California Energy Outlook: Where Are We and Where Are We Going? IEPA 2019 Annual Meeting September 24, 2019 Arne Olson

Agenda Where are we today? Where are we going? Still early on the road to decarbonization Tighter on capacity west-wide as thermal plants continue to retire Rapidly changing composition of retail service and procurement functions Where are we going? We know how to decarbonize the power sector, now just need to get it done Continue to need firm capacity Need to hit the accelerator in the other sectors

Where are we today?

One third of the way to SB100! (The easy third) CEC estimates CA energy supply was 34% renewable in 2018 Two years before 2020 deadline for 33% Diverse resource mix Roughly one-third wind, one- third solar, one-third other 62% carbon-free energy (including hydro and nuclear) Coal almost a footnote in California’s energy supply today CA Energy Supply, 2018 Source: CEC * Includes imports from out-of-state resources

Impact of Solar Generation Net Load Rapid increase in solar buildout has led to significant changes in market dynamics CAISO Hourly Solar Generation by Year (March-May only) CAISO Net Load (March-May only) Source: CAISO, E3 Analysis; note that solar generation does not include rooftop solar 5

Impact of Solar Generation Thermal Generation Rapid increase in solar buildout has led to significant changes in market dynamics CAISO Hourly Solar Generation by Year (March-May only) CAISO Thermal Generation (March-May only) Source: CAISO, E3 Analysis; note that solar generation does not include rooftop solar 6

Impact of Solar Generation Hydro Generation Rapid increase in solar buildout has led to significant changes in market dynamics CAISO Hourly Solar Generation by Year (March-May only) CAISO Net Load (March-May only) Source: CAISO, E3 Analysis; note that solar generation does not include rooftop solar 7

Impact of Solar Generation Imports Rapid increase in solar buildout has led to significant changes in market dynamics CAISO Hourly Solar Generation by Year (March-May only) CAISO Imports (March-May only) Source: CAISO, E3 Analysis; note that solar generation does not include rooftop solar 8

Impact of Solar Generation Market Prices Rapid increase in solar buildout has led to significant changes in market dynamics CAISO Hourly Solar Generation by Year (March-May only) NP15 Day-Ahead Hourly Market Price (March-May only) Source: CAISO, E3 Analysis; note that solar generation does not include rooftop solar 9

Systemwide curtailment is on the rise due to excess solar power when load is low Peak of 225,000 MWh/month = ~7% of FOM solar generation in May 2019 Curtailment is increasing and spreading from spring to other seasons (fall, winter)

What about all that storage? Around 150 MW of batteries active in CAISO market today Primarily providing ancillary services: frequency regulation, spinning reserves, etc., and dispatching occasionally in RT markets No deep daily cycling and ramping trend yet, even on days with biggest duck curve Biggest sources of system flexibility are still gas, hydro, and imports Storage capacity will grow rapidly in next few years and typical operations are likely to change Typical Battery Dispatch in California Market in 2019

Despite renewable additions, growing consensus CAISO is tight on RA capacity 3-4 GW of gas retirements in 2019-2020 will leave the CAISO system significantly tighter in resource adequacy CPUC and CAISO project 2500-4500 MW of shortfalls Potential outcomes: delayed OTC retirements and/or accelerated energy storage procurement CAISO Resource Adequacy Forecast: 2020, 2021, 2022 CPUC System Resource Adequacy Forecast: 2019-2028 Source: CPUC

NW Capacity Surplus / Deficit in Recent Studies Not just a California problem: the NW is, or will soon be, in a capacity short position NW Capacity Surplus / Deficit in Recent Studies Policy-driven changes to the resource mix are resulting in the loss of significant quantities of firm capacity Northwest may need as much as 8 GW of new capacity by 2030 Variable resources and energy storage cannot easily replace this lost capability An investigation of the RA issue has begun through the Northwest Power Pool Utilities interested in developing a regional RA program Resource Adequacy Symposium October 2, 2019 Portland Airport Sheraton https://www.nwpp.org/events/28

Southwest is already banking on batteries to perform daily cycling to serve peak load NV Energy 2018 procurement: 1,000 MW of solar, 100 MW of storage NextEra: Dodge Flats 200 MW PV + 50 MW/4-hr storage NextEra: Fish Springs 100 MW PV + 25 MW/4-hr storage Cypress Creek: Battle Mountain 101 MW PV + 25 MW/4-hr storage El Paso Electric 2018 procurement: 200 MW of solar, 100 MW of storage APS 2019 procurement: 100 MW of solar, 850 MW of storage 200 MW of 3-hr storage added to existing solar facilities 150 MW of 2-hr standalone storage 100 MW PV + 100 MW/3-hr storage 400 MW of additional 3- to 4-hr storage NV Energy 2019 procurement: 1,200 MW of solar, 560 MW of storage EDF RE: Arrow Canyon 200 MW PW + 75 MW/5-hr storage 8minute Solar: Southern Bighorn 300 MW PV + 135 MW/4-hr storage Quinnbrook and Arevia: Gemini 690 MW PV + 380 MW/4-hr storage Possible upgrade in battery size to 531 MW/4-hr storage California and the Southwest are about to embark on a grand experiment in relying in Lithium-ion batteries to provide a significant quantity of reliable capacity

CCAs are procuring new resources through major renewable energy deals Many major solar, wind, and energy storage deals signed by some of the newest CCAs Clean Power Alliance 233 MW Arlington Solar San Jose Clean Energy 100 MW PV, 10 MW battery storage at Sonrisa Solar Park 20Y contract signed just months after SJCE launched service earlier this year East Bay Community Energy 100 MW PV, 30 MW battery storage at Sonrisa Solar Park 112 MW Rosamond Solar Peninsula Clean Energy 200 MW Wright Solar Park Monterey Bay Community Power / Silicon Valley Clean Energy 150 MW PV, 45 MW battery storage Slate1 Solar 128 MW PV, 40 MW battery storage Big Beau Solar 200 MW Duran Mesa / Corona Wind (NM) Over 2,500 MW in total long-term contracts signed by CCAs to date

Regional market expansion continues EIM map covering a larger and larger swathe of the West BPA has been telegraphing its intent to sign the implementation agreement this fall Enhanced Day-Ahead Market (EDAM) discussions have indicated significant benefits from earlier coordination WAPA Rocky Mt. Region joining SPP

So where are we today? Renewables development has been slowed by the CCA transition but is still happening Solar is messing with dispatch and hourly prices in all the ways we expected it to, but continued opportunities for gas generation Storage isn’t quite there yet but we are sure counting on it to come through Regional markets continuing to expand Resource Adequacy is the hot topic everywhere as coal plant retirements continue

Where are we going?

California’s clean energy ambitions: the hard work is still ahead Meeting long-term carbon goals requires a significant escalation across all sectors of the economy 15% renewables * per the CEC California Energy Demand 2017 IEPR Revised Forecast “High Plus” Scenario 6 including SB 350 25% renewables 33% renewables Begin installing electric heat pumps 30% EV sales in light-duty 50%+ RPS 74% zero-carbon electricity 100% EV sales in light-duty Doubling EE savings* + 50% heat pumps sales Nearly zero-carbon electricity 100% heat pump sales 100% of truck sales are electric, hybrid or CNG Nearly half of remaining fossil fuels = advanced biofuels

E3 Study of Resource Adequacy under Deep Decarbonization in California California has established aggressive goals for economy-wide decarbonization and zero carbon electricity generation Study sponsored by Calpine to examine the question of what resources are needed to maintain resource adequacy in a deeply decarbonized system that is heavily dependent upon renewables + electric energy storage Two alternative scenarios are considered that each meet economy-wide goals of 80% reductions in GHG emissions below 1990 levels by 2050: High Electrification High Biogas This study was funded by Calpine Corp. https://www.ethree.com/wp-content/uploads/2019/06/E3_Long_Run_Resource_Adequacy_CA_Deep-Decarbonization_Final.pdf

Methodology and Models This study was completed using three E3 models of the California electricity system California PATHWAYS model develops scenarios for meeting 2050 economy-wide decarbonization goals Electric Sector carbon budgets and electrification loads passed to RESOLVE PATHWAYS Economy- wide GHG Scenarios California-wide RESOLVE model developed least- cost resource portfolios to meet GHG targets Electricity resource portfolio passed to RECAP RESOLVE Electricity Capacity Expansion California-wide RECAP model tests the reliability/sufficiency of the resource portfolios Calculates Loss-of-Load Expectation RECAP Electricity Resource Sufficiency

PATHWAYS High Biogas Scenario PATHWAYS High Electrification Scenario Electrification results in significant load increases for both scenarios Electrification of transportation and buildings aids in decarbonization of California economy The two scenarios represent booked values for increased electric loads (30-60% relative to present) High Biogas High Electrification 2020 2050 Annual Energy (TWh) 315 417 511 Peak Load (GW) 65 78 93 PATHWAYS High Biogas Scenario PATHWAYS High Electrification Scenario +60% +30% Electrification Transportation Transportation Buildings Buildings Other Other Industry Industry Existing loads Buildings Buildings

High Electrification Scenario Total Installed Capacity (GW) California will rely mostly on solar and storage to meet decarbonization goals Long-run portfolio dominated by solar + storage Wind and geothermal valuable but supply-limited 100%+ Clean Energy Standard achieved by 2050 in both scenarios High Biogas Scenario High Electrification Scenario Wind and geothermal are procured up to maximum resource limits Solar and storage are procured to meet remaining carbon targets Total Installed Capacity (GW)

2050 Forced Gas Retirement Cases Relative to High Electrification Scenario 25 GW Gas 10 GW Gas 0 GW Gas (High Elec Scenario) 15-hr duration 5x New Capacity Build (GW) 17-hr duration 6-hr duration 3.5x 2.3x 1.1x 50% annual curtailment +$65b +$28b Significant renewable overbuild and storage is required to retire gas while maintaining reliability $6,600/ton cost of CO2 reductions from 9.8 MMT high elec case $22,000/ton cost of CO2 reductions from 9.8 MMT high elec case

Energy Balance Changes by Season Sunny Spring Week Hot Summer Week During spring months, gas generation is unnecessary due to excess solar production and low loads During summer months, high loads require small amounts of gas generation during the night when no solar is available Supply (High Electrification Scenario) Load Cloudy Winter “Worst” Week Winter months become the main reliability constraint due to energy deficits During cloudy winter weeks, gas is required for reliability Reliability Constraint

Storage capacity contribution Energy storage is not a perfect substitute for firm thermal generation capacity Limited discharge duration becomes significant at higher penetrations Rule of thumb: 15-20% of peak load can be met with diurnal energy storage (4-8 hours) Multi-day storage would be required to achieve equivalent value to gas capacity Storage capacity contribution

New technologies are required to achieve a fully zero-carbon grid Firm, carbon-free resources would be needed to get to a zero-carbon grid These resources will be crucial for reliability but will have low utilization Candidates include: New nuclear Fossil generation with carbon capture and sequestration Renewable natural gas (RNG) Renewables with very long-duration storage E3 is currently exploring the role of these technologies in a study for Environmental Defense Fund

Long-Term Resource Additions with and without Offshore Wind Resource diversity (such as offshore wind) valuable for nighttime energy production Study sponsored by Castle Wind Long-Term Resource Additions with and without Offshore Wind There is significant value to resource diversity in the long run in California even under low solar & battery prices RESOLVE modeling shows that offshore wind could greatly reduce reliance on solar and storage in 2030 and beyond

Land-use may be the biggest constraint on the high-solar future More stringent land-use protections can increase costs significantly Extending market footprint to entire West makes it easier to find low-conflict lands Power of Place Advancing a Clean Energy Future

RPS policies create market distortions that devalue other zero-carbon resources Daily Energy Price Profile under High RPS – California Market prices remain at traditional levels when fossil is on the margin Prices are negative during oversupply events due to lost REC value Daily Energy Price Profile under low GHG Cap – California High market price on carbon drives high prices when fossil is on the margin Prices drop to zero but not below during oversupply events Persistent negative pricing presents a significant policy risk due to transfers among market participants May also dampen investment in clean energy resources due to perceived market risk

Where do we need to go? Make sure our institutions are up to the challenge of rapid electricity decarbonization Move toward policies focused on carbon instead of clean electricity Hit the accelerator in all the other sectors

Thank you! Energy and Environmental Economics, Inc. (E3) 44 Montgomery Street, Suite 1500 San Francisco, California 94104 Tel 415-391-5100 Web http://www.ethree.com Arne Olson, Senior Partner (arne@ethree.com)