On Feb. 28, 2018, my fellow Commissioners and I received a letter from NRG California South, which operates 11 natural-gas fired power plants in the state. The letter stated that NRG intended to "shut down and retire" two of its facilities: the Ormond Beach Generating Station by October and the Ellwood Generating Station by next January. Together, these plants have the capacity to provide 1,570 megawatts to residents and businesses in Southern California. 

In daily life, the critical role of these gas plants often goes unnoticed. NRG's brief letter would likely cause most Californians to shrug, or perhaps feel pleased that these older power plants, which emit high levels of particulate pollution when they run, will soon be shuttered. But as I will explain here, my colleagues and I at the California Public Utilities Commission know that these plants — and others — are in specific places where their power is vital to the reliability of the state's electric grid.

So what is the best response to the challenges exemplified by NRG's letter?  Last week, my fellow Commissioners and I approved a significant market redesign that was supported by a surprising range of stakeholders. Our decision (18-06-030) offers a window into the complex structure California has developed to plan and assure grid reliability.

How we got here

As with many aspects of California’s current energy system, this story has its origins in the electricity crisis of 2000-2001, when the state experienced market manipulation, high energy prices, and rolling blackouts. In the aftermath of the crisis, California’s leaders established laws and rules to keep such a disastrous situation from ever happening again. 

To implement these laws and rules, the CPUC designed a program called Resource Adequacy. Its title is literal: the program's purpose is to require entities that serve electric load to demonstrate that they have adequate resource capacity — the instantaneous power needed even in times of both the highest demand and large-scale outages — to serve their customers for anywhere from one month to a year. Plants that have capacity contracts may not run very frequently — sometimes just a few hours each year — but they are always ready, poised to operate if called upon. Looking back, Resource Adequacy has been a success: at the transmission level, the state has experienced a cost-effective, fully reliable grid for the past 15 years. 

At the same time, California has done a very good job developing a diverse energy portfolio. Over many years and with the investment of hundreds of millions of dollars, the CPUC has managed resource programs designed to bring new energy resources to market readiness. We are now home to leading-edge energy storage facilities, solar production that outdoes the rest of the country, wind resources from within and outside the state, first-ever market-based demand response, and energy efficiency that has kept energy use per capita relatively constant since the 1970s. 

All of these resources are functioning alongside more traditional nuclear, hydropower and natural gas plants to provide daily electricity to our state. The ever-growing diversity of electricity production in California is a good thing, and it has brought new — and welcome — attributes that are serving everyone. What’s more, our portfolio will now provide a platform for the state’s new, ambitious greenhouse gas emissions reduction targets.

Emerging threats to reliable and affordable capacity

Amid all this positive news, what is going wrong?  As in any complex system, gaps and inconsistencies can emerge that, if not fixed, may lead to gaming or other unfair behavior, which in turn can threaten reliability and affordability. To tackle these challenges, this year I proposed bigger-than-usual changes in the annual refresh of the Resource Adequacy program. These are more consequential than the typical technical refinements of the last decade, but I think conditions call for it.

Late in 2017, small load-serving entities began reporting that they were receiving insufficient responses to their requests for offers to buy Resource Adequacy Capacity. This was magnified by the fact that California is experiencing a proliferation of the number and type of entities that are procuring electricity for customers. While California law has long enabled "community choice," local governments began forming load-serving entities and gearing up to procure electricity in earnest in 2017. Where five community choice entities existed in December 2016, one year later, 21 community choice entities were operating or planning to operate in 2018. They now serve a combined 15 percent of the load under our jurisdiction.

As reliability planners, we begin to worry when the entities with a Resource Adequacy obligation begin to come up short at the same time as owners of critical resources — such as NRG — announce their intention to shut down. If there isn’t enough affordable capacity to meet demand, we start to fear a return to the market manipulation and high energy prices the state suffered through in 2001. 

The problem is magnified in areas with transmission constraints that we call "local areas." There are 10 local areas around California — thankfully few, but home to millions of Californians in places such as Humboldt and Fresno, as well as Oxnard, site of the Ormond Beach plant, and Goleta, the Ellwood plant’s home.

In these places, perhaps only one or two large power plants exist, and we don't have enough transmission to get other sources of power to customers in the rare event of scarcity. The generators in these areas are needed to serve load in case of major transmission outages. A reduction in supply means that we have very little buffer, and the conditions for not being able to meet demand are closer to reality. The gas plant's role in these places is narrow but critical: to keep the lights on in the face of extreme heat waves and unexpected outages.

The redesign

Faced with these conditions, I proposed two new policies, which my fellow Commissioners and I voted to adopt on June 21.

First, each fall, load-serving entities will be subject to a three- to five- year capacity requirement in local areas, which is a significant extension of their present obligations. It means that in 2019, load-serving entities — community choice aggregators, utilities and direct access providers — must have resources under contract for at least 2020 through 2022, and perhaps beyond. 

Second, should they wish to meet this obligation jointly, they can use a central buyer structure. A central buyer is a historically proven approach found in many other states. It also addresses load migration and cost-shifting issues while ensuring coordinated and cost-effective procurement. It allows one buyer to purchase capacity on behalf of several entities and protect ratepayers by avoiding non-market-based backstop procurement. Our aim is to use this administrative structure to improve market functioning and achieve cost efficiency, market certainty, and reliable electricity for California ratepayers.

Will it work?

I know that these policies aimed at natural gas plants seem counterintuitive given California’s long-term transition to an electric grid with dramatically lower greenhouse gas emissions. Yet in the near term, capacity from natural gas power plants is still needed to undergird our electric system, and some entities are having trouble procuring it via the market.  

In my view, ratepayer value and grid reliability dictate that we should retain these plants for the next few years. If the market-driven Resource Adequacy process is not delivering sufficient returns to provide incentives for critical resources like Ellwood and Ormond Beach to continue operating, then it is our job to redesign the market — or develop administrative alternatives.

In fact, one set of administrative tools is already in place for plants like Ellwood and Ormond Beach that propose to retire even as they are still needed for grid reliability. These tools are managed by the California Independent System Operator (CAISO), which ensures reliability in operations by balancing California's grid second by second. One of the tools is "backstop procurement," shorthand for a set of mechanisms to provide a contract to power plants that lack one, if the CAISO finds they are needed to ensure grid reliability. CAISO has used the backstop mechanism more frequently in the last few years, as the operators of more gas plants have announced plans to retire their facilities.  

But while the backstop program is an important part of our toolkit, it presents an affordability problem: ratepayers end up paying more, because the prices paid to the plants for their capacity are not set through a competitive process. So our redesign of Resource Adequacy provides one last market-based option for load-serving entities to use before the backstop program potentially kicks in.

I believe that given the conditions we are seeing, this pair of policy moves has the potential to bring California through the next few years with sufficient, reliable capacity at reasonable prices. Our actions also preserve key resources in the natural gas fleet for the increasingly narrow function that we need them for right now: to support the growing fleet of renewable and zero-emission generation that our state has committed to as the energy resources of the future, without compromising reliability or affordability.