California’s Community Choice Energy (CCE) industry purchases twenty-five percent of the electricity California consumes. Its CCEs are causing new solar and energy storage plants to be deployed faster than the state requires and with greater effect.
The renewable share of electricity sourced by California’s CCEs will approach 100 percent by 2030, earlier in some cases, later in others, but generally outpacing state goals. [i] Even better news: CCE generation costs are lower than investor owned utility (IOU) generation costs.
California CCEs purchase electricity from large projects, mostly outside their own service areas. This means CCE-enabled decarbonization investments are supporting decarbonization goals but not local goals for greater electricity self-reliance and stronger local economies.
California diverts a portion of CCE revenues to state regulated IOUs. CCEs call this portion an “exit fee”.[ii] Regulators call it a “power charge indifference adjustment (PCIA)”. Figure 1 shows that PCIA fees have increased by nearly an order of magnitude over several years.
The PCIA revenue diversion also prevents CCEs from purchasing power from (or investing in) community renewable and storage projects and from collaborating with cities and counties to plan for and accelerate the state mandated transition to electric vehicles.
In a 2017 article about CCE entitled “The Exit Fee Dilemma”[iii], I predicted that “legislative action will likely be needed to balance legitimate financial interests of utility managers and increasingly compelling interests of local jurisdictions in economic and infrastructure resiliency.”
The PCIA does more than just compensate IOUs for the cost of navigating a state mandated transition. It is a permanent annual revenue diversion that continues indefinitely, even though 2002 CCE authorizing legislation, AB 117[iv], only allowed recovery of specific transition costs for a predictable and limited period after CCE customer enrollment. [v]
AB 117 clearly specified CCE transition cost responsibilities. But the California Public Utilities Commission (CPUC) redefined them in 2006[vi] and then again in 2018[vii]. Each CPUC ruling significantly expanded CCE cost responsibilities. Adding the PCIA to the actual cost of electricity generation now compels CCEs to charge roughly the same price for bulk electricity as IOUs charge[viii].
Figure 1 below shows that PCIA charges have increased by hundreds of percent and by hundreds of millions of dollars in recent years.[ix] In some cases, the PCIA has reached as high as 4.5 cents per kWh, or more than a third of the total cost California CCEs must recover from their customers.
PG&E PCIA Growth (Source: San Jose Clean Energy
California CCEs have reduced their power procurement costs to levels well below those of their IOU counterparts. Absent the PCIA, CCE generation service rates would be highly attractive relative to IOU generation rates. From a regulatory perspective, this outcome might become disruptive for IOUs. Instead, it is highly disruptive for CCEs.
So, generation cost savings CCEs capture are not being invested locally but rather are handed over to the regional IOU that provides electricity transport services in their area. As a result, IOU generation customers now pay less for electricity than they would have if California’s two dozen CCEs had not been launched.
California CCEs focus on bulk electricity procurement and struggle to build capacity for an integrative local role. Their strategic interest in local resource development is overshadowed by the need for revenues to cover both costs of power purchases and PCIA revenue transfers to IOUs.
Diverting a portion of CCE revenues to state regulated IOUs does not result in lower cost, lower carbon, or more resilient electricity service. Rather the opposite. The PCIA has become an impediment to locally important CCE goals and financial stability, diverting CCE attention from local resource and infrastructure development.[i]
PCIA variability and unpredictability are as problematic as explosive PCIA growth. For some CCEs, the PCIA has changed by a factor of two or more in a single annual cycle. The PCIA process in California is opaque and dependent on information that cannot be checked or challenged, making total annual CCE annual operating costs impossible to forecast and putting strategically important CCE long term plans at risk.
PCIA variability and unpredictability also restrict CCE capacity and appetite for local engagement and investment. By exposing CCEs to highly variable costs outside their influence or control, the state limits their effectiveness as facilitators of local climate action and adaptation. By creating the appearance of cost parity between IOUs and CCEs, it eliminates an incentive for IOUs to manage their generation costs.
One other indirect effect must be acknowledged. CCEs will continue to view IOUs and the CPUC as unreliable, perhaps even hostile, partners, and significant cost and climate saving opportunities that require CCE/IOU collaboration will continue to be missed.
Is corrective action possible? Regulatory precedents are hard to set aside, but could CCE revenue collections that now flow to IOUs be put to better use?
They could if they were retained by CCEs and used to make community solar projects attractive to investors, communities and electricity customers.
Every CCE member jurisdiction has suitable sites for community solar projects. In other states, community solar projects are delivering both local and statewide benefits, including transmission cost containment and avoidance. At present in California, these benefits cannot be monetized and captured by project developers and used to offset higher costs of smaller projects located where solar resources are less ideal. So, community solar project developers cannot meet the prices offered by developers of larger solar projects located in California’s best solar resource areas.
Continued heavy reliance on centralized renewable electricity supply may be working to California’s economic and environmental disadvantage. Transmission costs are increasing while costs of community-scale solar projects are not. California’s electricity market assigns the same value to large projects with low generation cost and high transmission usage as to smaller, somewhat more costly, projects with little or no transmission usage. In California, community renewable projects cannot be financed based on prices the California electricity market pays.
New California legislation[ii] authorizes both IOUs and CCEs to propose community solar programs. However, it fails to address the gap between costs of community solar projects and larger projects that feed in at higher voltages. For the new legislation to have the intended result, California needs to find a way to supplement the prices its electricity market pays for power generated and delivered locally.
CCEs are natural sponsors and facilitators for community renewable projects. Why not reduce a CCE agency’s PCIA obligations by the amount the CCE spends to make community solar (and local storage paired solar projects) price competitive with larger projects? Doing so would:
1. Put California CCEs in a position to purchase power from cost-effective community solar and storage paired solar projects in their service areas;
2. Reduce the need for massive new investment in long distance, high voltage transmission capacity;
3. Enable CCEs to assist the communities they serve in striking a resilient balance between centralized and decentralized systems and resources; and
4. Deliver an extra dividend on California’s investment in creating a strong, capable CCE industry.
Recommendation. California needs a way to capture the environmental and economic benefits of community solar. Other states have found a way. California’s CCE industry should ask the California legislature to consider allowing California CCEs to use all or a portion of annual CPUC mandated PCIA charges to put local renewable projects on an equal economic footing with projects that require new high voltage transmission capacity to deliver electricity locally. This will increase CCE capacity and flexibility to address local energy resilience needs and to provide equitable access locally to the environmental and economic benefits of solar electricity.
California’s PCIA is restricting CCE capacity and flexibility to address local needs and aspirations. In general, it is an impediment to CCE/IOU collaboration. The California legislature should aim to make state-imposed cost responsibilities as fair and predictable as possible. It may be necessary to bring state law and the PCIA into alignment by amending or clarifying AB 117.
End Notes:
[i] In some cases, they have had the effect of consuming and destabilizing CCE financial reserves.
[ii] https://fastdemocracy.com/bill-search/ca/20212022/bills/CAB00024748/
[i] State law sets a goal of 60% renewable electricity by 2030.
[ii] Investor owned utility customers in California may not “depart” or “exit” IOU generation service to CCE service without causing their CCE generation provider to pay a fee every month thereafter to compensate the IOU for its loss of the portion of the customer’s revenues that cover “above market” generation costs - even though the customer had not been informed of the fee/penalty when signing up for IOU electricity service. The narrative underlying transition costs in CCE authorizing legislation was that customers departing IOU generation service for CCE service should be held responsible for “net unavoidable” costs of electricity supply contracts previously entered into by an IOU on their behalf.
[iii] https://www.iresn.org/news/2017/8/1/the-exit-fee-dilemma
[iv] See http://www.leginfo.ca.gov/pub/01-02/bill/asm/ab_0101-0150/ab_117_bill_20020924_chaptered.pdf for AB 117 text.
[v] Departing IOU generation customer obligations, aka “exit fees”, were defined in CCE authorizing legislation, AB 117, as follows: “Any additional costs of the electrical corporation recoverable in commission-approved rates, equal to the share of the electrical corporation’s estimated net unavoidable electricity purchase contract costs attributable to the customer, as determined by the commission, for the period commencing with the customer’s purchases of electricity from the community choice aggregator, through the expiration of all then existing electricity purchase contracts entered into by the electrical corporation.”
[vi] In 2002, California IOUs were contracting for large blocks of natural gas fueled generation to take advantage of relatively low natural gas costs. Subsequently, they contracted for large blocks of renewable generations to meet RPS requirements. The California legislature intended when it passed AB 117, for transition costs arising out of power contracts an IOU had entered into prior to a CCE’s launch to last only as long as the contracts remained in effect. There is no evidence the California legislature intended that CCE and IOU rates increase in lock step no matter how high IOU generation rates go. But now on average they do. In 2006 , the CPUC introduced a method of determining an annual “Power Charge Indifference Adjustment” (PCIA) for all ratepayers. The PCIA is added to costs a CCE incurs to procure electricity. The PCIA is derived from the utility’s “Indifference Amount”, which is updated annually in each IOU’s Energy Resource Recovery Account (ERRA) proceedings. The Indifference Amount is the difference in a given year between the cost of the IOU’s supply portfolio and the market value of the IOU’s supply portfolio. In 2018, the CPUC changed the PCIA to require CCE customers to pay the “above market cost” of all IOU generation, including IOU owned power plants. These changes directly conflict with a specific provision of AB 117, which limited transition fees to “estimated net unavoidable electricity purchase contract costs”. See end note vii.
[vii] Cf. https://cal-cca.org/sb-612/
[viii] The result for CCEs is like an engineer’s understanding of the laws of thermodynamics: “You can’t win. You can’t break even. You can’t even get out of the game.”
[ix] They can also go down when the cost of IOU generation portfolios go down or their value goes up as happened in 2022.