by Jeff St. John
February 28, 2020

California is on the hunt for carbon-free electricity to meet massive decarbonization mandates — and not just from within its borders.

Over the next month, state regulators will decide whether to take a 5-megawatt baby step on a 40-year-old plan to tap the Pacific Northwest’s bounty of efficient, carbon-free electricity for California’s long-range energy needs. 

This month, the California Public Utilities Commission will weigh arguments for and against a proposal from utility Southern California Edison to start a “proof of concept carbon-free transaction” with the Bonneville Power Administration (BPA), the federal agency that runs the Pacific Northwest’s hydropower and transmission complex. 

Under the plan, BPA would supply 5 “average megawatts” of electricity on a 24-hour, 365 days per year basis through the transmission links connecting its system to that of California grid operator CAISO. But there’s a wrinkle: This hydropower is technically a “carbon-free surplus energy transaction” built on “5 megawatts of programmatic energy efficiency savings” that BPA achieved in 2016 and 2017 above and beyond its mandated goals. 

In other words, it’s excess energy efficiency that BPA has already achieved and verified, and expects to last for at least 12 more years, but can’t otherwise recognize the value of, according to Ralph Cavanagh, senior attorney with the Natural Resources Defense Council. In fact, BPA loses money for every unsold megawatt of efficiency beyond its goals, giving it little economic incentive to continue pursuing such efficiency gains.

SCE’s proof-of-concept transaction, however, would allow BPA to lock in multiyear contracts to deliver firm hydropower-generated electricity that those extra efficiency investments have made available to its system, Cavanagh said. “There is hydropower moving from the Northwest to California, but it would not be available save for the energy efficiency achievements of BPA.” 

SCE is proposing a fairly small-scale test. Five megawatts of capacity is a fraction of the 12 gigawatts of generation capacity California will need to build by 2030 to meet its long-range clean energy and grid reliability plans. 

But BPA has a surplus of energy efficiency it’s eager to find ways to export, Cavanagh noted. On top of the roughly 6,000 average megawatts its efficiency efforts have saved since 1980 — worth an estimated $4 billion per year in reduced electricity costs — the Northwest could achieve an additional 4,300 average megawatts of efficiency through 2035, according to the regional planning group Northwest Power and Conservation Council. 

And with California’s utilities hungry for carbon-free energy to help meet their targets of 60 percent by 2030 and 100 percent by 2045, SCE is hoping its proof of concept “could lead to a broader market in California” for Pacific Northwest efficiency-driven surplus electricity, as long as it doesn’t cost more than the alternatives or lead to increased emissions.

A decades-old plan comes of age 

Cavanagh worked on the plan that BPA brought to SCE in 2017, but his history with the concept stretches back to the early 1980s when he proposed it while serving as the Natural Resources Defense Council’s Northwest energy projects director. “People have been talking about this for literally 40 years,” he said in an interview this week. 

Until now, a combination of political barriers and misaligned economics have prevented this kind of regional efficiency-based transactions from becoming reality, he said. “There’s a long history of energy exchanges between the Pacific Northwest and California, [but] almost all of them are on the spot markets because there’s a prohibition on hydropower transfers.” 

That’s largely because Pacific Northwest political leaders at the federal and state level have put restraints on committing its hydropower to long-term out-of-state contracts, in order to avoid losing control of a system that’s delivered the country’s cheapest electricity for decades — or becoming an “energy farm” for California’s much larger energy appetite. 

Without long-term contracts, California utilities or energy buyers seeking Northwest power have been forced to buy on spot markets, with hourly prices set at key nodes of transmission between the Northwest and California, as well as on the Pacific DC Intertie, the 3,100-megawatt capacity high-voltage, direct current link between the regions. These prices can sometimes soar into the hundreds or even thousands of dollars per megawatt-hour, Cavanagh said.  

SCE’s proposal, by contrast, offers a stable and reliable resource, based on a first-of-its-kind interregional exchange of energy efficiency, he said. While the concept may be decades old, “it’s never been done before," Cavanagh added, which makes SCE's proposal a test case for other similar efforts. 

To be clear, the 5-megawatt supply involved will be real electrons, generated by BPA’s 31 dams and one nuclear power plant, Cavanagh said. In other words, “these are not carbon offsets." Rather, the megawatts delivered will be both generated by zero-carbon resources and made available by zero-carbon efficiency gains. 

SCE also made clear that it will not count the megawatts it’s buying from BPA, or the price it’s paying for them, as any part of meeting its existing or future in-state energy efficiency goals or achievements. Nor will it count the megawatts toward meeting its grid reliability requirements

Still, the details of SCE’s plan to pay for the power it’s buying from BPA have raised some questions and concerns from the CPUC and various stakeholders. As always, there are challenges in quantifying the value of energy efficiency as electricity not generated, transmitted and consumed, and in particular whether or not those savings are “incremental” to what would have otherwise happened. 

Questions on costs and fairness  

SCE has asked the CPUC for permission to charge ratepayers about $9 million over three years to cover the costs of the 5-megawatt deal, which amounts to an average increase of 0.03 percent on bills. While SCE is permitted to keep its contract prices confidential, it has disclosed that they will consist of an “energy price” based on its best “at-market” offer for BPA’s hydropower, plus a “Clean Power Fee.” 

This additional fee represents the costs that BPA incurred to achieve the incremental efficiency levelized over their 12-year useful life, as well as rates and costs of forgone customer sales and transmission costs, plus an undisclosed “market premium.” Of that stack, SCE estimates that the fixed cost of the efficiency improvements, called the “EE Program Cost,” will amount to about $3 million of the program’s total cost.  

According to SCE, the market price it’s paying for those energy efficiency megawatts — roughly $35 per megawatt-hour to start, and to be based on more refined market referents later — is cheaper than the cost of achieving efficiency gains within its service territory. The utility also plans to recoup some costs by reselling the hydropower it buys on CAISO markets, making it available to other utilities or the community-choice aggregators (CCAs) serving a growing share of the state’s utility customers. 

Still, SCE’s plan does call for passing the $3 million in EE Program Cost on to “unbundled customers,” including CCAs and retail electricity providers selling directly to large industrial and commercial customers, through its Public Purpose Program Charge. 

This drew a protest from retail power trade groups Direct Access Customer Coalition and Alliance for Retail Energy Markets, which asked the CPUC to limit SCE’s pass-through costs. The California Community Choice Alliance didn’t oppose the pass-through for the proof of concept but asked the CPUC not to allow it to set a precedent for future market growth. 

Meanwhile, consumer advocacy group The Utility Reform Network filed a protest with the CPUC listing a series of questions it would like to see answered about SCE’s plan, including whether it might increase customer costs compared to existing alternatives, such as continuing to buy Northwest hydropower on the spot energy markets. 

In its reply to comments, SCE stated that it doesn’t intend the market constructs it’s setting up for the proof-of-concept transaction to set any kind of precedents. Indeed, the whole point of the proof of concept is to test out whether such a transaction can be successfully scaled up or whether it needs more refinement. 

As for whether SCE’s proof-of-concept prices may exceed current spot market prices, that’s missing the point, Cavanagh contended. Spot market prices might be cheaper at times, but they’re also highly volatile and subject to major price spikes. What’s more, they offer none of the future price certainty provided by long-term contracts, which can allow BPA to make efficiency investments with confidence that it will achieve a steady return and allow California to secure reliable carbon-free power at comparatively low cost. 

The CPUC will take up these questions in public hearings scheduled for mid-April. SCE has asked the CPUC to approve its proposal by October so that it can get it up and running by year’s end and report on progress in 2021. 

If the proof of concept does yield a workable model for expanding the sharing of efficiency-enabled Northwest power to California, “This opens the door to a much larger carbon resource, which can be measured in the hundreds or even thousands of average megawatts,” Cavanagh said.

“There’s not enough efficiency in the Northwest to meet all of California’s needs. But there’s certainly enough to make a difference.”