BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Transcription

1 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Order Instituting Rulemaking to Develop an Electricity Integrated Resource Planning Framework and to Coordinate and Refine Long-Term Procurement Planning Requirements. R COMMENTS OF SOUTHERN CALIFORNIA EDISON COMPANY (U 338-E) ON RULING OF ASSIGNED COMMISSIONER AND ADMINISTRATIVE LAW JUDGE SEEKING COMMENT ON POLICY ISSUES AND OPTIONS RELATED TO RELIABILITY JANET S. COMBS CATHY A. KARLSTAD Attorneys for SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California Telephone: (626) Facsimile: (626) Dated: December 20, 2018

2 COMMENTS OF SOUTHERN CALIFORNIA EDISON COMPANY (U 338-E) ON RULING OF ASSIGNED COMMISSIONER AND ADMINISTRATIVE LAW JUDGE SEEKING COMMENT ON POLICY ISSUES AND OPTIONS RELATED TO RELIABILITY TABLE OF CONTENTS Section Page I. INTRODUCTION...1 II. CALIFORNIA S ELECTRIC SECTOR IS UNDERGOING WIDESPREAD CHANGES THAT ARE CREATING CHALLENGES IN MAINTAINING RELIABILITY...3 A. B. C. California s Electric System is Rapidly Evolving on Multiple Fronts...3 Transformation of the Electric System is Creating Risks to the Viability and Reliability of the Current System...5 A Comprehensive Statewide Approach is Needed to Achieve a Decarbonized, Reliable, and Affordable Energy Future...12 III. SCE S RESPONSES TO THE QUESTIONS IN THE RULING i-

3 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Order Instituting Rulemaking to Develop an Electricity Integrated Resource Planning Framework and to Coordinate and Refine Long-Term Procurement Planning Requirements. R COMMENTS OF SOUTHERN CALIFORNIA EDISON COMPANY (U 338-E) ON RULING OF ASSIGNED COMMISSIONER AND ADMINISTRATIVE LAW JUDGE SEEKING COMMENT ON POLICY ISSUES AND OPTIONS RELATED TO RELIABILITY Pursuant to the Ruling of Assigned Commissioner and Administrative Law Judge Seeking Comment on Policy Issues and Options Related to Reliability, dated November 16, 2018 ( Ruling ), Southern California Edison Company ( SCE ) hereby submits these comments in response to the questions and issues identified in the Ruling. I. INTRODUCTION SCE appreciates the California Public Utilities Commission s ( Commission s ) attention to emerging electricity market issues that may affect overall electric system reliability. The questions posed in the Ruling are critically important to California s success in meeting its greenhouse gas ( GHG ) emissions reduction goals and other policy objectives while maintaining grid reliability. SCE agrees that several factors driving change in the electric sector, as highlighted in the Ruling, create a need for the Commission to evaluate how it and other state entities should address the associated reliability challenges. In particular, an electric system with just enough resources and little to no excess capacity results in new risks of resource insufficiency and market power. As California reduces its reliance on natural gas generation, it - 1 -

4 must have a transition plan that ensures sufficient reliability resources stay in operation to maintain a reliable and affordable electric system during the transition to a decarbonized future. The state will also need to recognize and reconcile the trade-offs between its core energy policy principles of decarbonization, reliability, and affordability and its preference for increased customer choice in the provision of energy services. If these challenges are not addressed, SCE is concerned that reliability and customer affordability could be compromised and/or the state s decarbonization goals may not be achieved. In Section II of these comments, SCE describes changes in the California electric sector that may affect reliability (Section II.A), discusses the emerging challenges to the viability and reliability of the electric system under the current market and regulatory constructs (Section II.B), and recommends actions the state should take to set the stage for a clear, orderly path forward to maintain reliability and affordability through the transition to a deeply decarbonized California electric grid (Section II.C). At a high level, SCE recommends the following: California must clearly define and prioritize its energy policy objectives, reconcile the tensions between accomplishing its core principles of decarbonization, reliability, and affordability and a preference for increasing retail competition, and enact policies that are consistent with this overall vision; The state must ensure strong centralized oversight over all load-serving entities ( LSEs ) resource planning to achieve state decarbonization goals and maintain reliability and affordability. This should include Commission jurisdiction to review, accept, reject, or modify all LSEs integrated resource plans ( IRPs ) and require all LSEs compliance with IRP requirements in the event of deficiencies; and The IRP process must adequately assess reliability by considering the implications of natural gas plant retirements and other resource sufficiency issues in both the current electric system and a future deeply decarbonized, high electrification system

5 In Section III of these comments, SCE addresses the specific questions posed in the Ruling to the extent they are not answered in Section II. 1 II. CALIFORNIA S ELECTRIC SECTOR IS UNDERGOING WIDESPREAD CHANGES THAT ARE CREATING CHALLENGES IN MAINTAINING RELIABILITY A. California s Electric System is Rapidly Evolving on Multiple Fronts The California electric system is undergoing a period of substantial change, especially with regard to its generation, wholesale, and retail components. First, California is currently entering an era of tighter generation supplies than we have experienced in recent years. 2 The types of generation resources available are also changing. California has set aggressive goals to reduce GHG emissions by 40% from 1990 levels by 2030, and 80% from 1990 levels by More recently, SB 100 increased California s Renewables Portfolio Standard ( RPS ) to 60% by 2030 and established a state policy that eligible renewable energy resources and zero-carbon resources supply 100% of all retail sales of electricity to California end-use customers by The Governor has also set a statewide goal to achieve carbon neutrality as soon as possible, and no later than 2045, and achieve and maintain net negative emissions thereafter. 5 Today, natural gas generation is the primary integration resource for the large quantity of intermittent resources on the system, ensuring that the system can ramp quickly to meet customer load as solar power begins to decline in the afternoon and evening hours. However, state policy is causing that natural gas generation capacity to decline. Once-through-cooling ( OTC ) units 1 These comments generally focus on reliability from the perspective of resource sufficiency. Transmission is also crucial to grid reliability and must be considered in any comprehensive evaluation of reliability. SCE urges the Commission to coordinate with the California Independent System Operator ( CAISO ) and other agencies on the interconnected issues affecting reliability in resource planning, transmission planning, procurement, and market operations. 2 Ruling at 3. 3 See Senate Bill ( SB ) 32 (2016); Exec. Order S-3-05 (2005). 4 See SB 100 (2018). 5 See Exec. Order B (2018)

6 have retired or will retire by the end of Additionally, [o]n an environmental policy basis, there is a desire to minimize the need to run thermal generating units, especially those in disadvantaged communities, and potentially retire[] them altogether, if possible, to meet our ambitious GHG targets. 6 Natural gas plants are also facing increasing economic pressures as zero-marginal cost resources like wind and solar proliferate. 7 The electric sector is also undergoing changes in the types of entities that serve customer load. In the past, the three large investor-owned utilities ( IOUs ) served most of California s electricity customers and were responsible for planning and executing resource procurement to serve most customers within the Commission s jurisdiction. Particularly with the advent and expansion of community choice aggregators ( CCAs ) and the continuation of direct access ( DA ), there are now many more LSEs serving smaller shares of the state s overall electric load. Many of these LSEs began service in recent years and experience scale challenges in procuring output from large thermal generators. 8 New CCAs are expected and recent legislation increasing the DA cap requires the Commission to study potential effects of further DA expansion. 9 As a result of expanding LSE choice, the Commission has estimated that more than 85% of retail load may be served by sources other than the IOUs by the mid-2020s. 10 These entities are accountable to additional authorities besides the Commission, which may create conflicts between their priorities and broader state policy. CCAs are subject to direct oversight by their local governing boards, with a 6 Ruling at While energy storage is a promising replacement technology, it is not currently being deployed at a scale that could offset the shutdown of large natural gas plants. 8 See Ruling at See SB 237 (2018). 10 See Commission, Consumer and Retail Choice, the Role of the Utility, and an Evolving Regulatory Framework, Staff White Paper, May 2017, at 3, available at: ates/retail%20choice%20white%20paper%205%208%2017.pdf

7 primary focus on local policy objectives. Electric service providers ( ESPs ) are accountable most directly to customers, who may leave for another provider if their priorities are not met. The Commission s transition from a long-term procurement planning ( LTPP ) process to the current IRP process reflects these structural changes. Historically, LTPP focused on planning and procurement by the IOUs for reliability purposes. IRP includes all Commissionjurisdictional LSEs (more than 40 entities) and considers a variety of state goals, including: meeting the state s 2030 GHG emissions reduction goal; minimizing localized air pollutants and other GHG emissions, with early priority on disadvantaged communities; minimizing impacts on customers bills; and ensuring system and local reliability. 11 The transition to a new type of electric sector, characterized by renewable resources and energy storage for integration, procured by many LSEs with disparate aims, must be carefully managed if California is to maintain reliability and affordability and achieve its decarbonization goals. However, it has become apparent that these changes are introducing challenges that the current market and regulatory constructs may not be equipped to handle. As discussed below, ensuring reliability through this transition will require clear leadership from the state on its policy priorities. B. Transformation of the Electric System is Creating Risks to the Viability and Reliability of the Current System As the transformation discussed in Section II.A progresses, the electric sector s ability to weather changes under current market and regulatory structures is being tested, and some challenges to maintaining reliability are emerging. First, generation markets are showing signs of becoming constrained, leading to reliability and market power concerns. Second, while the IRP proceeding should assess and address these challenges, current analyses are not addressing the complicated near- and mid-term implications of natural gas retirements and other reliability 11 See Cal. Pub. Util. Code (a)(1)

8 challenges or the longer-term implications of electric system performance in a deeply decarbonized, high electrification future. Third, LSE fragmentation has resulted in challenges to planning and procurement constructs that are intended to resolve reliability and resource sufficiency concerns. Constrained Generation Markets are Leading to Reliability and Market Power Concerns Reliability has been traditionally defined as having sufficient resources to serve the need. In an electric system with an oversupply of resources, maintaining reliability has not been as challenging. Now, California is entering a period where supply, particularly of those resources that can integrate intermittent renewables, is becoming tighter relative to system needs. In addition to OTC unit retirements, other natural gas plants are becoming uneconomic and choosing to retire. 12 The CAISO s Transmission Plan suggests that while additional natural gas plant retirements are expected, there is little buffer to accommodate such retirements. 13 As a result, the CAISO has invoked back-stop procurement constructs, such as reliability must-run ( RMR ) agreements and capacity procurement mechanism ( CPM ) designations, to retain resources to provide necessary reliability services For example, La Paloma Generating Station Units 3 & 4 (totaling approximately 515 MW) and Ormond Beach Generating Station Units 1 & 2 (totaling approximately 1,516 MW) have recently announced planned permanent shutdown for economic reasons. See 13 The CAISO identified potential system-wide reserve margin issues emerging with as little as 1000 to 2000 MW of retirements beyond the current planned retirements. CAISO, Transmission Plan, March 22, 2018, at 22, available at: This buffer is already shrinking with the announcement of additional retirements. 14 See id

9 Additionally, there have been problems in Southern California with regard to fuel supply and storage capacity. 15 The recent challenges to Southern California Gas Company ( SoCalGas ) system deliverability, due to the de-rating of the Aliso Canyon natural gas storage facility and other recent unplanned pipeline outages, impairs the system s ability to deliver the natural gas needed for electric generation plants and has resulted in penalty charges that generators pass on to electricity wholesale markets. This, in turn, affects the ability of the natural gas generation fleet to meet system and/or local reliability needs in an affordable manner. Even as energy storage resources are becoming more cost-effective at scale, the electric sector will require affordable natural gas generation resources to remain available to provide a smooth and reliable transition to a deeply decarbonized grid. Economic retirements and fuel supply and storage issues create risks that California will not have sufficient natural gas generation to maintain reliability during this transition. Tightening energy markets and geographic constraints in which resources are needed in specific locations also raise concerns regarding wholesale market functionality and generator market power. Energy and capacity markets function best with either excess capacity and/or free entry to the market (i.e., the ability of a new resource to quickly enter the wholesale energy market to provide energy and capacity). Increasingly, the California market has neither of these attributes; capacity margins are growing thinner due to the aforementioned resource retirements thereby decreasing competition in the market and increasing the possibility that the remaining 15 See Commission, California Energy Commission ( CEC ), CAISO, and Los Angeles Department of Water and Power, Aliso Canyon Risk Assessment Technical Report Summer 2018, May 7, 2018, available at: nd_outreach_office/aliso%20canyon%20summer%202018%20technical%20assessment.pdf. This issue is also discussed in further detail in SCE s IRP. See Integrated Resource Plan of Southern California Edison Company (U 338-E), R , August 1, 2018 ( SCE IRP ), at

10 suppliers may exercise market power. 16 As the Ruling observes, the CAISO s 2017 Annual Report on Market Issues and Performance indicates that the CAISO system showed signs of becoming less competitive. 17 IRP Analyses Have Yet to Adequately Address Resource Sufficiency Challenges Despite the reliability concerns outlined above, the IRP process thus far has identified no system reliability deficiencies through However, SCE is concerned resource sufficiency issues have not yet been appropriately studied in the IRP process. Other than policy-driven OTC unit retirements, the Commission s Reference System Plan assumed that all natural gas plants, including planned additions through new local capacity requirements ( LCR ) procurement, will be available for the planning horizon. As explained above, it is unlikely that all the existing and planned natural gas resources will be able to remain available in the market as statewide GHG emissions goals become more stringent and more zero-emissions, zero-marginal cost resources are added to the system. Indeed, the Commission recognized that this assumption was criticized by many parties and is a simplifying assumption that does not necessarily reflect reality. 19 Additionally, the IRP process has not yet evaluated reliability under the type of deeply decarbonized, high electrification system that will be necessary to meet California s economy- 16 The current Net Qualifying Capacity ( NQC ) total capacity value for August of 2019 is 49,627 megawatts ( MW ). See Compared to the NQC for 2017 of 56,011 MW, this represents an 11% reduction in Resource Adequacy ( RA ) capacity. See The CAISO also shows retirements for OTC resources and Diablo Canyon between 2020 and 2025, totaling 6,085 MW of capacity. In addition to the OTC resources and Diablo Canyon, as of October 2018, an additional 623 MW of capacity has requested retirement from the CAISO to be effective by the end of If approved, the total retirements of installed capacity would total 6,708 MW, equal to another 13.5% reduction below the 2019 RA capacity. See While new resources are likely to come online over that same time period, it is anticipated that the quantity of new resources will be significantly below the quantity of retiring resources. 17 Ruling at See Administrative Law Judge s Ruling Seeking Comment on Production Cost Modeling, R , September 24, 2018, Attachment B at 6 (Staff noted that the Reference System Plan had no system reliability issues and a 19% reserve margin in 2030). 19 Decision ( D. ) at

11 wide GHG emissions reduction and other environmental policy goals. SCE s IRP includes a CAISO system-wide plan based on SCE s Clean Power and Electrification Pathway the SCE Pathway System Plan with a more stringent 2030 electric sector GHG emissions planning target of 28 million metric tons and higher electrification in the transportation and building sectors than assumed in the Commission s Reference System Plan. This SCE Pathway System Plan includes significant integration resources, such as 9,604 MW of storage in 2030, which are necessary to meet the state s GHG emissions goals. 20 These integration resources, coupled with the assumption that all natural gas generation would be available during the planning horizon, provided sufficient resources to meet the 15% planning reserve margin. 21 If the IRP process does not appropriately address natural gas plant retirements and other resource sufficiency issues in a deeply decarbonized, high electrification system, then downstream planning and procurement processes will not properly address future resource sufficiency. This outcome would pose significant risks to maintaining reliability. Similarly, transmission planning processes will not be able to appropriately identify potential transmission needs, as these processes depend on having a realistic view of the load to be served and available resource topology in the future electric system. Increasing LSE Fragmentation Introduces Challenges to Planning and Procurement Constructs Finally, increasing LSE fragmentation and the proliferation of new, smaller, and often locally-controlled LSEs introduces unique challenges to the electric sector s ability to achieve state goals, including reliability. The Ruling correctly notes that [l]oad shares of retail electric providers are sufficiently disaggregated such that one LSE is unlikely to procure the entirety of [the] output from larger thermal generators. 22 This makes it more difficult for these generators to contract for the amount of their output they need to stay in the market, even if such 20 See SCE IRP at See id. at Ruling at

12 resources are needed to maintain reliability. In many cases, the IOUs will not have a need for additional resources as load departs to other LSEs, creating a situation where it is unclear if any LSEs will procure the needed system resources. An increasing number of small LSEs may also procure based on specific local or customer objectives that do not result in optimal outcomes for the electric system as a whole. This LSE fragmentation also makes the resource planning process more complicated. All Commission-jurisdictional LSEs (including IOUs, CCAs, and ESPs) are required to participate in the Commission s IRP proceeding and file IRPs. SB 350 provided the Commission with significant jurisdiction over CCA and ESP resource planning through the IRP process. For instance, the Commission concluded that its authority and responsibility over CCA planning is considerably broader than the CCAs and their representatives argue, and emphasized the Commission s authority to ensure that the portion of the electric sector under our authority and jurisdiction is meeting its GHG and reliability obligations on behalf of the electric system. 23 Nonetheless, the Commission does not have the same authority over CCA and ESP procurement it has with respect to the IOUs. It also remains to be seen how fully CCAs and ESPs will participate in the IRP process. For example, as SCE discussed in previous comments, certain CCAs indicated that the IRPs they filed with the Commission for the cycle do not represent their full, strategic, or internal IRPs, which will be developed separately. 24 These comments suggest that many CCAs intend to perform resource planning outside the Commission s review and oversight. If CCAs intend to file compliance IRPs with the Commission that do not represent their actual internal resource planning, this will significantly undermine the benefits and usefulness of the Commission s IRP process and could adversely affect California s ability to reliably and affordably decarbonize. The Commission also left for 23 D at See Comments of Southern California Edison Company (U 338-E) on Load-Serving Entities Integrated Resource Plans, R , September 12, 2018, at

13 a later date the question of what, if any, differential means the Commission may use to ensure CCA compliance with the IRP requirements in the event of deficiencies. 25 In sum, SCE is concerned that if California s electric sector continues down its current path, without taking steps to address the many challenges discussed above, the state may find itself in a situation where: Markets break down, compromising either reliability or affordability. For example, if there are significant unplanned natural gas plant retirements and the remaining resources either are not sufficient to meet the need or are able to wield market power that results in higher costs to customers. Decarbonization and other environmental goals are compromised. For instance, if reliability becomes challenged, the CAISO may require natural gas plants to remain available through RMR agreements, CPM designations, or other mechanisms. However, these are not long-term or optimized solutions and may inhibit the state s transition to lower emitting resources to meet GHG emissions reduction goals. California s decarbonization, reliability, and affordability objectives cannot be reconciled with its preference for increased retail competition. Although there are other possible approaches (e.g., capacity markets), California s current direction is to pursue its energy policy through centralized planning. The state must recognize the tension between increased retail competition, and reliably and affordably decarbonizing the electric sector through centralized planning and develop a comprehensive energy policy that reconciles these competing objectives, including by ensuring that the Commission s authority over resource planning applies equally to all LSEs. Otherwise, the state may not meet its overall policy goals. 25 D at

14 C. A Comprehensive Statewide Approach is Needed to Achieve a Decarbonized, Reliable, and Affordable Energy Future Although there are a number of ways to address the challenges discussed in Sections II.A and II.B, SCE recommends that the state and the Commission focus on three priority areas. First, the state must clearly define and prioritize its policy objectives for the electric sector and reconcile the tensions between competing preferences. Second, the state must ensure equal treatment of LSEs with respect to participation in, and Commission authority over, the resource planning process. Finally, the IRP process must address reliability by assessing the potential for additional natural gas plant retirements, as well as evaluating a scenario that takes into account the magnitude of integration and reliability resources needed in a deeply decarbonized, high electrification system. California Must Clearly Define its Policy Objectives and Address the Tensions Between Competing Preferences Currently, California s energy policy is based on three core principles: decarbonization, reliability, and affordability. 26 The most straightforward way to achieve these goals is through centralized resource planning. The state recognized as much by establishing the SB 350 IRP process to implement centralized and coordinating resource planning for all LSEs. At the same time, however, the state continues to promote customer choice for energy services. Under the current electricity market structure and regulatory processes, California s core principles of decarbonization, reliability, and affordability are in conflict with its preference for increased retail competition. Increasing LSE fragmentation is making it more difficult to achieve the state s core energy policy objectives for the reasons described previously. Moreover, an electric 26 See Commission, California Customer Choice, An Evaluation of Regulatory Framework Options for an Evolving Electricity Market, August 2018, at 7, available at: gy_-_electricity_and_natural_gas/cal%20customer%20choice%20report% %20rm.pdf

15 sector with more than 40 small LSEs subject to varying degrees of local control and priorities is contrary to the state s desire for centralized planning of its electric system. As SCE stated in its Customer Choice Project comments, 27 the state s core principles of decarbonization, reliability, and affordability should be prioritized. The state must then recognize that there are instances in which expanded customer choice conflicts with achieving these objectives through centralized resource planning. 28 California needs to clearly prioritize its energy policy objectives, and enact policies (including resource planning, procurement, market mechanisms, and directives around retail competition) that are consistent with this overall vision. The State Must Ensure Equal Treatment of LSEs with Respect to the Commission s Authority over Resource Planning Processes Strong centralized resource planning and oversight, such as the Commission s jurisdiction to review, accept, reject, or modify individual LSE IRPs and require compliance with IRP requirements in the event of deficiencies, is an essential part of ensuring that the state s decarbonization, reliability and affordability objectives are achieved. The Commission must be able to ensure that all LSEs (including IOUs, CCAs, and ESPs) submit meaningful IRPs for Commission review and oversight and direct all LSEs to comply with IRP requirements if they are not met. Otherwise, the IRP process cannot function as intended. It will be challenging to successfully predict whether an LSE s plan meets GHG emissions reduction, reliability, and other IRP goals, and missing information from an LSE s plan could also lead to a system-wide deficiency when individual LSE IRPs are aggregated. Furthermore, if the Commission cannot enforce IRP requirements for all LSEs, including ordering the procurement of identified needed 27 See Comments of Southern California Edison Company (U 338-E) on the Draft Gap Analysis / Choice Action Plan, November 13, 2018; Comments of Southern California Edison Company (U 338- E) on the Draft Green Book, June 11, It is not simply the expansion of customer choice that creates conflicts; rather conflicts occur when customer choice is implemented in ways that do not create a level playing field or equal obligations for all LSEs. Customer choice expansion under disparate obligations is likely to create challenges with respect to the state achieving its core principles of decarbonization, reliability, and affordability

16 resources, there may be a lack of sufficient resources to achieve GHG emissions reduction targets or reliability requirements. Accordingly, the Commission should exercise the full extent of its existing jurisdiction to require all LSEs to submit meaningful IRPs for Commission review and oversight and ensure that all IRP requirements are met by those LSEs. To the extent there are any gaps in the Commission s authority over CCAs and ESPs, the Commission should clearly identify any gaps in its current authority under SB 350 to enable the Legislature to take action to fill those gaps. The State Must Ensure the IRP and Related Processes Adequately Address Reliability Issues for the Future Grid It is also critical that the IRP process appropriately assesses electric system reliability in the context of the electric sector s transition to deep decarbonization. The IRP process plays a key role in ensuring that California s electric system has sufficient resources to maintain reliability as it meets the state s GHG emissions and other state goals at an affordable cost to customers. In order to effectively fill that role, the Commission should develop a deep decarbonization, high electrification scenario as an alternative base case for the next IRP cycle, in close cooperation with CAISO for resource sufficiency assessments and transmission planning. 29 Meeting the state s climate goals in 2030 and beyond requires near term identification of the resources and transmission needed for the electric sector to achieve its own GHG emissions goals and to help facilitate decarbonization across California s economy. Moreover, it is crucial that the Commission and the CAISO analyze the system and local reliability impacts of reductions in revenue for natural gas plants and the potential additional 29 As SCE will explain in greater detail in its comments on the Administrative Law Judge s Ruling Seeking Comments on Inputs and Assumptions for Development of the Reference System Plan, dated November 29, 2018, SCE recommends that this alternative base case be based on the High Electrification Scenario in the CEC s recent Deep Decarbonization in a High Renewables Future report. See CEC Energy Research and Development Division, Deep Decarbonization in a High Renewables Future, June 2018, available at:

17 retirements of such plants, for both the current system and a future deeply decarbonized, high electrification system. The study should also analyze the effects of the continuing restrictions on use of the Aliso Canyon natural gas storage facility, and how pipeline outages affect the ability to fill storage facilities to levels sufficient to ensure energy reliability. Until the Commission can consider a deep decarbonization, high electrification alternative base case in the IRP cycle as discussed above, SCE suggested in its IRP that the Commission ask the CAISO to complete these studies as part of its Transmission Planning Process. 30 SCE also recommends that the Commission establish a reliability threshold mechanism for expedited procurement and deployment of flexible energy storage resources to address reliability concerns on the electric grid should they arise. 31 These three priority areas are not a comprehensive list of all actions needed to address reliability challenges in the electric sector. For example, the Commission s recent proposed decision identifying the distribution utilities as the central procurement entity for local RA, 32 with modifications set forth in SCE s comments, 33 is a good step towards addressing some of the near-term challenges in the RA market. Additionally, as further addressed in response to question 9, action is needed to address structural defects in the SoCalGas system and the impacts of such defects on the California electricity market. SCE looks forward to working with the Commission, other state agencies, the Legislature, the Governor, and other stakeholders to address these and other challenges to maintaining reliability while achieving a decarbonized and affordable energy future. 30 See SCE IRP at 17-19, See id. at 20-21, See Proposed Decision Refining the Resource Adequacy Program, R , November 21, See Opening Comments of Southern California Edison Company (U 338-E) on Proposed Decision Refining the Resource Adequacy Program, R , December 11,

18 III. SCE S RESPONSES TO THE QUESTIONS IN THE RULING 1. Does the California electricity system face a near-or medium-term reliability challenge? If so, describe how you see the nature of the problem. Yes, the California electric system faces near- and medium-term reliability challenges. 34 As explained in Sections II.A and II.B, California s electric system is rapidly evolving, introducing challenges to planning for resource sufficiency and procuring necessary resources. The combination of new and evolving state goals (such as increased RPS and GHG emissions reduction targets), a different electric system (with far more intermittent renewable resources and less natural gas resources to backstop/integrate), increasing retail competition and LSE fragmentation, and wholesale changes to the planning and procurement processes are creating new risks to grid reliability. For example, the Commission s recent RA report shows how the RA market is becoming tighter, stating: While many new resources were added during 2017, the overall capacity that can be used to meet LSEs RA requirements decreased considerably. 3,851 MW of older gas and cogeneration facilities retired during While this was partially offset by 438 MW of new resources, overall saw a significant decrease in available capacity. 35 Likewise, the CAISO s Transmission Plan emphasizes the market pressure on the natural gas fleet, and the market constructs employed to address these pressures, citing local capacity concerns that have led to the ISO entering in 2017 into the first new [RMR] agreements 34 If a large natural gas plant in a critical location chooses to shut down, it could create a reliability concern in the very near term. 35 Energy Division, The 2017 Resource Adequacy Report, August 2018, at 6, available at:

19 for generation capacity since 2006, as well as to issue annual [CPM] designations for two generating facilities for In Section II.B of these comments, SCE discusses risks to the viability and reliability of the electric system, including: additional retirements of natural gas plants that have traditionally been key resources for reliability and renewable integration and the system s potential inability to absorb these retirements; challenges to SoCalGas system deliverability and associated impacts on the natural gas electric generation fleet; the challenges a system with just enough resources can cause with respect to affordability and market operations; and the new challenges caused by increasing LSE fragmentation and the proliferation of new, smaller, and often locally-controlled LSEs. Section II.B also addresses SCE s concerns that the IRP process has not yet appropriately considered these issues by, among other things, evaluating the reliability of a future electric system including significant natural gas plant retirements and the higher levels of zero-carbon electricity and electrification that are needed to meet California s climate goals in 2030 and beyond. Not only does each of these issues pose challenges to reliability, but assessing and understanding the compounding effects of these issues is also a challenge. Potential solutions to these challenges are provided in Section II.C and the responses to subsequent questions. 2. Is the resource adequacy or the IRP proceeding (or a mix of both) the appropriate venue for addressing these types of reliability concerns? Explain your rationale. Both the IRP and RA proceedings should play a role in addressing these reliability concerns. In short, IRP is responsible for ensuring resource sufficiency in the planning process, whereas RA is responsible for market constructs that will ensure that available resources needed to ensure reliability are procured. Therefore, both proceedings need to serve their intended 36 CAISO, Transmission Plan, March 22, 2018, at 22, available at:

20 purposes, as well as coordinate with one another and CAISO market rules, to ensure reliability is maintained. Role of IRP Proceeding The IRP proceeding is tasked with addressing many of the newly emerging issues facing the electric sector that are discussed in Section II, and with identifying the resources that will be needed for the deeply decarbonized, safe, and reliable electric system that meets state policy goals. 37 Unless future IRP assumptions more accurately represent a more stringent GHG emissions target (leading to additional renewables), higher electrification, and natural gas generation s economic and physical constraints, the IRP may not appropriately assess whether the electric system has sufficient resources to maintain reliability in this future scenario, and a significant problem may be missed. As explained in Sections II.B and II.C, the next IRP cycle should plan for deeper decarbonization of the electric sector, with higher transportation and building electrification assumptions than were used in the cycle, to ensure the state s economy-wide GHG goals are met and put the state on a path to achieving 2045 goals. Specifically, SCE suggests the Commission analyze, as an alternative base case, the High Electrification scenario in the CEC s Deep Decarbonization in a High Renewables Future report. 38 The Commission should require all LSEs to include a case in their individual IRPs that conforms to these assumptions and constraints. Further, in conjunction with the CAISO, the Commission should examine system and local reliability and transmission system impacts of potential future natural gas plant retirements and SoCalGas system constraints in this deeply decarbonized, high electrification system. 37 See Cal. Pub. Util. Code (a), (a)(1); Joint Scoping Memo and Ruling of Assigned Commissioner and Administrative Law Judge, R , May 26, 2016, at See CEC Energy Research and Development Division, Deep Decarbonization in a High Renewables Future, June 2018, available at:

21 In addition to these issues, the IRP proceeding may need to consider market-related reliability issues that emerge as the California electric system continues to evolve. Specifically, the IRP is designed to plan adequate system resources to meet physical grid needs, plus the 15% planning reserve margin. However, a system with just enough resources provides an opportunity for individual generators to wield market power. Role of RA Proceeding The primary objective of RA has been to procure sufficient resources to meet system load plus a planning reserve margin (system RA), resources needed in specific local areas due to transmission topology (local RA), and resources capable of ramping to meet the changing conditions on the grid of supply and demand (flex RA). RA currently uses a single year procurement structure for system and flexible resources, and a three-year forward procurement structure for local resources. The RA instrument was developed after the energy crisis to ensure that LSEs contract for resource capacity that would then have a must-offer obligation to the CAISO. This ensured that, when needed, these units would be operational and their energy would be available to ensure grid reliability. This construct worked successfully for many years during a period where grid conditions were largely static (i.e., the type of generating technology was largely static and the only significant variable was expected load), but was not intended to address resource planning with regard to potential load growth or new resources. Therefore, even when the grid was in a steady-state, RA in and of itself was not sufficient to ensure reliability, and other proceedings (such as resource planning proceedings) were required. Today, the grid is in a transitional state, given the state s efforts in transitioning from a natural gas generation-heavy system to one that leverages more renewables and other preferred resources. To ensure reliability through this transition, RA plays an important role in providing natural gas plants that are needed for reliability the market certainty needed to remain online. Given increasing use of other technologies with low or zero marginal costs of production, wholesale energy markets alone have not been able to sustain the viability of natural gas plants

22 (which, to some extent, remain necessary to ensuring grid reliability). With more of the RA need being fulfilled by non-gas technologies, however, the opportunities for natural gas plants to ensure their economic viability have been reduced in that venue as well. As a general matter, a natural gas plant not receiving an RA contract has few opportunities to remain economically viable and will likely consider, and pursue if necessary, resource retirement. Interactions Between IRP and RA Proceedings and CAISO Market To effectively navigate towards California s decarbonized future, the long-term planning processes (IRP) and short-term planning processes (RA) will need to inform one another to ensure that GHG emissions goals are met with reliability clearly in focus. The current reliability resource need shown in the RA proceeding may or may not be completely indicative of longer term system need, based on long-term resource planning in the IRP. Likewise, the IRP proceeding needs to account for resource sufficiency issues appropriately (e.g., by examining natural gas retirement scenarios) to ensure resources are planned that can be contracted through RA processes. Both IRP and RA are needed, and while they each serve distinct purposes, alignment is needed to ensure both can function properly. In addition, CAISO market rules and market operations must be considered as an overlay on any resource solutions planned and procured in IRP and RA, because reliability will ultimately be realized through market operations. 3. Are potential solutions to the problems you describe in answer to Question 1 already under consideration? If so, where? Yes, some of the potential solutions to the problems SCE described in its response to question 1 and Section II are already under consideration. The IRP proceeding is currently developing methodologies and analyses to better understand reliability. On November 29, 2018, the Commission issued an Administrative Law Judge s Ruling Seeking Comments on Inputs and Assumptions for Development of the Reference System Plan, including a proposed inputs and assumptions document. That document

23 notes that the IRP modeling will incorporate the ability to retire baseline resources and the ability to enforce RA requirements in RESOLVE. 39 Properly implemented, these two RESOLVE functions will allow IRP modeling to better reflect the possibility of additional natural gas plant retirements and any reliability impacts. Beyond modeling improvements, SCE proposed a reliability threshold mechanism in its IRP as an interim process to expedite procurement and deployment of flexible energy storage resources to address near-term reliability concerns. 40 SCE s IRP also recommended that the Commission ask the CAISO to include in its Transmission Planning Process a study of the reliability impacts of additional gas retirements and constraints in the SoCalGas system under both the current system and a high renewables, high electrification case. 41 Finally, on November 21, 2018, the Commission issued a Proposed Decision ( PD ) in the RA proceeding directing the three IOUs to conduct central procurement to ensure sufficient local area resources would be available to meet grid reliability needs. 42 The Commission directed this action in large part to ensure sufficient reliability on the grid; however, it also addresses the difficulties of increasingly granular resource need in an environment with a larger number of smaller LSEs. The PD recognizes that the form and structure of this procurement may need to change in the future as grid conditions and regulatory structures change. It also deferred to a later date the potential for central procurement of system and flexible RA resources. Moreover, the PD still looks to a three-year horizon for the procurement of local resources. While this is a significant change over the single year horizon, even a three-year horizon is not completely capable of enacting the transition in grid topology and resources that will ultimately be needed to achieve California s decarbonization goals. In other words, the PD 39 See Administrative Law Judge s Ruling Seeking Comments on Inputs and Assumptions for Development of the Reference System Plan, R , November 29, 2018, Attachment A at A-15-A-16, A-47-A See SCE IRP at 20-21, See id. at 17-19, See Proposed Decision Refining the Resource Adequacy Program, R , November 21,

24 is a necessary step in the immediate term to continue to ensure reliable service, but it is not sufficient in and of itself. Additional changes will be required to reliably and affordably decarbonize the electric system under an environment with a competitive wholesale energy market and a competitive retail energy market. 4. If your preferred solutions are not already under consideration, describe what else is needed, why, and where. In making your recommendations, please address issues of cost allocation, cost minimization, environmental justice, impacts on existing LSE procurement processes, ability to support achievement of state policy goals, and any other topics relevant to your recommendations. The response to this question is addressed in Section II.C and the response to question 9. Specifically, SCE recommends: California should clearly define and prioritize its energy policy objectives, reconciling the tensions between accomplishing its core principles of decarbonization, reliability, and affordability and a preference for increasing retail competition. It must then enact policies that are consistent with this overall vision. The state must ensure strong centralized oversight over all LSEs resource planning to achieve state decarbonization goals and maintain reliability and affordability. This should include meaningful Commission oversight over all LSEs IRPs, including the ability to approve, deny, or modify any IOU, CCA, or ESP plan and require all LSEs compliance with IRP requirements in the event of deficiencies. The IRP process must adequately assess reliability by considering the implications of natural gas plant retirements and other resource sufficiency issues in both the current electric system and a future deeply decarbonized, high electrification system. In the IRP, the Commission should develop and analyze an alternative base case based on the High Electrification scenario in the CEC s Deep Decarbonization in a

25 High Renewables Future report. 43 All LSEs should be required to perform a case that conforms to this alternative base case in their individual IRPs. The Commission should also work with the CAISO to examine system and local reliability and transmission system impacts of potential future natural gas plant retirements and SoCalGas system constraints in this deeply decarbonized, high electrification system. The Commission should evaluate the potential for natural gas generators to purchase gas via tariffs rather than wholesale market transactions. This would serve to mitigate balancing risk and associated penalties currently enforced on wholesale gas purchases, which are then passed through to the wholesale power market. This issue is discussed further in the response to question Is the CAISO market structure equipped to handle the challenges you identified in response to Question 1? Why or why not? No, the CAISO market structure is not equipped to handle all of the challenges identified in Section II and the response to question 1 at this time. As the resource mix remains in flux as California transitions to a decarbonized grid, it would be unreasonable to presume that the existing CAISO market framework can remain static. It is not currently possible to identify all of the future CAISO market modifications that will be needed, because the state has not yet fully identified the resources that will be needed to meet California s GHG emissions goals in 2030 and beyond. The CAISO largely operates a grid consisting of resources that are developed and approved by other entities; other than the planning and development of the transmission grid itself, the CAISO is a recipient of the loads and resources within that grid, and is charged with operating the grid in a reliable, cost-minimizing manner. To determine what CAISO market mechanisms and modifications will be necessary to reliably operate a decarbonized electric system, the state first needs to plan for the future 43 See CEC Energy Research and Development Division, Deep Decarbonization in a High Renewables Future, June 2018, available at: