In 2004, California Public Utilities Commission (CPUC) passed the least-cost best fit (LCBF) rule as part of California’s Renewable Portfolio Standard procurement. This statute required utilities to select renewable resources that have the lowest cost and that best fit their system needs.
While this rule had good intentions, it also had unintended side effects. While it meant to clarify which renewables should be selected to meet California’s Renewable Portfolio Standard and ensure the stability and reliability of California’s electrical grid, it created a system that tipped the scale toward certain renewables while leaving out others. Over the past few years, procurement of resources such as wind, solar thermal, and solar PV has gone up dramatically, while the procurement of baseload geothermal and biomass resources has declined significantly.
According to the CPUC, during the RPS period from 2003 to 2013, 6,000 MW of wind and 6,000 MW of solar were contracted by the Commission. Meanwhile, only 100 MW of geothermal resources were contracted for the same period. Geothermal generation is growing at a slow crawl in California as a result of this existing policy despite operating economically in the state for decades.
Why? The absence of integration costs in valuation is one reason for the bias. Without accounting for these costs, it’s impossible for utilities to make accurate cost comparisons among different renewable resources. Specifically, the basis of this tipped scale came from how LCBF was calculated. In the past, a non-zero integration adder was used for technologies like solar. This zero-adder was chosen because in 2004 there wasn’t enough evidence to estimate integration costs from respective technologies. And despite many reviews, policies, and mounting evidence over the last 10 years, which conclude that integration costs need to be considered, the CPUC has not changed its policy.
Integration cost, simply put, is the cost of connecting a power plant to the electrical grid. Different technologies can cost different amounts to connect. The most common factors in the integration cost include those for transmission upgrades and ancillary services. These costs can vary depending on the type, penetration levels and the supporting infrastructure of the resource in question that is selected to fulfill a power purchase agreement.
To understand how and why integration cost was left out when the CPUC was instructing utilities to estimate which technologies were the most affordable for their grids, it’s important to understand the difference between certain types of electricity sources. Not all renewables generate electricity equally; each technology has different strengths and weaknesses. There are intermittent sources that do not continuously generate electricity due to some factor outside direct control of the operator. Think of clouds blocking sunshine from reaching solar panels, for example. While intermittent power sources may be predictable with advanced meteorological techniques, the operator is dependent on nature for their electricity.
Other generators produce baseload power. This type of power is the minimum amount of energy that a utility or distribution company must generate for its customers and is usually supplied by technologies that can be controlled by human operation such as coal, nuclear, biomass or geothermal power where available. In the Western States particularly, geothermal power can be a sustainable and emission-free option.
There is also fast-peaking power. These are power plants that generally run only during peak demand when there is a high demand for electricity. Although these plants supply only occasional power, the power supplied commands a much higher price per kilowatt hour than a plant supplying baseload power. In the past, most of these plants have been natural gas power plants, but the current cheap price of natural gas has made it more common to use for baseload power.
Under the current system, LCBF has placed a significant amount of peaking and intermittent power sources on the grid by unintentionally making these resources appear more affordable. In truth, the unseen integration and ancillary costs are not factored in the equation, which makes for an inaccurate calculation that disregards baseload energy sources like geothermal power. If California continues on its current path, electricity rates will go up for the consumer as utilities scramble to rebalance their grids after procuring too much intermittent power.
When the CPUC wrote the zero-adder into law, they stated “that the further addition of intermittent renewables to the system may, in future years, cause us to change [zero-adder] determination.”
The future is here. It’s time to adjust the zero-adder for integrations costs in order to more accurately reflect the true costs of integrating different renewable technologies. It’s becoming a well-accepted fact in the electricity business that a diverse portfolio of renewable resources is best to ensure a low cost, well-balanced electrical system. The current construction of the law is pushing California away from a diverse renewable system and toward a high-cost, intermittent power system that could become unbalanced.
Lead image: Geothermal plant via Shutterstock