by Jeff St. John
September 04, 2020

California’s heat-wave-driven rolling blackouts last month, and the threat of more to come, have focused state political leaders and energy regulators on how to fix the California Public Utilities Commission’s resource adequacy (RA) program, the state’s primary tool to ensure grid resources to meet peak demands.

After nearly two decades of incremental changes, it’s becoming clear that RA may be unsuited for the state’s increasingly clean-powered and battery-backed future grid. 

That’s the focus of a new CPUC proceeding to reform the RA program. And beyond proposals for incremental fixes to the structural problems that have been brought into stark relief by last month’s grid emergency, there are some more radical proposals to redo the RA construct from the bottom up. 

California's resource adequacy problems in a nutshell 

CAISO CEO Steve Berberich laid out his view of RA’s failures after last month’s rolling blackouts, the first that state grid operator CAISO has had to call since the 2001 energy crisis. 

Beyond decrying the CPUC’s decision to order 3,300 megawatts of new RA capacity instead of the 4,700 megawatts CAISO wanted, as well as questioning the state’s reliance on imported energy that may fail to materialize during region-wide heat waves, Berberich also laid out structural flaws that he said need to change.

"To fix this, resource adequacy must be reformed so that every hour of the year is properly resourced,” he said. Specifically, today’s focus on meeting a preordained system peak between 5 and 6 p.m. doesn’t match the “net peak” that arises after solar power fades away, as late as between 7 and 8 p.m., he said. 

What’s more, “all load-serving entities must procure to their local needs across all hours,” he said. That includes the community-choice aggregators (CCAs) taking over an increasing share of the energy procurement responsibilities of the state’s three big utilities.

Berberich’s proposed “fixes” underscore deeper problems. In simple terms, today’s RA is a program originally designed for a system served by baseload nuclear and hydropower and dispatchable natural gas generators. That won’t work for a state that’s retiring nuclear and natural-gas plants, getting its daytime energy from solar and shifting to batteries as the marginal resource of choice.  

“The planning process was really planning for system peak, because if you had enough for system peak, you had enough for everything else,” explains Eric Gimon, a senior fellow at the Energy Innovation, a think tank.

“The future planning paradigm, with a lot of renewables — nobody knows exactly what it will look like," Gimon said.

That future is arriving quickly and exposing RA’s flaws. In an extensive report, CPUC Energy Division staff “identified three intersecting problems,” noted Ed Smeloff, director of grid integration at advocacy group Vote Solar. 

“One is, the natural-gas power plants are coming off long-term contracts and not getting sufficient revenue and may retire,” Smeloff said.

“Two, we’re adding a lot of use-limited resources — batteries, mainly — and we don’t quite yet know how they’re going to perform.” 

“Third, the responsibility for resource adequacy is fragmenting,” Smeloff said. 

What used to be a market dominated by investor-owned utilities Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric, plus a handful of retail energy providers, will by the end of 2020 encompass 23 CCAs serving about 25 percent of CAISO’s peak load, compared to 66 percent of load served by utilities, according to the CPUC. By 2021, the agency expects 26 CCAs to be serving 30 percent of peak load.

Traditional assumptions are breaking down 

Natural-gas power plants are indeed being undercut by California’s clean energy policies. Not only are new plants not being built, but existing ones are also losing energy market share to solar power. 

With less opportunity to sell their energy into markets glutted with solar power, natural-gas plants are increasingly turning to RA revenue. Because “utilities want to get the cheapest deal possible, they would find some old clunkers” to serve their RA needs, Gimon said. “But those clunkers are kind of expensive to run.” 

This situation has led to market activity that indicates these RA-contracted power plants aren’t performing up to snuff, according to the CPUC staff report. Under “RA-only” contracts that utilities and CCAs are signing with natural-gas plants, “some types of resources are bidding to ensure that the resource is not dispatched” by offering bids above the expected market clearing price, or even up to the bidding cap of $1,000 per megawatt-hour. 

In other words, RA-only power plants may be purposely setting their bids too high to clear the market, and thus escaping their commitments to meet peak grid needs. 

This isn’t just a problem for in-state resources. Out-of-state RA contracts, which have increasingly made up the gap between in-state RA capacity and system needs, are also bidding in at prices that fail to clear the market, according to a 2018 report from CAISO’s independent market monitor. The CPUC changed import rules last year to try to fix this, but the “staff remain[s] concerned that [load-serving entities] and import providers are structuring complex contracts in an attempt to evade the essence of the requirement.” 

These kinds of problems have led to demands from CAISO to the CPUC seeking more long-term certainty from the RA contracting program. “System, local and flexible resources need to be contracted for on a longer-term basis,” said CAISO CEO Berberich. 

But this approach may conflict with the second problem CPUC staff has identified: the need to enlist more of the state’s future marginal resources of choice. Those resources include batteries, which may lack the storage capacity to meet CAISO’s preferred multihour service commitments. They can also include demand-side resources like demand response, behind-the-meter batteries or grid-responsive electric vehicle chargers, which are more unpredictable in when, how long and how much they can supply capacity. 

“That’s also what leads CAISO into trouble, I think,” Energy Innovation's Gimon said. “They’re thinking about everything from the point of view of a gas plant.” 

Finally, there’s the problem of California’s fragmented cast of load-serving entities. The CPUC doesn’t hold the same regulatory oversight over CCAs as it does over utilities, but it has established regulatory oversight over their participation in the RA program. At the same time, the agency has in the past expressed concern about CCAs' ability to meet their growing share of resource adequacy needs. 

The CPUC’s decision this year to centralize local RA procurement with utilities to try to reduce market power problems has also undermined CCAs' ability to earn money from locally procured behind-the-meter assets. And the CPUC’s new requirements on import capacity, meant to increase visibility into what out-of-state resources are being relied upon, were opposed by CCAs on the grounds that they undermine existing contracts. 

Fixing RA: Tinker on the edges or build it back from the ground up?

By no means has the CPUC been standing still. It's taken steps to align the state’s increasing share of solar power with the realities of the net peak.

The CPUC has also extended the contract terms for RA from one year to three years to create more stability. It’s reduced the assumed capacity value of solar projects that aren’t providing grid resources during net peak hours. And it’s created rules for hybrid solar-storage resources that both reflect their value for those net peak hours and set requirements to prevent solar that would otherwise be supporting the grid to go toward charging those batteries. 

The CPUC staff report suggests two more incremental changes that could help fix the problems it has identified. 

First, it would consider “bid caps” to prevent RA-only resources from failing to clear their energy in CAISO’s day-ahead market, to “help to ensure that capacity contracted to meet California reliability needs is indeed available to do so.” 

Second, it would reform the “Maximum Cumulative Capacity” construct, devised in the early days of RA to align the different types of deliverable power contracts that utilities would sign with generators. The suggested Maximum Cumulative Capacity reforms are meant to adapt to the new paradigm of solar, storage and demand response, to “ensure they achieve their purpose of preventing over-reliance on use-limited resources,” including solar, wind and batteries, “in meeting system needs.” 

More radical options for restructuring are also in discussion. Most notable is a proposal from the state's only electric-only utility, Southern California Edison, and backed by CalCCA, the trade group representing the state’s CCAs, that would essentially rebuild RA using a “bottom-up” approach. 

That’s because the SCE-CalCCA proposal would move away from today’s “top-down” assessment of RA needs which then splits them up amongst individual load-serving entities. In a state with dozens of CCAs, that's “no longer sufficiently accurate to ensure reliability,” the proposal says.  

Instead, it envisions each load-serving entity building its own “load duration curve,” or forecast of loads for every hour of every month, and then combining them to yield a systemwide set of requirements. That’s a far more accurate way to determine "system needs as California transitions to an electrical grid with 100 percent of retail sales served by zero-carbon resources," Eric Little, SCE's wholesale market design manager, said in an email. 

Solving California's growing "net peak" problem

To help solve the “net peak” problem, SCE and the CCAs propose subtracting the contribution of solar and wind resources to each hour of each day.

“We are moving to what we now call a 'net peak load,'” said Beth Vaughan, CalCCA’s executive director, or a measure of reliable capacity that’s “more honest” than the systems now used by RA, such as “effective load-carrying capacity,” that attempt to estimate the average capacity value of renewables that can’t be dispatched. 

The resulting “net energy need” that this process would yield would reveal "the overall amount and duration of energy needed above and beyond the renewable generation, as well as the amount of energy available for storage charging.”

That last point is important, particularly since batteries are expected to replace natural-gas plants as the main source of resource adequacy for California in future years and are already being contracted in gigawatt-hour scales to meet the CPUC’s latest call for new resources. 

Batteries need energy to charge them up, and if they’re using energy that would otherwise be supporting the grid at the time they’re charging, that could undermine grid reliability. To solve for that, SCE and CalCCA propose a rule that forces all storage-based RA sources to prove that their charging capacity is coming from either excess wind and solar generation or other energy that’s in excess of its hour-by-hour needs. 

Shifting toward "net qualifying energy"

Finally, in addition to RA's existing concept of measuring individual resources in terms of their “net qualifying capacity,” or how much energy they can provide during a pre-determined grid peak, the proposal would add the new measurement of “net qualifying energy,” or “the amount of energy that could be expected from the resource given any use limitations for the month.” 

That concept “doesn’t exist right now,” Vote Solar’s Smeloff said, but it could be a valuable way to pinpoint the hour-by-hour energy needs across a power grid that’s seeing the rapid changes that California is facing. 

This proposal needs a great deal of work before it can replace today’s RA construct, and it's unclear how much progress the CPUC will make toward its stated goal of having changes ready in the first quarter of 2021. Determining net qualifying energy for different resources will be a complex undertaking, particularly more complex configurations like the hybrid solar-battery systems that make up the fastest-growing share of California’s future energy mix, Smeloff said. 

Requiring each load-serving entity to calculate and cover its own unique capacity needs also runs the risk of each one procuring more resources than the system as a whole needs, which would be an expensive and inefficient solution to the state’s grid reliability needs. Creating methods for these entities to be able to trade or pool resources will be critical, but will have to avoid the potential for double-counting the same resources — or leading to “application of market power,” that is, resources being able to withhold their capacity to drive up costs.

“This is a big paradigm shift, and we’re not going to get there overnight,” CalCCA’s Vaughan said. The example of last month’s heat wave highlights the need for getting started now.