A gas pipeline near San Jose, Calif. / Image via Shutterstock

San Diego’s new government-run utility will likely have to spend millions on natural gas-fired power it doesn’t want as it takes its first steps into the energy market this year.

San Diego Community Power, the new utility, wants to provide, at minimum, 50 percent renewable energy to its customers beginning March 2021. But a state law essentially requires it invest in a pricey piece of natural gas-based energy from the get-go under a knotty set of regulations set up to ensure the grid has more power than it needs on a hot summer day.

The public utility issued a bid Tuesday to purchase what’s known as “resource adequacy.” It’s not energy. It’s a payment electric utilities make to power plants to ensure they have enough power to exceed demand by 15 percent. The requirement is meant to curb the kinds of massive rolling blackouts experienced during a state energy crisis between 2000 and 2001.

That extra 15 percent capacity is a sliver of the San Diego Community Power’s energy portfolio yet one of the most expensive, according to estimates from Pacific Energy Advisors presented to the utility’s finance committee earlier this month. The consultants anticipate the utility will pay about $27 million for it, likely purchased largely from the private utility San Diego Gas and Electric.

Other new public utilities face similar high price tags in a capacity market dominated by California’s three private utilities. And some were slapped with multimillion-dollar fines from regulators when they couldn’t buy enough to meet state mandates under short deadlines.

“There aren’t enough sellers in this market, and that’s what’s really driven the price up,” said Lori Mitchell, director of San Jose Community Energy, a new government-owned utility that’s appealing millions in fines from the state Public Utilities Commission.

In short, government-run utilities created to lower energy costs and increase renewable energy use while breaking private utility monopolies now find themselves buying expensive fossil fuels from those same monopolies, which can charge sky-high prices because they lack competitors.

Renewable energy companies would like to compete for that required capacity by building big batteries that can store energy and drive natural gas-fired power plants into quicker retirement. There are plenty of interested buyers, especially government-owned utilities with ambitious greenhouse gas reduction targets like San Diego Community Power. But there’s another problem. The state regulatory agencies place very low values on renewable projects over fossil fuel ones, making it difficult for renewables to become true contenders.

“It really puts us in a pickle,” Mitchell said. “Right now we’d love to make some investments in (solar plus battery storage) but we’re very hesitant to do that because it may have no value.”

San Diego Gambles on SDG&E Playing Nice

As more and more cities break away and form their own utilities, the ratepayers automatically shift to the public utility unless they opt out. The 15 percent extra capacity requirement travels with them.

But investor-owned utilities hold most of the contracts on the power behind it, and all public utilities can do is hope they’ll sell it.

“It’s a small amount of power you have to buy but it’s expensive power,” said Cody Hooven, the city’s chief sustainability officer.

The estimated cost behind the backup power is cheap: $7.50 per megawatt hour. By comparison, the cost of renewables is an estimated $16 per megawatt hour. But San Diego Community Power is budgeting $27 million for just 1,200 megawatts of backup power on contracts it makes with SDG&E or competitors. By comparison, it plans to spend $19.2 million on 400,000 megawatts of renewables.

That shows just how inflated the cost of these backup power contracts have become.

San Diego Community Power should hear back soon on whether SDG&E will offer to sell. Any offers are due May 26 and San Diego Community Power will make a decision by mid-June.

Utilities have until Halloween to meet their 15 percent benchmark.

Hooven said she doesn’t know how much of the capacity SDG&E owns, is willing to sell or even has.

“We hope they will offer to us first,” Hooven said.

SDG&E communications manager Helen Gao told Voice of San Diego in an email the utility “(doesn’t) plan on participating” in the public utility’s bid. Instead, it will offer to sell its extra capacity on the market.

A similar negotiation went sour last year in Northern California between Pacific Gas and Electric and a new public utility taking its first steps into the energy market. San Jose found itself scrambling to find enough capacity months earlier than expected after some last-minute changes to the rules for purchasing capacity at the state level.

“We tried to purchase (some) from PG&E. That would have been an elegant solution but PG&E wasn’t interested,” Mitchell, the San Jose public utility’s director said.

PG&E did not respond to a request for comment.

San Jose did not meet the requirement by deadline, and the Public Utilities Commission returned with a hefty $6.8 million fine in February 2019.

The fine amount is synonymous with the amount of back-up power the utility couldn’t secure in time.

San Jose appealed the fine. CalCCA, an association of the public utilities forming across California, made San Jose’s struggle a central point in a larger fight against penalties for the increasingly scarce resource.

“(Public utilities) … are forced to make increasingly difficult choices: either accept unreasonable terms for a small amount of (capacity) that is available or risk the penalties of non-compliance,” an October 2019 petition to the Public Utilities Commission read.

Meanwhile, even private utilities are missing the mark, but often get their fees waived. That was the case for SDG&E, which filed a request to the Public Utilities Commission asking for relief from meeting part of its capacity requirements in 2019. The utility had “pursued all commercially reasonable efforts” Edward Randolph, the director of the energy division, agreed in a letter granting the waiver dated Feb. 12.

Government-owned utilities are also pursuing “commercially reasonable efforts,” CalCCA argued in its petition. But they’re not getting reasonable prices or offers at all in some cases, it wrote.

The total amount of capacity fines rose from about $150,000 in 2017 to over $9 million in 2019, CalCCA noted in its petition.

Mitchell said San Jose saved enough to cover the cost of the fine should it end up having to pay.

“(Customers) still saved money being with us,” she said. But that money could have been used to offer even lower rates or support community projects, Mitchell said.

Several other government-run utilities received fines over $1 million in previous years, like Pioneer Community Energy northeast of Sacramento and East Bay Community Energy based in Berkeley.  Those utilities paid the fines until San Jose appealed. Now those same utilities are following San Jose’s lead and appealing subsequent fines.

Smaller electric service providers also get slapped with fines. Just Energy Solutions Inc., which provides electricity to all three of California’s investor-owned utilities, accrued $550,000 in fines as of January 2019. The company paid those fines because the legal fees would outweigh the benefits, said Inger Goodman, Just Energy Solutions Inc.’s regulatory manager.

“(Regulators) keep telling us there’s plenty of capacity but when we put out our (bids) we aren’t getting any offers,” Goodman said. “The capacity is there. It’s just a matter of who’s holding onto it and who’s selling it.”

Capacity Rules Could Be Blocking Renewable Energy Expansion

Currently natural gas-fired power plants provide most of this extra backup energy, and electric utilities pay power plants to provide it. Such a plant owned by NRG Energy Inc. in Carlsbad sits idle most of the year. But it can fire up in about 10 minutes to help meet summer heat wave demand. (It replaced an older plant built in the 1950s that took 18 hours to ramp up.)

California could have retired 27 percent of its natural gas power plants in 2018 without negatively affecting the reliability of the electric grid, concluded a report published that same year by the Union of Concerned Scientists, a scientific advocacy organization.

Renewable energy companies want to build projects that could eventually replace natural gas. But they aren’t considered as reliable as conventional fossil fuel power under a kind of state scoring system called “net qualifying capacity.”

Renewables are rated much lower under this system in part because, if the wind isn’t blowing or the sun isn’t shining, the energy isn’t available all the time to provide backup power. Gas can be stored for an eternity on site. But renewable energy companies say they can build utility-scale lithium-ion batteries that store the sun and wind’s energy more reliably.

“The regulation has lagged behind market development,” said Rachel McMahon, senior manager of public policy at SunRun, a solar company based in San Francisco.

One example is the (Cuyamaca) El Cajon peak energy plant in San Diego County, said Lauren Randall, SunRun’s director of public policy. The natural gas backup plant was acquired by SDG&E.

“We can replace that with solar paired with storage and we can do it in a way that has equity, affordability and community benefit at the heart of it,” Randall said.

San Jose recently signed agreements with a developer to install batteries paired with solar technology that should guarantee power from 6 a.m. to 10 p.m. Still, because renewables don’t count as much toward state-mandated capacity requirements, it’s harder to monetize the full value of them, Mitchell said.

“(Public utilities) were formed to advance local clean energy goals. By really stacking the regulations in favor of gas plants, it’s really challenging for us to meet those goals,” Mitchell said.

Disclosure: Mitch Mitchell, SDG&E’s vice president of state governmental affairs and external affairs, sits on Voice of San Diego’s board of directors.

Correction: An earlier version of this post misstated where SunRun is based. It is based in San Francisco.

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