On October 12, 2023, the California Public Utilities Commission (CPUC) opened a new proceeding, through an Order Instituting Rulemaking (OIR), to consider various changes to the Resource Adequacy (RA) framework for California’s power system and update the RA requirements for Load-Serving Entities (LSE) in California. This proceeding is the next step in a multiyear effort to adapt the RA framework to help maintain reliability while decarbonizing California’s power system.

Development of California’s RA Program

The CPUC created the RA program in response to the 2000 to 2001 California energy crisis to ensure reliable electric service. The RA program currently comprises three requirements of all LSEs: System RA, Local RA, and Flexible RA.

• System RA requires that each LSE obtain enough capacity to meet their share of California Independent System Operator’s (CAISO’s) peak demand plus a Planning Reserve Margin (PRM). The CPUC has consistently set the PRM at 15 percent, although it was recently increased to 16 percent for 2023 and 17 percent for 2024 and 2025.
• Local RA requires that each LSE procure enough capacity to overcome a local transmission grid emergency, and the CPUC sets the Local RA requirement each year for the following three years.
• Flexible RA requires that each LSA procure enough flexible capacity to meet the highest expected three-hour net load ramp each month, and the CPUC sets the Flexible RA requirement each year for the following year.

In recent years, the CPUC has implemented several rulemakings aimed at reforming the RA framework to maintain reliable electric service as electricity demand grows and legacy thermal generation resources are replaced by renewable generation resources and storage resources. Most relevant to the present rulemaking is the 2022 implementation of a Slice-of-Day (SOD) framework for determining the RA requirements and the qualifying capacity of a given generator for the purposes of RA compliance.

Before the introduction of the SOD framework, an LSE met its System RA requirement if it contracted for enough capacity to meet its maximum demand plus the PRM of 15 percent for each month. This method made sense in the early 2000s, when a vast majority of California’s load was served by the three utilities, and each utility held significant amounts of long-term tolling agreements with gas-fired generation. Now there are 38 LSEs in California and multi-year tolling agreements have largely been replaced by short-term RA-only capacity contracts. Concerned that the RA program’s original framework no longer accurately counted the LSEs’ capacity, the CPUC requested proposals for a change to the RA framework in November 2019. In June 2022, the CPUC adopted the SOD framework to begin in 2024 as a test year with full implementation in 2025.

Under the SOD framework, each LSE must demonstrate that it has enough capacity to satisfy its specific gross load profile, including PRM, in each of the 24 hours on CAISO’s “worst day” in that month (the day containing the hour with the highest coincident peak load forecast). Thus, the SOD framework more closely tracks the actual capacity requirements of each LSE by monitoring the maximum demand for each hour of the “worst day” rather than the maximum demand for the month.

Alongside the introduction of the SOD framework as a more precise measurement of an LSE’s RA compliance, the CPUC is also considering more accurate methods of calculating a generator’s RA attributes. One such method is Unforced Capacity Evaluation (UCAP), which derates the RA value of a resource by discounting its deliverable qualifying capacity value to account for recent historical unit forced and urgent outage rates during tight resource adequacy supply hours. In the CPUC’s June 2022 order, it deferred to a later proceeding its decision on whether to require the use of UCAP as an RA counting method in the SOD framework.

The New RA Proceeding

In the proceeding established by the October 12 OIR, the CPUC intends to consider several issues concerning RA procurements over the next several years, including further refinements to the SOD framework and reconsideration of the UCAP method of RA counting. Among other things, the OIR identified the following issues as within the preliminary scope of the proceeding: 1) modifications to the SOD framework; 2) the use of the UCAP methodology in determining the RA value of a given generator; and 3) modifications to the Qualifying Capacity counting conventions and requirements for demand response and other resources.

Additionally, the CPUC intends to use this proceeding to establish the Local RA requirement for 2025-2027 and 2026-2028 compliance years, the Flexible RA requirement for 2025 and 2026 compliance years, and the PRM for 2026 and 2027 compliance years. The CPUC has also decided to consider the RA program’s reform and implementation proceedings in a single track. This is a pivot from recent proceedings, in which the CPUC addressed issues related to the 24-hour SOD framework in a “Reform Track” and procurement obligations and program implementation details in an “Implementation Track.” The CPUC’s decision to merge the “Reform Track” and “Implementation Track” reflects an acknowledgment of the interrelationship between the RA refinements and the SOD framework.

Key Takeaways

The reforms and implementation decisions made in this proceeding will likely impact the RA value of most generators, even generators that have previously entered into long-term power purchase agreements selling RA to an LSE. For example, under the SOD framework, which favors dispatchable over intermittent generators, a solar generator may lose RA value for not operating during high-demand nighttime hours, while a natural gas peaker plant may gain RA value for its availability in those hours.

Changes to the RA counting methods, like the use of UCAP, will also change the commercial value of different resources but in a more particularized fashion. For example, resources that experience more forced outages could have their RA values diminished. These RA counting methods could provide a more granular assessment of each resource’s RA value, which could help LSEs to more accurately purchase the capacity necessary to maintain reliable service.

Finally, an increase in the PRM, if adopted, likely would increase demand for RA attributes and grow the overall RA market. In June 2023, the CPUC considered raising the PRM to between 18-20 percent but ultimately decided to maintain the status quo regarding the PRM of 17 percent for 2024 and 2025 due to concerns regarding the future availability of generators currently in development and the potential rate impacts that project delays could have under a higher PRM. Accordingly, the CPUC’s decision regarding the PRM for 2026 and 2027 will likely depend on its assessment of whether planned resources will come online when expected. If the PRM does increase, LSEs will be required to procure additional capacity, thereby putting upward pressure on the price of RA attributes.

Request for Public Comments

The OIR expressly opens the door for stakeholders to help shape the CPUC’s ongoing RA reform efforts by giving each commenting party the opportunity to identify no more than five issues relating to refinements of the RA program that it believes should be addressed in the proceeding. The comment period is open and the timeline for this proceeding is as follows:

• Comments on the OIR are due on November 1, 2023.
• Reply comments on the OIR are due on November 11, 2023.
• The Prehearing Conference is on November 17, 2023, at 10:00 a.m. PT via Webex.

The Wilson Sonsini energy and climate solutions team is pleased to assist you in preparing comment letters or to analyze existing offtake agreements that could be impacted by any RA change in law. For more information, please contact Wilson Sonsini attorneys Nic Gladd, Peter Mostow, Todd Glass, Matt Bogdan, or contact Max Learner.