In a step towards achieving its clean energy and energy reliability goals, California has enacted Assembly Bill 1373 (AB 1373). The legislation, signed into law by Governor Gavin Newsom this month, introduces a state-level “central procurement” mechanism that has the potential to reduce project development risks and accelerate offshore wind development in California. The law is also intended to help develop long-duration battery storage and new geothermal power plants.
California’s Department of Water Resources as a “Central Buyer” – A Novel Approach
The new law is specifically intended to stimulate development of offshore wind, long-duration energy storage and other large-scale, long lead-time resources that are challenging for individual or smaller load-serving entities to procure in the typical timeframe and processes of power procurement in California.
In that regard, and to give project developers greater certainty, the new law authorizes the California Department of Water Resources (DWR) to buy “clean” energy from these capital-intensive and hard-to-build offshore wind and other projects and to sell the power to utilities and eligible electric customers. Central procurement is considered important by some for the development of California offshore wind, which is facing profitability challenges from inflation, rising financing costs, and supply chain disruptions. Offshore wind developers have not started new projects since the December 2022 lease auction.
The DWR would act at the request of the California Public Utilities Commission (CPUC). Central procurement is considered important by some for the development of California offshore wind, which is facing profitability challenges from inflation, rising financing costs, and supply chain disruptions. Offshore wind developers have not started new projects since the December 2022 lease auction.
For this central procurement, the CPUC would review integrated resource plans (IRPs) submitted under the existing resource-planning process by load-serving entities (e.g., electrical corporations, electric service providers, and community choice aggregators) to evaluate the need to procure "eligible energy resources." These are defined as resources that: (1) directly support the state’s clean energy goals without increasing reliance on fossil fuels, (2) are not already sufficiently subject to contract based on the most recent IRPs, (3) have a construction lead time of at least five years (e.g., large-scale offshore wind projects), (4) do not generate electricity using fossil fuels or their derivatives, and (5) do not otherwise use combustion to generate electricity, other than as ancillary to, and necessary for, geothermal electricity generation.
How DWR Buys and Resells Power and Selects Projects
If the CPUC identifies the need for procurement, the new law authorizes the DWR to conduct competitive solicitations and to contract for the electric power output of the eligible energy resources. When deciding which bids to accept, the DWR would be expected to consider the project's likelihood of success and ability to meet deadlines, the project's lifespan, the project's ability to provide energy and other services at different times and places, the project's impact on the community and its workforce, and the developer's plan to monitor coastal waters and wildlife.
In buying the power, the DWR would enter a power purchase agreement (subject to CPUC review) and then resell the electricity. Costs incurred would be recovered through a charge to be shared among customers of all California load-serving entities (excluding local government-owned utility distribution entities which are excluded from some of the law’s definitions of “load serving entity”). California’s state-owned electric utilities can, however, voluntarily purchase power to meet CPUC-approved resource requirements. This DWR procurement authority extends through 2035, and the DWR may utilize its bond issuance authority for certain activities under the new law.
Relationship to Federal Law; Other Matters
AB 1373 does not address a critical question concerning the viability of the central-purchaser regime. Well-established federal law prohibits the CPUC and DWR from setting prices or terms for wholesale electricity sales by non-governmental entities. However, AB 1373 mandates CPUC review and approval of the specific wholesale sales rates and terms outlined in the bill. If the effect of CPUC review and approval is that the rates charged by a utility subject to the Federal Power Act could be state-regulated, it is possible that this feature of the bill could be challenged.
Part of Wider California Effort to Streamline Infrastructure and Renewable Projects
In addition to the central procurement mechanism, AB 1373 includes a rebuttable presumption in favor of transmission projects approved by the California Independent System Operator (CAISO) governing board, measures to expedite electricity interconnections, and capacity payments for entities failing to meet their system resource adequacy requirements. Previously, California did not allow an electrical corporation to build a transmission line without a CPUC certificate that the construction met certain public interest requirements. The new law also allocates funds for workforce development and environmental research under the Voluntary Offshore Wind and Coastal Resources Protection Program.
The new law is consistent with earlier efforts this year in California to streamline opportunities for clean energy and clean energy infrastructure. For example, on May 19, 2023, the Governor issued Executive Order N-8-23 establishing an “Infrastructure Strike Team,” comprised of senior executives across various state agencies. The team is tasked with streamlining efforts and coordination across and between federal, state, tribal, and local entities on infrastructure and renewable energy projects, with a particular focus on expediting major clean-energy and zero-emission vehicle infrastructure projects through private-sector collaboration. Further, on July 10, 2023, California enacted SB 149, which streamlines judicial review of energy projects and procedures around documentation under the California Environmental Quality Act (commonly referred to as the CEQA), with the express goal of making California more competitive for funding, including from the Inflation Reduction Act and the Bipartisan Infrastructure Law.
Additional author: Jason Pham