OPINONATED: CAISO Ignores Massive Market Distortion that Harms Local Renewables

13 Oct 2016

By Craig Lewis

The California Independent System Operator just dropped the ball on needed transmission access charge reform and Californians will continue paying a steep price for this failure.

In most electric utility service territories in California, transmission fees are applied to every kWh of metered customer electricity usage, regardless of whether the transmission grid is used at all.[1] This situation subsidizes remote energy generation that by definition is dependent on hundreds, or even thousands, of miles of costly transmission lines. It also distorts the market for local renewables by making generation from remote sources appear cheaper, which further drives a perceived need for additional transmission infrastructure.

The costs associated with transmission infrastructure have been rising rapidly for more than a decade, even as the price of energy has been falling, especially renewable energy. Ratepayers unknowingly pay for these hidden “shipping and handling” fees on top of the price of energy, which adds about 3¢/kWh of hidden costs to the price of wholesale long-term energy contracts, increasing wholesale energy costs by roughly 50 percent.

The solution to this market distortion is staring CAISO in the face, since it is already applied to the many municipal utilities within CAISO’s balancing authority. The simple solution is to allocate transmission access charges (TAC) based on the transmission energy downflow (TED) at the substations—as is currently the case with munis—instead of basing it on the amount of energy used by individual customers, since customer usage includes locally-generated electricity that does not use the transmission system.

In contrast, utilities that own a stake in the CAISO-managed transmission infrastructure (including PG&E, Southern California Edison, and San Diego Gas & Electric) operate under the distorted TAC structure. For these Participating Transmission Owner (PTO) utilities, CAISO assesses the TAC on every kWh of electricity that passes through a customer meter, regardless of whether the energy originated on the customer’s roof with no use of the transmission grid, or 1,000 miles away and delivered over transmission lines.

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Despite the existence of an easy solution, CAISO is failing to serve the best interests of Californians, which fuels distrust by state policymakers when it comes to forming a regional grid that would be governed by a multi-state board. Policymakers, including Rep. Anna Eshoo (D-CA), are seeing CAISO’s failure to resolve the existing transmission cost allocation distortion as proof that California must maintain full autonomy over its grid. Any other approach could lead to worse outcomes than the “deregulation” debacle around the turn of the century that gave birth to the grid operator in the first place.

After a strong push by a broad coalition of over 50 stakeholder organizations, led by the Clean Coalition and including leading environmental and industry groups, CAISO agreed to address the issue last winter, only to then move the subject to a new review process in the summer and start again. However, as of Sept. 26, CAISO has fumbled once again, canceling the most recent initiative citing a false rationale that fails to reflect the actual drivers of transmission investment, and burying this issue within a much broader scope and vague schedules that may require years to address. These are years California ratepayers cannot afford. Hence, CAISO’s failure to address the existing problem it has with unfair transmission cost allocation will continue to result in unnecessary transmission infrastructure investments and related costs. This will depress development of clean local energy, the associated jobs, and impact California’s energy mix for decades.

In CAISO’s Sept. 26 announcement, several reasons were cited for delaying consideration of this issue, but the rationale was amateurish to the point of being deceitful. While taking no position on the proposed solution, CAISO erroneously stated that transmission investment is primarily driven by increases in peak load. Although peak load growth is a driver of transmission investment in general, California’s efficiency measures have resulted in little recent or projected growth in peak load, and most currently planned transmission is actually being built to fulfill the demand for new remote renewable sources[2] – a demand that would be reduced if local renewable energy were utilized. Staff further stated that most local generation, which is primarily solar, does not reduce peak load. This is demonstrably false, based on evidence provided to CAISO, including PG&E’s own projections of the impact of local generation reducing its peak load.

Fixing the problem now is critical because utilities and community choice aggregators will soon be contracting for a lot more renewable energy to meet California’s new 50 percent Renewable Portfolio Standard adopted under SB 350. How much of this energy will come from local resources and how much new transmission will be needed will depend on eliminating the massive transmission charge’s market distortion. The Clean Coalition estimates that sourcing just 10 percent more of our total energy from local generation would save $15 billion in transmission investment over the next 20 years and cut the growth in transmission fees in half.

Instead, CAISO is focused on expanding its operations to other western states. While this expansion might have merit, unless the problems with how CAISO allocates transmission costs are dealt with first, the existing bias against local renewables will be spread across the West. This will make it much harder to redress since governance will no longer be based in California but spread across multiple states. Given the financial impacts at stake and the readily available solution, the transmission cost allocation issue must be resolved first to ensure that we have an effective approach that is fair to Californians and ready for replication across other states.

Given CAISO’s failure to address the transmission cost allocation problem, legislative action should come into play to force it to act thanks to California’s governance authority! The solution will result in proper pricing signals that attract more local renewables into the market.

The Solution

 Transmission costs should be applied consistently across all utilities based only on energy that actually uses the transmission grid. This can be accomplished with the simple fix proposed by the Clean Coalition: use the method applied to non-PTO utilities for all service territories by charging TAC based on Transmission Energy Downflow, which is the energy that flows from transmission grid to the local distribution grid.

This fix will align TAC payments with actual delivery from the transmission grid and create a consistent transmission cost treatment across all utilities. The only cost to implementing this fix is to install settlement-quality meters at the substations that don’t currently have them, which the Clean Coalition estimates will cost $20 million. The potential for savings in transmission investment drastically outweighs this cost. By investing in distributed generation, our existing transmission infrastructure can meet our needs for longer and with less investment in new transmission.

While it’s uncertain exactly how much additional local distributed generation would be built as a result of the TAC fix, a conservative estimate suggests it would more than double the projected growth. This would dramatically increase the amount of energy coming from local renewables and also slow the expected growth in TAC rates, saving California ratepayers approximately $20 billion over the next 20 years, as illustrated in the line graph below.[3] In addition, communities would see the substantial economic, environmental, and grid resilience benefits associated with local renewables.

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Once the TAC is solely based on energy sourced from the transmission grid, market prices will accurately reflect the true transmission-related costs of different types of power — meaning local generation will be more competitive. PTO utilities currently select energy bids by comparing energy pricing only and ignoring transmission costs, since they apply the TAC to all energy. Since locally generated energy, including exported net metering energy, is not delivered through the transmission grid, local energy should avoid the TAC and the locally generated energy should be credited with approximately 3 cents/kWh of additional value, as illustrated in the charts below. In other words, a fix to the TAC system would make local renewables more cost-competitive.

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What’s next?

In its recently canceled Transmission Access Charge Billing Determinant initiative, CAISO had the opportunity to correct this market distortion by consistently applying the non-PTO TAC treatment to all utility service territories. It’s a fix that would require minimal costs that would be recouped in less than two years during the first year of new procurement under the fixed TAC. It would save ratepayers billions of dollars.

The Clean Coalition and its supporters will continue to fight this battle to persuade CAISO to resolve the simple TAC billing determinant issue without further delay, so that CAISO fulfills its organizational mission to California ratepayers and obligation to align cost allocation with cost causation, operating the transmission system in the most cost-effective manner.

Local renewables have been subsidizing the transmission grid for too long and the time to fix it is now, before the ISO expands to become a multi-state entity. CAISO has everything it needs to align TAC assessment with transmission usage, but it’s up to ratepayers to persuade them to take action now.

—Craig Lewis is executive director of the Clean Coalition, a clean energy nonprofit.

[1] TAC fees are based on the aggregate gross metered usage, not the net metered usage.

[2] According to a 2013 Edison Electric Institute (EEI) report, 76% of the proposed expenditure on transmission between now and 2023 for EEI members (California is well represented) is specifically to integrate centralized renewable energy to the transmission grid. Since that report was issued, California increased its RPS to 50% renewable energy by 2030.

[3] The Clean Coalition bases this analysis on: (i) PG&E 2015 Distributed Resource Plan filings showing slow trajectory growth in the share of Gross Load that will be served by distributed generation (DG); (ii) assuming PG&E’s share of Gross Load served by DG applies to all PTO utilities; and (iii) assuming CAISO’s projection of 7 % nominal growth in TAC rates in future years. We then compare PG&E’s Business-As-Usual 260 MW DG growth with higher annual growth in share of PTOs’ new Gross Load served by new DG generation. The analysis assumes that new DG generation never exceeds forecasts for new Gross Load.

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