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Community choice aggregation: How far can it push energy sector transformation?

A recent Energy Gang podcast explored some of the challenges facing California’s grid and the kinds of market reforms that could provide potential solutions. One of the ideas that dominated the first 20 minutes was customer engagement and community choice aggregators (CCAs) — topics of particular interest for me, as I have been researching CCAs as part of my curriculum as a fellow in the Clean Energy Leadership Institute’s 2017 class.

But the light bulb really went on when Jigar Shah tied CCAs to my employer’s — the Smart Electric Power Alliance (SEPA) — 51st State Initiative.

“I do think that the work that Julia Hamm has been doing at SEPA on this 51st State (initiative) has, I think, really moved the ball forward in a big way,” he said.

Beyond the props from a high-profile industry thought leader, what got me thinking was the connection between the emerging role of CCAs in California and the work SEPA has been doing on the future of the electric power sector’s business and regulatory models.

Specifically, last year, SEPA released a 51st State paper laying out four doctrines of market reform. While we recognize that electricity market reform will be driven by local market conditions, and therefore, will vary between individual jurisdictions, the four doctrines provide an essential, common framework for the discussions and policies that will be developed locally.

The four doctrines are:

  1. A primary goal of the market should be to promote efficiencies in the production, consumption, and investment in energy and related technologies.
  2. The role of the utility, as a public service entity, should be clearly defined so that all market participants can understand their roles in enabling customer options in a fair, transparent, and non-discriminatory manner
  3. Rate structures should provide transparent cost allocation that supports a sustainable revenue model for utility services providing a public good.
  4. Customers should be presented with a variety of rate and program options that expand their choice of and access to energy-related products and services, and that are simple, transparent, and create stable value propositions.

 

CCA basics

Of course, before looking at how CCAs do and don’t fit into the four doctrines, we need a clear definition of what community choice aggregation is and how it differs from the traditional utility business model.

CCAs are not-for-profit corporations that aggregate a customer base — usually, but not always, in a specific city or region — and provide electricity on the retail level. They tend to be opt-out programs — meaning all residents in the CCA service territory are automatically enrolled, but can opt to stay with their incumbent utility — but can be also be opt-in depending on the locality. State law — now on the books in seven states — allows for the formation of CCAs, essentially as energy buyers’ clubs.  The aggregating organization can purchase electric power directly in wholesale markets, but still retains the incumbent utility for distribution, metering and billing.

CCAs are a few steps short of a full-fledged municipal utility in that they do not directly own transmission or distribution infrastructure. The elements they share with public power are local choice, participation and control in energy procurement. Additionally, because CCAs are not categorized as utilities but as “electricity service providers,” they are not subject to the same rules as utilities.

CCAs have become a flashpoint in some markets where their popularity is challenging the traditional electricity sector paradigm. In California, in particular, incumbent utilities stand to lose a significant portion of their retail load as more and more jurisdictions join established CCAs or form new ones.

Going beyond those basics, the 51st State’s four doctrines provide deeper insights into the positive aspects of CCAs, and the challenges they raise.

 

The potential to promote efficiency

A primary goal of the market should be to promote efficiencies in the production, consumption, and investment in energy and related technologies.

As currently constructed, CCAs only address the production of electricity. By procuring renewable energy, CCAs are contributing to and accelerating investment in renewable energy resources, effectively contributing to reducing carbon emissions. Further, the rise in popularity of CCAs demonstrates the market’s need for greater customer engagement.

However, the potential for CCAs to play a wider role in the promotion of energy efficiency and market innovation remains untapped:

  • Local vs. regional renewables: Most CCAs obtain their clean energy through power purchase agreements for renewable energy credits from projects outside of their service territories. Could the market incentivize the investment in more locally generated distributed energy for CCAs to use in their energy portfolios, as seen in Marin Clean Energy’s Local Sol initiative?
  • Opportunity for other types of cost savings: If CCAs can purchase wholesale power as aggregate entities, could they also support other market efficiencies, for example, through bulk purchasing of smart meters or encouraging participation in demand response programs?
  • Opportunities for collaboration: Could CCAs and utilities collaborate to create new platforms for customer choice in the future? This begs the question of what kind of market incentives would support CCAs partnering with transmission and distribution utilities to lead together toward new grid management models such as blockchain or virtual power plants for transactive energy needs, or microgrids for greater resiliency.
  • Future markets: Are CCAs emerging as a symptom of the market’s inefficiency to meet customer demand for renewable energy procurement? Will the market allow CCAs to continue to purchase renewable energy or bulk energy in a sustainable way?

 

The need for clear definitions

The role of the utility as a public service entity should be clearly defined so that all market participants can understand their roles in enabling customer options in a fair, transparent, and nondiscriminatory manner.

While CCAs do not directly address the role of the utility, they still influence the utility’s business model.

Wholesale power procurement: As a buyers’ club, CCAs remove some of the responsibility for wholesale power procurement from the incumbent utility. The laws in seven states allowing the formation of these organizations empower CCAs to assume this responsibility, but do not clarify how the role of the incumbent utility may be altered in response to this new player.

Existing utility responsibilities: The incumbent utility continues to maintain the poles and wires in its distribution and transmission system; it also manages metering, billing and customer service.

The caveats here include:

  • Generation portfolios: CCAs have the flexibility to achieve more aggressive clean energy targets than regulated utilities. But in states where CCAs are not subject to renewable mandates or where customers are not as concerned with their generation mix, might CCAs shift to procuring less renewable energy? California is working to address this issue with a new regulatory proceeding aimed at standardizing portfolio information across all load serving entities — utilities or CCAs.
  • Long-term planning: In California, there is a proposed decision that would alter the long term contract compliance requirements for CCAs and utilities in relation to RPS resources and planning. Although not finalized yet, these discussions reflect the challenge that California, and potentially other states in the future, face around long term contracts, load planning, and renewable energy credits (RECs) given the increased demand for renewable energy.
  • Future roles: Regulators, legislators, customers, consumer advocates and utilities (to name a few) all have a stake in determining the future roles of utilities and CCAs. Thus far, the foundation for CCAs has been legislative — with a focus on local control — which presents a different regulatory and governance model than the traditional relationship between utilities and public service commissions. As customers take a more engaged role, the electric power sector’s traditional governance paradigm may also change.

A recent paper published by staff at the California Public Utility Commission staff notes these concerns in the context of the long-term viability of the Integrated Resource Planning (IRP) process that is part of the state’s emission reduction efforts. “The challenge facing the CPUC in the implementation of the IRP proceeding is that as non-IOU LSEs (load serving entities, for example, CCAs) serve an ever-greater percentage of load, the CPUC’s top-down approach to regulation will be challenged by the need to interact with many more procuring entities. Further complicating the issue is the fact that there are outstanding questions regarding what role the CPUC has in the CCA IRP process” (CPUC).

 

Transparent, sustainable rates

Rate structures should provide transparent cost allocation that supports a sustainable revenue model for utility services providing a public good.

While CCAs have offered the opportunity for customers to benefit from wholesale electricity procurement, the cost of maintaining grid reliability as a public good is not easily valued.

Grid Reliability: Because the CCA uses the incumbent utility’s assets in the distribution and transmission of energy to its customers, many debates over the use of this infrastructure, as well as the costs associated with maintaining it over time, have emerged in CCA areas. Recent discussions over the Power Charge Indifference Adjustment (PCIA) in California demonstrate the need for continued exploration of this issue as a part of providing transparent cost allocations for all parties involved.

Several questions remain:

  • Determining cost allocation: Given that there is a cost associated with maintaining the grid, engaging with customers, or even valuing distributed energy resources (DERs), who determines what those cost allocations are, given that CCAs are legislatively enacted and not regulated through the public service commission like IOUs? Additionally, if CCAs are removing the incumbent utility’s retail load, then the issue arises of stranded cost recovery for the generation sources that the incumbent utility committed prior to the CCA’s existence.
  • Electricity supply chain: CCAs are taking on a new role in the retail choice arena by adding an element of local control and participation in electricity procurement. But, as “electricity service providers,” what cost allocations must be determined within the electricity supply chain to then allow for utilities and CCAs to develop sustainable business models?

 

Customer choice

Customers should be presented with a variety of rate and program options that expand their choice of and access to energy-related products and services, and that are simple, transparent, and create stable value propositions.

CCAs create a method for customers to procure electricity services in a new way that responds to a number of shifting consumer interests and demands.

Electricity as a service: Electricity customers today want options. If they can choose from four cell phone companies, why not four electricity companies? In the customer’s mind, electricity has shifted from a commodity to a “service”.

Climate versus cost: Customers are increasingly concerned about climate change, an issue that has been an important drivers for CCA growth in states such as California. However, in other states, such as Illinois, the main driver may be economic — the offer of lower electricity costs. In such cases, if a CCA’s rates go up, local enrollment and participation may go down.

Customer involvement and local control: CCAs are a means of empowerment for customers, giving them the opportunity to choose the type of generation that produces their electricity. In California, CCAs’ efforts to provide clean energy at lower costs have been one of the main reasons that consumers are switching to CCAs over incumbent utilities. CCAs provide a means for local control through a collective – and arguably fundamental – resource. For example, Marin Clean Energy, California’s first CCA, positions itself as a local community organization with a tag line of “My community. My choice”.

California’s large investor-owned utilities — Pacific Gas and Electric, San Diego Gas & Electric and Southern California Edison — acknowledge the additional value that CCAs are bringing to the table in their statement to the California PUC during the public meeting in February of this year, noting that they “support customer choice, including the CCA option, and acknowledge that such growth has potential opportunities for local control over environmental policy and renewable resources.” (Comments on Feb 1, 2017) However, they also note some concerns that CCAs might duplicate their efforts to provide effective customer engagement programs.

However, several questions remain:

  • Offerings to all customers: Are CCAs responsible for offering their services to all customers? As of now, they do not have the same requirement as incumbent utilities to provide service to all customers as the legally mandated “provider of last resort.” If CCA adoption increases, what happens to customers who decide not to participate in these programs?
  • Rate structures for all: Because CCAs have the ability to set electricity prices for their customers, they also have the ability to establish innovative rate structures. However, these new rate structures could send conflicting market signals to customers or other market players if they differ significantly from other rate structures within the state. The case in point here is California, where the state is moving toward a mandatory rollout of time of use rates for its investor-owned utilities in 2019.

Perhaps, the unresolved questions about CCAs’ and utilities’ respective roles will offer the most opportunity for innovation. As currently structured, CCAs aren’t enough — in and of themselves — to reform markets. But within the larger transformation of the energy sector transformation, they provide new models for engaging customers and creating products to meet changing market conditions.

Similarly, while regulatory reform and new utility business models are important, a deeper paradigm shift is needed to ensure these new models are sustainable. The 51st State Initiative and its four doctrines embody that paradigm shift, looking to engage and balance all stakeholders’ concerns and interests. While we know there is no perfect balance, we believe that dynamic, collaborative processes can be used to address these topics and to further power change in our industry.

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