BILL ANALYSIS AB 44 Page 1 Date of Hearing: March 23, 2009 ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE Felipe Fuentes, Chair AB 44 (Blakeslee) - As Amended: March 18, 2009 SUBJECT : Energy storage facilities. SUMMARY : Creates incentives for investor owned utilities (IOUs) and non-utility companies to build energy storage devices that store energy produced from renewable facilities. EXISTING LAW : 1)Authorizes the California Public Utilities Commission (PUC) to approve an increase of between one-half of one percent and one percent in the rate-of-return otherwise allowed an IOU for investment by the IOU in renewable generation facilities. 2)Requires IOUs to procure at least 20% of their electricity sales from renewable resources by 2010. THIS BILL : 1)Authorizes the PUC to approve an increase of between one-half of one percent and one percent in the rate-of-return otherwise allowed an IOU for investment by the IOU in energy storage devices that store energy from eligible renewable resources during off-peak periods and dispatch that energy during on-peak periods. 2)Authorizes the PUC to establish additional incentives for eligible storage facilities including but not limited to tariffs for customers, increases in the rate-of-return that exceed the one percent authorized above, and/or rebates for storage facilities. 3)Requires the PUC to develop a time-variant tariff that creates appropriate incentives for an eligible storage facility. FISCAL EFFECT : Unknown. COMMENTS : According to the author, the purpose of this bill is to create incentives and remove barriers for both utility-owned and merchant-owned energy storage facilities. The author believes these energy storage facilities will be necessary for AB 44 Page 2 California to meet its renewable energy goals since they can store energy produced by wind and solar facilities at times that electricity is not needed to be used at peak periods when electricity is in high demand. 1) Why do we need energy storage facilities : California law requires all retail sellers of electricity to meet at least 20% of the retail sales using electricity from renewable resources by 2010 - a Renewable Portfolio Standard (RPS). The California Air Resources Board (CARB) has identified an advancement of the RPS to 33% by 2020 as one of the key actions needed to be taken in order to meet the greenhouse gas (GHG) reduction goals of AB 32 (Nunez), Chapter 488, Statutes of 2006. Two bills have been introduced this legislative session to create the 33% RPS goals (AB 64 (Krekorian) and SB 14 (Simitian)). While several studies have determined that a 33% RPS is achievable, it can only be met with a heavy reliance on wind and solar energy. The problem is that both resources are intermittent. They only produce electricity when the wind is blowing or the sun is out. This intermittency could create reliability problems for the electricity grid since the grid managers cannot count on the solar and wind energy being available at the same time there is demand for electricity. One way to resolve this reliability problem is to build more electricity generation facilities that are capable of turning on and off quickly and can be available when the renewable energy facilities are not operating. These facilities are referred to as "peaker plants." They generally run on natural gas. They are also relatively expensive to operate compared to other generating facilities that operate around the clock. Another approach would be to find ways to store the electrical output of renewable facilities to use hours later. The storage devices could help take the place of peaker plants. 2) What is energy storage : Energy storage devices are devices that can take electricity and covert the electricity into some other form of energy so it can be stored and converted back to electricity at some later point. The most common form of energy storage device in use today are batteries. However, there are no commercially available batteries that could cost-effectively store the large amounts of electricity that can be produced by large scale wind farms or solar facilities. Another form of electricity storage that is already in use in California is pump AB 44 Page 3 storage, where water is pumped into a reservoir at night and then released through turbines during the daytime to produce electricity. Additionally, there is research taking place today to develop other storage devices using compressed air, flywheels, and fuel cells. This bill defines storage systems to include any device that stores energy generated from an eligible renewable resource during off-peak periods and dispatched the energy during on-peak periods. The device must also be capable of storing energy for at least two hours and must be able to respond to orders from the transmission grid managers to absorb or dispatch energy. The author envisions the development of storage devises that are owned and operated by the utilities and storage devices that are owned by private parties that could buy renewable power from renewable developers or the utility and then sell that power back to the utility at a later time. 3) Incentives to IOUs : This bill allows IOUs to earn a higher profit on investments they make in energy storage devices than they do on investments in natural gas generation facilities. The higher profit concept is based on Public Utilities Code section 454.3 which allows IOUs to earn higher profits on investments in renewable facilities. According to the PUC, no IOU has applied for higher rate-of-return under 454.3 since it was approved in 1988. Section 454.3 also contains language that provides that the IOU can only earn the higher rate-of-return if the facility results in ratepayer benefits by lowering the cost of electricity over the life of the facility and if the facility is actually used. To ensure that ratepayers receive similar benefits from storage devices, the author and the committee may wish to amend the bill to include a provision that in order to receive the higher rate-of-return the energy storage devise must be less expensive to operate than a comparable peaker plant taking into account the economic costs of the carbon and other air emission from the peaker plants and that the facility must actually be useful and used . 4) Incentives to non-utilities : The bill requires the PUC to develop a time-variant tariff that would create the appropriate incentives for eligible storage facilities. Generally time-variant pricing allows a utility to charge its customers more for electricity at peak times of the day when electricity AB 44 Page 4 is more expensive to procure, but then charge less at off-peak times when it is less expensive to procure. A time-variant tariff could benefit storage facilities if the facility was able to "buy" the electricity from the utility when it is at the lower rate and then "sell" the electricity back to the utility when it is more expensive. The bill provides that the tariff should be set to provide the appropriate incentives for the storage facility, but contains no language to ensure that the tariff also benefits ratepayers. This language gives the PUC wide latitude that could result in tariffs that the Legislature may view as a give away to the energy storage device owner without a commensurate benefit to rate payers. To ensure that this bill also protects ratepayers, the author and the committee may want to consider amending the bill to add language to provide that the time-variant tariff should be set at an appropriate level that provides incentives to invest in energy storage facilities if the PUC finds that the tariff does not result in ratepayers paying an increased cost for storage facilities beyond the economic benefits the facilities provide through load shifting and voltage support . The bill requires that an eligible storage device must store energy produced from an eligible renewable resource. However, a time-variant tariff would apply to purchase of all electricity delivered from the utility, irrespective of whether the electricity is from renewable resources. There does not appear to be an easy way to create a time-variant tariff just for renewable power. 5) Open ended incentives : The bill also allows the PUC to create additional incentives for eligible storage facilities that it sees fit. These incentives could include rebate programs, additional increases in the rate-of-return, standard-offer contracts, or revolving loan programs. Over the past few years, the PUC has created a number of similar programs for other technologies without clear legal authority and at times in contradiction to Legislative goals. In each case, the Legislature has had to pass legislation to change the programs so they are more consistent with Legislative goals. Examples of this included the PUC's Self Generation Incentive Program, the California Solar Initiative, and the California Climate Institute. Given the PUC's history of creating ratepayer-funded programs that are inconsistent with Legislative goals, the committee and the author may wish to consider the appropriateness of giving the PUC broad latitude to create new AB 44 Page 5 incentive programs as it sees fit . REGISTERED SUPPORT / OPPOSITION : Support None on file. Opposition None on file. Analysis Prepared by : Edward Randolph / U. & C. / (916) 319-2083