March 2001 and 1.5 million people in California are plunged into darkness as rolling black-outs spread across the state. These arose because of manipulation of the electricity market by Enron following the deregulation and compulsory vertical breakup of the large investor owned companies (IOUs) three years earlier. In California, these companies were required to separate out most of their generation from supply. Requirements to invest in energy efficiency were also removed, and too little new generation was built to meet California’s growing demand.
There were substantial repercussions from the crisis – in April 2001, Pacific Gas and Electric (PG&E) filed for bankruptcy (which it did as a kind of insurance policy, not because it was actually going to cease to exist) and the other power utilities were put under pressure. Two years later, Governor Gray Davis, who was blamed for mishandling the crisis, lost the gubernatorial election to Arnold Schwarzenegger. The balance sheets and credit ratings of the investor owned utilities are still impaired from the crisis.
Since then, California has re-regulated the activities of its IOUs: PG&E in Northern California, Southern California Edison, San Diego Gas & Electric and Southern California Gas. They are now required to achieve ambitious energy efficiency targets:
- Regulators have told companies to regard energy efficiency as the first priority in terms of preparing for the future.
- Companies are required to save 5% of electricity and spend $3.1 bn over the three years 2010 to 2012 to reduce their customers use of electricity and gas.
- The companies are required to offer customers tiered tariffs so the first units of consumption are at a lower price than subsequent units.
- Different “baselines” are set for different climates within California to compensate for differing energy needs.
The revenue earned by the Californian IOUs is now decoupled from the amount of power they sell. This means that the regulator, the California Public Utility Commission, makes sure that the company can recover its fixed costs of producing electricity (the costs of maintaining and improving the distribution wires, the head office staff) regardless of how much power it sells. To do this it has to “true up” the tariff every year to reward the company if sales were lower than anticipated, or to cut the price if the volumes were higher than expected. The system is fiendishly complicated and critics maintain that there remains an incentive to sell volume.
As well as the IOUs, California has 48 publicly owned electricity companies (the largest of which, Los Angeles Department of Water and Power, serves three million customers) four small rural coops and some native American companies. Unlike the situation in other states, these are not regulated by the Public Utilities Commission and are free to set their own tariffs and not obliged to provide energy efficiency services nor use renewables. Even so, many choose to do so.
The electricity used for each person in California has been stable since the mid-1970s, unlike the average for the other 49 states. (However, California’s population has almost doubled to 37 million in the same time, so installed power capacity has grown to 67GW which is similar to that of the UK.) The utilities and, to an extent, the regulator have been keen to claim the flat line per capita electricity consumption as being a consequence of aggressive energy efficiency policy, decoupling of profit from mount of energy sold, and the establishment of tiered tariffs. A careful analysis by energy customer champion group TURN argues that much of the credit should actually go to higher appliance standards and reduction in the size of the energy intensive sector.
Per capita electricity consumption, California and other 49 states
Source: Natural Resources Defense Council, March 2010
Californian legislators also passed legislation to increase the strength of local government. In 2002, the Californian state legislature adopted Community Choice Aggregation, copying similar legislation passed in Massachusetts in 1997. This allowed local government to decide how to source the generation used in its local boundaries. So far, a number of counties and cities have thought of using CCA either to increase the proportion of renewables, increase the amount of local generation or create more local employment.
The IOUs have not passively accepted this. In June 2010, PG&E funded a proposition, put to California voters in a referendum, to make it more difficult for counties to establish CCA areas. But this proposition was defeated by 5%.
California is regarded as one of the most environmentally progressive states in the USA. However, even California has its stars – and not just in Hollywood. Berkeley, a university city of a hundred thousand in the Bay area, stands out. It’s the home of Lawrence Berkeley Laboratory, which carries out much of the number crunching for the Department of Energy.
Three quarters of Berkeley use of domestic energy is gas to keep homes warm and to heat water. Reducing energy use by homes means retrofit of existing homes. Since 1982, Berkeley has been operating the Residential Energy Conservation Ordinance (RECO). This requires all residential buildings being sold or undergoing substantial (that is, greater than $50,000) renovations, between 500 and 700 homes a year, to install ten mandatory energy and water efficiency improvements. These include installation of loft insulation, low-flow showers, draft stripping on external doors and insulation jackets on hot water tanks. There has been a 14% reduction in gas use in homes over the past ten years. The cost of these measures is between $100 and $2,100.
How do Berkeley residents feel about local regulations making it more expensive for them to buy and sell their homes? Billi Romain from the City explains:
“… local people feel its part of the charm of the city, part of the self-identity. It’s also the case that the homes in Berkeley have held their value despite the economic down-turn – so the cost of mandatory measures is not a high proportion of the cost of the home.”
Because the list is mandatory, it has to be limited to those which are publicly acceptable, and not necessarily the ones that save the most of most carbon:
“A lot of people are worried by air sealing in case they breathe in stale air or chemicals from plastics, so we can’t make that compulsory even though it is a recognized energy efficiency measure in other parts of the country.”
Berkeley is now considering “enhancing” the list of measures. These changes are intended to provide a better foundation for a deep retrofit of the house by requiring a Home Energy Rating System II report – this includes a pressure test, modeling of the building’s performance and verification that the work has been undertaken satisfactorily by the not for profit Community Energy Savings Corporation. If this is agreed this will be one of the most rigorous inspection regimes around. And it’s not cheap, costing around $700 per property. The issue of mandating a particular type of Home Energy Assessment protocol is a tricky one. It requires the contractor learning and using bespoke software systems; and ones they might feel are far from perfect.
The proposed new system is intended to complement better the incentive packages being offered by the state and the local utility program: PG&E is offering a generous incentives for the Comprehensive Retrofit Package. So why hasn’t the RECO spread more generally to other areas? Some cities have introduced it. Davis, San Francisco and the state of Nevada now have RECO. But most have not. Billi Romain explains the mentality of the people here is different and the housing market very different:
“Bear in mind that there are areas in California where house prices have slumped by 70% from the recession.”
Berkeley was also where the Property Assessed Clean Energy (PACE) Financing package was invented. The city launched the Smart Solar/Berkeley FIRST Program (Berkeley’s name for the PACE style program) in 2007, strongly supported by Mayor Tom Bates:
“Reduction of greenhouse gas emissions is the issue for me. I want to look at my public service time and say I did everything I could about this issue.” (Interview with Green Technology magazine 2006.)
This allowed homeowners to access up front finance to pay for solar photovoltaics panels. A typical home installation providing 3.5kW peak power might cost $12000 after grants of $3 to 4,000. The money was “lent” by the city and recouped through an assessment or charge paid through their property tax. This meant that the owner could invest in energy efficiency measures or renewables with long pay back periods – longer than the period they are likely to live in the home.
The idea was that the city would raise low cost finance through issuing bonds which would take advantage of the City’s excellent credit rating. But the programme was withdrawn in 2009 after only 13 properties made use of the mechanism. Many of the other would-be participants found the 7.75% interest rate unappealing compared to the cost of finance from merely extending their mortgages.
Issuing bonds has substantial set-up costs and these have to be recouped through the high rate of interest. The idea of PACE is good, but it has to be done on a large enough scale – several hundred preferably several thousand homes so the city can cover the set-up and handling costs.
Why was the programme restricted to solar PV and not to other expensive, long-payback measures? Billi Romain explained that many of the cheaper measures are already compulsory and not suited to long term financing. The issue with expensive external insulation and boiler replacements was that it was difficult to verify installation to the satisfaction to the investment community.
There are four other PACE style programmes in Palm Desert and Sonoma County in California and two out of state, in Babylon, New York and Boulder County, Colorado. Together they had lent $40m by early 2010 and improved around 2,000 homes. However, a key message is that use of securities and bonds is only viable with a certain size of programme.
So far, I have written about regulations imposed on the existing utilities, or regulating households to make them install energy efficiency measures. Another option for localities is to take over delivering energy services from the investor owned companies. This can be through influencing generation, taking over aspects of energy delivery in their locality or providing a full-blown rival to the investor owned model. In California we see all three.
Under Californian law cities and counties can decide to generate or source their own electricity – the Customer Choice Aggregation (CCA). They are still reliant of the local utility to distribute the power, to interact with the state system operator and to bill the individual customers. CCA does not help cities address perceived weaknesses in customer service or frequent outages; there’s not even that much scope to reduce the bill unless they have access to a much cheaper source of generation than the local utility. Even iconoclastic Berkeley has not decided to avail itself of the CCA. But Marin County on the other side of the bay has.
Dawn Weisz has a tough job on her hands. She manages the 20-person team at Marin Energy Agency, which now has responsibility for sourcing electricity for the small county on the other side of the Golden Gate Bridge to San Francisco. In 2007, three quarters of the population were “very interested” in the local authority sourcing their own power (so they could achieve fossil fuel independence by 2030). On that basis, they used the CCA to take over control of buying their own generation. The county wants to buy power at a price no more than PG&E’s generation price and yet have a higher renewable content. (The county still relies on PG&E to maintain the electricity distribution network, interface with the customers and deliver energy efficiency measures.)
For the next five years, Marin will obtain wind power from Shell. Dawn is keen that the county increases the amount of locally produced renewables especially from solar, biogas, small wind and geothermal. Of these, wind is the most cost-effective but it has often had difficulty obtaining permits because of local opposition. But local government, which own Marin Energy Agency, will take responsibility for managing the permitting of the new local turbines. Dawn is optimistic that it will deliver. The other technologies are economically more marginal and it is hard to see how the agency will exploit them to deliver low prices and high renewables content simultaneously.
South San Joaquin Irrigation District in Manteca, California, already has bags of cheap, zero-carbon electricity and is not interested in using CCA. The district is 100 years old and was established to provide local farmers with water. Fifty years ago, it developed the Tri-dam. It is determined to improve energy efficiency, install solar PV, improve the quality of its power supply and reduce customer bills by 15% by municipalising the ownership of the IOU’s distribution assets. Serving just 35,000 customers, many of them farmers; it is not like the usual-suspect liberal and university town counties like Berkeley, Austin Texas or Cambridge Massachusetts. Its population consists of conservative farmers interested in low prices and efficiency rather than climate change. The District aims to deliver environmental outcomes through better customer service:
“Selling less electricity is good business for a public authority like us since we’re not trying to make more profit for shareholders”.
But, why take over ownership of local wires? Jeff Shields the general manager of the District, explains:
“We want to buy the house and not just rent it. We wish to enhance the security through investment in the distribution. Also want to take on the energy efficiency responsibilities.”
Revenues from the TriDam project, which the District funded in the 1950s, make it cash rich:
“We’re a rarity in California – a public agency with cash surpluses.”
This approach is putting them into headlong conflict with PG&E, the local IOU. In 2005, PG&E hired an IT consultant to hack into the water district’s IT system. After an FBI inquiry and a fine by the California Public Utilities Commission, PG&E handed over $404,000 in damages (see The Manteca Bulletin: SSJID throws down gauntlet). Jeff Shields is now reconciled to taking over ownership of local distribution system through the courts. He well understands the challenge. It took him five years to get through the courts when he managed the municipalisation of Emerald People’s Utility District, and two years for Trinity County Public Utility District .
When Gray Davis signed the order in 2001 declaring emergency restrictions to reduce the need for rolling blackouts from his desk in Sacramento, perhaps he reflected on the irony that a viable alternative to the deregulation which he opposed, and which would later cost him his job, was staring him in his face. Voters in Sacramento created SMUD in 1923, but it didn’t start delivering power till 1946 when the California Supreme Court finally dismissed PG&E objections to the compulsory purchase of the companies wires business in Sacramento. The public utility now serves 1.1 million people, the second biggest public utility in California after LA Department of Water and Power. Unlike LADWP, SMUD is operated as a community-owned, free-standing agency instead of a department of a local government. It is free to use its surpluses to re-invest as it sees fit, rather than paying these back to municipal coffers. It is overseen by a Board of directors, who are elected and represent wards within the city.
Sacramento has electricity tariffs around 30 per cent lower than those in the surrounding areas (10.8c/kWHr compared to 13.7c/kWh for PG&E – which is itself lower than the other IOUs). Its percentage of renewables is around double that of the California renewable portfolio standard.
Sacramento is pursuing a range of initiatives to reduce demand through substantial energy efficiency work on existing buildings, encourage photovoltaic panels (the only renewable electricity suited to the city) and develop skills in the installer base.
One of its most popular demand reduction programs has been ‘shade trees’, which provides small trees for free for residents to plant near their homes, to reduce the need for air conditioning. The policy is also good for community morale and has resulted in the greening of green spaces adjacent to buildings.
SMUD has also developed a careful, customer-centric approach to rolling put smart meters and retrofit of homes. SMUD maintains a list of qualified contractors who have all the correct licenses, have attended the Building Performance Institute training and have the warranties. These contractors act as an effective spokesperson for the retrofit program. So far 10,000 have taken advantage of the SMUD’s energy efficiency loans, mainly for installing heating, ventilation and air conditioning systems and windows. Increasingly people are using them for PV too. All items have to at least be energy star rated, for windows performance has to be higher as Energy star is the minimum standard in California. A third use SMUD financing to pay for the measure – the rate is not that competitive with a 4% spread between the rate SMUD borrows and the cost of the loan to cover transaction costs. The main appeal for customers is its simplicity – the loan can be processed very quickly as the contractors will help with the paperwork. An extension to the mortgage might be cheaper but could take six weeks to be agreed. SMUD considered and decided not to choose on-bill finance. This remains an issue they might return too.
SMUD has been rolling out smart meters, cautious to avoid the consumer back-lash that have afflicted some of more aggressive programmes. The customer satisfaction is running at 95% as a result of simple things like promising and delivering on commitments to come to the residents home within a one hour time slot, and investing in a lot of hand holding. The cost of the meter is around $90/house. There are significant operational savings from avoiding the need to meter read and faster fault detection. They have selected a wireless communication system.
Consumers are allowed to select to use a time of use tariff. Many customers had already voluntarily applied for the Peak Corps tariff, which – outside of the smart meter mechanism – uses transponder technology to remotely switch off A/C for a proportion of an hour when demand is high. Consumers are paid for this “demand shift” service.
Such is the popularity of the SMUD that adjoining counties like Yola have sought to join the SMUD service area and leave the IOU that currently serves them. Such moves have been resisted by the IOU, PG&E.
- Does decoupling of power company net revenues from the volume of power sold remove the incentive to sell more power?
- Does municipal power production allow climate change and social goals to be achieved more effectively than the regulation of investor owned companies?
- Can mandatory energy efficiency codes as operated in Berkeley work in other areas? Especially in areas with softer property markets?
- Can a local area that isn’t a liberal, university town generate the political will to address climate change through local democratic pressure?
- What is the size of locality that it needed for local Government to be effective at taking over responsibility of energy efficiency and distributed generation? How should it manage its interaction with the rest of the rest of the network?