A Fork in the Road on California’s Route 33

California has a plan. And as with most visionary goals, it’s long on ambition and short on details.

So the state’s utilities are often left to chart their own course as they work their way toward getting 33 percent of their power from renewable sources by 2020. The challenges are vast, and among the major questions utilities in the state are facing is whether they’ll drive themselves to the finish line or whether they’ll pay someone else to take them there.

Two utilities at different ends of the state have settled on contrasting approaches to reach the 33 percent mark. Southern California Edison (SCE) is relying on power purchase agreements (PPAs) as its preferred mode of transportation. The much smaller Sacramento Municipal Utility District (SMUD) is banking on ownership as the vehicle that makes the most sense for its situation.

Though these utilities are on different ends of the spectrum — SCE serves 13 million people while SMUD serves 1.5 million customers in Northern California — they are staring down some of the same challenges to meeting the 33 percent goal. They’ve been incrementally creeping their renewable portfolios upward, but they’ve been doing so at a time in which a weak economy has drastically cut energy needs. As the economy gains steam, consumption will go up as well — so maintaining that percentage of power produced by renewables will become an even steeper challenge.

The Ownership Model

This is America, and ownership is the dream, right? Utilities get a lot out of ownership. They get control. They get consistency that extends beyond a 20- or 30-year contract. They get to better manage in which forms of renewable energy they will invest. They also get to plunk down a whole lot of capital.

When looking at the wind industry, SMUD realized long ago that it had a great source in its own backyard. The source and the need weren’t going anywhere, so the utility opted to invest long term. SMUD’s Solano County wind farm was developed in 1994 and added to in 2006. The utility will double the project’s capacity this year by adding 128 MW of turbines.

“We decided to own the wind rights and own the projects,” said Jon Bertolino of SMUD. “We did our own development, which allowed us to act as the lead agency for permitting purposes. If we bring the land, bring the wind rights, bring the permitting approvals and bring the interconnection into a deal, then we can get lower costs.”

It’s also seen as a good way to hedge against the volatility of fossil fuels with a technology that will produce predictable results.

Even at SCE, which has opted to go almost exclusively with the PPA approach, there is obvious value in doing it yourself, even if it does come with all the headaches that are inherent in ownership.

“It really adds certainty to the project when utility ownership is involved,” said SCE’s Dan Chase. “We see everyone from two guys, a dog and a good idea to [more stable projects]. So many times the projects that you think are going to work end up falling apart, and I think utility ownership helps with that piece.”

The PPA Route

It’s no secret why PPAs are valued by utilities — especially those working to bring new renewable energy projects online quickly and with little upfront cost. SCE has decided to place its investment dollars mostly toward the ownership of transmission projects, which gives the utility financial benefits while allow project owners to tap into new areas of development.

From SCE’s point of view, it allows the utility to be more “technology agnostic,” rather than make big financial bets on which types of technology it wants beyond the length of a contract. “We will take the last, best and final offers in an RFP and we rack ‘em all up and we try to negotiate contracts with the ones that look best and meet the need for that time,” said Chase.

And while utilities don’t own the project, they still have a financial stake in it’s success. What they don’t have, however, is control.

“What [developers] do with a project after they get the PPA is totally up to them and we don’t really have any input into that anymore,” said Chase. “But we hope that they come online on time, on schedule and with what they said they were going to come online with.” Chase added that, “it’s shocking how often that doesn’t really happen.”  

It’s all a part of the new world in which California’s utilities exist — straddled between requirements from the state to meet high RPS targets, pressure from customers to keep costs down, and internal debates about which path to take on the road to 33 percent.

Image: Dudarev Mikhail via Shutterstock

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