that will determine an optimum portfolio that is needed to meet reliability and clean energy goals at the lowest costs over a 10-year forecast period. The CPUC will run this model under multiple scenarios. Ultimately the CPUC uses the outputs of the modeling to adopt a Preferred System Plan (PSP). The PSP is then used to guide the individual procurement plans for each LSE and procurement directives to each LSE. However, the specific resource types identified in the PSP are generally not binding on each LSEs own procurement and instead provide a broad guidance for what needs to be collectively procured. This means that inclusion of a specific resource type in the PSP is not a guarantee or mandate that the resource type is procured in that volume, but including on a resource type in the PSP will highly influence LSE procurement decisions and how state agencies prioritize public policy issues around those resources.
In implementing the IRP requirements, the CPUC relied on modeling software that could develop a cost-effective portfolio for a statewide resource mix and could then apply that statewide portfolio target to individual LSEs. However, the IRP process has focused on optimizing utility scale technologies and uses most DER resource types as fixed inputs. The values of these resources continued to be based on targets of the individual DER programs. Using these resources as a fixed input in the model means that the model will optimize other resources based on how many DERs are assumed in the model vs. picking the optimal amount of DERs to meet state goals. Consequently, the full goals of the IRP process have never been realized.
In the intervening years since 2015, the Legislature and the CPUC have continued to adopt specific resource programs outside of the IRP process. This includes the energy efficiency programs, demand response programs, behind the meter generation programs including the Self Generation Incentive Program (SGIP) and changes in Net Energy Metering (NEM), and electric vehicle charging programs. For some of these programs the CPUC acknowledged that they were not cost-effective and for others they applied cost effectiveness tests using an avoided cost calculation to determine they were cost-effective. The goals of these programs were not set by resource needs determined by the IRP and instead are either ignored in the IRP planning process or are considered fixed inputs to the modeling.
The Avoided Cost Calculator
Shifting Toward Competitive Procurement to Determine Cost Effectiveness?
However, the CPUC rejection of the Community Solar proposal shows, or at least implies, that the CPUC does not actually believe that the ACC is an accurate measure of avoided cost and the language in the Final Decision and comments from President Reynolds before the final votes indicate that CPUC leadership now believes the best, and maybe only way, to determine cost-effectiveness and the only way to prevent cross subsidization is through IRP modeling and competitive procurement. According to President Reynolds:
“…competition is economically efficient. It drives down the cost to contract with these resources. It makes electricity bills more affordable for everyone and that’s because ratepayers, including those on fixed incomes and renters, all of us who pay for the clean energy that is available for everyone in the grid through our electricity bills. So the IRP allows us to get clean energy at least cost to serve everyone.”
While the statements from President Reynolds do not specifically indicate a move away from program design based on the ACC or another tool to approximate ratepayer value of a particular program or technology, the statement can and should be read to indicate a general shift in how the CPUC decision making is increasing shifting toward the IRP process as the primary means to achieve lowest cost clean energy.
HOW TO PROCEED
Using IRP to Optimize DER Procurement – If the CPUC does not believe the ACC is an accurate method to determine cost effectiveness of DERs and instead wants to determine DER cost effectiveness through a more direct comparison to supply side resource costs, programs like the Self Generation Incentive Program (SGIP) and the creation of new programs targeting DERs will face an increasing high burden to show that they result in lower costs to ratepayers before they are approved. Using the IPR process to optimize for DERs could be the best approach to determine the value of DERs and set DER program goals.
The original goals of the IRP process envisioned a point in time where resource procurement for both supply side and demand side resources and utility scale and small-scale projects competed through competitive all source solicitations. Until now the CPUC has only used the IRP process to drive utility scale planning. There is no indication in the scoping documents for the current IRP proceeding to better optimize DERs for cost effectiveness but, the language related to the recent CPUC decision may indicate a change in direction in how the CPUC approaches supply side and DER programs.
In theory a move to optimizing DERs within the IRP planning process could benefit DERs that are already cost competitive with utility scale supply side resources if the final Preferred System Plan picked DERs as an optimal resource to meet California’s clean energy and reliability mandates. While the IRP’s PSPs do not generally result in specific mandates for LSE’s to procure specific resources and the IRP PSP would not remove other barriers to developing specific DERs, having the DER as part of the PSP would result in increased pressure and prioritization to resolve the barriers related to those specific resources.
Beyond the CPUC, the CEC lead process to develop a bi-annual SB 100 Report will also influence how DERs are prioritized in the future. While the results of the SB 100 do not directly impact the IRP process, the CPUC and CEC closely coordinate on the SB 100 Report and its result will influence assumptions used in the IRP process. The SB 100 Report will likely spell out an optimum resource mix to meet the statewide carbon goals. The current SB 100 Report is scheduled to be published by the end of 2024 so there is little opportunity to further influence this report cycle.
Build New Coalitions of Advocates – Currently the most active proponents of DERs at the CPUC are groups that often argue that California can meet its energy goals just with DERs. These groups base their advocacy around an anti-utility argument and arguments for “energy democracy.” These groups tend to take positions and follow strategies that make them appear as fringe groups. The trade associations and companies that promote DERs as part of an all-of-the above solution are not as engaged across proceedings at the CPUC and instead only engage in proceedings that are specific to their technology or business model. Consequently, the CPUC staff often come to a point where they view DER programs as only being supported by the more fringe groups and all DERs have similar cost shifts.
There needs to be a coalition of companies that promote new DER procurement programs that deliver a consistent message to the CPUC, Legislature and the Governor’s office on the role of DERs and how to develop a program that will allow DERs to compete effectively with utility scale projects. The Coalition also needs to be able to engage in a broader range of proceedings. As discussed above other proceedings like the IRP could be leveraged to increase procurement of DERs and removal of barriers to DER deployment.
This coalition could be broader than just DER companies and could include environmental groups that take more holistic policy approaches to clean energy and Load Serving Entities that want to procure DERs as part of their portfolios.
Develop a New Procurement Program – If the CPUC wants to move toward more direct market competition between DERs and utility scale projects, a DER coalition should develop and propose a new program that moves away from carve outs or subsidies but allows DERs to compete more effectively against utility scale projects. Since the CPUC has limited authority over specific procurement decisions of the CCAs, and the CCAs will be responsible for much of the new procurement, developing the specifics of this program could be challenging and will likely need to include input from the CCAs.
Move Program Design Authority to the Energy Commission – Due to limited bandwidth and regulatory inertia, the CPUC staff are currently not well positioned to develop innovative programs that will help deploy cost effective DERs. The Energy Commission may be better situated to develop new programs that overcome existing barriers. One example of moving authority to the CEC would be to set DER targets in the IRP process but task the CEC with determining the barriers to meeting those targets and grant them the authority to resolve those problems. If access to customer data is a problem, then the CEC should have the authority to set the rules on how DER providers can access data. If determining how to value compliance with CAISO and CPUC resource adequacy rules is a challenge, then the CEC should be tasked with coordinating with the CAISO and CPUC to develop a program that appropriately values resource adequacy compliance.
Legislative Package to Remove Barriers – The new coalition process could be used to develop a legislative package that addresses barriers to entry for DERs. While there have been dozens of bills focused on DERs over the past decade which collectively have made little difference in the DER marketplace, most of these bills have been focused on specific resources and not on DER generally or have been viewed as subsidy programs that shifted costs between customers. If a coalition could agree on a specific set of issues that need to be addressed to promote DERs and could support Legislation from the time it is introduced, meaningful changes are more likely.
