In most electric utility service territories in California, local renewable energy is assessed fees for transmission usage, even though local renewables do not use the transmission grid.

Worse, locally generated energy is assessed transmission usage fees that are exactly the same as the transmission fees assessed on energy that is generated remotely and dependent on hundreds of miles of transmission grid usage.

Local renewables like rooftop solar generate energy for use on the distribution grid. The market distortion resulting from local generation being assessed transmission fees means that local renewables are being robbed of approximately $0.03/kWh of value, which is equivalent to more than 30% of the average wholesale cost of energy in California.

An alliance of over 40 stakeholder organizations, led by the Clean Coalition, has been urging the California Independent System Operator (CAISO) to eliminate transmission charges on local generation. CAISO sets the rules for California’s transmission system and has an easy opportunity to resolve this massive market distortion in its upcoming wholesale Transmission Access Charge initiative.

By applying a transmission charge approach already in place for the state’s municipal utilities, CAISO can help stimulate the deployment of substantially more local renewables, and Californians will start seeing a lot more commercial-scale renewables like solar on rooftops, parking lots, and parking structures.  Through slowing and eventually reversing the growth in transmission costs, California ratepayers could expect to save approximately $50 billion over the next 20 years. [1]

The problem

Currently, CAISO collects Transmission Access Charges (TAC) from utilities on a per-kWh basis to recover costs associated with building, financing, operating, and maintaining California’s transmission grid. The TAC rate varies by utility, but the $0.03/kWh in the Pacific Gas & Electric (PG&E) service territory over the course of a 20-year power contract is indicative. [2]

Utilities like PG&E pass these charges to ratepayers through the transmission and delivery component of their bills. Utilities always recover TAC costs in full from their customers, so they will continue to recover all transmission costs after the TAC market distortion is fixed — but ratepayers will save billions in transmission costs by avoiding transmission investments that would be made if the TAC market distortion persisted.   

It is worth noting that CAISO assesses TAC in two different ways, depending on whether a utility owns transmission infrastructure that is managed by CAISO. For utilities that do not own part of the CAISO-managed transmission system, like California’s municipal providers, CAISO correctly assesses TAC based on the amount of energy that the utility pulls from the transmission grid. Any energy that is produced by distributed generation and consumed within the local distribution grid avoids TAC. In other words, these non-Participating Transmission Owner (non-PTO) utilities properly pay TAC only on the energy that actually uses the transmission system.

In contrast, utilities that own a stake in the CAISO-managed transmission infrastructure, including PG&E, Southern California Edison, and San Diego Gas & Electric, operate under the distorted TAC structure. For these Participating Transmission Owner (PTO) utilities, CAISO assesses TAC on every kWh of electricity that passes through a customer meter, regardless of whether the energy originated on the customer’s roof with no use of the transmission grid or 1000 miles away with heavy use of the transmission grid.

The time to correct the TAC market distortion is now, because transmission costs are rising quickly. CAISO has long predicted that the TAC rates will increase 7% each year. [3] In addition, CAISO’s 2015-16 Transmission Plan cites a long list of transmission projects slated to meet California’s energy needs. If market incentives for local renewables are not aligned soon, California ratepayers will be responsible tens of billions of dollars in transmission costs that could have been avoided by investing in local generation.

The solution

Transmission costs should be applied consistently across all utilities based only on energy that actually uses the transmission system. This can be accomplished with the simple fix proposed by the Clean Coalition: use the method applied to non-PTO utilities for all service territories, and charge TAC based on Transmission Energy Downflow, which is the energy that flows from transmission grid to the local distribution grid. This diagram illustrates the problem and solution:

This simple fix will create consistent transmission cost treatment across all utilities and align TAC payments with actual use of the transmission system. Importantly, no new equipment will be necessary to implement this solution because the transmission metering infrastructure is already in place.

Once TAC are solely based on energy sourced from the transmission grid, market prices will accurately reflect the true costs of different types of power — meaning local generation will be more competitive. PTO utilities currently select energy bids by comparing energy pricing only and ignoring transmission costs, since they apply TAC to all energy. Since locally generated energy, including exported net metering energy, does not use the transmission grid, local energy should avoid TAC, and the locally generated energy should be credited with approximately 3 cents/kWh of additional value, as illustrated in these charts:

Importantly, the TAC correction will save ratepayers billions of dollars by avoiding unnecessary transmission investments. Assuming a modest increase of 10% in local generation output each year, the Clean Coalition’s proposal would slow the expected growth in TAC rates and eventually even cause them to decline, saving California ratepayers approximately $50 billion and over the next 20 years.[3] In addition, communities would see the substantial economic, environmental, and grid resilience benefits associated with local renewables.

CAISO can correct this market distortion that robs from local renewables. The fix is simple: consistently apply the non-PTO TAC treatment to all utility service territories.

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[1] The Clean Coalition bases this analysis on (i) PG&E 2015 Distributed Resource Plan filings showing slow trajectory growth in the share of Gross Load that will be served by distributed generation (DG); (ii) assuming PG&E's share of Gross Load served by DG applies to all PTO utilities; and (iii) assuming CAISO’s 2014 stated projection of 7% nominal growth in TAC rates over the next 20 years. We then compare PG&E’s Business-As-Usual 260 MW DG growth in Year 2, plus 100 MW Additional DG (i.e., wholesale DG + NEM exports) and 10% annual growth in share of PTOs; new Gross Load served by new DG generation. The analysis assumes that new DG generation never exceeds forecasts for new Gross Load.

[2] See Clean Coalition Comments in Response to the Transmission Access Charge Options Issue Paper (Nov. 11, 2015).

[3] See CAISO Memorandum from Keith Casey, Vice President of Markets; Infrastructure Development, Briefing on Long-term Forecast of Transmission Access Charge (Oct. 25, 2012).