Gluttony and Hunger

Last week I went with my family on a three-day cruise from Florida to the Bahamas. What would persuade me to go to the Bahamas in the middle of August with a ship of revelers? The occasion was the wedding of my niece who wanted to do something memorable for the happy occasion. It was so thoughtful, and she and her groom had a lovely ceremony. That said, this was one of those “all inclusive” cruises, where food abounds, and drinks flow freely. It seemed as if most of the passengers were intent on 72 hours of revelry on a scale that would have made Caligula blush.

While I am no stranger to enjoying the cheer of a few cocktails – on occasion too many –the corrupting effects of an open bar harkened to the effects of environmental policies combined with free-flowing financing in our industry of late. It was, sadly, predictable that years of easy credit and subsidies would inevitably lead to some “bad decisions” and acquisition of things that might not look good once one sobers up. Now, the boat may have docked in California. I, among many others, fear we may be looking around the landscape at assets that looked good in our exuberance, but may not serve us well in an actual dispatch. I speak of a resource mix that may be too heavy on variable energy resources – particularly solar – and not enough less sexy, dispatchable generation.

This mismatch of resources is highlighted in an unusual place: a California PUC docket on Integrated Resource Planning (IRP). Since it is the State of California’s own policies that have in large part generated the disparity, it seems a rare assertion of accountability on the part of the Commission. While CPUC staff suggested that the CAISO system might be slightly short planned generation in the immediate years, the CAISO staff painted a more sobering picture. It seems that the system may be more than 2,000 to 5,000 MW short in 2022 based on CEC estimates of on-peak demand and available resources. The relentless retirement of thermal generation – so desired by California policy makers – has occurred as the time of day for peak demand has shifted toward evening hours and the demand needs to meet steep ramping conditions.

Put the drinks on my tab, I’m good for it…

Very well, one might say, we can use imports to limp our way through this hangover until enough batteries are available to balance the system. Not so fast. The regions around California are experiencing their own changes in generation mix with renewables coming on and coal retiring while demand continues to grow. The assumption that there are large quantities of resources to be imported needs to be updated. CAISO seems to be doing this and has sounded an alarm bell that the system dispatch may be getting increasingly difficult to meet in the immediate out years. Moreover, the problem will only be exacerbated by the implementation of once-through-cooling regulations in 2022, and the impending retirement of Diablo Canyon nuclear station. Suddenly, it’s looking a little scary out there, particularly in the inevitable lean hydro years.

Now, before anyone accuses me of being anti-renewables, let me profess that is not the case. A prudent risk management approach to climate change provides the rationale to procure a change in generation investment in a sober and deliberative manner. That is the benefit of a cap-and-trade system: it imposes economic discipline on decision-making. The problem is that policy makers have been undermining the market for years; first by forcing regulated utilities to procure vast amounts of thermal generation in the 2000s, and then by pushing renewable procurement with rate-base financing and development that took advantage of federal and state subsidies.

The result? A glut of supply driving down market prices often leading, quite naturally, to a capitulation by owners resulting in the retirement of thermal unit. Had the development of generation – both for thermal and renewable resources – been subjected to energy market forces and prices derived by the cap-and-trade mechanism, the resources available to the CAISO would likely be much more balanced and flexible.

In the market environment we find ourselves today, it is very likely we will need extraordinary contracting to keep thermal capacity online and imports flowing into California. If history is any guide, these out-of-market resources will be supplemented by policies designed to double down on a massive requirement for storage. While storage is an evolving technology with long-term potential, the current limits of battery storage mean using it to solve the short-run problem will be expensive and difficult.

Sober reflection or more drinks?

What is needed is market-based mechanism to procure dispatchable capacity – e.g., thermal – that will only run for small periods of time. Whether this is a robust change in the way ancillary services are priced or changes to how California prices and procures capacity is open to debate. We must additionally revisit how demand can participate in the market to help balance the system. In the rush toward the promised land of renewables, demand response has been the overlooked or forgotten element that may be the easiest and least costly solution to implement.

My fear is that once policy makers come to grips with the immediate urgency of the situation they will reach for more “command and control” responses of the kind suggested above. We are about to wake up from our “cruise of indulgence” … but will we simply encounter more of the same unsustainable frivolity? Or do we disembark from our cruise and begin the serious business of dealing with the real world. I hope the latter, because the bar may be closed soon. Lights out.