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United States

GIVING CUSTOMERS A CHOICE

The CPUC finally adopted a deregulation framework, claiming it will offer customers a wide variety of choice from 1998. The framework incorporates a wholesale power pool and opportunities for direct access. The plan endorses AWEA's "renewables portfolio standard," which could guarantee a market for wind, but also includes provisions which limit near term opportunities. There is criticism of the surcharge on ratepayers requiring them to pay separately for old, uneconomic plant such as nuclear reactors. The surcharge will distort the pool price: utilities will be allowed to sell power into the pool very cheaply because all they will be collecting is the cost of ongoing operation and maintenance, instead of full capital costs. This is not regarded as true competition. If pool price reflected market prices for electricity, wind would have a fair chance. The five year transition period is considered too long. The key to making competition work could be to allow residents to band together in large blocks of demand, but the CPUC plan appears to prevent this for some years.

The California Public Utilities Commission (CPUC) finally adopted a deregulation framework on December 20 that will govern America's largest electricity market, ending a process of often acrimonious debate that dragged on for over two years and which attracted the attention of energy experts around the globe. Before a standing-room-only crowd, a divided CPUC endorsed a plan put forward by its president, Dan Fessler, and rejected a slightly more radical free market plan offered by two other CPUC commissioners. "With the decision today, we open the door to the broadest array of choice in which former ratepayers can function as informed customers," said Fessler. "The variety of customer choice which we seek for Californians after January 1, 1998 is currently unavailable in the world."

Based largely on a negotiated compromise offered by the Independent Energy Producers, large electricity consumers and Southern California Edison, the new CPUC deregulation package, approved on a three-two vote, incorporates both a wholesale power pool similar to the one currently operating in the United Kingdom and opportunities for customers to have direct access to alternative electricity supplies. Both options for power would be made available at the start of 1998, along with so-called "contracts for differences," where purchasers of electricity could hedge the risks of pool prices through fixed price contracts arranged with pool participants. Yet another option would be to continue buying electricity from the existing local distribution company (the current monopoly).

The new plan lays out a five-year transition period whereby all customers will be assessed a new surcharge to help pay for older, uneconomic power plants such as nuclear reactors. In addition, the deregulation plan lays out strategies to ensure today's electric utilities do not dominate tomorrow's market, but calls for these details to be finalised within the next 100 days.

The approved plan raised as many questions as it answered. While it endorses the "renewables portfolio standard" that has been pushed by the American Wind Energy Association (AWEA) and which could eventually guarantee a new market for wind power, it also includes a number of provisions which close observers feel will limit near term opportunities for all renewables.

The positives . . .

"We think the commission has selected the proper path -- moving renewables forward by maximising reliance on market forces while minimising additional fees, bureaucratic oversight and long, expensive administrative processes," states Randy Swisher, AWEA executive director. Swisher notes the CPUC specifically rejected establishing a surcharge to fund renewables, a position favoured by many environmental groups. He cautions, nonetheless, that the next eight to nine months are critical as this is the time period when both the "CPUC and the California Legislature will be hammering out the details" of the approach to renewable energy development.

Swisher remarks that the portfolio standard promises to "get solid gains in deployment of renewable capacity without having a huge financial impact." The standard would require all distributors or sellers of electricity in California's huge $14 billion electricity market to purchase a minimum amount of renewable energy. Just how much is yet to be determined. "We could end up with a real market for renewables -- something we've never had before," says Swisher, referring to the fact that past efforts to incorporate renewables such as wind power relied upon price supports and explicit subsidies.

And the negatives . . .

The reaction from Livermore-based Kenetech, the troubled US wind industry leader, is less enthusiastic. "There are some good words about renewables [in the order], but we've been hearing good words for six years now," comments Eric Miller, the firm's director of business development. "I think their conviction [to renewables] is sincere, but there is nothing in this order that adds predictability in the marketplace or any real business opportunities. Will anyone commit to a new wind project in this state because of this order? We don't see anybody stepping forward," adds Miller.

One of the principal ironies of the CPUC plan, Miller points out, is its commitment to allow utilities and independent power producers to recover all past stranded investments in above market power plants from ratepayers. While this protects Kenetech's existing 500 MW of wind capacity located in the state, a lucrative source of direfully needed revenue for the company, it also protects all uneconomic plant, "delaying real market prices for electricity for quite a long time," says Miller. However, the CPUC has provided utilities with incentives to renegotiate existing power purchase contracts to bring costs closer to current market prices. For example, Pacific Gas & Electric or Southern California Edison will be allowed to keep 10% of any cost savings derived from renegotiated power purchase contracts.

Nonetheless, enforcing a separate surcharge on customers to pay for old plant distorts market prices because utilities will then be allowed to sell power into the power pool very cheaply. All they have to collect is the costs of ongoing operation and maintenance, instead of the full capital cost associated with their power plants. This tilts the market in favour of utilities, since non-utility competitors wishing to construct new state-of-the-art facilities will not enjoy such subsidies and therefore will not be able to enter the market.

Rich Ferguson, national Sierra Club energy chair, is particularly concerned about this latter impact. "The utilities are allowed to fully depreciate all of their assets before competition hits. That's not real competition," Ferguson complains. He uses the following illustration to show how the future system would work -- at least until 2003 and 2005 -- when the real market competition gets underway.

The surcharge required to pay for the above market costs associated with nuclear and existing independent capacity could amount to as much as $0.06/kWh. The likely price of power sold into the wholesale power pool -- called the Power Exchange -- will be only $0.01-0.02/kWh because this is what utilities will be able to bid for old fossil fuel units that are almost already fully depreciated. "No new clean power plants can compete at such an artificially low price," says Ferguson, referring to the expected pool prices. If the surcharge for uneconomic plants on the system can be minimised, and the power pool price reflect real market prices for electricity, "then there might be some room in the system for other stuff -- like wind and other cost effective renewables," he points out.

Ferguson sums up the gist of the CPUC deregulation plan like this: "We will protect the utilities for the next ten years and then feed them to the wolves." He worries, however, that during this protracted transition, non-utility generators, such as Kenetech, could perish. "That would be a terrible result," he acknowledges, concluding: "It would be really neat to see how customers behave if renewables resources such as wind power were allowed to compete on truly equal terms."

The CPUC plan, contend critics like Ferguson and Miller, still frustrates those customers who wish to buy clean renewable energy such as wind power in the near future. The key to making competition work, according to a growing consensus of renewable energy boosters, is to ensure that residents be allowed to band together in large enough blocks of demand to reach the economies of scale necessary to lower the costs of new renewable energy facilities. The approved CPUC plan appears to place limits on these transactions until the early part of the next century. But wind and renewable energy developers in the US need to be able to access such opportunities now in order to get a firmer toe-hold in the emerging competitive market for power.

a good road map

Despite all the nits, AWEA consultant Nancy Rader is optimistic that the CPUC plan provides a decent road map to revitalise an industry that was on the verge of major success before the deregulation bomb fell in California and then was dropped in at least 30 other states.

Rader has produced a detailed analysis of the critical issues for wind developers under the brave new world of competition articulated by the CPUC. Among the major issues she sees are the following:

¥ What target level of resource diversity will serve as the base for the "renewables portfolio standard?" AWEA has long argued that January 1994 should be the base year, since that is the high-point for renewable resources on California's system. Among the issues are definitions of renewables: do utility-owned projects count? And at what rate should the standard's target escalate? AWEA suggests starting at about 11% of state energy needs earmarked for renewables, increasing to 13% by the year 2000, an increase of 1.8% which is equivalent to the amount of renewables that would have been added to the state's system through the now comatose Biennial Resource Plan Update (BRPU).

¥Who should be subject to the standard? Rader suggests retail electricity providers should be those governed by the standard while the Independent Energy Producers prefer imposing the renewables requirement on distribution utilities. This issue will have to be resolved in the California Legislature.

¥How do you promote diversity within the renewables standard? The CPUC is concerned about the closing of several biomass plants in California because of high costs associated with gathering fuel. The wind industry does not, however, want to create different bands for each technology within the renewable standard because it would increase costs and only limit new opportunities for wind power, the cheapest renewable energy option.

¥A series of very complicated issues surround the administration of renewable energy credits, including who will actually own these credits and be able to profit from them. The most important aspect, claims Rader, is that the credits are used to create one large market for all renewables, no matter who is assigned ownership. "Creating a single market is important to maximise efficiency," she says. Existing projects will have to find ways of adjusting their prices if this is necessary to stay in the market.

AWEA's Swisher points out that for the renewables standard to really work, it needs to operate on a national scale. He says AWEA is considering pushing for federal legislation incorporating the standard. In addition, the states of Massachusetts and Wisconsin are currently looking at the standard, as are boosters of wind in the Pacific Northwest.

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