Coast Economic Consulting By L. Jan Reid CEM vs. the CPUC: Why are RPS Contracts Labeled Top Secret?

Background  M.S. in Economics and Finance from University of California (1998)  CPUC Office of Ratepayer Advocates (ORA) staff member  Economic Consultant  Witness and advisor in cases related to the procurement of electricity and related fuels, demand response, the cost-of-capital, capital adjustment mechanisms, and emergency power-restoration standards  Workshop presentations include seminars on risk, effects of deregulation; performance incentives; and utility performance standards  Developed models to evaluate procurement contracts, utility cost-of-capital, post-emergency electricity restoration time, elasticity of demand, and market power effects COAST ECONOMIC CONSULTING2

Topics  The “California Energy Markets” request for Renewables Portfolio Standard (RPS) Contract Data.  RPS Costs  Why RPS Prices are not as high as they seem COAST ECONOMIC CONSULTING3

In Perspective California requires each load-serving entity (such as PG&E) to serve 33% of its load with renewable energy by (Executive Order S-2109) The California Public Utilities (CPUC) mandates that utilities progress toward their RPS goals via an annual procurement target (APT). As of the end of 2010, PG&E was at 17.7% renewables, SCE was at 19.4%, and SDG&E at 11.9%. Thus, PG&E’s portfolio would have to be 18.9% renewables in 2011, 20.1% in 2012, 21.3% in 2013, etc. 25% of the APT can be met by purchasing renewable energy credits, rather than actual electricity. COAST ECONOMIC CONSULTING4

In Perspective (continued) The CPUC is required by state law to establish a Market Price Referent for RPS contracts. The MPR is set by on-line date and by contract length. Regulated utilities typically hold one RPS solicitation per year in which they receive bids for RPS contracts. All utility procurement costs are paid for by consumers. The utilities are required to procure a planning reserve margin (PRM) of 16-18%. The utilities’ resource adequacy (RA) requirement is based on the PRM. The utilities must procure RA for both system and local requirements. Thus, a contract which provides either system or local RA decreases the utilities’ requirements. COAST ECONOMIC CONSULTING5

The Public Records Request COAST ECONOMIC CONSULTING6 November 2010: California Energy Markets filed a Public Records Request with the CPUC. The CEM asked the CPUC to disclose the price of already- approved Renewables Portfolio Standard (RPS) contracts. The CPUC claimed confidentiality and denied the request. The CPUC considers RPS contract prices to be market-sensitive. According to CEM, “El Dorado Energy, a 10 MW thin-film PV project in Boulder City, Nev., sells power to Pacific Gas & Electric at rates ranging from a low of $158.46/MWh to a high of $279.39/MWh, with an average of $ ” (CEM 1115 [11])

The Arguments Against Disclosure COAST ECONOMIC CONSULTING7 Bidders in renewable-energy solicitations would bid just below the disclosed price, which would harm competition. Market troubles similar to those encountered during the energy crisis might occur. Information cannot be released because the CPUC considers it privileged. CEM believes that “Of course, the real reason the CPUC may want to keep prices clandestine is that it fears public backlash against the RPS program for its high costs.” (CEM 1115 [11])

1.Utilities file the anuual cost of all of their contracts with the Federal Energy Regulatory Commission (FERC). The price information is publicly available. 2.Consumer advocates would love it if RPS developers bid just below the average price paid in the last solicitation. Since 2005, the MPR for 20-year contracts has risen by 66.91% while spot prices for electricity at NP-15 have fallen by 44.09%. 3.The CPUC already publishes a Market Price Referent for RPS contracts. (See Slide 10) 4.Every exchange provides bidders with the current bid and ask price for each product (including electricity products). COAST ECONOMIC CONSULTING8 Four Inconvenient Facts

COAST ECONOMIC CONSULTING9 Reasons for High RPS Prices 1.Construction prices have risen. For example, steel prices have risen by 76% over the last four years. 2.Prices for key parts (such as turbines) have risen dramatically. After all, when demand increases and supply remains the same, prices rise. 3.Financing costs have risen significantly. 4.Most importantly, the government-created demand for renewables rises every year. As utilities get closer to their RPS goal, prices rise. 5.Prices rise because demand is increasing and supply is relatively fixed.

The MPR ( ) COAST ECONOMIC CONSULTING10

Financial Benefits of Renewables COAST ECONOMIC CONSULTING11 Decreases greenhouse gas costs. In 2008, the Synapse medium-term forecast estimated that CO 2 costs would increase from $17.30/ton in 2014 to $53.40/ton in Typically 20-year fixed-price contracts, thus avoiding natural gas price volatility Decreases RA costs Provides a hedge against inflation and natural gas price volatility Avoids fines imposed on older, dirtier plants. During the energy crisis, fines resulted in energy prices as high as $1,700 MWh on some plants, paid for by consumers.

The Northstar Project (AL 3759-E) COAST ECONOMIC CONSULTING12 Duration20 Years LocationMendota, Calfornia Generation TypeSolar On-line Date2013 Project ViabilityHigh MPR$108.98/MWh Environmental Value$31.00/MWh PriceAbove MPR Benefit/Cost Ratio1.03

Why does the contract have a high value? COAST ECONOMIC CONSULTING13 1.The contract doesn’t begin for three years, thus hedging inflation risk. 2.The project is highly viable. 3.The project will deliver power in a significant number of peak and super peak hours, when the market price of electricity is highest. 4.The project is located in California and thus will provide economic benefits to the residents of California.

Resources COAST ECONOMIC CONSULTING14  California Energy Markets  California Public Utilities Commission  Federal Energy Regulatory Commission,  Synapse