Stoel Rives partner discusses impact of CPUC's new 4,000 MW procurement decision

The California Public Utilities Commission’s (CPUC) recent decision to allow load serving entities (LSEs) to procure an additional 4,000 MW of net qualifying capacity (NQC) is expected to help meet urgent future capacity needs but could come at a high cost to ratepayers and impact customer affordability, Community Choice Aggregators have warned.

The February 23 decision adds 4,000 MW to the 2021 Mid-Term Reliability (MTR) procurement order of 11,500 MW.

“The new order comes after episodic procurements from the CPUC to meet the growing capacity needs in California,” said Seth Hilton, partner in the San Francisco office of Stoel Rives LLP. The first CPUC order came in 2019 for 3,300 MW, which was followed up by the much larger 2021 MTR order. The additional 4 GW authorized last month was the result of the CPUC proceeding in September.

That proceeding saw a proposal for programmatic procurement, which would cover both reliability needs and procurement of clean generation to meet greenhouse gas emissions (GHG) goals. The idea is to create more regular procurements for LSEs by setting targets. It would also potentially initiate a study determining what additional capacity is needed to meet reliability standards and allocating that out to LSEs, requiring them to continuously meet the procurement goals to ensure the state stays within the reliability standard.

Comments from the proposal indicated that the CPUC should order procurement immediately given urgent capacity needs in California’s future and to provide LSEs with additional notice about the need to procure resources. This led to the new 4,000 MW procurement requirement.

Hilton said that under the 2021 procurement order, which called for procurement requirements through 2025 and 2026, the CPUC ordered LSEs to procure 2,000 MW of long-lead time resources. But there were challenges.

“One challenge with episodic procurement, given Covid supply chain issues and the amount ordered, it’s been difficult for LSEs to procure those resources in a timely fashion,” Hilton said.

Because of this, the CPUC pushed out the long-lead time requirement to 2028 to give LSEs more time to procure resources. But given that the previously planned capacity won’t be available in 2026, the CPUC ordered backfills and told LSEs to procure 2,000 MW of other resources for 2026 and another 2,000 MW for 2027 to ensure sufficient capacity going forward.

“I think it’s difficult for all LSEs due to challenges around development and a lot of challenges around interconnection for those resources,” Hilton said. In addition, CCAs and energy service providers (ESPs) were shown in a report issued by the Energy Division that they were ahead of schedule in terms of procurement, Hilton said. This was due to the entities procuring additional resources.

“It’s actually investor-owned utilities (IOUs) like Pacific Gas and Electric (PG&E), Southern California Edison (SCE) and San Diego Gas and Electric (SDG&E) that have been challenged in meeting those requirements,” he said. "There’s certainly challenges for all LSEs, it won’t be easy, but so far CCAs and ESPs have managed the challenge.”

If any of the procurement requirements aren’t met, Hilton said that LSEs could face penalties.

The CPUC has the option to order backstop procurement for the IOUs to obtain additional resources if a CCA or ESP hasn’t been able to procure that resource. But to Hilton’s point, the IOUs have been the ones facing difficulties meeting the requirements and there is no backstop to compensate for these shortfalls, “which is a challenge.”

In a previous interview with NPM, Marin Clean Energy (MCE) explained that if the CPUC approved the 4,000 MW additional procurement requirement, it could exacerbate the customer affordability crisis in California. Due to the existing market favoring sellers, and with current supply chain shortages and transmission queue backlogs, prices have already risen for new builds. This can end up being paid, ultimately, by ratepayers for many years after the contracts are signed.

Hilton agreed that there is a risk of the order impacting affordability because the cost of procuring capacity is going up. “There is a current shortage of capacity that makes it more challenging to procure and prices go up,” Hilton said.

However, he pointed out that the February decision did adopt some flexibility for LSEs who have delayed projects and how they manage their procurement requirements.

“On one side, the decision ordered additional procurement and on the other it adopted some flexibility mechanisms that give LSEs a little bit of a break in terms of meeting the timing requirements for capacity procurement,” he said.

*This story was originally published exclusively for NPM subscribers last month.


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