CAISO Says Renewables Threaten Efficient Gas Plants

By Published On: November 27, 2011

Potential closure of a northern California power plant illustrates a debate about whether utilities or the grid operator need to enter intermediate-term power purchase agreements with existing plant operators that lack contracts to help balance out the intermittency of renewable energy supplies. More than 3,000 MW of highly efficient natural gas-fired capacity is at issue. On one side are Calpine and the California System Independent Operator, which claim that keeping the gas-fired plants open is essential. On the other are utilities and ratepayer advocates who say mandating fossil-fueled power purchase contracts is premature and could raise utility bills. The parties have been hashing out the issue in the past few months in two separate California Public Utilities Commission proceedings. One deals with resource adequacy and the other with utility long-term procurement planning. The issue gained urgency late last month when CAISO chief executive officer Steve Berberich called commission president Mike Peevey to say that Calpine intends to shut down its 578 MW Sutter Energy Center outside Yuba City. Berberich told Peevey that the efficient combined-cycle plant is so important to the grid that CAISO is seeking to enter an unconventional capacity contract to keep it open, according to a transcript of the conversation. “We’re always concerned with keeping capacity on the grid in the short-term and long-term,” said grid operator spokesperson Steven Greenlee. However, he said the grid operator knew of no definitive plan for shutting the down the Sutter plant, but instead that it’s concern was based on resource adequacy reports and other information. Calpine is concerned that it will eventually lose money operating the plant unless it comes under a long-term contract, explained Joe Ronan, company senior vice president. “With the net and no contract there is some question about the plant’s future,” he said. Ronan expressed hope that regulators would make policy changes to keep Sutter and other efficient gas-powered plants open. Calpine warns in two separate commission proceedings that the increase in renewable energy on the grid is threatening the economics of modern power plants that supply energy on a short-term basis but lack long-term contracts. Most of those plants were built during the state’s brief period of deregulation before regulators created today’s hybrid market in which utilities enter long-term power purchase agreements with new power plant developers in place of buying most of their power on a short-term or real-time basis. Net revenues for efficient natural gas combined-cycle plants without contracts have declined in recent years, Calpine attorney Jeff Gray told the commission in its utility long-term procurement plan proceeding. He presented data showing that their revenue has been cut in half. The prospect is for more of the same in the future, he wrote, which could cause Calpine and other plant operators without contracts to close 3,200 MW of modern capacity. Replacing the plants--which Calpine suggests would quickly decay once shut down--would cost up to $5.5 billion, according to Gray. To maintain the economic viability of the facilities--which can ramp up quickly to even out dips in energy from renewable resources--he’s urging regulators to order state utilities to sign three- to five-year “flexible” capacity contracts with Calpine and other operators. Independent Energy Producers policy director Steven Kelly said that the “incredibly clean” plants can’t bid into the procurement process under current CPUC policies, even though they could be a big help in integrating renewable energy into the grid in the years ahead. He added that their revenues have been hurt by declining power demand in the recession and consequently that they “are getting to the end of their rope.” Kelly called on the state regulators to show leadership by authorizing intermediate term contracts for the plants. The grid operator concurs, according to grid operator attorney Beth Ann Burns. In a filing earlier this month, she asked the state regulators to authorize a new category of procurement for resource adequacy purposes aimed at keeping the plants open. The grid operator wants to be able to enter resource adequacy contracts with the plants one year at a time. Pacific Gas & Electric attorney Charles Middlekauf maintains that studies to date on integrating renewable energy into the grid remain inconclusive regarding how much ancillary fossil fuel power could be needed in the years ahead. He points out that there may be more economical approaches than running fossil fuel plants. In its resource adequacy proceeding, for instance, the commission is examining the role that automated demand response programs--which quickly shed load upon command--could play in compensating for dips in output from renewable resources. The utility attorney also notes that the grid operator already has the power to order that plants stay open as long as they are needed and to put facilities without contracts on a closure watch list. The commission should be skeptical of “alarmist stories that the lights will go out” as it weighs the proposal by the grid operator and Calpine, according to The Utility Reform Network attorney Marybelle Ang. If the grid operator does enter contracts with the combined-cycle plant operators, she urges the commission to apportion any resource adequacy margin the agreements provide to individual utilities in the form of resource adequacy credits. This would reduce their resource adequacy costs on behalf of ratepayers, according to Ang. State policy generally requires utilities to maintain a 15-17 percent reserve margin of generation capacity.

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