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Sep. 26, 2017

CCA programs: More green or only red?

CCA promises to offer more green energy at a lower cost. This defies the current state of the world in which renewal energy sources, such as wind or solar, cost more than fossil fuels, such as natural gas.

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By Lynn Reaser

More green energy at a lower price? This is the promise of Community Choice Aggregation (CCA) programs, which a number of communities throughout California are pursuing. San Diego is one of them.

The concept is relatively straightforward. A community replaces the public utility as the purchaser of power with the premise that a local government will more actively pursue non-fossil fuel sources of energy and that it can do so at lower cost. This raises an interesting question: Can a local government be more efficient in the power business than a heavily regulated public utility? While that seems possible, the underlying paradox involves the CCA’s promise to offer more green energy at a lower cost. This defies the current state of the world in which renewal energy sources, such as wind or solar, cost more than fossil fuels, such as natural gas.

Unfounded Conclusions

The City of San Diego recently commissioned a study to consider the feasibility of a CCA. This was a major report, with the end product totaling over 800 pages. The Fermanian Business & Economic Institute (FBEI) at Point Loma Nazarene University (PLNU) completed an in-depth review of its findings.

It is important to understand the concept of “feasibility.” It says nothing about the actual probability of success. Indeed, anything could be feasible. With a project of this size – a CCA in San Diego would become the largest in existence – we should demand more.

The study fails to credibly show that a CCA is even “feasible.” The FBEI found all four of the study’s major conclusions regarding the feasibility of a CCA for the City to be unfounded.

Unfounded Conclusions
• The study fails to show that a CCA would achieve the City’s Climate Action Plan (CAP) objectives. Under its CAP goals the City’s aim to receive 100 percent of its energy from renewable sources by 2035. Accomplishing this goal is the most important motivation for a CCA. The study’s Base Case for a CCA only achieves a 51 percent renewable energy supply by 2035.

- There is also little indication that a CCA would result in actual greenhouse gas (GHG) reduction. The difficulty that a CCA could encounter in attracting capital would mean that little additional renewable capacity would be created. As a result, San Diego would just be taking renewable energy from other regions. It therefore could have minimal or no impact on efforts to reduce greenhouse gas emissions.

• The study brings no credible analysis or data to its conclusion that CCA customers would face lower rates than under current conditions. It begins with CCA rates being above that of the utility and ends with them being lower only because of an implausible assumption. Although the CCA and utility would face the same energy markets, the study assumes that power acquisition costs would be flat for the CCA, but rise by about 3 percent per year for the utility.

• Its findings on the economic impact of a CCA are unrealistic. They primarily are based on specious cost savings for consumers. There is also a part showing the hypothetical impact of a solar facility in San Diego that the study said is not feasible due to space requirements. The study shows that such a facility would create just 11 jobs, but one employee would earn $2.3 million despite working just half time!

• The study concludes that a CCA would be financially feasible, but shows negative net present values (NPVs) in all but two of the eleven cases presented. Unfortunately, the case with the worst NPV with a negative $2.8 billion could also be the most likely.

What Should the City Do or Not Do?

Bad policy frequently is the result of inadequate information. Given the high costs, large risks, and questionable benefits, the City of San Diego should proceed cautiously. It should at least wait for two critical pieces of information:

1) The City should wait to see if the California legislature would mandate that all utilities, including SDG&E, meet a 100% renewable goal by 2045. This would enable the City to achieve its CAP goals without undertaking huge financial risks.

2) The California Public Utilities Commission (CPUC) is revising formulas to compensate utilities (and their remaining customers) when residents or businesses leave, as would be the case with a CCA. The size of this “exit fee” could magnify the worse case negative $2.8 billion NPV citied in the study.

While a CCA might have potential, the evidence we have seen so far indicates that it would produce little new green energy to help us reduce greenhouse gases but could plunge the City into years of red ink.

Lynn Reaser is chief economist at Point Loma Nazarene University’s Fermanian Business & Economic Institute.

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