California's Tighter Green-Energy Plan Advances

Boards Seek Big Rise In Renewable Power Over Next 12 Years
By REBECCA SMITHSeptember 13, 2008;

California's two energy agencies Friday endorsed a plan that would require utilities to obtain a third of their electricity from renewable sources by 2020.
The California Energy Commission, a policy-and-planning agency, and the California Public Utilities Commission, which regulates utilities, issued the joint recommendation that, if implemented, would be the most ambitious renewable-energy plan in the U.S.

But the target raises questions about how much the goal could cost consumers. The plan's price tag is "the question of the hour," says Jackalyne Pfannenstiel, an economist who chairs the California Energy Commission. She endorses the goal but said it could be modified because of cost hurdles or other barriers. She believes, however, that the cost of renewable energy will eventually fall.
In a joint recommendation to the California Air Resources Board, the lead agency on climate-change matters, the energy commission and the public-utilities commission said the 33% goal is needed for California to reduce greenhouse-gas emission 29% by 2020 -- the key provision of the landmark environmental law signed by Gov. Arnold Schwarzenegger in 2006.
Already, the state appears likely to miss its current target of garnering 20% of its electricity from renewable resources by 2010. As electricity consumption has increased, the portion of renewable energy California consumes has actually been dropping, from 14% in 2003 to 12.7% last year.
The proposed policy faces votes by several regulatory bodies and could be implemented either through a state law or an executive order by Gov. Schwarzenegger.
Setting such an ambitious target is risky. It could compel state regulators to approve numerous renewable-energy development projects which later turn out not to be feasible or economically viable. That could raise electricity prices and limit supply down the road.
So far, the utilities commission has approved all the renewable-energy contracts that have come before it. Even so, fewer than 500 of the 6,000 megawatts of renewable generating capacity that is under contract to utilities are in operation.
Developers face big obstacles as they try to expand the state's wind, solar and geothermal power. Many of the biggest projects currently planned are in mountain and desert locations. They face rising construction costs, local opposition and complicated regulatory reviews. In addition, some of these proposed projects still lack the infrastructure to transmit the electricity from generators to users.
"The biggest barrier to meeting the state goal is getting transmission access," said Amber Mahone at Energy and Environmental Economics, a San Francisco research firm hired by the utilities commission to estimate the potential impact of the new renewables goal.
The recommendation also supports creation of a cap-and-trade system among Western states to limit greenhouse-gas emissions by the power sector and other polluters. That is also expected to be a difficult policy to implement.
In a preliminary analysis of the greenhouse-gas-reduction program released this spring, Energy and Environmental Economics said a 33% renewable goal could push average electricity prices to about 17 cents per kilowatt hour in California by 2020, a 30% increase over the current average cost of about 13 cents.
It is impossible to know for sure. There is no public disclosure of the costs. The renewable-energy contracts between utilities and the public-utilities commission, which number about 90 so far, aren't public documents.
Consultants hired by the utilities commission to analyze costs say they will rely on their own estimates because they don't want to work from confidential data that others can't verify.
The public-utilities commission uses an "avoided cost" method to determine whether renewable projects will generate power at reasonable prices. So long as a renewable-energy contract offers electricity at no more than what it would cost to get electricity from a newly built gas-fired power plant, a contract is deemed reasonably priced. Currently, the benchmark price is about 10 cents a kilowatt hour, not including energy-delivery costs. Since gas-fired electricity costs have risen sharply with higher fuel costs, that set price has increased.
But there are indications that some of the newly planned projects may have difficulty generating power at previously approved prices. Recently, generators have been asking for exceptions that would allow them to be compensated at prices even higher than the benchmark set by the commission. Fifteen contracts have been approved at prices above the commission's initial benchmark and nine more are pending.
Other developers that have received contract approval now want to renegotiate with the state because their costs are rising. The utilities commission has approval to spend as much as $750 million extra on new or renegotiated contracts. A staff member at the commission said she expects the sum will be reached "pretty quickly."
Other variables could also hamper California's goal. One immediate threat is the expiration of federal tax credits for wind and solar projects that are keeping many projects afloat. Expensive upgrades to the electricity-transmission grid also are needed to open up development areas, such as the Tehachipi Mountains that divide Northern California from Southern California. Nearly $2 billion in transmission upgrades are needed there for 1,500 megawatts of wind development. So far, only three of 11 segments of a transmission upgrade have garnered necessary approvals.
PG&E Corp.'s Pacific Gas and Electric Co. and Southern California Edison, owned by Edison International, support a higher goal but say there needs to be flexibility. Sempra Energy's San Diego Gas & Electric Co., with the least renewable energy under contract, opposes a 33% target unless changes are made. The utility would like to be able to sign deals with out-of-state producers, for instance. "We support renewables," says Bill Ichord, SDG&E's vice president of regulatory affairs, "but it needs to be done in a rational way."
Write to Rebecca Smith at rebecca.smith@wsj.com