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May 13, 2024

California Seeks Input on New Central Procurement Mechanism for Renewable Power Generation

Advisory

The California Public Utilities Commission (CPUC) is seeking comments, by May 24, 2024, on the need and process for procuring electricity via the state’s new central procurement mechanism intended to promote the development of renewable and zero-emission power generation. This mechanism helps the state to bolster long lead time projects that can be challenging to fund and develop via existing procurement processes, such as offshore wind, geothermal, and long-duration energy storage. Central procurement allows the state to purchase clean energy resources that are capital intensive and may have high upfront costs, but still enables the state to achieve its clean and renewable energy goals. The comment period offers an opportunity for parties to the CPUC’s ongoing integrated resource planning and related procurement proceeding to help shape CPUC’s needs analysis and procurement determination. Additionally, for parties and non-parties alike, the CPUC ruling is the first detailed insight into the CPUC’s current thinking on central procurement.

Background

Last year, California passed Assembly Bill (AB) 1373, which authorized the CPUC to request the Department of Water Resources (DWR) to conduct centralized procurement of identified eligible energy resources until January 1, 2035. The new law requires the CPUC to evaluate and determine if central procurement is necessary to achieve reliability and the state’s renewable, zero-carbon energy goals by September 1, 2024. If a need is identified, then the CPUC must also identify, by September 1, 2024, the clean energy resources that should be procured to meet that need, and within six months of that determination, request DWR to exercise its authority as a central procurement entity to procure the identified eligible energy resources. DWR may then sell that procured power to utilities and other eligible customers.

CPUC is now seeking comments on this central procurement mechanism through its ongoing integrated resource planning and related procurement proceeding, which is the proceeding through which the CPUC considers, plans, and determines electric procurement for the state. As such, via the April 26, 2024 ruling, CPUC is requesting comments from the registered parties to this proceeding, including energy producers and developers, utilities, nonprofit organizations, and government agencies.

Eligible Energy Resources

Per the ruling, “eligible energy resources” are defined as those that (1) directly support California’s clean energy goals without increasing reliance on fossil fuels, (2) are not already sufficiently subject to contract under recent integrated resource plans, (3) have a construction lead time of at least five years, (4) do not generate electricity from fossil fuels or their derivatives, and (5) do not otherwise use combustion to generate electricity, other than those related to geothermal energy.

The ruling also recommends that resources be considered for central procurement if they contribute to resource diversity, enable the state to achieve its renewable and zero carbon electricity goals, are already identified in a preferred system plan (PSP) portfolio, and address procurement challenges for existing technologies, as well as support market transformation for emerging technologies.

Notably, there are four potential resource types that the CPUC has already identified: offshore wind, geothermal, long duration energy storage, and out-of-state wind. The ruling also mentions other emerging technologies as potential resources that fit the criteria to be considered for central procurement: non-lithium-ion battery energy storage and natural gas with carbon capture and storage.

CPUC Request for Comments

CPUC seeks feedback from parties to the CPUC’s integrated resource planning proceeding on the central procurement mechanism created by AB 1373. The comment period will end May 24, 2024, and parties submitting comments may include specific proposals for central procurement in their comment submissions if they comply with all elements described in the ruling.

Parties are asked to provide remarks and respond to an array of questions on eligible resources, the CPUC’s need determination for resources to be centrally procured, central procurement’s relationship to load-serving entity (LSE) procurement, allocation of costs and benefits, and the procurement process and timeline. This affords parties an important opportunity to give detailed feedback to CPUC on critical elements of the central procurement mechanism and the underlying needs determination.

Procurement Timeline and Process

The ruling proposes a procurement timeline of approximately four to five years. That proposed timeline begins with the CPUC requesting DWR to procure certain resources via the central procurement function by March 2025, and ends with the CPUC decision to approve contracts and associated cost recovery by approximately 2029 (for deliveries by 2035). In between, DWR and CPUC will engage with publicly-owned utilities and LSEs to develop solicitation plans; and DWR will carry out pre-bid activities, open the solicitation for project proposals, evaluate bids, and submit proposed contracts to the CPUC for consideration.

It should be noted that the CPUC ruling contemplates revisiting the need determination for resources to be centrally procured by DWR at the time of each successive PSP adoption. Therefore, the need determination, due September 1, 2024, will not be the only determination for central procurement — there will likely be future determinations and adjustments to the portfolio for central procurement.

The New Central Procurement Mechanism Does Not Modify or Preclude Existing Authorities

As the ruling makes clear, the new central procurement function authorized in AB 1373 does not modify or preclude already existing procurement authorities. The CPUC maintains its authority to require investor-owned utilities (IOUs) to undertake centralized procurement (as in Decision D20-06-002) and the central procurement function in DWR is distinct and apart from the central mechanism for backstop procurement outlined in Decision D20-12-044 that authorized IOUs to procure on the behalf of other LSEs who do not meet their procurement obligations. All other tools remain available to the CPUC to procure long lead time resources.

Conclusion

The CPUC ruling seeking comments on the central procurement function authorized in AB 1373 provides an important opportunity for parties to the integrated resource planning proceeding to influence how the need for central procurement is evaluated and the critical substance of the mechanism. Furthermore, the ruling provides insight into the CPUC’s current thinking on potential eligible resources and the timeline for implementation. More specifically, at this stage, the CPUC clearly identifies offshore wind, geothermal, long duration energy storage, and out of state wind as potential, if not likely, eligible resources to be procured via this new mechanism; and the process for soliciting and awarding contracts is expected to take approximately four to five years, with projects starting to come online approximately six years thereafter.

If you have questions or would like to discuss this matter further, please contact the author of this Advisory or your Arnold & Porter contact.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.