Ensuring resource adequacy for community choice aggregators in California

Community Choice Aggregation provides multiple advantages

Community choice aggregation (CCA) allows communities to collectively procure energy on behalf of their customers. Community choice aggregators (CCAs) not only procure energy directly from the wholesale market but also manage the energy needs of retail customers. However, the wires business-i.e., transmission and distribution (T&D)- as well as metering, billing, and customer interface remain with utilities under the CCA model.

Thus, CCAs are a practical intermediate form between no retail choice-the historical norm in California-and the theoretical ideal of full retail competition. This level of aggregation enables CCAs to participate in wholesale markets while the customer still gets a retail choice between the CCA and the existing utility in the area. Beyond California, CCAs are becoming popular in many other states in the United States, including Massachusetts, Ohio, Illinois, New Jersey, New York, and Rhode Island.

While CCAs are an innovation on the energy procurement side with a primary focus on cost reduction, they also allow for aggressive decarbonization of the participating communities across key segments that need to be focused on as part of respective climate goals. These segments include electricity, transportation, and buildings. The basic idea is to first decarbonize electricity completely and then electrify the rest. Many CCAs, such as Silicon Valley Clean Energy, are already very active in these segments.

However, CCAs face multiple barriers, including procurement of RA capacity

However, CCAs come with their own set of issues for policymakers, including: maintaining grid and supply reliability in the presence of increased the penetration of variable and intermittent renewables; ensuring that the wires (T&D) businesses stay profitable and that customers staying with utilities are not unfairly penalized; ensuring that regulatory transaction costs stay under control; and more. While all of these need to be resolved in due course, we focus here on a specific issue- that of maintaining resource adequacy (RA) related to maintaining grid and supply reliability.

Resource adequacy is a key issue facing CCAs. Under its RA program, the California Public Utilities Commission (CPUC) requires load-serving entities-both independently owned utilities and electric service providers-to demonstrate in both monthly and annual filings that they have purchased power generation capacity commitments of no less than 115% of their peak loads. These purchase requirements are intended to secure sufficient generation commitments from actual, physical resources to ensure system reliability. Since capacity commitments require flexible and responsive generation, these are typically provided by natural gas power plants as well as storage projects. While CCAs were initially exempt from procuring RA capacity, as their share of customer demand has grown they have also been brought under the purview of the RA program.

As the CCAs grow-in the presence of the tight RA supply conditions in California -they are finding it increasingly hard to procure RA at reasonable costs. These tightening supply conditions are due to a variety of reasons, including upcoming retirement of thermal plants subject to the State Water Resources Control Board’s once-through-cooling requirements as well as the decline in the resource adequacy value of solar. Thus, CCAs are increasingly forced to make difficult choices: either accept unreasonable (i.e. costly) terms for the small amount of system and flexible capacity that is available for purchase or risk the penalties of non-compliance. In this context, CCAs have even petitioned the CPUC for waivers on RA compliance.

A well-functioning capacity market is an attractive solution

One of the issues with obtaining ample RA capacity is that the RA procurement in California is primarily via bilateral contracts. That is, due to various reasons-including California’s turbulent history with competitive power markets -while California uses energy markets run by California Independent System Operator (CAISO), the state still requires load serving entities (LSEs) to procure capacity in a bilateral fashion. This is despite rigorous debate on the adoption of capacity markets during the establishment of the RA regime, including early analysis from CPUC staff (which supported establishment of capacity markets) as well as industry alliances and academics. By contrast, other jurisdictions, such as the Pennsylvania-New Jersey-Maryland Interconnection (PJM) and the New England Independent System Operator (NEISO), use well-functioning capacity markets for procuring capacity (i.e., RA).

A potential issue in this context is the management of incentives and the exercise of market power. Given that the Investor Owned Utilities (IOUs) hold most of the RA capacity under bilateral contracts, it has been expected that some of these RA contracts would become available to CCAs, particularly as some of the IOU demand shifts to CCAs. However, it appears that the IOUs are not releasing RA capacity to CCAs as expected.

While there may be many reasons for this, the incentives of IOU cannot be ruled out. Namely, IOUs and CCAs are competitors in a way (for the same set of customers). It may be in the best interests of IOUs to not release RA capacity and instead let CCAs become unprofitable and eventually even fail due to rising RA procurement costs. For example, while 46% of PG&E’s load has moved to CCAs, PG&E has stated that it does not intend to sell RA capacity for 2020 and beyond until September. In this context, while only CPUC can determine the exercise of market power, CAISO’s Department of Market Monitoring (DMM) has acknowledged that RA capacity procurement appears to be structurally uncompetitive in most local areas.

While CCAs are lobbying CPUC for adoption of a near-term RA sales framework for excess IOU RA capacity, including for the setting up of a new central RA procurement agency on behalf of CCAs, the bottom line is that California has a bilateral RA market that lacks both transparency and a clearing function to efficiently match sellers and buyers and to ensure least cost procurement of RA capacity. This provides an opportunity to bring back the discussion of capacity markets to the table. A capacity market, similar to PJM and NEISO, would provide not only transparency but also the clearing function, and would allow CCAs to procure RA capacity from any source-whether existing or new- willing to sell into the market.

This capacity market, in its full form, may be hard to establish in California, given its turbulent history with capacity markets. In particular, as recently as 2018, FERC rejected some generators’ petition for capacity markets in California given CAISO opposition. However, given that California is looking for solutions to the RA capacity issues for CCAs, perhaps it would allow experimentation with a platform that allows a “light” capacity market to function for the CCAs. In fact, there is historical precedent in California for using such capacity markets for specific issues, such as backstop capacity.

We believe that the opening up of a light capacity market, which could be based on voluntary participation (such as in the Midwest), would allow CCAs to procure RA capacity in the least costly manner. Given the transparency, many new flexible resources-including storage and demand response-would be able to bid into this market. This market may also couple with some of the recent innovation in the California electricity sector, such as the Demand Response Auction Mechanism (DRAM). Given the competition for the new RA capacity coming to this market-and reduction in potential market power-even IOUs would be incentivized to release their excess RA capacity into this market to generator extra revenues.

Originally published at https://energy.stanford.edu.