California load-serving entities experience increasing challenges in procuring resource adequacy capacity

By Seth Hilton, partner, Stoel Rives LLP

California’s resource adequacy requirements were first adopted in the wake of the California energy crisis. In response to a statutory obligation to establish resource adequacy requirements for the load-serving entities under its jurisdiction, the California Public Utilities Commission adopted a resource adequacy policy framework in 2004, setting system capacity requirements starting in 2006, local capacity requirements starting in 2007, flexible capacity requirements in 2014, and multi-year local capacity requirements this year. Load-serving entities are required to make annual compliance showings around October 31, for the following year, and month ahead compliance showings forty-five days prior to the compliance month. System requirements are based upon load forecast plus a fifteen percent planning reserve margin, and local and flexible requirements are determined by studies performed by the California Independent System Operator (CAISO).

The capacity available to meet these requirements has been shrinking, however, at the same time as the number of load-serving entities continues to expand with the growth of community choice aggregation. A June 20, 2019 ruling in the Commission’s Integrated Resource Plan proceeding (R.16-02-007) observed that market participants had noted a tightening in the bilateral resource adequacy market, and Commission staff had seen a decline in the robustness of competitive solicitations. The June 20 ruling also noted that eleven load-serving entities had filed for waivers of system requirements for the 2019 compliance year.

The June 20 ruling attributed the shrinking availability of resource adequacy capacity to a number of causes, including upcoming retirement of thermal units subject to the State Water Resources Control Board’s once-through-cooling requirements, and the decline in the resource adequacy value of solar, the result of the Commission’s adoption of the effective load carrying capability (ELCC) methodology in 2017. As the June 20 ruling noted, “overall ELCC values have declined” since the methodology was first adopted in 2017.

The Ruling also noted that California is now increasingly relying in imports to meet its resource adequacy obligations. A CAISO Department of Market Monitoring report from September 10, 2018, entitled “Import Resource Adequacy”, similarly noted that the overall volume of imports used to meet resource adequacy requirements have been steadily increasing, and expressed concerns that imports “may have limited availability and value during critical system and market conditions” under the bidding rules then applicable to import resource adequacy capacity. The June 20 ruling proposed immediate procurement of additional resource adequacy resources, and the extension of OTC deadlines, to “keep the reliance on import capacity similar to historical limits, instead of increasing the reliance to almost the maximum potential level of imports.” The ALJ Ruling also suggested that new import capacity might be “discounted by 1/3 to account for the risk associated with increasing imports.”

In a decision issued in November, the Commission ultimately recommended extending the OTC deadlines for four thermal plants (Huntington Beach, Redondo Beach, Alamitos, and Ormond Breach), and required load-serving entities to procure an additional 3,300 MW of resource adequacy capacity, to commence deliveries in the 2021 through 2023 time period. The Commission rejected the idea of discounting import capacity, and instead stated that it would address import capacity rules in its resource adequacy proceeding (R.17-0-020).

Even before it voted out its procurement decision in docket R.16-02-007, the Commission voted out a “Decision Affirming Import Resource Adequacy Rules,” D.19-10-021, in docket R.17-09-020 (“Import RA Decision”). The decision purported to clarify resource adequacy rules for imports, including requiring that that non-resource specific import resource adequacy resources self-schedule (bid as a price taker) into the CAISO markets.

The California Community Choice Association (CalCCA) filed for rehearing of the Import RA Decision, arguing that the Commission’s purported affirmation of existing rules in fact established new requirements only several weeks prior to the deadline for load serving entities to file year-ahead compliance showings (October 31). CalCCA also filed a motion to stay implementation of the Import RA Decision; it was supported by the CAISO, which recommended that the Commission maintain the status quo for the upcoming year-ahead and month ahead resource adequacy showings.

In its Application for Rehearing, CalCCA stated that the “vast majority of contracts for import RA in California” do not contain bidding requirements that would comply with the Import RA Decision (application for rehearing at 12). According to CalCCA, the value of these contracts for CCAs potentially exceeds $47 million, and the cost to execute replacement contracts could be more than $87 million. If CCAs were unable to find replacement capacity, CCAs could face penalties up to $34 million, according to CalCCA.

A recent report from the Energy Division of the CPUC showed that compliance filings for September 2019 revealed that load-serving entities in California were relying upon 4,737 MW of non-resource specific imports.

The CAISO and Powerex Corporation have also filed applications for rehearing of the Import RA Decision.

The CPUC has yet to act on the motion for stay, or the pending applications for rehearing. Compliance deadlines for year-ahead 2020 and for month ahead for January 2020 have now passed. Although the Commission has now recommended an extension of OTC deadlines, that recommendation still has to be adopted by the California State Water Resources Control Board. CCAs have also asserted that investor-owned utilities have been slow to make excess resource adequacy capacity available to CCAs as load has shifted to CCAs from those utilities. All of these impacts are likely to result in an increasingly tight resource adequacy markets, especially for CCAs.

Seth Hilton is a partner at Stoel Rives LLP where his practice focuses on the California energy sector, representing clients before California’s energy regulatory agencies including the California Public Utilities Commission and California Energy Commission, as well as in stakeholder proceedings at the California Independent System Operator.

The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.

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