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by Darwin Bond-Graham, November 5, 2011
On October 18 the Sonoma County Water Agency and its contractors, Dalessi Management Consulting, LLC, and MRW & Associates publicly presented their much anticipated feasibility study for establishing community choice aggregation in Sonoma County.
The gist of it?
Sonoma Clean Power, as the supporters have dubbed it, is doable. It can provide low-carbon, non-nuclear energy to Sonoma's homes and businesses. CCA can be an economic stimulus as local green energy projects sprout up around the county, producing local jobs and both private and public sector investments.
But the feasibility study presented one downside. According to the models and estimates compiled by Dalessi, green power will come at an added cost of about $4-10 added to the average consumer's electricity bill each month.
Paul Fenn, a widely respected expert on energy economics says the feasibility study is wrong. Sonoma County can have both green energy and lower rates. The key is to focus on building local solar, wind, geothermal, and other renewable resources, and focusing on making all aspects of the energy system, from generation to consumption, more efficient. Furthermore, the study isn't just wrong, according to Fenn it wasn't even necessary. Fenn should know. He was the author of AB 117, the 2002 legislation which makes aggregation possible. Fenn and his colleagues at Local Power, Inc. are much sought consultants in the world of energy economics, and have assisted in establishing CCAs and public finance mechanisms for green, local energy far and wide.
I spoke with Fenn last week about Sonoma County's CCA effort, the feasibility study, and related issues.
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Bond-Graham: Dalessi and MRW reach the conclusion that a CCA will cost more than the status quo. This is similar to estimates regarding the East Bay where Navigant Consulting determined through pilot studies that CCA would increase rates in Berkeley, Oakland and elsewhere. Can you give some background on these studies, and explain their shortcomings?
Fenn: From our point of view Navigant kind of poisoned CCA in the East Bay. The key problem is that they use these pre-existing rate models, but CCA is a new structure. It's not a private utility. It's not deregulation. It's not a municipal utility. CCA has demand side orientation. Navigant from the beginning has excluded all demand side technologies from their portfolio design, from their model. Dalessi did the same thing. It's so harmful to the current economics of the model if you do that. It's sort of like picking the cheapest item out of your grocery bag so that the average cost of everything remaining in the bag goes up tremendously. Energy efficiency, broadly defined, is the radical economic opportunity in energy. If you exclude it, it makes localization, and green power, and CCA look expensive. That was the result of these Navigant studies [East Bay] and that was the result of the new Dalessi Study [Sonoma County].
Bond-Graham: But even with the claim of higher rates, the Sonoma County Board of Supervisors seem to have welcomed the study and are pushing ahead.
Fenn: Yes, it appears that it didn't harm the political case.
Bond-Graham: Can you explain how the energy portfolio can become greener and the rates can go down at the same time?
Fenn: Bill parity is what customers actually care about. Will they pay more, or pay less? To focus on rates, but omit efficiency, means that you're not showing the valuable proposition to the customer. For example, California has some of the highest energy rates in the country, but it has some of the lowest energy bills. The reason is we have more investment in efficiency than other states have.
The focus on rates is part of the problem. It's a failure to focus on the role of the demand side and localization, which should be a very big piece of the cost model. When you do a cost model showing wind, solar, thermal, you should be strategic in that. The key component is efficiency because it's the cheapest way to reduce bills. If you've got an economic model for CCA that just has wind, solar, geothermal, etc., that's going to look expensive. Wind is nominally expensive, and solar is very expensive. Geothermal is somewhat cheaper. Efficiency is the thing that enables you to achieve bill parity, even lower bills, with all those renewables in the portfolio.
Saying otherwise causes the public to think about all of this in terms of a false choice, thinking 'oh, we have to have higher rates for electricity to be greener.' That might work for some people, for the few who can afford it, but it's not a formula for success. I want to push the notion that Sonoma can achieve that greener portfolio at lower costs.
Bond-Graham: Marin County is now largely served by a CCA, Marin Energy Authority. Their rates are somewhat higher than PG&E, and their power mix is questionably green. What's the problem in Marin?
Fenn: The issue in Marin is the approach taken by the agency. The green power that's being marketed is being purchased on the wholesale market and resold to consumers. Green power on the wholesale market is sold at a premium. If you're going to go out on the market and buy power from a plant that somebody else owns, you're going to have to pay for the renewable energy credits, you pay for green power, there are premiums attached to those. There's not way around it.
We're taking an alternative approach in San Francisco which is focused on the use of the city's revenue bond authority, as well as potential equity investment from the outside, if somebody comes forward, to build these green power facilities, and to plan building these facilities into the service from the start. That way you don't have nearly as much of a premium attached to the resource as you would buying it on the market. It's rent vs. own.
MEA is basically selling rented power. Now they're refocusing on building new facilities which is good. But they're doing it after having already signed a separate deal with Shell [Energy North America, a subsidiary of the Shell Oil Company] to provide power. So they have to gradually phase in their customers and build the revenue to issue bonds to build new things, or attract equity, which they haven't done so much.
In San Francisco voters actually approved the authority ten years ago.
Bond-Graham: So the best scenario for starting up a CCA is to emphasize building local renewable resources right from the start?
Fenn: Sonoma, to its credit, is focusing on building resources. We worked pretty hard getting that to the center of the table, rather than this rent first and own later approach. The question was how do we plan to build? I was actually impressed and surprised by how much focus there is on the job creation and carbon reduction and energy independence side of things, even with a consultant study showing higher rates. It shows how the County's leaders are seeing the big picture. It shows how thinking is shifting and people are getting more real about the economy and carbon. The jobs side of it is pretty promising cause there's a greater depth to the effort.
On the other hand I feel like, gee guys, if you just scoped the model the way we scoped it [including energy efficiency efforts], you don't have to come out saying there's a premium. You don't have to give the argument to PG&E that this is going to raise your rates. Who knows what PG&E is going to do, but it gives an opening to PG&E, and creates a false sense of choice between lower rates and sustainability.
There's something else though that's important to point out. If you look at the fourth scenario in the Dalessi study [the most ambitious push toward a local/green energy portfolio for Sonoma County], if you look at the estimated premiums per year, even without accounting for energy efficiency, by the year 2032 there's no premium. That is important to show. It's the difference between paying a permanent marginal premium [by sticking with PG&E] or, having up front payments followed by no premium. So once your debt is paid off on your investments there's no premium, even without the efficiency factor.
Bond-Graham: So even though the modeling in the feasibility study is wrong, it's still saying we can transform our energy system into a local, renewables-based one in twenty years, and at that point in time our rates will be on par with what consumers would be paying under PG&E?
Bond-Graham: It seems like the Dalessi study also makes some unrealistic projections about the stability of energy rates offered by PG&E in the years ahead. Their peer reviewer MRW is even more generous here, saying in their comments that Dalessi "may have overestimated the likely short-term future increases in PG&E generation rates." But natural gas is a big gamble. The price could spike. PG&E derives a lot of electricity from gas-fired plants. Fracking shale gas deposits will supposedly increase the supply and cheapen the price over the next decade or two, but that's all a giant gamble really. Gas prices are volatile and could shoot up for a number of factors.
Fenn: There's an extraordinary kind of lemming effect in the energy industry to follow short term price signals and to project them into the indefinite future. If gas is going up or down there's projections following that which are unrealistic. The most recent thing is fracking. It has opened up all these gas lease claims in the US. But no one really knows if fracking will actually be allowed. There's a lot of countries now banning fracking because of environmental questions related to it. States are considering banning fracking. The states of New York, New Jersey, Ohio are all considering banning it. That's where all this gas would come from. I've seen this a number of times in my career where a political trick such as the exemption of disclosure of chemicals used to obtain gas causes the short term market people, the hedging people, to make announcements, to give these platitudes, signals to the market that basically drops the price. So the price isn't dropping based on a supply and demand prospectus. These firms only care about the next six months anyway. If states ban fracking the price of natural gas will suddenly shoot up again, then PG&E's gas prices will change dramatically. Classic mistake.
Bond-Graham: Sonoma County is relatively wealthy and full of skilled and motivated people, so setting up a CCA there seems eminently doable. What do you think about the prospects of pursuing CCA in places like Mendocino County, that have smaller populations, smaller pools of talent, less government capacity, and less private sector and public sector capital available?
Fenn: Mendocino could join Sonoma in their CCA.
There's another option that we've been telling cities and counties around the state though. In California there's been this tendency among governments to do feasibility studies of CCA, to spend all this money before they just go out and see if they can get energy through aggregation. This is not really the way it's supposed to be done now though. When I wrote the CCA law the idea was that CCA is an alternative to municipalization. It's an alternative in which you don't actually do anything, you don't actually commit anything as a rate payer or as the public, until you know what your rates are going to be. I California there's been this tendency to treat it as though it were some new kind of municipalization, where you have to study it to predict what's going to happen.
Under municipalization you have to study the transition because you first have to acquire the lines before you can start service, and you don't know what you're going to pay for the lines until you go to court to fight over the price. The price determines the cost of your service. You have study feasibility of municipalization in order to be able to tell the voters when they approve the bond authority to acquire the lines how their rates are going to be affected.
But under CCA there's no acquisition of the lines. So all you have to do is go out to the market and say, 'who wants it?' That doesn't have to cost anything. Unfortunately there's this kind of front heavy approach now —probably because this all started under the bubble [2003-2007]— where local governments had all this money, and governments would rather spend $500,000 on studies than do anything. Well now it's arguably smarter to just do it.
So we're [Local Power, Inc.] now just going to counties and saying, 'hey, you don't have to pay us anything. If you will just adopt an option so we can go out and pull it together, we'll go out and pull it together. You don't have to pay us anything. If you like it, you approve it. If you don't like it, then you don't approve.' You don't need consultants to do this. You just need to know what the price is going to be. These feasibility studies are kind of unnecessary. The CCA is designed to not need it.
If you look at what's going on out in Illinois, they're not studying this stuff. They're saying as a county, 'do we want to go out and get a greener deal? Yes. Ok. Go forth and multiply.'
Bond-Graham: So other states are pursuing the model more as intended, and wasting less money up front?
Fenn: In that respect they are. And not just Illinois, also in Ohio and Massachusetts, both are setting up CCAs with less up-front spending. They're not taking this heavy-handed utility approach that you see in California. It's much more of a steering approach. The public agency decides what it wants. It sets the terms and conditions. It has the ultimate authority to say yes or no.
Feasibility studies just aren't necessary. In an economy where there's just not a lot of cash on hand, it's arguably smarter to just skip it. There's also a lot of fear of the market, especially because of the energy crisis.