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California Looks Hard at New Coastal Power Plant


California is on the cusp of a huge changeover in its aging electric power generation fleet, and is facing a complex array of competing alternatives for replacement supply. 

NRG's proposed 632 megawatt (MW) Carlsbad Energy Center in San Diego, is a case in point. The fate of the Carlsbad facility will be decided in the coming weeks by the five-member California Public Utilities Commission (CPUC). The state's high-voltage grid operator, the California Independent System Operator (CAISO), also is actively involved in the debate.

California faces important questions about how to time its investment in large, grid-scale infrastructure while awaiting an anticipated proliferation of what are called "preferred resources," which include energy efficiency, demand response, and clean distributed generation.  

The challenge of predicting where, when, and in what quantities these preferred resources will be developed adds a dimension of complexity to the decisions of those responsible for both carrying out California's policy goals and ensuring a reliable electric grid. 

Background: Aging Power Plants from "The Greatest Generation"

Most of California's major power plants are located along or near the Pacific Coast, where the population is concentrated. Many of these plants have operated for decades, and they are nearing the end of their useful lives.

But other factors, not just normal aging and wear-and-tear, are pushing these plants into retirement.

Three years ago, the massive San Onofre Nuclear Generating Station, with a capacity of over 2,200 megawatts, was taken off line due to a major equipment failure that proved fatal to the plant's continued operation. Its majority owner, Southern California Edison Company, announced in June 2013 that the plant would be permanently shuttered and decommissioned.

Meanwhile, numerous major fossil-fueled power plants along the California coast are slated for closure in the coming years. The timing of their closure is being driven by environmental issues associated with their use of ocean, bay and river waters for cooling, a technology referred to as "once through cooling."

In total, California faces the loss of thousands of megawatts of electrical generating plants. 

This retirement of a large segment of California's generation resources is a foretaste of what other U.S. regions may face in the coming years with their aging fleets of coal-fired power plants. 

California's choices are also complicated by its large commitment to renewable power and by the state's policy commitment to the "loading order." With respect to renewable power, California is targeting 33 percent renewables by 2020, and Governor Jerry Brown is pushing to increase that to 50 percent. The "loading order" is a policy adopted by California's energy agencies twelve years ago and is designed to decrease electricity demand by increasing energy efficiency and demand response, and meet new generation needs first with renewable and distributed generation resources, and second with clean fossil-fueled generation. Adding to the challenge, California also has a longstanding moratorium on new nuclear plants (which was upheld by the U.S. Supreme Court in 1983). California since 2007 also has barred new coal-fired baseload power from serving the state.

NRG's Proposal: The Carlsbad Energy Center

NRG is the owner of the Encina Power Station, a 965 MW natural-gas-fired power plant that has been in operation since 1954. In its place, NRG has proposed to build the Carlsbad Energy Center, a modern, 632 MW simple cycle natural gas-fired facility, adjacent to the old Encina plant. 

NRG entered into a 20-year "purchase power tolling agreement" with San Diego Gas & Electric Company (SDG&E) for nearly the full capacity of the proposed new Carlsbad facility (600 MW). The agreement is contingent upon SDG&E's receiving authorization from the CPUC to consummate the agreement and to recover the cost of the commitment in its retail electric rates. SDG&E filed its application at the CPUC in July 2014 (Application No. 14-07-009).

On March 6, 2015, an assigned administrative law judge (ALJ) issued a Proposed Decision, recommending that SDG&E's request for approval of the Carlsbad agreement be denied. Consistent with the recommendations of ratepayer advocates and environmental groups (including the Sierra Club), the ALJ found that SDG&E should first attempt to replace the Encina facility by procuring, through a request-for-offers solicitation process, a variety of small-scale "preferred resources" (renewable energy, demand response, energy storage, etc.) in locations in the San Diego load area.

In comments filed later in March, SDG&E and NRG, as well as the California Independent System Operator (CAISO), opposed the ALJ's Proposed Decision, and urged the CPUC to approve the Carlsbad facility. 

The CAISO in particular focused on the need for the Carlsbad facility in order to ensure the reliability of the grid in San Diego once the Encina plant is retired.

For its part, NRG not only asked for approval of the purchase power tolling agreement, but also suggested an alternative, namely, approval of a modified, smaller version at 500 MW, 100 MW less than originally proposed. This could be done, NRG explained, by eliminating one unit of the six units proposed at Carlsbad, dropping the plant's capacity from 632 MW to 500 MW. The sixth unit could be installed later if the desired increment of 100 MW of "preferred resources" did not materialize. 

NRG's alternative proposal worked. 

On April 6, 2015, CPUC President Michael Picker issued his own "Alternate Decision," proposing to approve a 500 MW purchase power tolling agreement between NRG and SDG&E. California rules allow any of the five Commissioners to issue an "Alternate" that differs from an ALJ Proposed Decision. The full CPUC then gets to pick between the "Alternate" and the ALJ Proposed Decision.

In the Carlsbad case, a vote by the Commissioners is expected in May or June. 

Deja Vu All Over Again?

To observers of large energy infrastructure proposals before the CPUC, the current situation faced by NRG's Carlsbad Energy Center might seem reminiscent of SDG&E's 2006 proposal to construct the Sunrise Power Link, a 117-mile-long, high-voltage transmission line from the Imperial Valley into SDG&E's service territory in San Diego. 

SDG&E in that instance applied to the CPUC for a certificate of public convenience and necessity, authorizing construction and operation of this project. 

In October 2008, the ALJ in the Sunrise case issued a Proposed Decision, recommending that the requested authorization be denied, based on reasoning similar to that used by the ALJ in the pending Carlsbad case – namely, that SDG&E should address the reliability needs by acquiring preferred generating resources within the San Diego load area, in lieu of such a large infrastructure project. 

Thereafter, then-CPUC President, Michael Peevey, responded by issuing an Alternate Decision, recommending approval of the Sunrise project without restrictive conditions. 

The CAISO, among others, supported the Peevey Alternate, on the ground that the Sunrise project was the best solution for reliability in the San Diego area.

In December 2008, the Commission majority voted to adopt the Peevey Alternate, granting SDG&E authorization to proceed with the Sunrise project. SDG&E then proceeded with construction, and in June 2012 the Sunrise project was completed and placed into service, at a cost of approximately $1.9 billion.

The Dance Between the CPUC and the CAISO

The CAISO plays a key leadership role, alongside the CPUC and other state government agencies, in carrying out California's ambitious energy policy agenda.  Although technically a private corporation, the members of the CAISO's Board of Governors are appointed by the California Governor and subject to confirmation by the State Senate.

The CAISO's core mission is the reliability of the high-voltage grid, even as California transitions to a low-carbon energy sector.  In their mission statements and planning documents, CAISO board and staff have had to be adept in balancing competing demands.  In recent years, they have succeeded in integrating massive quantities of intermittent renewable energy sources.  In looking to the future, they have tried to balance between large infrastructure projects – power plants and transmission lines – and smaller-scale "preferred resources" in load areas, such as San Diego and Los Angeles.

The wave of power plant retirements along the coast has not escaped the CAISO's attention. In its annual transmission plan, issued on March 27, 2015, the CAISO described its efforts to balance among the three kinds of resources to meet this challenge:  transmission system investments, conventional generation, and preferred resources. 

At the CPUC, the CAISO is regarded as a peer organization, much like a sister state agency. But the CAISO also occasionally intervenes as a party in CPUC dockets, to place views on the public record, and to engage with other stakeholders in debates about infrastructure solutions. That is the role the CAISO is playing at the CPUC in the pending Carlsbad case.

President Picker Makes His Presence Felt

Commissioner Michael Picker was named President of the California PUC by Governor Jerry Brown, effective January 2015.

The Carlsbad case is the first major new energy infrastructure project to arise during President Picker's tenure. 

Like his predecessor Michael Peevey in the earlier Sunrise case, President Picker appears to be persuaded by CAISO's concerns about reliability. His Alternate Decision in the Carlsbad case demonstrates a desire to allow room for preferred resources, but also a willingness to back a large, conventional new generation source, even in the face of opposition, in an effort to solve San Diego's reliability needs.

The Commission's process allows for further comment by stakeholders and interested parties, and so the outcome of the Carlsbad case cannot be predicted with certainty. Environmentalists and ratepayer advocates are lined up in support of the ALJ's Proposed Decision denying approval for the project. 

But President Picker's direct, personal support for the Carlsbad Energy Center, in the form of his Alternate Decision approving a 500 MW version of the project, is certainly a noteworthy development.

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Richard Lehfeldt
Partner – Washington, D.C.
Phone: +1 202.624.2882