California s Solar Buildout: Implications for Electricity Markets in the West

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1 California s Solar Buildout: Implications for Electricity Markets in the West EPIS Electric Market Forecasting Conference Las Vegas, Nevada September 7, 2017 Arne Olson, Partner

2 Agenda Report From the Front: California s Current Solar Situation A Look Ahead: Too Much of a Good Thing? What Happens in California Doesn t Stay in California: Implications for Western Markets 2

3 About Energy and Environmental Economics, Inc. (E3) Founded in 1989, E3 is an industry leading consultancy in North America with a growing international presence E3 operates at the nexus of planning, policy and markets Our team employs a unique combination of economic analysis, modeling acumen and deep institutional insight to solve complex problems for a diverse client base including critical thought leadership State Agencies Regulatory Authorities State Executive Branches Legislators Utilities System Operators Financial Institutions Consumer Advocates Environmental Interests Energy Consumers Project Developers Technology Companies Asset Owners Financiers/Investors 3

4 E3 Practice Areas E3 s project scope and breadth is unmatched for a firm of its size We complete over 200 projects a year across the energy sector, emphasizing electricity This focus allows for constant innovation and development of best-in-class tools and analysis that leads to key insights, answers, and recommendations Distributed Resources & Retail Rates Analyzes distributed energy resources, emphasizing their costs and benefits now and in the future. Supports rate design and distribution system planning. E3 has five defined working groups that create continual innovation from cutting edge projects and constant cross-fertilization of best practices across the groups Clean Energy Provides market and policy analysis on clean energy technologies and climate change issues. Includes comprehensive and long-term GHG analysis. Asset Valuation & Large Users Services Planning Market Analysis Transaction support for buyers and sellers of energy assets and services Uses proprietary in-house models and in-depth knowledge of $ public policy, regulation and market institutions Develops and deploys proprietary tools to aid resource planners Informs longer-term system planning and forecasting? Models wholesale energy markets both in isolation and as part of broader, more regional markets Key insights to inform system operators and market participants 4

5 REPORT FROM THE FRONT CALIFORNIA'S CURRENT SOLAR SITUATION

6 California policy is driving significant renewable adoption SB 350 (2015): 50% RPS by 2030 SB 32 (2016): 40% reduction in economy-wide GHG emissions, relative to 1990 levels Net Energy Metering 2.0 decision will drive significantly more adoption of rooftop PV SB 100 introduced in 2017: 100% RPS by

7 Solar Buildout in CAISO Q1 Nameplate MW (AC) 40% GHG reduction statute (SB 32) 100% RPS bill introduced 50% RPS statute (SB 350) 33% RPS target (EO S-14-08) 33% RPS statute (SB X 1-2) 7

8 Impact of Solar Generation CAISO Net Load Rapid buildout of solar generation has led to early realization of CAISO s duck curve CAISO Hourly Solar Generation by Year (March May only) Max: 4889 Max: 6453 Max: 8528 Max: 9854 Max: 457 Max: 1110 Max: 2893 CAISO Hourly Net Load by Year (March May only) Evolution of the California duck 8

9 Impact of Solar Generation CAISO Thermal Generation CAISO s thermal fleet (almost exclusively gas generation) has responded to renewable increase by reducing operations CAISO Hourly Solar Generation by Year (March May only) Max: 4889 Max: 6453 Max: 8528 Max: 9854 Max: 457 Max: 1110 Max: 2893 CAISO Hourly Thermal Generation Dispatch by Year (March May only) 9

10 Impact of Solar Generation Market Prices Rapid increase in solar buildout has clearly begun to suppress daytime market prices but negative pricing has not yet been observed in the day-ahead market CAISO Hourly Solar Generation by Year (March May only) Max: 4889 Max: 6453 Max: 8528 Max: 9854 Max: 457 Max: 1110 Max: 2893 NP15 Day-Ahead Hourly Market Price (March May only) High hydro conditions lead to low spring prices in LLH periods Limited impact of solar PV on market pricing apparent at low penetrations High solar penetration suppresses prices in the middle of the day; prices close to $0/MWh, and then negative 10

11 Lack of flexibility leads to solar curtailment and negative pricing Original CAISO Duck Curve Not Enough Ramping Capability to Serve Load During Evening Hours Actual CAISO Duck Curve Spill Solar During Daylight Hours to Maintain Sufficient Ramping Capability Unserved Energy Limited Ramping Capability Limited Ramping Capability Renewable Curtailment Because curtailment is strongly preferred to unserved energy, asymmetric penalties are applied to the two Unserved energy: $10,000-50,000/MWh (value of lost load) Renewable curtailment: $10-25/MWh (REC replacement cost) 11

12 Flexibility in California market is still limited Limits on CAISO downward flexibility: Inflexible generation resources (nuclear, CHP) Other self-scheduled generation and must-take imports Extremely high hydro conditions in 2017 Significant non-renewable generation during curtailment: 3,400 MW hydro 3,100 MW imports 2,100 MW gas 2,300 MW nuclear CAISO dispatch on April 8,

13 California s gas fleet has been experienced significant ramping and cycling Dispatch (MW) Number of Committed in Hour Count of Committed Units by Type NP-15 DAM Price ($/MWh) 8,000 10,000 MW of daily ramping from aggregate gas fleet CAISO: March 1-3, 2017 Ramping down during morning and back up during evening Up to 50 gas plant starts per day Mostly CTs but some CCs as well Many CT units are starting twice per day Number of Committed Units by Type /1/17 3/2/17 3/3/17 CCGT CT Steam 13

14 Renewable generators are bidding negative prices Timing of negative bids throughout the day is indicative of renewable generation (specifically solar PV resources) submitting negative bids for energy Most common bids are in the range of -$15 to - $25/MWh representative of current Bucket 1 REC value in California Summary of negative bids in CAISO day-ahead market (April 2, 2016 May 12, 2016) Concentration of negative bids in middle of the day indicative of solar PV resources Most negative bids for generation are between -$15 and -$25/MWh Based on published bids posted to CAISO OASIS website Size of bubble indicates volume of negative bids (MW) 14

15 Significant increase in negative prices in Western EIM in intervals (246 hours, 2.8%) 5313 intervals (443 hours, 5.1%) 6679 intervals (556 hours, 6.3%) Intervals with Negative Prices 5379 intervals (448 hours, 15.6%) 15

16 Negative pricing now being seen in day-ahead market % of Total Hours in Month with DAM Prices of: Almost all negative prices occur in daytime hours Almost all negative prices occur in evening hours 107 hours 18 hours 41 hours 185 hours 6.4% Hours with Negative Prices 16

17 A LOOK AHEAD TOO MUCH OF A GOOD THING?

18 Solar Buildout in CAISO Expected Trends through 2030 Nearly 40 GW of total solar deployment by 2030 Meets 50% RPS plus voluntary sustainability goals Limited non-solar potential: Solar Thermal Geothermal: 1800 MW Wind: < 3000 MW Solar PV (BTM) Solar PV (Utility-Scale) 18

19 Meeting the state s climate goals will require even more renewable generation Complete decarbonization of the electric sector may not be necessary or productive At least 75% of electricity supply must come from zero-carbon electricity generation sources by 2050 Higher levels may be counter-productive to electrification strategy due to higher electric rates California GHG Emissions by Sector under 85% Renewables Transportation Recycling & Waste Industrial High GWP Electricity Res & Com Agriculture 19

20 Electrification will result in significantly higher electric loads Electrification of transportation, buildings and industry through 2050 aid in decarbonization of the California economy California Electricity Loads by Customer Class Transportation Industry Buildings Other Industry Electrification Buildings Existing Loads 20

21 Renewable deployments accelerate after % renewables by 2030, % by % 50% 60% Renewable Capacity (MW) Integration solutions needed: Regional coordination Renewable diversity Flexible loads, especially flexible fuel production 4-8 hr. stationary storage Dispatchable hydro & thermal generation 21

22 WHAT HAPPENS IN CALIFORNIA DOESN T STAY IN CALIFORNIA Olson, A., C.K. Woo, N. Schlag and A. Ong (2016) What Happens in California Does Not Always Stay in California: The Effect of California's Capand-Trade Program on Wholesale Electricity Prices in the Western Interconnection, The Electricity Journal, 29(7),

23 Rest of WECC appears to have limited ability to back down to import CA Solar Saturday March 25, 2017 (CAISO) Limited Response of NW & SW Thermal Gen 23

24 E3 Develops Custom Energy Price Projections using AuroraXMP Hourly Energy prices at various Western locations NP15, SP15, Mid-C, Palo Verde, COB, Mead/Mktplace, 4 Corners, Mona Additional price streams available on request Capacity (annual or monthly), Ancillary services, CO2 and REC prices Additional features for energy storage valuation Synthesized hourly price volatility to better reflect real markets Sub-hourly prices to reflect 15-minute and 5-minute market opportunities Optimal storage dispatch tool to supplement AuroraXMP T&D deferral value where data is available Analysis of additional revenue streams (SGIP, bill reductions) Custom scenarios to reflect important trends Market: Gas & CO2 prices, expansion of EIM or RTO footprint Technology: solar, wind & battery costs Policy: RPS, GHG, coal retirements, EVs, EE, energy storage 24

25 E3 Modeling Approach for Energy Market Price Forecasting Key Input Variables For Western Market Scenarios Load Forecast (Including Impact of Rooftop Solar, DG Storage, and EV Adoption) Forecasted Resource Buildout (To meet policy goals & reliability needs) Transmission and Operational Changes (Market seams prevent fully integrated & optimized trading between BAAs) Hourly Production Simulation of California & WECC dispatch E3 Enhancements Reflect: - Wheeling costs & transactional friction between different BAAs - Negative prices during renewable curtailment - Refined hydro and storage representation - In-depth local E3 expertise of CA and WECC energy policies Other Major Drivers Gas Prices Base Market Price Forecast (Hourly results by Scenario & Zone) -Dispatch & Transmission flows E3 Post-Process Customization Enhanced volatility, A/S, capacity & sub-hourly pricing, etc. Carbon Prices 25

26 E3 has implemented numerous customized enhancements to AuroraXMP Policy-consistent resource build-out including GW of rooftop solar in California Curtailment of renewables and negative pricing Constraints to represent transactional friction of real markets High transaction costs and limited ability to trade hourly outside of California Limited ability to back down thermal generation Self-scheduled resources Gas balancing penalties Hurdle rates at California border to reflect deemed GHG content of imported energy Separate hurdle rates for Northwest hydro to represent Specified Source or Asset Controlling Supplier imports with no allowance obligation E3 analysis of historical market prices indicate a significant carbon premium at Mid-C due to California cap and trade rules 26

27 $/MWh (nominal) California prices become more volatile over time High priced hours get higher with rising gas and CO2 prices Increased renewables cause more negative pricing Highest prices during morning and evening ramps Trends in SP-15 Prices SP-15 forecast indicates over 1000 hours of curtailment by Hours 27

28 Energy prices increase during ramping hours April 15 Sample Day in Aurora Renewable Curtailment Price ($/MWh) Storage Charging Load Renewables Hydro Thermal 28

29 Month Monthly Average 2030 midday prices are negative in CA during most months, and negative in spring for NW and SW NP-15, 2030 Month Monthly Average SP-15, 2030 Hourly Average Hourly Average Midday NP15 prices are consistently negative by 2030 NW winter demand holds prices up SP shows more curtailment than Northern CA SW is more strongly correlated with CA than NW Month Monthly Average Mid-C, 2030 Month Monthly Average Palo Verde 2030 Hourly Average Hourly Average 29

30 Policies that focus on RPS instead of GHG lead to negative pricing and lower wholesale energy prices RPS policies create market distortions and push solar and wind onto the grid even when not productive Negative pricing during overgeneration hours encourages wasteful use GHG-focused policies lead to higher average energy prices particularly during hours when solar is not producing Daily Energy Price Profile in High RPS World Market prices remain at traditional levels when fossil is on the margin Net impact is low overall energy price for wind output Daily Energy Price Profile in Low GHG World High market price on carbon drives high prices when fossil is on the margin Net impact is higher overall energy price for wind output During periods of renewable curtailment, market prices are negative due to opportunity cost of generating a REC When renewables are on the margin, market price drops to zero, but doesn t go negative 30

31 Implications for market participants in the West Solar developers and off-takers: significant risk of curtailment/negative pricing during daytime hours by mid-2020s Wind & geothermal developers: opportunity to steal back market share from solar due to production during non-curtailment hours Thermal plants: continued suppression of operating margins but increased rewards for flexible operations Hydro and nukes: reduced margins but potential to be rewarded for zero-carbon energy under the right policy Energy storage: will be needed, the question is when, how much and what kind 31

32 Thank You! Energy and Environmental Economics, Inc. (E3) 101 Montgomery Street, Suite 1600 San Francisco, CA Tel Arne Olson, Partner