The 2023-24 Budget: Proposed Energy Policy Changes

2023-24 BUDGET The 2023-24 Budget: Proposed Energy Policy Changes GABRIEL PETEK | LEGISLATIVE ANALYST | MARCH 2023 SUMMARY In this brief, we assess the Governor’s proposed changes to how the state procures and pays for reliable clean energy. The Governor proposes to (1) establish a new central procurement role for the state to secure energy resources that would be used by electric utilities, for which costs would be recovered from ratepayers, and (2) require electric utilities that experience energy deficiencies to make payments in support of a new state-operated program that provides emergency backup electricity resources. These proposals would represent significant changes in state-level energy policy, as electric utilities have historically been responsible for procuring and paying for energy resources and reliability. As such, the proposals raise a number of key questions for the Legislature to consider, including: (1) how these policy changes might impact electricity rates; (2) whether these proposals are necessary in light of existing state procurement requirements and significant funding provided for electric reliability in the 2022-23 Budget Act; (3) what risks the proposed new procurement role might pose to the state; and (4) the degree to which the proposals are needed now, as opposed to in a future year. We also recommend the Legislature weigh whether it may want to consider these proposals as part of the policy process, rather than the budget process, which could allow for more time for thoughtful deliberation. BACKGROUND The Legislature set interim targets on the path to this goal via Chapter 361 of 2022 (SB 1020, Laird), Greenhouse Gas and which requires that zero-carbon sources make up Clean Energy Goals 90 percent of statewide electricity sales by 2030 and 95 percent by 2035. As discussed next, the State Has Established Ambitious electricity sector has been a driver of statewide Greenhouse Gas (GHG) and Clean Energy emissions reductions thus far, but continued Goals. Chapter 488 of 2006 (AB 32, Núñez/Pavley) reductions are needed to meet these future goals. established the goal of limiting GHG emissions statewide to 1990 levels by 2020. In 2016, Electricity Sector Has Made Progress in Chapter 249 (SB 32, Pavley) extended the limit to Reducing Emissions Through Transitioning 40 percent below 1990 levels by 2030. Emissions to Cleaner Sources. Over the last decade, have decreased since AB 32 was enacted and the the electricity sector has been a primary driver state achieved its 2020 goal a year early. However, of statewide emissions reductions, as shown the rate of reductions needed to reach the SB 32 in Figure 1 on the next page. Reductions target are much greater. Chapter 337 of 2022 mostly have resulted from changes in the mix (AB 1279, Muratsuchi) established an additional of resources used to generate electricity— objective, requiring the state to achieve carbon primarily increases in resources characterized neutrality by 2045. In addition to these overall as “renewables” (such as solar and wind) along GHG reduction goals, the state has adopted with a decline in coal generation. A wide variety particular emissions reduction goals for the of factors have contributed to this shift, including electricity sector. Specifically, Chapter 312 of technological advancements, federal policies, 2018 (SB 100, de León) established a state policy and state policies. As shown in Figure 2 on the that 100 percent of retail electricity come from next page, nearly 60 percent of retail electricity zero-carbon sources by 2045. sales came from zero-carbon resources in 2020, including 36 percent from resources that qualify as renewable. www.lao.ca.gov 1 2023-24 BUDGET Reliability Challenges and Recent Funding Figure 1 State Facing Some Energy Emissions From Electricity Have Declined Significantly Reliability Challenges. Climate Million Metric Tons of Carbon Dioxide Equivalent change is contributing to demands on the state’s electric grid, with 140 warmer temperatures leading 120 to more calls for electricity during peak evening hours in the 100 summer months. In August 2020, 80 California experienced rolling 60 power outages due to a heatwave 40 and accompanying strain on the 20 electric grid. The state avoided outages in 2021 and 2022, but 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 energy resources were strained Source: California Air Resources Board (2022). California Greenhouse Gas Emission Inventory - 2022 Edition. during summer heatwaves. A major Data available at: https://ww3.arb.ca.gov/cc/inventory/data/data.htm heatwave in September 2022 caused the state to send an emergency text message alert to 27 million Californians to encourage energy Figure 2 conservation—the first time such a measure had been deployed. While the state has experienced Nearly 60 Percent of Retail Electricity significant growth in renewable energy sources in Sales Are From Zero-Carbon Resources recent years, solar resources are not well-positioned 2020 to supply energy during peak evening hours after the sun has gone down. Greater development of energy storage technology will be needed to help Natural Gas address the misalignment challenge of growing and Other Renewables demand during times that a key renewable energy Fossil Fuel source is not available. Significant Growth in New Energy Resources, but Also Project Delays. In recent years, the number of clean energy projects across the state has increased exponentially, with the amount of renewable energy supply more than tripling since 2005. Between 2020 and 2022, 130 new clean energy projects came online to serve customers Large Hydro Nuclear in the California Independent System Operator network, which provides electricity to 80 percent of California. However, some projects also have experienced delays due to issues with the supply chain, permitting, and connecting new resources to the electric grid. While the state is on track to continue to develop new clean energy resources over the next decade, such delays in bringing these projects online could pose challenges in meeting the state’s clean energy, emissions, and reliability goals. 2 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Recent Budgets and Policy Actions Provided • Distributed Electricity Backup Assets Significant Funding for Clean Energy and ($700 Million). This new program, Reliability. The 2022-23 budget package planned administered by the California Energy for $9.6 billion over five years for clean energy Commission (CEC), provides incentives for programs and reliability efforts. The administration certain distributed energy resources that indicates that California also has received federal can be used to support the state’s electrical funds to support various energy efficiency efforts grid during extreme events. The CEC is still through the Inflation Reduction Act and the developing the program, which is intended Infrastructure Investment and Jobs Act, but has not to fund zero- or low-emissions technologies yet provided specific details on the status of this such as fuel cells and energy storage at both funding or what types of projects it could support. existing energy facilities and new facilities. The Governor’s budget proposes some reductions In addition to these budget actions, Chapter 239 to state energy activities, but would maintain of 2022 (SB 846, Dodd) authorized the extension the majority of the planned funding ($8.7 billion). of the Diablo Canyon Power Plant (DCPP)—which Moreover, a large share of this funding—$3.3 billion was scheduled to retire by 2025—through 2030. across five years—is for three programs intended to Diablo Canyon is California’s last remaining increase statewide electricity reliability, which the nuclear power plant, and the state has identified Governor does not propose reducing. Together, the it as a valuable near-term source of zero-carbon administration refers to these three programs as the energy during the transition to greater renewable “Strategic Reliability Reserve,” and they include: resources. While the legislation authorized an • Electricity Supply Strategic Reliability extension, DCPP still has to receive required Reserve Program (ESSRRP, $2.3 Billion). permits at the local, state, and federal levels This program funds the Department of in order to continue operations. SB 846 also Water Resources (DWR) to secure additional authorized the following expenditures: electricity resources to help ensure summer • Loan to Pacific Gas & Electric (PG&E) (up electric reliability. So far, these activities have to $1.4 Billion). The Legislature specified included extending the life of gas-fired power intent to provide a General Fund loan plants that were scheduled to retire, and of up to $1.4 billion to PG&E to support procuring temporary diesel power generators extended operations at Diablo Canyon. and new energy storage. The ESSRRP Of this total amount, the Legislature has provided between 554 megawatts (MW) and authorized $600 million so far. The potential 1,416 MW of energy during last September’s remaining $800 million is subject to a extreme heat event. For context, the rotating future appropriation. PG&E was awarded outages in 2020 were caused by a shortfall of a $1.1 billion federal grant from the U.S. about 500 MW. Department of Energy in November 2022 and • Demand Side Grid Support ($295 Million). is expected to use this award to pay back the This new program, administered by the state for loans it ultimately receives. California Public Utilities Commission (CPUC), • Clean Energy Reliability Investment Plan provides customer incentives to reduce net (CERIP, $1 Billion). Senate Bill 846 also electricity load during extreme events. In the included legislative intent to provide a total summer of 2022, utilities began enrolling of $1 billion General Fund from 2023-24 participants in the program, which pays through 2025-26—$100 million in 2023-24, customers to reduce their energy usage $400 million in 2024-25, and $500 million during summer peak evening hours when the in 2025-26—to support the CERIP, which electric grid is strained. CEC recently developed. The legislation www.lao.ca.gov 3 2023-24 BUDGET required the plan to support investments Procuring Reliable that address near- and mid-term reliability Clean Energy Resources needs and the state’s GHG and clean energy State Generally Determines What Levels of goals. In accordance with the legislation, Energy Resources Are Needed, Then Requires the administration proposes to provide Regulated Local Entities to Procure Them. $100 million in 2023-24 for CERIP-identified With regard to CPUC-regulated electric utilities, activities. Specifically, the Governor proposes: the state generally has assumed responsibility for (1) $32 million for DWR to develop a proposed determining (1) how much energy will be needed to new central procurement role described reliably meet statewide demand, and (2) what share below; (2) $33 million for extreme event of those resources must be from renewable sources support (including additional funding for the to meet the state’s GHG reduction and clean energy Demand Side Grid Support and Distributed goals. After the state determines these needs, it Electricity Backup Assets programs); then requires local energy providers—known as (3) $20 million for various administrative, Load Serving Entities, or LSEs—to procure them. community engagement, and planning (As described below, this process works slightly expenditures; and (4) $15 million to help new differently for publicly owned utilities [POUs].) LSEs energy resources come online. can procure energy through purchasing contracts or by developing the resources themselves (such as by building solar arrays). Please see the nearby box for more background about LSEs. Load Serving Entities (LSEs) in California LSEs are entities that provide electricity to customers. They include the following types of organizational structures: • Investor Owned Utilities (IOUs): The territory of California’s six privately owned IOUs covers about 75 percent of the state’s electricity needs. The three largest IOUs in the state are Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric. The California Public Utilities Commission (CPUC) regulates IOUs by setting their electricity rates for customers and requiring them to procure and maintain a certain amount of energy resources. • Community Choice Aggregators (CCAs). The CCA program allows cities, counties, and other government entities within the service area of an IOU to purchase and/or generate electricity for their residents and businesses. The intention of this program is to increase options for customers. The IOU continues to deliver the electricity through its transmission and distribution system and provides meter reading, billing, and maintenance services for CCA customers. CCA energy resource needs are regulated by CPUC. There currently are 25 CCAs in California. • Electric Service Providers (ESPs). ESPs are non-utility companies that provide electricity to large electric users within the service territory of an existing electric utility. They are regulated by CPUC and there are 20 ESPs in California. • Publicly Owned Utilities (POUs): POUs are regulated by locally elected governing boards such as municipal utility districts, which govern POU energy resource needs and rates. The state has some authority over POU energy resources. POUs provide about 25 percent of the state’s electric services. Examples of large POUs include Sacramento Municipal Utility District and Los Angeles Department of Water and Power. There are 47 POUs in California. 4 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET State Has Adopted Numerous Requirements then required to use CPUC’s model to develop for LSEs to Help Ensure Reliability and their own individual IRPs. CPUC ultimately Procurement of Clean Energy Resources. approves each LSE’s IRP and the process is CPUC is responsible for a number of programs and updated every two years. The IRP process is activities designed to (1) grow the share of renewable CPUC’s primary planning tool to ensure that resources used to generate electricity and (2) ensure the state is meeting its emissions reductions regulated LSEs are procuring enough energy to both goals from the electricity sector. CPUC initiated serve demand and meet state GHG goals. These a related process, the IRP Procurement programs and initiatives include: Track, in 2019. The IRP Procurement Track orders LSEs to undertake additional resource • Resource Adequacy (RA) Program. procurement beyond the normal IRP planning The RA program was established in 2004 to time line, recognizing that some newer clean promote electric reliability. CPUC establishes energy resources have longer lead times (such RA obligations for all LSEs within its jurisdiction, as offshore wind and long duration storage). including Investor Owned Utilities (IOUs), Community Choice Aggregators (CCAs), and Recognizing that the state’s growing electricity Electric Service Providers. LSEs are required to needs and emissions reduction goals will necessitate demonstrate compliance with RA requirements new resources, CPUC has used these processes on both a monthly and annual basis and must to mandate unprecedented expansions in energy pay penalties if they do not comply. The current procurement in recent years. For example, between RA program mandates a 16 percent planning 2020 and 2022, CPUC’s IRP procurement orders reserve margin (that is, the amount of resulted in more than 11,000 MW of new energy resources an LSE must have on reserve, as resources, most of which are coming from solar, a percentage of peak total electricity load, in wind, and battery storage projects. CPUC also case of extreme events). The planning reserve has expanded its allowed time lines for LSEs to margin will increase to 17 percent in 2024. This secure new energy resources in recognition of the margin is also known as the planning standard timing difficulties in bringing these resources online. or RA margin. For instance, in February 2023, CPUC extended • Renewable Portfolio Standard (RPS). its deadline for a new procurement order that The RPS was established by Chapter 516 totals 4,000 MW of additional energy capacity from of 2002 (SB 1078, Sher) with the initial 2026 to 2028. requirement that 20 percent of retail electricity Public Utilities Also Subject to Some must be provided by renewable energy State Requirements for Energy Resource resources by 2017. The RPS program is Procurement. Because POUs are outside of overseen jointly by CEC and CPUC and has CPUC’s jurisdiction, some—although not all—of their been updated numerous times. Senate Bill 100 reliability requirements differ from those of other increased the RPS requirement to 60 percent LSEs, and their compliance with state requirements of retail electricity coming from renewable largely is overseen by CEC. Like other LSEs, POUs sources by 2030. All LSEs, including POUs, are are subject to the RPS requirements for renewable required to comply. energy procurement. Additionally, the state’s largest • Integrated Resource Planning (IRP) POUs (which account for 94 percent of POU electric Process. The IRP process was established load and customers) are required to submit an IRP in 2015 through Chapter 547 (SB 350, de every five years to CEC. In addition, Chapter 251 of León) to plan for how LSEs could meet 2022 (AB 209, Committee on Budget) required CEC mid- and long-term energy procurement to develop updated planning reserve requirements and GHG goals while maintaining reliability. for POUs that account for the increased frequency As part of this process, CPUC conducts of extreme weather events and reliability challenges modeling that sets out a path for the state the state has experienced in recent years. CEC to meet its energy needs while reaching its is required to develop these requirements by emissions reduction goals. Regulated LSEs are December 2023. www.lao.ca.gov 5 2023-24 BUDGET IOUs Sometimes Play Centralized state’s clean energy goals and satisfy electricity Procurement Role. LSEs generally are required demand. The state’s electricity planning agencies to procure new energy resources themselves, but anticipate that demand will grow significantly IOUs are legally authorized—and, in some cases, over the next decade due not only to climate required—to procure resources on behalf of other change and higher temperatures, but also to a LSEs. For example, a 2019 CPUC decision ordered shift towards zero-emission vehicles and more LSEs to procure additional RA-qualifying resources electric-powered appliances and heating. This and allowed IOUs to act as a procurement likely will necessitate adding larger “long-lead time” backstop. In response to this order, between 2020 resources (such as offshore wind, long duration and 2022, 15 LSEs elected to have an IOU procure storage, and geothermal electric generation) to the energy resources on their behalf. CPUC also has state’s portfolio. However, such resources typically compelled IOUs to procure resources on behalf are more expensive and take longer to develop. of other LSEs, because the relatively small size of Moreover, fewer of these projects currently exist some LSEs—in particular, many CCAs—can make in California, so local entities do not have a proven procuring larger resources somewhat difficult. history to rely upon when seeking to develop or Over the past few years, IOUs have experienced procure them. Because of the expense and general challenges in centrally procuring resources due to risk associated with newer, large technologies, associated costs, as they have simultaneously been smaller LSEs face particular challenges in procuring facing growth in other types of costs such as those these types of resources. related to wildfire mitigation. State Has Some Limited History of GOVERNOR’S PROPOSALS Undertaking Procurement Activities. While Governor Proposes Two Major New Energy the state mostly tasks LSEs with procurement Policy Changes. The Governor has put forward responsibilities, it has occasionally stepped in two major proposals related to procuring sufficient to undertake these activities in the past. For clean energy resources to meet reliability and example, during the energy crisis of the early GHG reduction goals. These proposals are 2000s, California experienced electricity supply contained in budget trailer legislation. The shortages and utilities struggled to attain capital for proposals include: (1) establishing a new centralized energy projects. In response, DWR financed energy energy procurement role for the state, for which purchases on behalf of IOUs and entered into costs could be recovered from ratepayers, and long-term contracts for electricity valued at over (2) requiring “capacity payments” from LSEs that $40 billion. The last of these contracts terminated experience energy resource deficiencies during in 2015. In addition, as mentioned above, the months when the state utilizes the ESSRRP. 2022-23 budget package committed $2.3 billion Figure 3 describes each proposal in detail. over five years for DWR to secure additional Some Initial Funding to Come From the electricity resources intended to ensure summer General Fund. As described in the figure, the electric reliability. So far, ESSRRP activities have Governor proposes to fund the ongoing support mostly extended the life of natural gas plants that and operational costs for DWR’s new procurement supply electricity—these plants are only turned on role from new charges to ratepayers. These charges when the electric grid is experiencing major strain. also would be used to pay off any bonds that DWR The administration indicates that the ESSRRP might issue for large capital costs. In addition, the also provided financing support to IOUs for their Governor proposes using General Fund in 2023-24 procurement of electricity imports last summer. to help “stand up” the new procurement function Clean Energy Goals and Growing Electricity at DWR. Specifically, the CERIP that CEC recently Demand Will Necessitate Procuring New Types submitted to the Legislature includes $32 million— of Resources. While California has brought a of the intended $100 million budget-year amount— significant amount of clean resources online in to help establish this new central procurement recent years, including wind and solar projects, office and process. new resources still will be needed to meet the 6 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Figure 3 Summary of Governor’s Major New Energy Policy Proposals New Centralized Procurement Role for the State 9 New Central Energy Procurement Authority. The proposal provides the California Public Utilities Commission (CPUC) with the option to identify either an Investor Owned Utility (IOU), the Department of Water Resources (DWR), or both to procure energy resources through a centralized procurement process on behalf of Load Serving Entities (LSEs) that provide electricity services to customers. The proposal primarily focuses on establishing requirements for DWR, as DWR does not yet have the authority to centrally procure electricity resources in the way that IOUs currently do. Any resources that DWR procures through this process would be available for IOUs, Publicly Owned Utilities (POUs), and other types of LSEs to use. DWR would utilize its new Strategic Reliability Reserve office and staff to manage the procurement. 9 Requirements for Types of Resources Procured. The proposal requires DWR to conduct a competitive procurement process and prioritize investments that do not compete with LSEs’ traditional procurement. According to the administration, the DWR procurement is intended to be for long lead-time resources such as offshore wind, geothermal, and long duration storage. The proposed statutory changes, however, do not explicitly limit this procurement option to those types of resources. 9 Authority for New Electricity Rate Charges to Cover Central Procurement Costs. The proposal gives CPUC the authority to impose a non-bypassable charge to ratepayers to cover DWR’s procurement costs, should CPUC find that the charge would not unreasonably increase costs to customers. A new Clean Energy Procurement Fund would receive the customer charges and support the procurement activities. 9 Authority for DWR to Issue Bonds. The proposal gives DWR the authority to issue bonds, if necessary, to fund up-front costs for its central procurement activities. These bonds would be repaid with the ratepayer charges noted above. New Charges for LSEs That Do Not Procure Sufficient Energy Resources 9 Require Payments if LSEs Do Not Meet Energy Capacity Targets. To discourage LSEs (including POUs, which are outside the CPUC’s jurisdiction) from over-relying on the Electricity Supply Strategic Reliability Reserve Program (ESSRRP), the proposal would require utilities that do not procure sufficient energy capacity to make payments to help support the ESSRRP. 9 Payments Calculated Based on Energy Resource Deficiency. The state would assess a payment if an LSE does not meet its reliability obligations in a month when the state had to access the ESSRRP. Specifically, the payment would be based on a calculation that factors in the cost of the energy resource provided by the ESSRRP and the LSE’s deficiency in meeting its monthly Resource Adequacy or planning reserve requirements. The payments would be calculated by CPUC and the California Energy Commission. 9 Payments Would Be in Addition to Existing Integrated Resource Planning Enforcement Penalties. The proposed new payments would be in addition to existing enforcement protocols. Specifically, an LSE that fails to meet its planning reserve margin or Resource Adequacy requirements for the given month when the state used the ESSRRP would be subject to both this new charge and existing penalty payments. Other Technical Statutory Changes to of crosscutting questions that the Legislature Existing Energy Policies and Programs. will want to consider as it weighs whether or The proposed trailer legislation also includes not to adopt any of these changes. As such, we various statutory changes for the three Strategic recommend the Legislature take sufficient time to Reliability Reserve programs and DCPP which the engage with the administration and stakeholders administration considers to be technical “clean up.” such that it feels confident it has answers to these questions. The Legislature has a number of options KEY QUESTIONS FOR for undertaking such deliberations, including LEGISLATIVE CONSIDERATION oversight hearings and both formal and informal information requests to the administration. Below, The Governor’s proposed changes to the we summarize the key questions that we find merit way energy is procured and paid for in California legislative consideration. represent a significant new role for the state. As we highlight below, the proposals raise a number www.lao.ca.gov 7 2023-24 BUDGET How Would Ratepayers Be Affected? Are Current Processes and Resources How electric ratepayers would be affected by Insufficient? The administration states that the the Governor’s proposals is unclear. In order to procurement option and capacity payments to the understand the potential impacts, we recommend ESSRRP are necessary to avoid energy shortfalls the Legislature consider the following issues when occurring among LSEs. However, these processes evaluating the proposal: largely have been adequate thus far, and the state has taken numerous other actions in pursuit of • New Charges and Capacity Payments. the same goals. Yet the extent to which existing Under the proposal, LSEs that do not reliability requirements and procurement processes procure sufficient energy resources would will be sufficient to meet future needs is uncertain. be required to make a capacity payment The following are existing processes and resources to support the ESSRRP. In addition, LSEs that are designed to support current and future could be required to apply a non-bypassable electric reliability: charge to ratepayers to cover DWR’s central procurement costs. The effects these charges • Existing IRP and Planning Processes. would have on rates are unclear. Given that As described above, LSEs are required California’s electricity rates already are among to demonstrate sufficient energy capacity the highest in the nation and rising faster to the state through the IRP process, than inflation, the Legislature will want to RA requirements, and—in the case of POUs carefully consider the potential impacts on not subject to those requirements—separate rates and whether the potential benefits merit planning reserve margin targets administered those costs. by CEC. While the electric grid has been • Market Effects of Central Procurement. strained in recent summers, whether LSEs Under the proposal, DWR would be able to are actually at risk of a serious shortfall that procure energy resources on behalf of the could lead to reliability issues is unclear. state and LSEs if requested by CPUC. The The administration reports that no shortfalls current market for energy resources is strained, have been identified by any LSE for IRP energy with a large number of LSEs competing for resource procurement recently. CPUC has a relatively small pool of projects that often recognized the need for more energy will take years to develop. How the entrance capacity and has issued numerous orders in of DWR—a large, well-resourced entity with recent years both for LSEs to procure more the backing of the state—would influence the resources and to extend the time they have market for new energy resources is unclear. to do so, recognizing the delays in permitting The market for large, long-lead time resources, and building new energy projects described which the administration says would be the above. In addition, as noted, efforts currently priority for DWR’s procurement, is somewhat are underway at CEC to develop new planning nascent and developing, as these types of reserve margin targets for POUs, which could resources are newer technologies and very support additional reliability. expensive to build. This makes it even more • Existing Collective Action. LSEs have difficult to predict the potential effects of the successfully banded together to procure central procurement proposal. Because DWR resources in the past. For example, CCAs and likely would have more resources to expend POUs have formed joint powers authorities to than other purchasers, it is also unclear how procure power on a collective basis. Taking energy resource developers may alter prices. this approach to procure larger, long-lead time Ultimately, how energy resources are priced will resources may prove more challenging, as affect the rates customers are charged. these resources can be very expensive and the market is limited. However, certain existing locally based collective approaches may be sufficient to meet reliability needs in the future. 8 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET • Existing IOU Central Procurement. What Are the Risks to the State? IOUs have been directed to procure on behalf The administration has expressed concerns that of other LSEs in the past, and CPUC has LSEs might be hesitant to procure large, long-lead authorized them to recover their costs of time resources because of their high cost and doing so. Additionally, last summer, the risk as newer technologies. The Governor’s state provided financing support for IOUs to proposal to have the state pursue procuring procure through the ESSRRP. Some IOUs these resources instead essentially shifts this have reported challenges procuring energy risk from the privately owned utilities (and their resources on behalf of others due to the high investors) to ratepayers and taxpayers. While this capital costs of procuring larger resources could help facilitate the development of these and a more diverse landscape with the important resources, additional information is rise of CCAs. However, if the Legislature needed about the types of risks involved and their was concerned about the potential risks magnitude for the Legislature to determine if they of DWR acting as a central procurement are worth the potential benefits. Additionally, the authority, expanding centralized procurement Legislature could explore whether it might be undertaken by IOUs could be an alternative able to adopt statutory “guardrails” or protections option worth exploring. If the state were to to help minimize potential risks to the state from provide financing support to IOUs, similar to pursuing unproven technologies. For example, how it did in the summer of 2022, cost issues this could include capping the amount of funding could prove less of a barrier. DWR could invest in newer and more uncertain • DCPP. As described above, the Legislature types of technologies. The Legislature also could has authorized the extension of DCPP through require DWR to prioritize certain types of resources 2030, though the plant will have to overcome that it believes to be safer types of investments, a number of regulatory hurdles before it such as long duration storage projects. While the can continue operations past its originally Governor’s proposal would require DWR to utilize scheduled sunset date of 2025. Accordingly, project evaluation criteria, whether these would the administration is not accounting for the be sufficient to adequately assess and limit the availability of DCPP-provided energy past potential risks to the state is unclear. 2025 in its reliability planning and modeling What Is the Status and Effectiveness of for the next decade. Given the remaining Recent Investments? The state invested heavily uncertainty around whether the extension in reliability efforts in the 2022-23 budget package will proceed, we find that this approach is and state departments still have not spent most of reasonable. However, if DCPP continues the associated funds. While the ESSRRP appears operations as intended, the plant would to have provided important reliability support provide a significant contribution to helping during the September 2022 heat wave—primarily the state meet its reliability goals—2,280 MW, through utilizing natural gas plants—how it might which is more than double the reliability provide support in future years still is unclear. benefits provided by the ESSRRP in 2023 and More broadly, the Strategic Reliability Reserve nearly five times the MW shortfall that resulted programs have significant funds remaining in their in the rotating outages of 2020. The availability balance. For example, as of February 2023, the of DCPP from 2025 through 2030 could ESSRRP had committed $654 million for specific significantly improve the state’s reliability expenditures, but $1.4 billion of funding the outlook and reduce the urgency of the need Legislature appropriated for 2021-22 and 2022-23 that the administration has identified for these remained unspent. If the ESSRRP continues new policy proposals. to be relatively slow to spend down its existing funds, asking ratepayers to provide the program with even more funds through the proposed capacity payments seems potentially unnecessary. www.lao.ca.gov 9 2023-24 BUDGET Specifically, whether capacity payments in support Should the Governor’s Proposals Be of the ESSRRP—which LSEs would pass down Considered as Part of the Budget Process? to ratepayers—are needed seems questionable, The Governor’s proposals represent significant given the availability of significant General Fund policy changes for the state and they do not resources from the previous budget. Moreover, have a particularly strong nexus with the budget. existing penalty requirements already are in place The Legislature will want to consider the most to help discourage LSEs from under-preparing, so it appropriate venue for discussing and deliberating is also not clear that these payments are needed to these proposed changes. For example, the incentivize compliance with planning mandates. Legislature could consider these proposals through Is a Central Procurement Function Necessary the policy process, rather than as part of the Now? Should the proposals be adopted as budget budget process. Ultimately, ensuring it has the trailer legislation, the new authorities they grant to time and opportunities for developing a greater the state would take effect upon enactment of the understanding, sufficient input from stakeholders, statute, even though the administration estimates and thoughtful deliberation will be vital to ensuring it it would not utilize the procurement option in the can make an informed decision on these important 2023-24 fiscal year. A rationale could exist for the proposals. Given the policy implications of the state to take on central procurement authority to Governor’s proposals and the fixed constitutional support the procurement of larger, long-lead time time frame associated with adopting the annual resources—particularly given that these are difficult budget—as well as the complicated fiscal decisions for individual LSEs to procure on their own or the budget process will involve this year, in the even banded together. However, whether this new context of the General Fund shortfall—the budget authority is needed urgently this year is unclear. process may not be the best venue for deliberating The Legislature may want to consider deferring a these proposals. decision on these proposals beyond the coming budget discussion time line or even beyond the 2023 session. Delaying action could sacrifice some time that could be spent beginning to develop these resources, but given the many questions that remain about this proposal, taking more time to weigh the trade-offs could be valuable. 10 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET www.lao.ca.gov 11 2023-24 BUDGET LAO PUBLICATIONS This report was prepared by Sarah Cornett, and reviewed by Rachel Ehlers and Anthony Simbol. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 12 LEGISLATIVE ANALYST’S OFFICE