Opinionated:To CPE or Not To CPE

14 May 2019

By Steven Kelly

After many years of work, the California Public Utilities Commission earlier this year finally adopted a multi-year resource adequacy program to help ensure grid reliability. Now, the CPUC is considering additional changes to the adopted framework, particularly the insertion of a “central procurement entity” to mitigate the risk that the California Independent System Operator performs any resource adequacy procurement.

Under one of the proposed resource adequacy models, a central procurement entity serves as the “backstop” procurement entity for load-serving entities. The specter of a central procurement entity, likely state-sanctioned if not a state agency, entering the fray of Resource Adequacy procurement raises a host of issues that keep me awake at night.

For example, this framework will inevitably create incentives for load-serving entities, suppliers, or regulators to behave in unanticipated ways with unintended consequences.  Having said that, assume for instance that the CPE is a state entity. What if a regulator/legislator puts pressure on the entity to buy a “preferred resource” that wouldn’t actually be needed? Similarly, what happens if the Legislature acts in a manner that undermines the credit-backing needed to make this institution credit-worthy?

Moreover, as the counter-party to long-term commercial arrangements (e.g. up to 3 years or more), the central buyer must be credit-worthy; and, it must have mechanisms to ensure timely award and approval of contracts with needed resources. Finally, this central procurement entity will have on-going operational costs (rent, employees, etc.) which would be incremental to all the existing administrative costs in the market today, including those of the CAISO.

I am struggling to understand the added value of inserting a new central procurement entity (state-sanctioned entity if not a state agency) into the resource adequacy procurement process under this model to do essentially what is being accomplished by the CAISO today. That is, backstop procurement in the rare instances when individual utilities or other energy providers are deficient (individually or collectively) in local resource adequacy.

What is going on and why?

Currently, utilities and other load serving entities procure a specified amount of system, local, flexible and/or system resource adequacy on an annual basis by a date certain.  When CAISO finds deficiencies in the supply, individual load-serving entities are afforded an opportunity to “cure” the deficiency.  After the “cure” period, the grid operator is authorized under its Federal Energy Regulatory Commission- approved tariff to conduct “backstop” procurement to cover gaps in procurement (individually or collectively) to ensure grid reliability.

CAISO first employs its Capacity Procurement Mechanism to procure needed local RA in which generators/resources voluntarily bid to provide the needed RA capacity subject to a “soft-offer cap.”  The CAISO also can employ its Reliability Must-Run cost-of-service based agreements to ensure grid reliability in conditions where market power may exist or needed units are at risk-of-retirement.  Under these authorities, a modest amount of CAISO “backstop” procurement has occurred in recent years in an electric market that exceeds $20 billion annually.

The CPUC is considering inserting a central procurement entity in the resource adequacy framework to procure Local RA.  It would be “state-jurisdictional/state-sanctioned,” i.e., either a state entity or third-party approved by the commission to conduct needed backstop procurement.  Apparently, the primary purpose of this central procurement entity would be to mitigate the risk of any CAISO backstop procurement. Essentially, two models have been presented to accomplish this.

The first model, known as a Residual RA Procurement Model, builds-off the current resource adequacy framework in which load serving entities individually have an obligation to procure a specified amount of local RA.  Yet, the central procurement entity would be expected to procure local RA to fill any deficiencies prior to the CAISO doing so.

A second model, known as a Full Central RA Procurement Model, relieves utility and other energy providers of any local resource adequacy procurement obligation.  In this case, the central procurement entity would be authorized to procure all local RA.  To ensure that load serving entities could get credit for their already procured local RA, the energy supplier could bid their resources into the central procurement entity auction. If the resources “clear” the auction, then the load serving entity would be compensated at the central procurement entity-procured price.

An off-shoot of this proposal, known as the “Hybrid” Full Central Procurement Model, would allow load serving entities to voluntarily “show” their resources to the central procurement entity and, if local RA eligible, then the central entity’s local RA procurement would be reduced concomitantly to the benefit of all load serving entities in that local area.

I think it is incumbent that advocates for a central procurement entity show how it will be more cost-effective, efficient, and beneficial than the status quo.

Moreover, I think it’s necessary for the CPUC to consider alternative steps that can be taken to reduce the risk of CAISO backstop procurement. Far simpler and less costly approaches to instituting a central procurement entity may be at hand to reduce the risk of CAISO backstop procurement.  For example, the CPUC could simply increase its resource adequacy waiver price (to dis-incent the granting of waivers) and/or the CAISO could simply increase its CPM “soft-offer” cap (to incent load serving entities to procure local RA in the forward markets).

To the extent that CAISO backstop procurement is an actual problem, then we owe it to ourselves to consider solutions that are feasible, practical, and cost-effective.

Steven Kelly, Independent Energy Producers policy director.

 

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