The pace of clean energy deployment in California is currently too slow to achieve the state’s ambitious climate targets. The Governor’s proposed Clean Energy Central Procurement mechanism in the 2023-24 energy trailer bill is a powerful policy concept that has the potential to correct this trajectory.
In this blog post, we highlight how strategic public procurement of clean energy assets can address critical obstacles to a rapid energy transition in California. We summarize the proposed mechanism, including its intent, scope, implementation approach, revenue sources and roles of key state agencies including the Department of Water Resources and California Public Utilities Commission. We then consider policy options to enhance the mechanism, including how in addition to energy generation assets such as offshore wind and geothermal it could support core infrastructure such as transmission.
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The 2022 Scoping Plan identified the astonishing clean energy build that California must execute to achieve its net-zero emissions by 2045 target. It requires, among others, more than tripling the state’s current installed solar capacity, building 20 GW of offshore wind from scratch, electrifying over 20 million cars and delivering 100 million tons of carbon capture and storage in about 22 years.
This kind of daunting calculus is faced by almost all U.S. states. Meanwhile, clean energy deployment in California is currently too slow to meet these ambitious goals. Recent permitting reform will help, but favorable permitting alone does not guarantee that projects get built. New policies that address fundamental barriers to project development, such as the ability to secure supply and offtake agreements as well as access connecting infrastructure, are key to enabling investment in priority initiatives such as offshore wind in the North Coast, expanded geothermal in the Salton Sea or large-scale carbon capture and hydrogen hubs. Typical policies including carbon pricing, technology subsidies and capital grants are unlikely to stimulate these private investments at the speed and scale necessary to achieve net-zero emissions by 2045. The DOE’s recent Commercial Liftoff Reports acknowledge this important iteration in climate policymaking: where interventions must now strategically target barriers that prevent risk-averse developers from executing final investment decisions on projects (Fig. 1). Click on image to zoom-in.
Clean Energy Central Procurement mechanism
The Governor’s proposed Clean Energy Central Procurement mechanism in the 2023-24 energy trailer bill provides a powerful demand backstop that should motivate in-state developers to deploy capital to priority renewable and zero-carbon energy projects that would otherwise be too risky to take on.
The provision empowers the Department of Water Resources (DWR) to procure energy for the purpose of achieving the state’s (SB 100) goal of supplying 100% clean electricity to all retail customers by 2045. This authority would only be exercised following a determination from the California Public Utilities Commission (CPUC) that the resources are required. The intent of the proposed law is to support resources identified as needed but for which there is uncertainty regarding their development potential, including notably offshore wind, geothermal and long-duration storage. For a risk-taking commercial enterprise, assured demand from an ultra-low risk, investment grade counterparty constitutes a drastic reduction in project risk, and so a powerful incentive to allocate capital towards project development.
In Table 1, we summarize the main elements of the proposed new law, including its intent, scope and implementation approach, requirements for cost recovery and revenue sources.
Policy options to enhance the mechanism
Although the Governor’s proposed Clean Energy Central Procurement mechanism marks an important shift in climate policymaking, there are ways it could be improved. We identify three options below.
Expand mechanism to include transmission infrastructure
Even with a guaranteed offtake, clean electricity developers will remain hesitant, if not unwilling, to execute a final investment decision on a project without available transmission. This could be addressed by clearly identifying transmission infrastructure as eligible for public procurement.[1] In fact, rapidly developing high-voltage lines to resource areas including the North and Central Coasts, Central Valley and Salton Sea may be the most important near-term action California can take to achieve its climate goals. For more information, see this blog post authored by CSG and Clean Air Task Force.
Consider alternative financing for asset procurement
It is reasonable that some portion of new clean energy development costs would be passed on to ratepayers. However, given the primary motivation for public procurement is the state’s goal of rapid decarbonization (as opposed to a goal of simply assuring a low-cost, reliable grid), it is arguable that a sizable share should be funded outside of the rate base. Alternative sources of financing, such as the General Fund, Greenhouse Gas Reduction Fund or General Obligation bonds, could defray part of the capital cost and enable faster project initiation and development of key assets and infrastructure.
Expand mechanism to non-SB 100 projects
The 2022 Scoping Plan identifies a significant role for both clean fuels and carbon management in California’s net-zero economy. These technologies could also benefit from strategic public procurement. For example, demand backstops to support clean hydrogen and direct air capture in priority hubs could establish the commercial conditions that speed these projects though to execution. In addition, state procurement of a core CO2 pipeline network and 1-2 storage sites would encourage more rapid CO2 capture development, such as from industrial and bioenergy point sources. For more information, see this op-ed on policy sequencing for large-scale carbon capture and storage deployment.
Conclusion
The ultimate obstacle to California’s net-zero emissions by 2045 target is: time. By providing a guaranteed, low-risk offtake for developers, public procurement short-circuits the otherwise lengthy and uncertain process for energy companies to develop viable projects. However, public procurement of clean energy alone is unlikely to spur technology deployment at the pace and scale necessary to achieve state climate goals. Assuring that connecting infrastructure is being simultaneously developed is also crucial, as is exploring alternative financing methods that reduce the cost burden on ratepayers and enable faster project initiation. Expanding the Governor’s proposed mechanism to incorporate these elements could make it one of, if not the most consequential climate policy this decade.
For more information, please contact Sam Uden (sam@csgcalifornia.com).
[1] For more information, see California Public Utilities Code sections §454.51, §454.52 and §454.53.
[2] Although §80823 authorizes CPUC to require electrical corporations provide transmission for DWR-procured energy, in practice this is unlikely to support the development of key multi-billion dollar corridors needed to unlock GW-scales of new generation from resource areas such as the North Coast and Central Valley. For more information, see CAISO’s 20-Year Transmission Outlook