That is the question customers are asking as their utility rates go up to pay for the cumulative cost of the aspirations of politicians and regulators. But until now the answer to that question was hard to get, at least in California where under state law and utility regulations the costs of utility procurement of renewable energy contracts was kept confidential. Governor Jerry Brown has signed SB 836 sponsored by Los Angeles County Senator Alex Padilla requiring that the California Public Utility Commission produce a report to the Legislature each year starting in February 2012 that tells the politicians and customers what impact on rates the aggregate costs of renewable energy will cause.
California Renewable Portfolio Standards
California started requiring in 2002 that utilities buy 20 percent of total retail sales of electricity in California from eligible renewable energy resources by December 31, 2017. In 2006, the Legislature increased the Renewable Portfolio Standard (RPS) target to cover all retail sellers requiring the same 20 percent of total retail sales of electricity in California from eligible renewable energy resources by December 31, 2010. Then in 2011, the California Legislature approved a bill embedding in law the 33 percent RPS goal by December 31, 2020 set by an Executive Order to Governor Schwarzenegger since such orders expire with the term of the Governor issuing them. So that is the current law.
Baby Steps in Renewable Energy Cost Transparency
The California Public Utility Commission enforces the law by setting specific procurement rules and approving the proposed purchases of renewable energy under the rules by each utility. SB836 still will not require disclosure of individual contract prices paid by the utilities but it will force the CPUC to’ add up the damage’ and be accountable by reporting that cost to the Legislature. Its’ not a perfect bill but it is better than total darkness that now shrouds the cost of renewable energy until the rate increases are approved.
“You’re going to see significant price increases over time from renewables, as you add it to the system, it is going to result in higher costs for consumers,” said Aaron Johnson, director of renewable energy policy at Pacific Gas and Electric Company in a recent San Francisco Chronicle story on the bill.
I doubt that Johnson’s bosses at PG&E or those responsible at the CPUC appreciated the truthful comment from the utility official feeling the heat from the rising cost of living into the aspiration of politicians and regulators. But there it was—we have all been forewarned—our day of renewable cost reckoning is near.
How much will RPS cost California ratepayers?
That is the big question isn’t it. Bloomberg Energy estimates that California investor owned utility rates will continue to increase about 5-7 percent per year over the next ten years, as a result of the cumulative cost of regulatory mandates and the need to invest in upgrading aging utility infrastructure to meet the changing needs from smart grid, renewable energy integration and emissions reduction. The historic average increase for commercial and industrial customers has been 6-8 percent per year since 2000. Bloomberg estimates that achieving the 33 percent RPS standard will cost about 2.5 percent or about one-half of that total annual increase with infrastructure upgrading and replacement cost increases making up the rest.
In 2009, Energy and Environmental Economics, Inc. was engaged by the California Public Utilities Commission to provide estimates of the cost impact of the new transmission required to deliver renewable energy to meet the 33% RPS goal. The results of that analysis found the cost of that new transmission will increase the cost of the renewables delivered using it by about 10 percent.
That cost increase was included in a subsequent CPUC staff report on implementation analysis found the cost of implementing the 33% RPS standard should be expected to be as follows:
• “Even if California makes no further investments in renewable energy [beyond the 20% RPS then in effect], this analysis projects that average electricity costs per kilowatt-hour will rise by 16.7% in 2020 compared to 2008 in real terms.
• In 2020, the total statewide electricity expenditures of achieving a 20% RPS are projected to be 2.8% higher compared to a hypothetical all-gas scenario, where new electricity needs are met entirely with natural gas generation.
• In 2020, the total statewide electricity expenditures of achieving a 33% RPS utilizing the current procurement strategy is projected to be 7.1% higher compared to the 20% RPS, and 10.2% higher compared to an all-gas scenario. “
That was 2009—this is 2012. What has changed? The growth of domestic unconventional oil and gas has decoupled natural gas prices from oil prices and driven down the market price for natural gas. That factor alone is having an equal opportunity impact on energy markets savaging the economics of coal fired generation and driving down the grid parity price to beat for renewable energy.
This is not where California regulators thought they would be when they adopted the current policies. Relying less on renewable energy and more on low cost natural gas for future power generation in order to reduce the expected increases in electricity rates and improve California competitive market position is not an answer advocates of renewable energy or of the Global Warming Solutions Act want to hear.
In business when the facts change we recalculate our bottom line and make adjustments. In politics, the answer appears to be double down and implement the policy changes faster before the rate impacts hit the fan.
By. Gary L. Hunt
Gary Hunt is President, Scalable Growth Strategy Advisors, an independent energy technology and information services adviser and a partner in Tech & Creative Labs, a disruptive innovation software collaborative of high tech companies focused on the energy vertical. He served as VP-Global Analytics & Data at IHS/CERA; global Division President at Ventyx, now an ABB company; and Assistant City Manager-Austin Texas responsible for Austin Energy and Austin Water.