Improving California Investor Owned Utilities Procurement Practices: The Need to Include Integration Costs in Renewable Energy Resource Selection

Abstract

By 2020, 33% of California’s electric power sales will come from renewable energy sources due to California’s Renewable Portfolio Standard (RPS). This implies a 359% increase, from 23,000 GWh to more than 80,000 GWh, in renewable energy generation since 2002. Also by 2020, 21% of the sales will be from intermittent renewable resources (IRRs) that will incur integration costs due to required flexible ramping resources to balance power supply and demand of the California grid.

The key parties implementing the RPS are divided on the integration cost values of IRRs. The California Public Utilities Commission (CPUC) requires that IOUs use a zero value for integration costs. This results in an inaccurate Net Market Value, a critical component in selecting new renewable resources. IRR generators also support a zero integration cost to avoid a diminution in value. Investor-Owned Utilities (IOUs) support a non-zero cost adder to ensure all costs are accounted to deliver the most cost-effective reliable energy to customers. Firm and reliable renewable energy generators prefer a non-zero cost adder to value dependable energy delivery. Finally, the California Independent Systems Operator (CAISO) with the CPUC acknowledge that integration costs may become significant as the renewable portfolio expands as additional IRRs commence operations. Per studies, integration costs become noticeable after 10% IRR penetration, but unfortunately, California’s IRR penetration will already be 14% in 2016.

IRR penetration is shown to be significant in a few European and U.S. markets where integration costs vary by region and have a projected range between $1/MWh and $11/MWh. One California IOU has proposed that IRR costs should be $8.50/MWh, which will result in an annual customer cost of $415 million, an $8.3 billion NPV over a typical 20-year renewable contract tenor. Such significant cost and definite high IRR penetration validates the urgent need to determine an interim and fair non-zero cost adder. This will send a price signal to the market to incentivize a reduction in integration costs which is presently non-existent. A long-term adder should be determined through a CPUC proposed public process to effect an efficient renewables selection process that will minimize integration costs.