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Expensive Bets: Clean Power Contracts in Cali

Californians may see a big jump in their energy bills in the near future due to the expensive nature of the clean power projects that the state’s utilities have contracted. The renewable electricity under contract will be billions of dollars more expensive than what the utilities would otherwise pay for power from natural gas plants, according to a state report released on Friday.

The report, written by the Division of Ratepayer Advocates (DRA), found that 59 percent of the power purchase contracts signed by the state’s three big utilities are set above the market price referent (MPR), which is the benchmark used by the California Public Utilities Commission to review renewable electricity contracts submitted by the utilities.

The MPR takes into consideration the cost of building, operating and maintaining a 500 MW combined cycle natural gas power plant. The commission publishes the MPR and notes whether each contract it approves is below or above the MPR. But it doesn’t divulge the actual contract pricing. On average, the more expensive contracts are priced at 15 percent higher than the MPR.

Surprisingly 77 percent of PG&E’s signed clean power contracts are above the MPR. At the same time 14 percent of all signed clean power contracts by utilities in the state have failed to deliver and another 15 percent have been delayed. The figures shed light on just how early the market is for utility scale solar and clean power projects.

These expensive contracts cost over $6 billion more than what utilities would otherwise pay for power from natural gas power plants, said the report, which looked at all the renewable electricity contracts signed by the utilities from 2002 to 2010 to meet state requirements. The report included contracts for power plants currently in operation as well as contracts for plants that haven’t yet been built. In fact, many of the contracts are for projects that haven’t been constructed, so the impact to consumers is still largely unknown.

State regulations allow the contracts to price above the MPR, recognizing that renewable electricity generally is more expensive at this point than power from fossil fuel sources but is better for the environment. But the commission also is supposed to use the MPR to ensure the contracts won’t be too expensive and therefore costly to consumers. Yet, the commission “has approved nearly every renewable contract filed by the utilities, even when contracts rate poorly on least-cost, best fit criteria,” the DRA said in the report. The commission has rejected two out of the 184 contracts it has reviewed.

The three utilities, Pacific Gas and Electric, Southern California Edison, and San Diego Gas & Electric, have collectively been signing dozens of power purchase agreements in recent years in order to meet a state mandate to get 20 percent of their electricity from renewable sources by 2010. They didn’t meet that mandate but are given until 2013 to comply. Meanwhile, they also are simultaneously racing to meet a requirement to get 33 percent renewable electricity by 2020.

PG&E has signed more contracts that are priced above the MPR than other utilities. Of the ones PG&E has signed, 77 percent of them are above the MPR, while Edison and SDG&E’s shares are less than 50 percent. A PG&E spokesman told the San Francisco Chronicle that the high price for solar electricity is the primary cause for the share of expensive contracts.

Efforts to meet these goals have spawned controversial solar power projects that are proposed to occupy large tracts of land in the desert and have attracted strong opposition from environmental and community groups. A few of them already have sparked lawsuits or threats of legal challenges. PG&E has even contracted for some really out there concepts, like so-called “space solar.”

Lining up money to build these large projects also has proven difficult for developers, some of which have had to sell their projects. Tessera Solar, for one, announced the sales of its two power projects in the last two months. OptiSolar sold its pipeline of projects under development to First Solar in 2009 for $400 million.

The DRA warned that the commission needs to scrutinize each proposed contract more closely to make sure that, ultimately, consumers won’t be screwed with unfairly high electricity bills. DRA’s recommendations included setting a pricing limit annually and requiring that utilities submit the particularly expensive contracts ($100 million above MPR-based prices) to a lengthier review process. DRA said the public also should be given easier access to information for how much these renewable electricity contracts are costing so far and will likely cost for the next 10 years, as well as the progress the utilities are making to meet the state mandates.

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Photo courtesy of PG&E