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Tuesday, January 4, 2011

2011 Predictions

It's time once again to prognosticate expected changes to the coming year.  With a "new" governor in Sacramento, things could get interesting. However, Governor Brown can probably be expected to stay the course regarding renewables policy, though he's less likely to veto "California-centric" 33% RPS legislation.  His stated energy policies are virtually identical to his predecessor’s, so there is little reason to expect significant changes, particularly as he focuses on resolving the state’s fiscal crisis.  Brown does have two CPUC Commissioner positions to fill, as well as one CEC Commissioner and two CAISO Governors.  How soon he fills those positions – and who he appoints – should give an idea of whether he intends any early redirection of regulatory energy.

Departed Commissioners Bohn and Grueneich represented the “extreme” positions on the CPUC (though with most Commission votes at 5 to 0, the distance between the extremes is not that great).  The Governor’s choices to replace them should give an idea of whether he plans a significant shift in CPUC policy.  Since the Commission has generally mirrored the Governor’s stated energy policy, there is no reason to expect any significant changes.  The current flow of events does, however, suggest some potential opportunities and challenges in 2011.

Resource Adequacy 
The CAISO has started the ball rolling toward reconsideration of some kind of centralized capacity market by asking the Commission to consider load following characteristics for resource adequacy.  The need to develop renewable integration products and maintain some level of viability for non-contracted conventional generation resources, should provide new life for a capacity payment mechanism.  The key to consideration of a capacity mechanism will be in emphasizing the need for resources available to integrate renewables.  If carefully handled, acknowledging the need for payment mechanisms to offset energy market price reductions could provide basis for new capacity market, though it will take 18 to 24 months to get anything adopted.

Long Term Procurement Planning
The first quarter will be the time to establish an out-of-the-box approach for new generation development.  IOU plans are likely to show minimal need for new resources.  Combination of slow economic recovery - less load growth[1], optimistic RPS and CHP forecasts - 2000 MW of new CHP seems excessive, IOU PV programs and RAM impacts are all likely to focus resource acquisition on replacing OTC units and supporting renewable integration.  Absent an explicit requirement to replace OTC generation with new flexible resources, the IOUs’ bundled customer service plan is likely to call for virtually no new gas-fired generation.  To the extent that OTC resource owners are able to come up with some kind of voluntary OTC replacement plan, they may be able to use it to justify new generation.  Whether the result will be a specific OTC replacement program or some kind of RFO “bonus” for OTC replacement remains to be seen.  This could be the year that a coherent OTC replacement policy gets serious consideration.

Smart Grid
A Smart Grid administrative structure will continue to develop.  Smart Meter brouhaha will dissipate as actual radio emissions impacts are understood.  Some sort of wired option - using landline telecom, perhaps - may become available as alternative for complainers, at their cost.  The idea of making smart meter installation optional is not likely to get much traction unless PG&E bungles things yet again.  Continued talk of smart grid as new killer app without any real consumer impact.  IOUs (particularly SCE) will push for money for grid improvements that improve reliability and operations.  ISO will continue to implement small changes, third party data entities will continue to participate with little in the way of meaningful business opportunity.

Electric Vehicles
The impact of EVs on the grid will remain trivial.  Price point and range limitations are likely to restrain enthusiasm.  The key to EV success may hinge on development of “battery service providers” that will facilitate battery swapping or other fast “refueling” options and change the equation for EV ownership.  Shake out will most likely evolve over the next two to four years as winning battery design and business models become apparent.  Long-term battery standardization and servicing model will be key to EV success.  Regulatory success will include the development of sub-metering rules that will not rely on utility ownership or control.  So far, the CPUC appears to be headed in the right direction – not attempting to put competitive EV service providers in the same category (and with the same restrictions) as electric utilities.

Renewable Portfolio Standard
This could be the year that the economic wisdom of the 33% RPS requirement begins to be questioned.  The combination of a good hydro year, continued low natural gas prices and PG&E’s negotiated General Rate Case settlement will keep current electricity prices from getting out of hand and igniting a "ratepayer revolt."  However, the next RPS solicitation (expected in the first quarter of 2011) should result in a revised – and reduced – Market Price Referent (MPR) that will make more renewable projects appear uneconomic.  A couple more large RPS projects will fail, causing much hand-wringing and questioning of the RPS paradigm.  Some big solar projects will begin construction, but by the end of the year California will not yet lead the world in installed solar generation capacity (but could by the end of 2012).  PV prices will come down a bit for smaller projects (sweet spot likely to be 5-20 MW thanks to IOU purchase programs).  33% RPS may get adopted by legislature, though there will finally be some questioning of the cost, particularly as gas prices - and MPR - continue to remain low.  Success of RAM and PV programs combined with failures of large projects may cause some questioning of reliance on huge projects.  It is possible that IOUs will finally decide that RPS prices are too high and exercise right to say so, slowing RPS procurement, but that probably won’t happen this year.

RECs will finally be adopted, though 33% legislation could muddy waters.

Energy Storage
“New” storage technologies will get a boost from the CPUC’s recent rulemaking (R.10-12-007) but only in how much it's talked about.  Policy development may be driven somewhat by PG&E’s pumped storage application.  Battery storage coordinated with EV development could begin to gain some steam.

Utility Generation Projects
PG&E's Manzana project will get a favorable PD and be approved.  If it is not, the language regarding ratepayer-funded versus developer-funded risk may be a useful stone to hurl at the CPUC's hybrid resource development paradigm.

SCE will get to build peaker in Oxnard.

CPUC Transmission Authorization
Questions will begin to arise about need for transmission projects as more huge RPS projects get cancelled anticipated delay in transmission development as projects look for ways to start building.

The CEC Infrastructure assessment will turn into a typical CEC activity - interesting but of minimal policy impact.  It will likely make use of information available from other sources and conclude that transmission is needed to access renewables.

The number AFC cases under consideration will be significantly reduced as the rush for ARRA funding ends.  Expect no more than 6 or so active projects once moribund projects are removed.  Several solar thermal projects with PPAs will need to either begin the siting process, convert to PV or fade away.

The CAISO is in the process of moving into its new headquarters which should keep it fairly internally focused during January.  They can expect some push back on the 2011 Transmission Planning Process, with questions about transmission projects included/excluded.  Expect some changes to the transmission plan as RPS projects rise and fall over the year.  It will become more and more obvious that out of state RPS projects likely to be more cost-effective and feasible than reliance on in-state resources.  If the legislature once again passes 33% RPS legislation that focuses on resources in California, it will further hamper the IOUs meeting the RPS requirement and may kick off the “it’s too expensive” argument.  Issue of WEC-wide balancing market likely to increase in importance, though implementation will be slow.

[1] The CEC issued a revised Short-Term Demand Forecast that estimates the CAISO peak demand will be some 2,400 to 2,700 MW below the 2009 forecast.  Current forecast values are comparable to the forecast in the 2006 LTPP decision (D.07-12-052).