The California Renewable Energy Resources Act obligates all Californian electricity providers to obtain at least 33% of their energy from renewable resources by the year 2020, making it the most aggressive renewable portfolio standard in the US.

SB X 1-2 is the latest in a raft of California laws enacted over the last five years, designed to radically change the state’s energy profile, reduce its greenhouse gas emissions, and reinforce its position as a global environmental leader. At the same time, these measures are intended to attract capital to the state, drive economic activity and produce jobs. The laws include California’s landmark AB 32 (2006), which obligates the state to decrease it emissions down to 1990 levels by 2020; SB 1368 (2008) which prohibits the import of electricity from plants failing to meet certain environmental standards; and AB 2021 (2006) which imposes energy efficiency mandates on utilities.

While the Federal Government remains paralysed on energy matters, California is forging ahead. Last year, for the first time, China surpassed the US in renewable energy investment and other countries are progressing at a more aggressive pace than the US.

These trends signal the erosion of US leadership, a vacuum that the individual states, led by California, are moving to fill.

Triumph and complications

SB X 1-2 symbolises California’s environmental pre-eminence and represents a triumph for California. However, the law is also painfully complicated. SB X 1-2 employs tortuous formulae that generally favour in-state development, but open the door to some out-of-state power, and which try to mitigate rate effects by (i) requiring limits to be placed on the cost of renewables; (ii) providing for waivers and exemptions for electricity providers unable to reach the targets; and (iii) seeking to streamline permitting for renewables projects and transmission infrastructure. The result is a dizzyingly dense document which is sometimes hard to decipher.

SB X 1-2 covers all electricity providers, including investor owned utilities (IOUs) and publicly owned utilities (POUs). IOUs and POUs will continue to be governed by separate regulatory regimes: the California Public Utilities Commission (CPUC); and the California Energy Commission and the California Air Resources Board, respectively.

Interim targets

The law contains interim targets: 20% by 2013; 25% by 2016, and dictates that in order to qualify, the power must come from a “renewable electrical generation facility”, which generally means a plant that meets all of the following criteria:

1. The facility uses biomass, solar thermal, solar photovoltaics (PV), wind, geothermal, fuel cells using renewable fuels, small hydroelectric generation of 30 MW or less, digester gas, municipal solid waste conversion (not utilizing combustion), landfill gas, ocean wave, ocean thermal, or tidal current; and
2. The facility satisfies one of the following requirements:
   1. The facility is located in California or near the border of California with the first point of connection to the transmission network of a balancing authority area primarily located within California; or
   2. The facility has its first point of interconnection to the transmission network outside California, but within the Western Electricity Coordinating Council (WECC) service area, and satisfies certain other conditions.

The law recognises that a California balancing authority operates the transmission grid within its metered boundaries, which may not be coterminous with the state’s political borders. The law also grandfathers contracts (including those for out-of-state power) entered into before June 1, 2010. Further, SB X 1-2 contains numerous statements that embrace out-of-state power.

Balancing the portfolio

However, SB X 1-2 also includes Section 399.16, which imposes a “loading order” – each provider must attain a “balanced portfolio” of renewables, falling under three categories:

1. Products that meet either of the following criteria:
   
   1. Have a first point of interconnection with a California balancing authority, or with distribution facilities used to serve end users within a California balancing authority area, or which are scheduled into a California balancing authority without substituting electricity from another source; or
   2. Have an agreement to dynamically transfer electricity to a California balancing authority.
2. Firmed and shaped products providing incremental electricity and scheduled into a California balancing authority.
3. Other products (including unbundled renewable energy credits).

For ease of reference, we will refer to the power above as the California Content and the REC Content.

Under Section 399.16, each provider must ensure that by the end of 2013, no less than 50% of its renewables consist of California Content, with such percentage increasing to 65% by the end of 2016, and 75% thereafter. Further, each provider must ensure that by the end of 2013, no more than 25% of its renewables portfolio comprises REC Content, with such percentage declining to 15% by the end of 2016, and 10% thereafter.

In essence, then, starting in 2017, all providers must procure not less than 75% of their renewables from in-state and in-state equivalent products and not more than 10% from unbundled RECs, with the remainder from firmed and shaped products that provide incremental power.

While the foregoing provisions are considerably more welcoming to out-of-state generation than a previous version of the bill, the “loading order” in Section 399.16, nevertheless, necessarily affects out-of-state facilities which must now revisit their strategies regarding sales to California.

The question of cost

Cost containment is a paramount consideration, especially since in-state development is generally considered to be more expensive and time-consuming that out-of-state construction.

SB X 1-2 addresses that challenge in a number of ways: By providing escape clauses for providers in certain circumstances, and by attempting to contain the cost of renewables and facilitate the building of plants and transmission in-state.

First, the law requires the Department of Fish and Game to establish an “internal division with the primary purpose of performing comprehensive planning and environmental compliance services with priority given to [renewables] projects…” Whether this division will be able to simplify permitting processes, overcome NIMBYism, and combat the growing practice of misusing environmental regulations to derail renewables projects, remains to be seen. What appears certain is that ways must be found to reduce regulatory impediments without sacrificing environmental protections.

Second, the statute recognises that new transmission will be needed; a tacit acknowledgement that while distributed generation must play an essential part, it alone cannot satisfy the law’s objectives. Consistent with the foregoing, the statute (i) requires the CPUC to determine applications for Certificates of Public Convenience and Necessity within 18 months; and (ii) admonishes the California Independent System Operator (ISO) and the POUs to work cooperatively to interconnect renewables to the grid in an efficient and cost-effective manner.

Collaboration between the ISO, IOUs and POUs is crucial to avoid duplicative transmission development and it is hoped that new leadership at the ISO, working together with the IOUs and POUs, will move swiftly and resolutely to effectuate joint transmission construction under legal structures that respect their respective business models.

Finally, the statute requires the CPUC to establish a limitation for each seller on procurement expenditures for renewables. The law requires the CPUC to submit a report to the legislature by 1 January, 2016, assessing whether each entity can achieve the 33% goal by 31 December, 2020, and maintain that level thereafter, within the cost limitations.

The law also provides that the CPUC shall waive enforcement as to a provider if it finds certain circumstances, including, inadequate transmission, permitting or interconnection hurdles, or insufficiency of renewables available to the seller. Additionally, “if the cost limitation…is insufficient to support the projected costs of meeting the renewable… procurement requirements, the [seller] may refrain from entering into new contracts or constructing facilities beyond the quantity that can be procured within the limitation…”

SB X 1-2 clearly sets a high bar for others to emulate. However, in positing the 33% standard, with the added slant in favor of in-state development, SB X 1-2 also recognises the need to ameliorate the possible downside of its ambitions; namely, increased rates.

The success of the law will ultimately depend on whether it has struck the right balance.

About:

David Nahai is a partner at the law firm of Lewis, Brisbois, Bisgaard & Smith and co-chairs the firm’s energy, water, environment and real estate practice. Nahai is the former Commission President and General Manager of the Los Angeles Department of Water and Power. www.davidnahai.com

Renewable Energy Focus U.S., May/June 2011.