UK: The California Public Utilities Commission Approves New Categories For Renewable Energy Procurement

In last year's 2011-2012 First Extraordinary Session of the California Legislature, California adopted numerous changes to its renewables portfolio standard (RPS), most notably to raise the State's RPS targets from 20 percent of retail sales to 33 percent (Senate Bill 2 (1X) or 33% RPS Law). In doing so, the Legislature also defined specific types of renewable products that are eligible to meet the RPS standards, but placed limits on the amount of renewables procured for some of those product types. These "product content" categories are codified in new Section 399.16 of the California Public Utilities Code. Of the three broad categories defined, only transactions that meet the various criteria of the first category (i.e., in-state renewable generation and its functional equivalents, as described in greater detail below) will be counted for satisfaction of RPS obligations without annual restrictions.

On December 21, 2011, in response to its May 5, 2011 Order Instituting Rulemaking,¹ the California Public Utilities Commission (CPUC) issued a decision to implement the State's product content rules (Decision).² The Decision is one of several CPUC decisions that will be needed to implement California Senate Bill 2 (1X). The Decision provides guidance to stakeholders in western power markets as to what types of renewable products will be eligible for unlimited procurement in the first category³ and which renewable products will be deemed to fall in the second and third categories (and thus be less marketable as a result of the annual procurement limitations imposed by Senate Bill 2 (1X)). For certain more complicated types of products; however, the Decision leaves open many details regarding compliance and implementation.

Senate Bill 2 (1X)

Effective as of December 10, 2011, Senate Bill 2 (1X) makes numerous and complex changes to the RPS program. Senate Bill 2 (1X) extends the State's RPS goal from 20 percent of retail energy sales by California investorowned utilities (IOUs), electric service providers (ESPs) and community choice aggregators (CCAs) to 33 percent by the end of 2020⁴ and creates portfolio content categories for RPS procurement.

Implementation

All participants in California's RPS market must provide the CPUC with more transactional information than has been previously required. Such information will allow the CPUC staff to assess the appropriate portfolio content category of RPS procurement and make subsequent compliance determinations. Specifically, in order to facilitate the new portfolio content category scheme, an IOU⁵ seeking CPUC approval of its RPS procurement contracts in the advice letter process must make an "upfront showing" related to the categorization of each proposed RPS procurement transaction. The upfront showing must be sufficiently detailed to allow for a finding that the IOU may recover its contract costs. Details in the basic contract (which typically includes information concerning the generation facility, interconnection, transmission rights and scheduling plans) may be supplemented with information from generation meter data, the Western Renewable Generation Information System (WREGIS), and additional agreements for dynamic transfer or firming and shaping (discussed below).⁶

The CPUC staff separately must determine whether the procurement complies with the requirements of the claimed portfolio content category. All retail sellers, including ESPs and CCAs, must maintain documentation of the entire course of each RPS procurement transaction for review by CPUC staff.⁷ This conformity determination is different from the CPUC's general enforcement of RPS procurement quantity requirements, which is based on each retail seller's total RPSeligible procurement as verified by the California Energy Commission (CEC).⁸

Public Utilities Code Section 399.16

The three portfolio content categories created by Senate Bill 2 (1X) are set forth in Section 399.16 of the Public Utilities Code and apply to RPSeligible generation associated with RPS procurement contracts or ownership agreements executed after June 1, 2010 and to RPS-eligible generation from utility-owned generation (UOG) facilities with an online date after June 1, 2010.

Category 1

The first category (Category 1) covers three subcategories of renewable energy transactions as set forth in Section 399.16(b)(1) of the Public Utilities Code,⁹ namely (i) in-state generation, (ii) outof- state generation scheduled into a California balancing authority¹⁰ without substitution from any other generation source, and (iii) out-of-state generation that is dynamically transferred into a California balancing authority. There is no annual percentage procurement limit for Category 1 transactions, and thus California utilities subject to RPS requirements should have a strong incentive to first seek procurement through transactions that qualify for Category 1 status.

In-State

The first sub-category of Category 1 transactions is relatively straightforward and generally covers in-state renewable generation (whether distributed or utility-scale).

Out-of-State and Scheduled Into a Balancing Authority Without Substitution

The second sub-category of Category 1 transactions covers renewable energy produced outside a California balancing authority that is imported into a California balancing authority without substitution from any other source. It does, however, allow use of another source for real-time ancillary services required to maintain an hourly or sub-hourly import into a California balancing authority. Only the fraction of the schedule actually generated by the renewable energy resource will count toward Category 1. For these types of transactions, the Decision notes that firm transmission may be beneficial in demonstrating that an out-of-state transaction qualifies for Category 1 status bringing "greater certainty and value," but the CPUC did not require firm transmission.¹¹

While the CPUC did not clearly address how the parties can demonstrate that an out-of-state renewable procurement transaction qualifies under the "scheduled without substitution" criterion for Category 1 status, it specified at least some of the "upfront showings" required by utilities in their advice letters for procurement in this category. The CPUC noted that demonstration of compliance with the criterion of scheduling into a California balancing authority area without substituting electricity may create some burden for retail sellers and recognized that, currently, there is no system that can gather all of the data necessary to document this criterion.¹² In the interim, the CPUC directed retail sellers to retain all records (such as WREGIS data, e-tags, transmission schedules and generation facility metering data) in an "auditable" form for possible later compliance checks.¹³ Compliance determinations also require more detailed information on generation schedules, delivery and ancillary services.¹⁴ CPUC staff, CEC staff, WREGIS staff and the parties to this proceeding may work to develop a more comprehensive and long-term approach to upfront showing and compliance determinations.¹⁵ Thus, these types of Category 1 transactions may be subject to further scrutiny and their compliance requirements subject to further refinement in the future.

One issue of debate in the rulemaking proceeding was whether unbundled renewable energy credits (RECs) originally associated with generated renewable energy that would meet these criteria also would fit into Category 1.¹⁶ Senate Bill 2 (1X) does not define "unbundled RECs" but does provide that a REC means a certificate of proof associated with the generation of electricity from an eligible renewable energy resource. This definition is unchanged from the original definition of a REC, which has been understood to record the production of RPS-eligible electricity — but not to actually include any energy or other power attributes of generation.¹⁷ The CPUC clarified that the REC carries the renewable and RPS compliance value, and once a REC has been separated from the RPS-eligible energy, the underlying energy may not be counted for RPS compliance.¹⁸ Accordingly, the CPUC made clear that unbundled RECs in and of themselves, even if originally created in connection with energy generated within a California balancing authority area, could not qualify for Category 1 status.¹⁹

Dynamic Transfers

The last subcategory of Category 1 transactions covers out-of-state renewable generation that is covered by an agreement to dynamically transfer electricity to a California balancing authority. Dynamic transfer refers to a range of methods by which a balancing authority receiving electricity generated in another balancing authority area may provide some or all of the functions and services typically provided by the balancing authority in which the generating facility is interconnected.²⁰

The CPUC acknowledged that the actual dynamic transfer arrangement is made between the balancing authorities (not between the generator and buyer) and interpreted the Section 399.16(b)(1)(B) criteria to mean that the generation claimed for RPS compliance is covered by an agreement executed by a California balancing authority, before the electricity is generated, to dynamically transfer electricity from the RPS-eligible generator outside a California balancing authority into the California balancing authority area during the time period in which the RPS-eligible electricity is generated.²¹

As with out-of-state transactions that are scheduled into a California balancing authority without substitution of the renewable energy, the CPUC left parties some flexibility as to how they may demonstrate that a transaction is appropriately deemed to be a dynamic transfer, noting that the "techniques and protocols" for these transactions "are evolving."²² However, although few transactions in this category have been previously accepted by the CPUC for RPS procurement purposes, one recent example of an accepted dynamic transfer is San Diego Gas & Electric's procurement from LS Power's planned Arlington Valley solar facility, accepted in CPUC Advice Letter 2311-E.²³

Category 2

The second category (Category 2), as set forth in Section 399.16(b)(2), applies to RPS-eligible generation located outside of a California balancing authority area and includes "firmed and shaped" transactions providing incremental renewable energy. Although Senate Bill 2 (1X) does not define "firmed and shaped" (nor does the industry provide a generally accepted definition), the CPUC views firmed and shaped transactions "as fundamentally providing substitute energy in the same quantity as the contracted-for RPSeligible generation, in order to fulfill the scheduling into a California balancing authority of the RPS-generation."²⁴

The CPUC stated that the general characteristics of firmed and shaped transactions can be translated into three elements that maintain the flexibility inherent in this category while providing the particularity required to allow transactions in this category to contribute to RPS compliance: (1) the buyer's simultaneous purchase of energy and associated RECs from the RPS-eligible generation facility without selling the energy back to the generator; (2) the availability of purchased energy from the buyer and (3) the initial contract for substitute energy is acquired no earlier than the time the RPS-eligible energy is purchased and no later than prior to the initial date of generation of the RPS-eligible energy under the terms of the contract between the buyer and the RPS-eligible generator.²⁵

In addition, a firmed and shaped transaction also must provide "incremental" electricity that is scheduled into a California balancing authority area. Several utility parties had argued that "incremental" should be interpreted as "procured at any time after June 1, 2010."²⁶ The CPUC rejected this proposal and instead adopted another proposal that "incremental" means "not in the portfolio of the retail seller claiming the transaction for RPS compliance prior to the firmed and shaped transaction."²⁷

IOUs seeking CPUC approval of contracts in Category 2 must make an upfront showing of the terms on the contract, the value to ratepayers and the projected cost over the life of the contract.²⁸ Compliance determinations will be based on whether the elements of a firmed and shaped transaction are present in the procurement.

Category 3

The third category (Category 3), as set forth in Section 399.16(b)(3), is a residual category covering three elements that fall outside of the first two categories: (1) eligible renewable energy resource electricity products that do not qualify under the first two portfolio content categories; (2) any fraction of the electricity generated that does not qualify under the first two portfolio content categories; and (3) unbundled RECs.

The CPUC determined that Category 3 is intended to cover a quantity of RPSeligible generation that failed to meet a particular criterion, e.g., a firmed and shaped transaction, where some of the substitute electricity is not scheduled in the calendar year of the RPS-eligible generation.²⁹ It is expected, however, that unbundled RECs will be the largest component of this category. Parties to the rulemaking proceeding disagreed whether unbundled RECs originally associated with electricity that would meet these criteria also would fit into Category 1 transactions (discussed above).³⁰

Upfront showings

An upfront showing in an IOU's advice letter must show (1) that the levelized price does not exceed $50 per REC (for contracts signed prior to December 31, 2013) and (2) that the RECs sought to be purchased were originally associated with RPS-eligible generation.³¹ Compliance determinations will be based on whether the unbundled RECs were retired in WREGIS for RPS compliance.³²

Usage Limitations

Section 399.16(c) sets forth specific requirements for all retail sellers pertaining to procurement credited toward certain compliance periods. Ultimately, as of January 1, 2017, 75 percent of the eligible renewable energy resource electricity products associated with contracts executed after June 1, 2010 must meet the requirements of one of the three new product content categories, but not more than 10 percent may be included in Category 3.

Contracts or Ownership Agreements Executed Prior to June 1, 2010

As outlined in Section 399.16(d), procurement from contracts or ownership agreements signed, or utility-owned generation online, prior to June 1, 2010 may be counted for compliance with the RPS without regard to the quantitative requirements for the use of each portfolio content category, with certain exceptions. The renewable energy resource must have been eligible under the rules in place as of the date the contracts or agreement was executed and, for an electrical corporation, the contract must be approved by the CPUC (even if such approval occurs after June 1, 2010). In addition, the energy underlying any RECs from such contract, agreement or generation that are unbundled and sold separately after June 1, 2010 may not be counted for compliance with RPS and instead must be counted in accordance with the limitations on procurement in Category 3.³³

The CPUC approved the Decision (5-0) although Commissioner Peevey reiterated concerns regarding the cost of RPS compliance associated with firmed and shaped transactions and expressed disappointment with the decision that all unbundled RECs must be placed in the residual Category 3.

Footnotes

^{1 Order Instituting Rulemaking To Continue Implementation and Administration of California Renewables Portfolio Standard Program, R.11- 05-005 (May 5, 2011).}

^{2 Decision Implementing Portfolio Content Categories for the Renewables Portfolio Standard Program, D.11-12-052 (Dec. 15, 2011).}

^{3 Throughout the CPUC proceeding, many parties referred to the different portfolio content categories as "buckets." In declining to use the bucket designation in the Decision, the CPUC stated that "the portfolio content categories have a more complex structure than can be captured by the 'bucket' metaphor." Decision at 6 n.10.}

^{4 This goal also includes retail sales by publicly owned utilities, over which the CPUC does not have jurisdiction for RPS purposes.}

^{5 The CPUC generally does not review the contracts of ESPs and CCAs.}

^{6 Decision at 8-11.}

^{7 Decision at 11-13.}

^{8 Decision at 12.}

^{9 Decision at 18.}

^{10 A "California balancing authority" has control over a balancing authority area primarily located in California. Pub. Util. Code. § 399.12(d). Currently, five balancing authorities have more than 50 percent of their load located within the state and, thus, meet this test: the California Independent System Operator Corporation, Balancing Authority of Northern California (formerly the Sacramento Municipal Utility District), Imperial Irrigation District, Los Angeles Department of Water and Power and Turlock Irrigation District.}

^{11 Decision at 26-27.}

^{12 Decision at 39.}

^{13 Decision at 39-40.}

^{14 Decision at 41-42.}

^{15 Decision at 42.}

^{16 Decision at 28.}

^{17 Decision at 29.}

^{18 Decision at 30.}

^{19 Decision at 32 ("[s]ince the categories are express, prescriptive, and separate, [Category 3] is where unbundled RECs belong").}

^{20 Decision at 27.}

^{21 Decision at 27-28.}

^{22 Decision at 28.}

^{23 See also California Indep. Sys. Operator. Corp., FERC Docket No. ER12-381 (Dec. 27, 2011) (accepting for filing amendments to the Interconnected Control Area Operating Agreement between the California Independent System Operator and the Salt River Project balancing authority area to implement pseudoties consistent with its dynamic transfer policy).}

^{24 Decision at 46.}

^{25 Decision at 46-57.}

^{26 Decision at 47-48.}

^{27 Decision at 49.}

^{28 Decision at 52.}

^{29 Decision at 54.}

^{30 Decision at 28.}

^{31 Decision at 56.}

^{32 Decision at 57.}

^{33 Decision at 82-83.}

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