Guest Juice: Blind Man’s Bluff

By Published On: October 12, 2012

By Steven Kelly “Least-Cost/Best-Fit” has been the guiding procurement principle at the California Public Utilities Commission for some time now. The intent is to ensure that the utilities procure power to meet their needs at the lowest cost to ratepayers. Originally arising in the Renewable Portfolio Standard legislation, the principle now is applied generically to all utility long-term procurement practices. From a procurement perspective, this is a fine guiding principle. However, what does “least cost/best fit” mean in practice? In California, while we have competitive markets to help achieve “least-cost” outcomes, the marketplace has become inundated with developers, i.e., sellers, operating virtually in the dark when it comes to knowing what it will take to “fit” into the utilities’ needs. I suggest that the lack of transparency in procurement practices is not cost-free. In reality, the current practices have tremendous and often costly consequences--congested interconnection queues which drive up costs and delay development, congested Requests For Offers which result in delay due to hundreds of bids from hundreds of bidders, etc. In the end, the state often has to rush to procure resources just in time to maintain overall grid reliability. These outcomes stem largely from sellers trying to guess what the utilities want and value most highly. For example, do impacts on local communities matter more than location? Does location matter more than ramping speed? Who knows? I surmise that if sellers don’t know what buyers--namely utilities--want, when and where they want it, then sellers blindly push anything on their plate toward the utilities. Furthermore, this is an inefficient and costly outcome. While in tandem with implementing the state’s technology-specific resource goals, e.g., the renewable energy mandate, the Combined Heat and Power program, and various energy efficiency initiatives, it’s time for the Commission to re-think its approach to transparency in procurement. It is particularly timely now because the state is moving toward a more product-oriented energy market (think “flexible capacity”) in which the operational characteristics of generation to follow load and/or support the integration of renewables will increasingly matter. For example, a utility spokesperson at a recent CPUC workshop suggested the need to move to what I would describe as a “multi-attribute/value approach” for project bid evaluation as the means to provide the utilities with the necessary tools to evaluate and compare the value resources, including so-called preferred resources, in the context of future market needs. This makes perfect sense, at least in theory. What will this proposed approach mean in practice? This approach will only exacerbate the unintended consequences mentioned above. Think congestion in interconnection queues and requests for offers, increased costs to ratepayers, etc., if sellers have no real clues as to what operational attributes are needed to best “fit” into the utilities’ portfolio, when and where they need those attributes, and how bid evaluation will actually “value” one attribute against another in light of all the other policy prescriptions and rules placed on utility procurement practices. We may be, yet again, at a cross-road where the Commission and the utilities can choose to improve procurement practices or, alternatively, maintain the status quo. At this pivotal point in time, we should be asking the fundamental question: will the information employed by the utilities to determine “greatest value” and “best fit” be transparent to developers as they conceive of and develop projects? Alternatively, will the information remain generally hidden from the market in which case we risk perpetuating the unintended and costly consequences that we have witnessed over the past decade? Unfortunately, the risk is high that the need for transparency continues to be skewered by the lingering ghost of the 2001 energy crises. I expect California’s planning and procurement practices to continue to struggle under the weight of too many projects, too few viable projects, and too little time will remain to modernize the fleet and ensure overall grid reliability at truly the lowest cost and best fit. Unless the Commission takes it upon itself to shed some transparency on procurement, we all end up in the dark and it won’t be least cost. --Steven Kelly is the Independent Energy Producers policy director, Edited By:

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