Electric Power Auction ‘Last Stand for Renewables’ : Energy: The competition for billions of dollars in future state utilities contracts comes as economics are heavily stacked against alternative producers.
A controversial auction of future electric power, which could be resolved as early as Wednesday, could represent the last big chance for California’s unique mix of wind turbines, geothermal plants and other energy alternatives to carve out more turf.
At stake are billions of dollars in contracts to produce electricity for the state’s public utilities--the biggest opportunity in years for those who make power from the sun, wind and subterranean steam.
But the auction comes as economics are stacked against alternative energy producers more than at any time in recent memory. And many in the utility business and on Wall Street believe that the twilight has arrived for industries based on such environmentally praised sources of energy.
“It’s the last stand for renewables to carve out a market niche for themselves before the new order (of utility deregulation) comes in,” said Arthur O’Donnell, editor of the industry newsletter California Energy Markets. “This is where the lines will be drawn for the future of energy in California.”
Under policies that are a legacy of the 1970s energy crises, the state Public Utilities Commission has required Southern California Edison Co., San Diego Gas & Electric Co. and Pacific Gas & Electric Co. to entertain bids from companies vying to sell them the power to light more than a million California homes.
But the auction has broken down over the utilities’ contention that the PUC’s process is flawed in favor of the renewable energies. Edison, going further, says it doesn’t need more energy until well into the next century. For their part, the renewable energy producers say that the utilities--particularly Edison and SDG&E--simply; want to build any new power plants themselves.
As the bids came in last December--framed under PUC formulas that one critic termed “death by detail”--the utilities cried foul. Some bidders, said utility executives, had scored well by using numbers that defied the laws of thermodynamics as well as the spirit, if not the letter, of the auction rules.
Edison accused some “clever” power producers of creatively--though not necessarily fraudulently--estimating production efficiency and other elements of their complex bids and asked the PUC to throw out Edison’s portion of the auction. The other utilities called for throwing out the most problematic bidders, but keeping the rest.
The alternative energy producers generally defend their bids--which cite energy-production costs substantially cheaper than the utilities’ own benchmark prices. And they stand ready to modify the more creative payment clauses that the utilities object to. Indeed, they say that “utility dinosaurs”--particularly Edison, which they call a “purveyor of doom”--are seizing on the issue to resist increased use of the independent producers’ renewable energy.
On Wednesday in San Francisco, the PUC commissioners are scheduled to begin hearing testimony to sort the matter out.
If the commissioners end up telling the utilities to accept somewhat modified bids, PG&E; and the renewable energy producers will be more or less content. But Edison, the biggest player in the auction, and SDG&E; say that their ratepayers would still see an unnecessary jump in their power bills if they are forced to buy additional alternative energy.
Edison--which has contended all along that it doesn’t need the extra power--estimates that the auction would add 1% to 2% to its customers’ average monthly bill, or $530 million in unnecessary costs from 1997 through 2004. SDG&E; estimates that the “manipulated” bids would cost its ratepayers an extra $26 million a year over the next 25 to 30 years of the contracts.
If the commissioners surprise most parties and throw out Edison’s part of the auction, it would be a major blow to renewable energy producers who have spent decades in research and development and are poised to become broadly commercial.
“It would not be the death knell of renewables,” said Gerald Alderson, president of Kenetech Corp., the largest of the wind-energy generators. “On the other hand, we’ve spent a lot of time developing what would be $500 million worth of projects.”
Proponents contend that some of these technologies--particularly wind and geothermal--have finally become competitive with the utilities’ fossil-fuel plants, citing the auction prices as proof. And though Edison may not need the new power production to keep its ratepayers’ lights on, Alderson and others contend that it owes it to them to switch to lower-cost producers if they are available.
“Some old, inefficient power plants ought to be turned off,” Alderson said. “But a utility is going to stand up and say ‘no,’ because they are still paying off the investment.”
The renewables companies also tout the long-term benefits of their energy sources, ranging from low environmental impact to more stable energy pricing--because they can be used as a hedge against future price hikes for natural gas, the utilities’ principal fuel.
California, which was once 70% dependent on oil for its electricity, turned to renewable energy for that reason. After the 1978 revolution in Iran drove up world oil prices, California experienced the steepest electricity price hikes in the nation. The state legislature and regulators responded with a policy--still unique in the nation--to promote non-fossil fuels for electricity generation.
Today, California has the most diverse palette of energy sources of any region in the world. Fully 10% of the mix comes from geothermal, biomass, solar and wind. And this is largely due to two big auctions--the current one being the second--in which part of the state’s future power needs have been set aside for renewable and independent power producers. Historically, this has in effect subsidized the renewables producers.
But most utilities and industry analysts see a less rosy future today. Even if some renewables can now compete on their own with some fossil power plants, the utilities argue, renewables will still be too expensive to vie with the even-lower energy prices to come under electric-utility deregulation, which has been taking hold since 1978.
“‘Social generation’ is a thing of the past,” said Edward J. Tirello Jr., a senior vice president and utilities analyst with NatWest Securities in New York.
“All these higher-cost renewables and independent producers are out the window,” Tirello said. “They can’t compete in a real, competitive world . . . particularly against the new generation of gas-fired turbines.”
Meanwhile, pressure on utilities to lower power bills, particularly to big industrial customers, is intense in California’s business climate. While benign weather and widespread energy efficiency programs keep monthly power usage and costs for residential and industrial customers among the lowest in the nation, California’s electricity rates remain higher than those in many other states, and large industrial users are threatening to push for even more deregulation--in retail power, something the utilities vehemently oppose--if they don’t get cheaper electricity.
All this leaves California’s utilities with little patience for the PUC’s support of renewable resources.
“We want to compete on a level playing field . . . and if we can do that, that eliminates an awful lot of the inherent disputes that are built into the current process,” said Don Fellows, Edison manager of renewable resources.
Edison, Fellows points out, already buys almost a quarter of its energy from renewable resources--about twice the national average among utilities. Edison also has more different energies in its generating mix than any other utility in the world. Utilities, he argues, should now be free to simply buy the cheapest electricity from any available source, and to determine on their own when they need it.
But Jan Smutny-Jones, executive director of the Sacramento-based Independent Energy Producers Assn., sees this as short-sighted dependence on currently low gas prices.
“The reality,” Smutny-Jones said, “is that none of the gas or oil crises that you can think of historically were predictable events. They just happened.”
