How community is turbo charging California’s drive for carbon neutral power generation

7 February 2019 (Last Updated February 6th, 2019 14:48)

Giving power to the people is a mantra we’ve all likely heard at some point. But community choice aggregators in California are really doing that. How are they being implemented and what has been the often unintended effect? Andrew Tunnicliffe finds out from Michael Ferguson, director of sustainable finance, Standard & Poors.

How community is turbo charging California’s drive for carbon neutral power generation
CCAs mean they can have a say in distribution and sales, leveraging the capability of traditional investor-owned utilities.

Since 2010, community choice aggregators (CCAs) have allowed customers to directly influence their community’s energy mix by giving them the power to choose where and how they buy their electricity and natural gas. While the procurement mechanism began life slowly, in California alone 1.85 million customer accounts are now managed under a CCA.

According to Michael Ferguson, director of sustainable finance at Standard & Poors Global Ratings, it’s not going to stop there. “CCAs are very likely to grow in prominence in coming years,” he says. Particularly given the recent news that California Governor Jerry Brown wants the state to reach a target of 100% renewable energy sources by 2045, achieved at least partly through CCAs.

Ferguson believes that target is more than doable, because of the ambitions of many of the CCAs already being agreed. “Even as the renewable mandate increases state-wide, numerous CCAs have renewable mandates that surpass state requirements, potentially leading to more rapid adoption of renewable energy,” he says.

The cost of CCAs for utilities

In addition to allowing communities to choose their electricity and natural gas sources, CCAs mean they can have a say in distribution and sales, leveraging the capability of traditional investor-owned utilities. However, this relationship has been strained for some time, with utility providers arguing they are being left to foot the bill to manage and maintain the infrastructure – a point that has gained some sympathy.

“CCAs are going to cause large swaths of individuals, even whole counties in some cases, to defect from the grid,” says Ferguson. “Of course there is a mitigating measure, depending on state, certain arrangements have to be made to compensate for the services and other attributes the grid provides to the CCAs. But effectively it leaves fewer people paying for infrastructure, which potentially causes rate hikes.”

There is another concern too; those rate hikes will hit the most vulnerable customers first. “In some instances, those who are more inclined to pursue renewables are more affluent, meaning rate hikes could be levied on individuals with less ability to pay,” he adds.

CCA regulation aims to reduce pressure

The pressures being put on investor-owned utilities led the California Public Utilities Commission (CPUC) to adopt a resolution that makes new CCAs responsible for at least part of the burden.

Speaking after the announcement, CPUC Commissioner Liane M. Randolph said: “Our actions today ensure that community choice aggregators can form and expand in a timely and expeditious manner, that remaining utility customers do not shoulder costs for customers who depart, and that double-procurement does not occur.” The news has gone some way to addressing the points raised by the state’s utilities, Pacific Gas & Electric, San Diego Gas & Electric, and Southern California Edison.

One of the biggest criticisms of CCAs, from traditional providers, has been the speed with which they can be set up and customers’ accounts reassigned. They say this is causing significant difficulty in predicting resource adequacy (RA); utilities, and load service entities, must forecast their annual load and provide month-by-month peak load projections for the year ahead each April.

“This scenario occurred in 2017 and will likely occur in 2018 when CCAs submitted implementation plans and began serving customers out of sequence with the RA timelines,” the CPUC wrote when announcing the resolution. CCAs had been exempt from this requirement until then.

Renewable power generation opportunities

Despite the concerns raised, there is much to celebrate with the growing popularity of CCAs, not least the environmental impact they are having and the potential opportunities for those serving the marketplace. “There is certainly going to be greener generation because of CCAs. Many of these (CCAs) form as a means for bundling buyer power for those individuals who would prefer more renewable energy,” says Ferguson, adding renewable developers could be well placed to take advantage of the “significant number of investment opportunities in years to come”.

However, more traditional utilities face a challenge: how to remain competitive in a dramatically changing environment. “Utilities that move towards more transmission and distribution, reliability focused models, are going to be better positioned to contend with shifts in generation type,” continues Ferguson.

Moreover, there doesn’t seem to be the appetite for new gas-fired assets, particularly in California, which means reliability of supply could suffer if gas-fired generation retires and is not replaced before battery storage is more economically viable. Investor-owned utilities need to look at both renewable generation and battery storage as a means for complimenting that renewable output, Ferguson adds.

“While batteries are not cost effective just yet, they are likely to improve in cost, efficiency, and depth of charge in years to come, which would expedite the displacement of gas fired generation,” he says.

Standing up to climate change – and the President

In September 2018, Governor Brown, a long-time critic of President Trump’s climate change stance, signed Senate Bill 100, committing the state to generating 60% of its power through renewable sources by 2030, and 100% by 2045. “California is committed to doing whatever is necessary to meet the existential threat of climate change,” he said at the time.

“This bill, and others I will sign…help us go in that direction. But have no illusions, California and the rest of the world have miles to go before we achieve zero-carbon emissions.”

“CCAs can effectively allow like-minded individuals to bundle together their purchasing power and acquire significant amounts of renewable energy, and have more of an environmental impact collectively,” says Ferguson. “Also, by binding individuals together, CCAs that serve as offtakers of these renewable plants can incentivise the development of utility scale solar, which can improve its finance-ability.” But, there are challenges that come with that.

Meeting the renewable energy challenge

Ferguson warns that the influx of greater quantities of renewable energy means pricing could become more volatile as supply fluctuates, due to wind and solar resources. “There could be spikes,” he says. However, that anticipated fluctuation could make the case for more investment in renewables over fossil fuels even stronger.

Battery storage is another key consideration if those fluctuations are to be managed effectively. Utilities have been working, for some time, to develop and position lithium-ion batteries across their supply area to provide local supply when the gird is compromised.

A huge driver of CCAs is the commercial sector too, with Ferguson saying commercial customers are “very important”.

“We anticipate that large corporates will continue to pursue power purchase agreements, not just to comply with the regulation of reaching 100% renewables by 2045, but to create a stable power supply and lower costs. These corporates can be very valuable. Some are high profile and their signalling of the importance of renewable energy can move markets, they often have sufficiently high credit quality that, as an offtaker, they can make the development of a renewable asset more expedient,” he explains.

With Governor Brown’s determination for the state to become carbon neutral within the next few decades, there is much work to do within the power generation sector. Today the sector accounts for 16% of California’s total greenhouse gas emissions, according to the governor’s office. However, with the number of operational CCAs now reaching double figures, momentum is well and truly building – and it needs to.

The state will see the retirement of a number of gas- and nuclear-powered plants over the next few years, placing more pressure on generation. With the lack of desire to invest in dated generation, renewable is arguably the only option.