Why Southern California Edison’s 125 Megawatts of DER Contracts May Get Rejected

Over the past decade, California has pushed utilities to invest in distributed energy resources (DERs) like rooftop solar, energy storage, demand response, electric vehicle charging stations, and other pieces of its future grid. 

Now, state regulators are on the verge of a first-of-a-kind decision to cancel a major DER investment that’s been nearly two years in the making — an unexpected move that’s left contract winners facing the loss of nearly two years of effort and millions of dollars in future business. 

Last month, the California Public Utilities Commission issued a proposed decision that would deny Southern California Edison from collecting ratepayer funds to pay for 125 megawatts of contracted DERs that constitute the second phase of its Preferred Resources Pilot, dubbed “PRP 2.”

The proposed decision is a sharp turnaround from the first round of 100 megawatts of PRP contracts approved in 2015. Rate-basing that procurement won unanimous approval from the CPUC’s five commissioners, despite arguments from the agency’s Office of Ratepayer Advocates (ORA) that the costs for utility customers outweighed the project’s benefits. 

ORA made essentially the same arguments last year against the 125 megawatts of PRP 2 contracts. But this time, CPUC Administrative Law Judge Patricia Miles agreed, presenting CPUC commissioners with the choice of voting yes or no on a proposal that would essentially kill the projects by denying them ratepayer funding. 

“SCE has failed to adequately justify why these 19 contracts are needed — whether under the Preferred Resources Pilot or to meet the objectives and requirements of existing Commission procurement programs or policies,” Miles wrote. “Accordingly, we are not convinced that approving the purchase and sale agreement contracts is in the best interests of SCE customers, and we do not authorize recovery of the costs of these contracts in rates.” 

Companies that won these PRP 2 contracts back in September 2016 include Advanced Microgrid Solutions with a 40-megawatt contract for demand response with energy conservation and batteries; Convergent with 35 megawatts of batteries; Hecate with 15 megawatts of batteries; NextEra with 10 megawatts of batteries and 10 megawatts of demand response; NRG with 10 megawatts of solar-storage; and residential battery startup Swell with 5 megawatts of batteries. 

Greentech Media contacted representatives of several of the companies involved, all of whom declined to comment publicly on the issue, as it has yet to be voted on by the CPUC. The five-member commission could vote on the issue as early as April 26. 

But as residential battery startup Swell wrote in comments with the CPUC, the proposed decision will “have a chilling effect on the DER market” in California. “Having the Commission reject an entire portfolio of competitively bid and awarded projects more than two years after such proposals were submitted to SCE, and approximately one and half years after SCE applied to the Commission for approval of the final contracts, will discourage and dissuade innovators and developers from continuing to invest in new solutions and business models,” it wrote. 

That view was echoed by an executive at one of the affected companies, who added that the decision, coming nine months after final testimony was collected, came as a complete surprise. “Pretty much every company is shocked. No one expected this at all.” 

The fine print

The CPUC’s proposed decision doesn’t accuse SCE of mishandling the contract bidding or awards process. “We are persuaded that SCE facilitated an open, transparent bid process and responded reasonably to market conditions to increase participation and competition,” it wrote. 

Instead, “the areas of controversy in this proceeding are essentially whether there is a need for the procurement that SCE seeks approval for under this proceeding, and whether the costs of these 19 PSAs are reasonable.”

SCE’s PRP 2 contract was tied into a number of other important initiatives to address its need for more local generation resources for its Orange County and western Los Angeles regions. The closure of once-through cooling (OTC) natural gas plants to protect the state’s coastal waters, along with the unexpected closure of the San Onofre Nuclear Generating Station (SONGS), add up to about 7,000 megawatts of generation capacity to be filled. 

SCE’s first big DER procurement came as part of its local capacity requirement (LCR) procurement in 2014, with more than 250 megawatts of solar, batteries, demand response and energy efficiency, as well as more than a gigawatt of new natural gas-fired power plants. In an additional to its original order, CPUC asked SCE to procure another 169.4 megawatts of preferred resources or energy storage to cover its LCR needs, giving it an opportunity to justify the cost of the PRP contracts as fulfilling this need. 

Since those contracts were signed, the projections of future capacity needs from state grid operator CAISO have shrunk, to the point where those extra megawatts may no longer be needed, the CPUC wrote. CAISO’s most recent Local Capacity Technical Analyses released in May 2017 “conclude that there is no remaining local capacity (LCR) need in 2018 and 2022, but rather a surplus, in the Los Angeles Basin,” it wrote. 

It also cited testimony from Caroline McAndrews, SCE’s director of the PRP, who said in an August 2017 evidentiary hearing that the utility no longer needs the PRP’s new megawatts of DERs to meet LCR. And while SCE’s internal studies indicate that it will face an increase, not a decrease, in load growth over that time, “SCE has not provided us with comprehensive analysis to support its forecast of expected load growth,” it wrote.

The proposed decision next turned to SCE’s claims that the PRP 2 projects are an important part of another set of pilot projects under the CPUC’s distributed resources plan (DRP) and integrating distributed energy resources (IDER) proceedings. DRP and IDER represent California’s attempt to create values for the costs and benefits of DERs, and then build them into the multi-billion dollar distribution grid investments made every year by SCE and its fellow investor-owned utilities, San Diego Gas & Electric and Pacific Gas & Electric. 

The first real-world pilots for DRP are known as “Demo C” projects, and consist of a mix of existing and new distributed energy installations, meant to show if it’s possible to aggregate and control DERs en masse to reduce peak loads on local circuits, balance energy flows from rooftop solar, and other similar grid management tasks. 

SCE has identified five separate PRP 2 projects that it plans to use as part of its DRP Demo C pilots. But the ORA argued that SCE has other current and future DER projects that can serve its Demo C needs, including about 78 megawatts of resources procured through its 2013 LCR RFO, or estimates it could fund from a proposed $80 million Distribution Deferral Pilot.

SCE argued that it has no other procurement sources besides the PRP RFO 2 that can hit the timeframes required for Demo C projects. But the CPUC’s proposed decision finds that “although we recognize that not approving two of the PRP contracts could jeopardize SCE’s ability to move forward with a Demo C project in the timeframe anticipated […] we ultimately conclude that they should not be approved for the sole reason that they may support Demo C.

The CPUC raises several objections on this front, including the fact that “the costs of the NextEra and Swell PSAs are significant, and far exceed the soft cost cap” that the CPUC set for these projects. Although the costs of these contracts remains a secret, this indicates that at least some of the PRP 2 projects came in at higher costs than anticipated. 

What’s next for the PRP? 

SCE is allowed to filed an “expedited Tier 3 Advice Letter” to ask for permission to exceed that cost cap, the CPUC noted. But the utility hasn’t availed itself of that option “to either increase the soft cost cap, or propose alternative Demo C projects,” it wrote. 

These omissions indicate that SCE has not taken every step available to defend itself against the ORA’s complaints about the cost of its projects. It also underscores an observation from several industry insiders — that it appears that, for this issue at least, SCE isn’t trying that hard to win the argument. 

“Basically, it seems that SCE didn’t go out there and try to defend this procurement to be necessary for the region,” Daniel Finn-Foley, senior energy storage analyst with GTM Research, noted. 

SCE is facing pushback by ratepayer advocates and regulators over its 2018 General Rate Case (GRC), the proceeding that sets its rates and revenues for the coming three years, which is now in the final stages of consideration at the CPUC. This, along with the legal challenges over SCE’s role in last year’s devastating wildfires, may be drawing most of the utility’s time and effort, leaving it with few resources to devote to defending the PRP 2 contracts, noted Finn-Foley.

Southern California Edison filed its counter-argument with the CPUC in March, saying that “the summary denial of this Application will seriously frustrate, if not end, the PRP endeavor.” 

In an argument against ORA’s claim that 125 megawatts of DERs are not needed, SCE pointed out that they provide an important hedge against any LCR resources that don’t end up coming online by their 2020 deadline. 

SCE also protested ORA’s approach of using net present value (NPV) as a measurement of the PRP 2 contracts’ cost effectiveness, noting that this method would provide negative values for nearly all of the state-mandated efforts to procure renewable energy, energy storage, demand response, and other alternatives to fossil fuels. 

Finally, SCE noted that “bidding into solicitations is not a cost-free enterprise. If adopted, this PD may have a chilling effect on the market, causing reliable developers to factor in a premium to cover the risk of Commission denial of preferred resources, driving up costs for customers. This PD’s approach in this regard seems inconsistent with state’s desire to reduce, if not eliminate, its dependence upon fossil fuels.” 

It’s unclear how these protests might alter the set of options before the CPUC to determine what happens to the PRP 2 contracts. It’s possible that a commissioner could draft an alternative proposed decision that allows SCE to ratebase the projects, or imposes partial restrictions on spending without denying them completely. But barring that, it’s likely that the current proposed decision will come before CPUC commissioners largely as written. 

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