BILL ANALYSIS SB 722 Page 1 Date of Hearing: June 24, 2010 ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE Steven Bradford, Chair SB 722 (Simitian) - As Amended: June 22, 2010 SENATE VOTE : (vote not relevant) SUBJECT : Utilities: renewable energy resources. SUMMARY : Increases California's renewables portfolio standard (RPS) to require all retail sellers of electricity and all publicly owned utilities (POUs) to procure at least 33% of electricity delivered to their retail customers from renewable resources by 2020. Specifically, this bill: 1)Requires the Department of Fish and Game to establish an internal division with the primary purpose of performing comprehensive planning and environmental compliance services with priority given to projects involving the building of eligible renewable energy resources and requires the internal division to ensure the timely completion of plans pursuant to the Natural Community Conservation Planning Act. 2)States legislative intent to increase the amount of electricity generated from eligible renewable energy resources per year, to that it equals at least 33 percent of total retail sales of electricity in California by December 31, 2020. 3)States a program to increase the quantity of California's electricity generated by renewable electrical generation facilities located in this state. 4)Permits any existing landfill gas facility approved by a POU prior to September 16, 2009, as a renewable electric generation facility to continue to qualify as an eligible renewable electric generation facility. 5)Permits a facility that is outside the United States, if it is developed and operated in a manner that is as protective of the environment as a similar facility located in the state, to qualify as an eligible renewable electric generation facility. 6)Lessens the determination of need for transmission facilities and requires the California Public Utilities Commission (PUC) to make findings that new transmission facilities are SB 722 Page 2 reasonably necessary or appropriate to facilitate achievement of the RPS, requires the PUC to provide assurance that costs that are subject to Federal Energy Regulatory Commission (FERC) jurisdiction are eligible for recovery in retail rates, and requires the PUC to approve an advice letter seeking assurance of cost recovery if the transmission facilities meet specified criteria, or if not less than 50% of the planned use for the capacity of the new transmission line is for interconnecting eligible renewable energy resources. 7)Makes a legislative finding that delivering genuine renewable electricity to California end-use customers is necessary to improve California's air quality and public health, and California end-use customers may be paying higher rates to achieve the RPS procurement requirements, and that the delivered electricity may be generated anywhere in the interconnected grid that includes many states, and areas of both Canada and Mexico. 8)Defines a balancing authority and California balancing authority that includes the California Independent System Operator (CAISO), and a local POU operating a transmission grid that is not under the control of the CAISO. 9)Requires the PUC to direct each electrical corporation to annually prepare a five-year renewable energy procurement plan as part of a general procurement plan process, and an annual compliance report for prior-year procurement. 10)Permits an investor-owned utility (IOU) to apply to the PUC for approval to construct, own, and operate an eligible renewable energy resource. 11)Requires retail sellers of electricity to procure at least 20% of electricity delivered to retail customers from renewable sources by 2013, 25% by 2016, and 33% by 2020. 12)Permits the PUC to delay compliance with a RPS requirement if it makes specific findings that there is insufficient transmission to meet the RPS, or there were unforeseen delays in permitting or interconnecting projects. The findings must consider whether the retail seller made all reasonable efforts to construct new transmission and made prudent decisions in procuring resources. The retail seller must also show that it has made all reasonable efforts to procure distributed generation resources and to procure renewable energy credits (RECs). SB 722 Page 3 13)Permits the PUC to establish a limitation for each IOU on its expenditures to procure eligible renewable energy resources used to comply with the RPS, and prescribes the elements on which the PUC shall rely. 14)Requires the PUC to authorize the use of renewable energy credits (RECs) to satisfy the RPS requirements and retires the REC after 18 months from the initial date of generation of the associated electricity or when the retail seller irrevocably retires the REC. 15)Permits various electricity products from eligible renewable energy resources located within the Western Electricity Coordinating Council (WECC) to count toward specific RPS targets and states a general principle that the resources provide benefits to this state, consistent with least-cost best-fit and project viability principles. The products and amounts include: a. Not less than 75% from either a new product with contract executed after June 1, 2010, with a first point of interconnection with a California balancing authority or is scheduled from the eligible renewable energy resource on an hourly or within-the-hour basis into a California balancing authority without substituting electricity from another source; or from a product that has an agreement with a California balancing authority that allows the balancing authority to dynamically transfer the electricity product; and, b. Not more than 10% of the products associated with contracts executed after June 1, 2010, that do not qualify under the 75% category, and include unbundled RECs. c. All other renewable energy resources contracts executed on or after June 1, 2010, not subject to the other limitation that firm and shape eligible renewable energy resource products providing incremental electricity, procured through a contract of not less than 10 years using substitute electricity to balance schedules meeting specific requirements. 16)Allows a contract for an eligible renewable energy resource executed prior to June 1, 2010, to count in full toward the procurement requirements if the resource was eligible as of SB 722 Page 4 that date, and if an IOU contract, the contract was approved by the PUC and the approval occurs after June 1, 2010. 17)Requires the PUC, in consultation with the California Energy Commission (CEC) to report to the Legislature by January 1 of every even-numbered year on the progress and status of procurement activities by each retail seller, the status of permitting and siting of renewable generation and transmission facilities necessary to deliver the renewable electricity, the projected ability of each IOU to meet the RPS, and any barriers to and policy recommendations for achieving the RPS. 18)Requires the CAISO and the balancing authority of each area in California to work cooperatively to integrate and interconnect eligible renewable energy resources to the transmission grid, and requires the CAISO to seek any approvals from the Federal Energy Regulatory Commission (FERC) that are necessary to accomplish the goals and requirements of the RPS. 19)Requires POUs to adopt and implement a RPS procurement plan and allows the use of RECs to achieve the following targets: a. Until December 31, 2012, the same percentage as actually achieved by the utility in 2009; b. 20% by December 31, 2013; c. 25% by December 31, 2016; and, d. 33% by December 31, 2020. 20)Requires each POU to report on an annual basis to its customers and to the CEC on specified information regarding price, resource mix, and status in implementing the RPS. 21)On or before July 1, 2011, requires the CEC in consultation with California Air Resource Board (ARB) to adopt regulations for the enforcement of the RPS on POUs. Provides that the ARB shall have the authority to impose penalties on POUs for failure to comply with the RPS. 22)Requires the PUC to annually prepare and submit to the policy and fiscal committees of the Legislature, a written report summarizing all IOU revenue requirement increases associated with meeting the RPS, all costs for infrastructure, any savings experience or costs avoided, all costs for incentives SB 722 Page 5 for distributed and renewable generation, all procurement costs of generation, and an change in the electrical load serviced by an IOU since the preceding report. 23)Requires the PUC to issue a decision on an application for a certificate within 18 months of the date of filing of the completed application when specified conditions are met, including that the PUC finds it is necessary to provide transmission to load centers for electricity generated in a high priority renewable energy zone or is reasonably necessary to facilitate achievement of the RPS. 24)Appropriates $322,000 to the PUC for additional staffing to identify, review and approve transmission lines reasonably necessary or appropriate to facilitate achievement of the RPS. EXISTING LAW: 1)Requires IOUs and certain other retail sellers to achieve a 20% RPS by 2010 and establishes a process and standards for renewable procurement. 2)Provides that POUs are not subject to the same procurement process and standards as IOUs, but are required to implement and enforce their own RPS programs. 3)Defines eligible renewable technologies to include biomass, solar thermal, photovoltaic, wind, geothermal, renewable fuel cells, small hydroelectric (30 MW or less), digester gas, municipal solid waste conversion, landfill gas, ocean wave, ocean thermal, and tidal current. 4)Provides that eligible renewable resources that are located outside of California may count toward the California RPS if the generator commences operation after January 1, 2005, and the facility is directly connected to California's transmission grid or the associated electricity is delivered to California. 5)Creates a cap on above-market costs of renewable electricity each IOU is required to spend under the RPS. If the cost cap is reached, IOUs are not required to sign any additional renewable contract that exceeds the market cost of electricity. 6)Requires PUC to develop flexible rules for compliance for the RPS that allows a retail seller that cannot not meet its SB 722 Page 6 annual RPS targets to delay compliance for up to three years and avoid penalties under certain conditions. 7)Requires the CEC to certify electric generation facilities for the construction and operation of thermal powerplants of 50 MW and larger. 8)Precludes an electrical corporation from constructing a line, plant, or system without having first obtained a permit from PUC that the present or future public convenience and necessity require or will require such construction (a certificate of public convenience and necessity or CPCN). FISCAL EFFECT : Unknown. COMMENTS : Over the past few years, there have been a few attempts to increase the RPS. The author and members of the Assembly have convened numerous stakeholder meetings to try to reconcile divergent concerns over some significant barriers. Some of the most unsurpassable impediments have included cost containment, transmission and siting constraints, the location of eligible generation and whether it's "delivered," and how much flexibility the utilities will be granted given anticipated or unanticipated impediments. The utilities' ability to comply with an increased RPS differs based on geographic attributes of their service territories. While San Diego Gas and Electric is relatively transmission-constricted, any increase in its RPS would need to be both in-basin and reliant on significant transmission investment. Southern California Edison service territory is replete with sunshine and windy passes, however, to access the huge quantity of renewable energy an increased RPS demands, also requires investment in transmission infrastructure. PG&E in Northern California, as a gift of geography, just happens to be endowed with a clean and relatively dispatchable watershed in its backyard (RPS eligibility only includes hydroelectric facilities under 30 MW). Nevertheless, even PG&E needs transmission to increase its RPS to 33%. To capture all of this requisite renewable energy, the CAISO, responsible for balancing the high-voltage transmission grid, estimates a statewide need for 6 new 500 kV transmission lines to reach 33% RPS. Just two have progressed beyond the first phase of planning and the determination of need. Background : In 2002, the Legislature approved SB 1078 (Sher), Chapter 516, Statutes of 2002, which created RPS. Under RPS, SB 722 Page 7 IOUs and competitive energy service providers (ESPs) of electricity were required to increase their renewable procurement each year by at least 1% of total sales, so that 20% of their sales are from renewable energy sources by December 31, 2017. This goal was accelerated to 20% renewable power by 2010 by SB 107 (Simitian), Chapter 464, Statutes of 2006. Last year, SB 14 (Simitian) and AB 64 (Krekorian) proposed to increase the RPS to 33% by 2020. Each bill took a different approach, but were similar in overarching goals. AB 64 was dropped, and the Governor vetoed SB 14 and stated that, although he supports the intent of increasing the RPS to 33% by 2020, the provisions in SB 14 would make achieving that goal difficult and too costly. The Governor's veto message added that an RPS should provide a streamlined regulatory processes and compliance flexibility that facilitates the timely construction of in-state resources. Instead of signing SB 14, he preferred to implement an executive order with the same RPS goals and directed the ARB to adopt RPS regulations using its authority for greenhouse gas reduction efforts provided by AB 32 (Nunez), Chapter 488, Statutes of 2006. The ARB was expected to complete the regulations implementing the 33% RPS by the fall of 2010. The Governor added that he remains ready to sign legislation that codifies a workable 33% RPS mandate. A balancing act : The CAISO is a not-for-profit public benefit corporation formed in 1997 during restructuring of the electricity industry. The CAISO is responsible for the operation of 25,526 circuit-miles of long-distance, high voltage power lines that deliver electricity throughout most of California and between adjacent balancing authorities, neighboring states, Canada and northern Mexico. The CAISO's principle objective is to ensure the reliability of the California grid, which can become challenging when large amounts of large-scale solar and wind are expected to become more prominent in California's resources mix. The CAISO must balance the electricity inputs and electricity demand to maintain voltage stability of the grid. Small hydroelectric, biomass and geothermal generation are more predictable resources, and the integration of these resources into both the markets and operations do not present significant problems. Concentrated solar is an intermittent resource, but the CAISO is less concerned with integrating solar than with integrating wind. Wind generation is extremely variable and often produces its highest energy output when the demand for power is at a low point. SB 722 Page 8 This bill requires external resources to schedule their output to a California balancing authority in the hour or within-the-hour that they are generating, which creates a must-take requirement at the interchange. In some intervals, these deliveries could suppress market clearing prices in the CAISO's market and even drive prices negative. If that were to occur, ratepayers will face contract payments for actual energy as well as additional costs to sell this energy (decrease, or a dec) to balance the voltage. In some instances, it is also possible that the CAISO may need to curtail interchange schedules, which may create additional concerns under RPS contracts and for purposes of RPS counting. How much will 33% cost : In a report providing preliminary results on the feasibility and costs of achieving a 33% RPS by 2020, the PUC concluded that such a goal "is highly ambitious, given the magnitude of the infrastructure build-out required." Under the PUC's analysis, the incremental cost of moving from the current to a 33% RPS would result in a 7.1% increase in utility costs. This increase included the costs associated with more expensive generation resources, new transmission, and other resources that will be needed to provide back up generation when renewable electricity is not available. The estimate assumes the utilities will continue the same balance of renewable technologies, which includes a large reliance on wind and solar energy, and that the direct costs of building new renewable facilities remains unchanged over time, and thus does not account for potential technology-related decreases in costs over time. The PUC's report included the cost of additional transmission to access the remote renewable resources. The CAISO, in its 2008 Report on Preliminary Renewable Transmission Plans, identifies six conceptual transmission projects that, if built and brought on-line by 2020, can help the state meet the 33% renewable standard in 2020 and for several years beyond. These potential transmission projects, intended to connect and deliver renewable resources to the grid, are estimated to cost a total of approximately $6.5 billion (+/- 50% accuracy) in 2008 dollars. SB 14 provided that IOUs would not be required to procure renewable resources that are above the market price of all electricity (market-price referent, or MPR) if the total above market cost of all renewable procurement the IOU executed 6% of the IOUs total revenue requirement for the ten-year period leading to 2020. This cost "cap" was meaningless and the SB 722 Page 9 contracts exceeded the MPR early in the program. SB 722 would permit the PUC to establish a limitation for each IOU on the procurement expenditures and prescribes the elements on which the PUC must rely when establishing the limitations. The bill requires the PUC to ensure the limitation is set at a level that prevents disproportionate rate impacts, however, it does not define or provide a quantitative definition of "disproportionate." The bill is only permissive. In order to ensure cost-containment is mandatory, this committee may wish to, by not later than January 1, 2016, require the PUC to establish cost limitations, and require the PUC to prepare a report assessing whether each electrical corporation can achieve a 33% RPS by 2020 within the adopted cost limitations. If the PUC determines that it is necessary to change the limitation, it may propose a revised cap. Absent further legislative action, the proposed modifications may take effect no earlier than January 1, 2017. If the cost limitation is insufficient, the IOU may refrain from entering into new contracts or to construct facilities beyond the quantity that can be procured within the limitation unless eligible renewable energy resources can be procured without increasing ratepayer costs relative to the procurement of conventional energy resources, and the cost of mitigating greenhouse gas emissions associated with such generation. Some of the parties have suggested additional language that requires the PUC to monitor the status of the cost limitation for each IOU and prescribes action the PUC must take within 60 days if it determines that an IOU may exceed its cost limitation. The additional language also requires the PUC to investigate and identify the reasons why the IOU may exceed its annual cost limitation, and notify the appropriate policy and fiscal committees of the Legislature that the IOU may exceed its cost limitation and the reasons. This committee may wish to adopt the additional language that requires the PUC to monitor and investigate each utility with regard to the status of reaching the cost limitations, and notify the Legislature. In addition, this bill states that California end-use customers may be paying higher rates to achieve the procurement requirements of this article. In order to ensure the PUC allows only just and reasonable rates, this committee may wish to strike that provision, and instead replace it with, "the commission shall ensure rates are just and reasonable, and are not significantly affected to achieve the procurement requirements of this article." SB 722 Page 10 The loading order : In previous RPS attempts, the term "delivery" was highly debated. The definition in SB 14 required simultaneous scheduling. A resource could "deliver" to California if it was either directly interconnected to a California control area or was scheduled into California within the same hour it was produced and from the same location from which it was produced. This requirement would have made it difficult to apply electricity from an out-of-state solar or wind facility toward a utilities' RPS, since many of these resources cannot be scheduled into California at the same time it actually generated. As a result, the utility could contract with the out-of-state renewable generator but never receive the actual renewable electrons. The actual generation would need to come from another, usually non-renewable facility, to compensate for the undelivered renewable electricity to "match" the output. This bill allows various "electricity products" from eligible renewable energy resources located within the WECC to count toward specific RPS targets. The bill states a general principle that the resources provide benefits to this state, consistent with least-cost best-fit and project viability principles. Not less than 75% of new renewable energy resources products from June 1, 2010, going forward, must meet the strongest reliability criteria. This category allows eligibility to products that have a first point of interconnection with a California balancing authority, or are scheduled from a renewable facility on an hourly or within-hourly basis without substituting energy from another source. SB 722 also allows eligibility for a renewable energy product that allows a balancing authority to "dynamically transfer" the renewable energy product. This is an attempt to mitigate the problems encountered in SB 14, where California paid to increase its renewable portfolio, but actually received non-renewable generation. In addition, it is intended to grandfather in the existing contracts that utilities have already signed. This bill attempts to "grandfather in" qualifying RPS contracts that were eligible under the RPS in effect or approved by the PUC as of June 1, 2010. Some parties have voiced concern that this language does not "grandfather in" existing contracts where minor or technical the terms and conditions may change, or where it might be most feasible for the utility to extend an existing contract. It is understood that the author will work with the SB 722 Page 11 affected utilities to resolve this issue while keeping within the spirit of the RPS. What's a REC : A REC represents the renewable attributes of renewable generation. A REC can remain bundled with the associated energy. In that case, the utility buys the renewable electricity and uses the RECs to meet its RPS obligation and uses the associated electricity to meet its own load. RECs can also be traded as a separate commodity from the underlying electricity (tradable RECs or tRECs). In this case, one retail seller purchases the tREC and applies it toward its RPS obligation and another retail seller purchases the associated electricity to meet its own load. The second retail seller cannot count that electricity toward its own RPS obligations. This bill limits the amount of RECs and renewable energy products that do not qualify under the interconnected requirement to not more than 10% of the renewable energy products associated with contracts executed after June 1, 2010. Some retail sellers and renewable generators have advocated for broader use of RECs. They believe that RPS should not limit the use of RECs or put restrictions on the geographic location or deliverability of the associated renewable resource. They believe this broad REC market would give retail sellers more procurement options and could reduce the cost of complying with RPS. A number of environmental groups, the Coalition of Utilities Employees, and California Wind Energy Association have all advocated for a very limited allowance for out-of-state RECs. They fear that a wide-open REC market will lead to "paper compliance with RPS" and will not result in the construction of any renewable generation within California. Enforcement and off-ramps : SB 722 permits the PUC to allow a retail seller to delay compliance with a RPS procurement requirement if it finds that the retail seller has demonstrated that specific conditions have been encountered that are beyond the control of the retail seller. Some allowable delays include inadequate transmission capacity, unanticipated permitting or interconnection delays, insufficient supply of renewable electricity, or unanticipated curtailment of renewable resources by the balancing authority or transmission owner. If a retail seller fails to procure sufficient renewable resources to comply with the RPS and the IOU has failed to obtain an order from the PUC authorizing a compliance delay, SB 722 requires the PUC to SB 722 Page 12 exercise its authority to punish the utility in the same manner and to the same extent as contempt is punished by courts of record. Some renewable developers and environmental groups are concerned that there are too many "off-ramps." They believe that the rules should be stricter and the punishment for noncompliance may not be significant enough of a deterrent to compel the utilities to comply. The utilities, on the other hand, believe that there should be flexibility because 2020 is 10 years into the future, and it is impossible to forecast all factors that might affect their ability to procure remote and intermittent renewable resources with any accuracy. Unanticipated consequences are bound to emerge. Publicly Owned Utilities : Current law does not require POUs to meet the same RPS that other electricity providers are required to meet. Rather, current law directs each POU to put in place and enforce its own RPS and allows each POU to define the electricity sources that it counts as renewable. No state agency enforces POU compliance or places penalties on a publicly owned utility that fails to meet the renewable energy goals it has set for itself. SB 722 requires most POUs to meet the 33% RPS by 2020 requirement. While the bill allows the PUC to adopt rules for REC purchases for retail sellers, POUs should be able to comply with the statutory restrictions on REC purchases without PUC involvement. Most of POUs do not object to creating a specific POU RPS mandate. However, some are concerned that their existing contracts would be precluded from future RPS compliance if they are amended or changed in any way. Where are the jobs : The renewable energy developers tout job-creation as one of the impetuses for increasing renewable energy procurement to 33% by 2020. Utilities have job training programs and most utility jobs are relatively good-paying secure jobs. PG&E has a Power Pathways program that offers programs aimed at producing the skilled workers needed by PG&E and the energy and utility industry. SCE provided $150 million to 10 community colleges to create customized training programs for utility workers. The jobs required to site and build the renewable generators may likely be short-term construction jobs. Most large-scale wind SB 722 Page 13 and solar facilities require very few ongoing maintenance technicians to keep them running. The solar panel manufacturers state that most of the job creation would be generated in the manufacturing sector, the industries that actually fabricate the solar panels or the wind turbines. In order to determine whether jobs are truly being created, and whether these jobs include women, minorities, and disabled veterans, this committee may wish to require the IOUs in their annual reports, to report on the efforts they are taking in recruiting and training employees to ensure an adequately trained and available workforce, including but not limited to, the quantity of new-hires associated with implementing the RPS, the diversity of the trainees and new-hires associated with RPS, and to the extent the information is provided, the same information for the renewable energy generation contracts. In addition, in its process to develop criteria for the rank ordering and selection of eligible renewable resources, require the PUC to consider the workforce recruitment, training, and retention efforts including the diversity of the employment growth associated with the construction and operation of the eligible renewable energy project. REGISTERED SUPPORT / OPPOSITION : Support California Biomass Energy Alliance (CBEA) (if amended) California Coalition of Utility Employees (CCUE) California Labor Federation California State Association of Electrical Workers California State Pipe Trades Council Large-Scale Solar Association (LSA) The Solar Alliance Union of Concerned Scientist (UCS) (if amended) Western States Counsel of Sheet Metal Workers Opposition California Manufacturers & Technology Association (CMTA) Analysis Prepared by : Gina Adams / U. & C. / (916) 319-2083