SENATE COMMITTEE ON ENERGY, UTILITIES AND COMMUNICATIONS Senator Ben Hueso, Chair 2015 - 2016 Regular

Bill No: SB 350 Hearing Date: 4/7/2015 Author: De León Version: 2/24/2015 As Introduced Urgency: No Fiscal: Yes Consultant: Jay Dickenson

SUBJECT: Clean Energy and Pollution Reduction Act of 2015.

DIGEST: This bill enacts the Clean Energy and Pollution Reduction Act of 2015, which creates or expands three related clean-energy goals to be achieved by 2030: (1) a 50 percent reduction in petroleum used in motor vehicles; (2) a doubling of the energy efficiency of existing buildings; and (3) generating 50 percent of total retail sales of electricity from renewable resources.

ANALYSIS:

Existing law:

1. Provides the California Air Resources Board (ARB) with primary responsibility for control of mobile source air pollution, including adoption of rules for reducing vehicle emissions and the specification of vehicular fuel composition. (Health and Safety Code §39000 et seq. and §39500 et seq.)

2. Directs ARB to implement motor vehicle emission standards, in-use performance standards, and motor vehicle fuel specifications for the control of air contaminants and sources of air pollution that ARB finds to be necessary, cost effective, and technologically feasible, unless preempted by federal law. (Health and Safety Code §43013 et seq.)

3. Directs the California Energy Commission (CEC) to continually assess energy consumption trends and to analyze the social, economic, and environmental consequences of these trends; carry out, energy conservation measures; and recommend to the Governor and the Legislature new and SB 350 (De León) Page 2 of 14

expanded energy conservation measures. (Public Resources Code §25200 et seq.)

4. Requires the CEC to develop and implement a comprehensive program to achieve greater energy savings in California’s existing residential and nonresidential building stock. (Public Resources Code §25943 et seq.)

5. Establishes the Electric Program Investment Charge (EPIC) Fund, to fund projects that benefit electricity ratepayers and lead to technological advancement and breakthroughs to overcome the barriers that prevent the achievement of the state’s statutory energy goals. (Public Utilities Code §25710 et seq.)

6. Requires retail sellers of electricity – investor-owned utilities (IOU), community choice aggregators (CCAs), and energy service providers (ESPs) – and publicly-owned utilities (POU) to increase purchases of renewable energy such that at least 33 percent of retail sales are procured from renewable energy resources by December 31, 2020. This is known as the Renewable Portfolio Standard (RPS). The California Public Utilities Commission (CPUC) establishes the RPS for retail sellers and ensures they progress in achieving it, and levies penalties for failure. The governing board of each POU establishes its own RPS. The CEC may issue a notice of violation against a POU for failure the adequately progress in meeting RPS targets and refer the POU to the ARB, which may assess penalties against it. The RPS provides numerous cost containment provisions and exceptions to compliance obligations. (Public Utilities Code §399.11 et seq.)

7. Requires all renewable electricity products to meet the requirements of a "loading order" that mandates minimum and maximum quantities of three product categories (or "buckets"), which includes renewable resources directly connected to a California balancing authority (CBA) or provided in real time without substitution from another energy source, energy not connected or delivered in real time yet still delivering electricity, and unbundled renewable energy credits (RECs). (Public Utilities Code §399.16.)

This bill:

This bill enacts the Clean Energy and Pollution Reduction Act of 2015, which creates or expands three related clean-energy goals to be achieved by 2030: (1) a 50 percent reduction in petroleum used in motor vehicles; (2) generating 50 SB 350 (De León) Page 3 of 14 percent of total retail sales of electricity from renewable resources; and (3) a doubling of the energy efficiency of existing buildings. Specific to the petroleum reduction goal, this bill directs the ARB to adopt and implement motor vehicle emissions standards, in-use performance standards, and motor vehicle fuel specifications in furtherance of achieving a 50 percent reduction in petroleum use in motor vehicles by January 1, 2030. Specific to the energy efficiency goal, this bill directs the CEC, by January 1, 2017, and at least once every three years thereafter, to adopt and update its comprehensive program to achieve greater energy savings in California’s existing residential and nonresidential building stock – known as the California Existing Buildings Energy Efficiency Action Plan – in order to achieve a doubling of the energy efficiency of existing buildings by January 1, 2030.

Specific to the renewable energy goal, this bill:

 Directs the CPUC and the CEC to implement the RPS to obtain the target of generating 50 percent of total retail electricity sales from renewable energy resources by December 31, 2030.

 Establishes the following RPS compliance periods and renewable energy goals for retail sellers and POUs: January 1, 2021, to December 31, 2024 – 40 percent; January 1, 2025, to December 31, 2027 – 45 percent; and January 1, 2028, to December 31, 2030 – 50 percent.

 Directs the CPUC to require all retail sellers of electricity to annually prepare renewable energy procurement plans and, for each IOU procurement plan, require the IOU to include a strategy for procuring a diverse portfolio of resources that provide a reliable electricity supply, including renewable energy integration needs, using zero carbon-emitting resources to the maximum extent reasonable, the net capacity costs of which shall be allocated on a nonbypassable basis.

 Requires retail sellers and POUs to ensure that, for each compliance period after 2020, at least 75 percent of the incremental renewable energy procurement is from generation either (1) directly connected to a CBA, or, (2) connected to another balancing authority and providing power to a CBA via dynamic transfers or by scheduling power from the facility into a CBA on an hourly basis. SB 350 (De León) Page 4 of 14

 Limits to 10 percent, for each compliance period after 2020, the incremental renewable power a retail seller or a POU may receive from unbundled RECs from generators not directly connected to a CBA.

 Directs the CPUC to establish limitations for each IOU on procurement expenditures for RPS compliance at a level that prevents disproportionate rate impacts and deletes provisions of existing law requiring the CPUC to report to the Legislature, by January 1, 2016, on the ability of each IOU to meet and maintain the 33 percent 2020 target within existing cost limitations.

 Authorizes the CPUC to assess penalties against a retail seller, and the CEC to assess penalties against a POU, for noncompliance with an RPS interim goal and, in the case of an IOU, prohibits the IOU from collecting the cost of the penalties in rates.

 Directs penalties collected from a retail seller or a POU to the EPIC Fund, to be used for renewable energy programs and research, development, and demonstration programs.

 Directs the CPUC and the CEC to consider the benefits of distributed generation; allow for consideration of costs and benefits of grid integration in RPS proceedings; minimize system power and fossil fuel purchases; recommend how to better align state incentive programs with the state’s clean energy and pollution reduction goals and provide benefits to disadvantaged communities; and give preference to the manufacture and deployment of clean energy and pollution reduction technologies that create jobs and investment in the state.

Background

State Efforts to Address Environmental Effects of Energy Use. In California, the energy sector, broadly defined, accounts for more than 85 percent of greenhouse gas emissions. The two largest sources of California’s greenhouse gases are transportation, at 39 percent, and electricity production, at 21 percent.1 Accordingly, the state’s existing clean energy and climate change programs focus on the energy sector in general and the transportation and electricity sectors specifically.

1 2013 Integrated Energy Policy Report (http://www.energy.ca.gov/2013publications/CEC-100-2013-001/CEC-100- 2013-001-CMF.pdf) SB 350 (De León) Page 5 of 14

Principal among those programs are the California Global Warming Solutions Act of 2006 (more commonly known as “AB 32”), which requires a reduction of the state’s greenhouse gas emissions to 1990 levels by 2020, and the RPS, which requires the 33 percent of the state’s electricity come from renewable resources by 2020. AB 32 tasks the ARB with developing a plan of measures that reduce greenhouse gas emission levels, to be updated every five years. To that end, ARB, in 2008, adopted a scoping plan that includes regulatory and market-based measures applicable to the state’s major economic sectors. Among the regulatory measures included in the initial scoping plan were numerous energy efficiency measures, measures to encourage the development and adoption of alternative fuels, and a 33 percent RPS. In 2014, ARB released an update to its scoping plan. The ARB approved its first update to the scoping plan in May of 2014. The state has reduced its overall emissions of greenhouse gases since passage of AB 32, as shown below:

Overall Greenhouse Gas Emission Decline Since Passage of AB 32

Sector 2006 2012

Electricity Generation (In-state) 50.05444 51.18008 Electricity Generation (Imports) 54.76146 44.14677 Industrial 99.65204 100.6717 Agricultural 37.7503 37.8634 Residential 30.60681 31.58783 Commercial 17.34549 22.02116 Transportation 192.1233 171.0075 Total Greenhouse Gas Emissions (millions of metric tons of carbon dioxide equivalent) 482.2939 458.4785

Source: California Energy Commission.

The Legislature approved the statutory RPS program in 2011 with the passage of SB 2 x1 (Simitian, Chapter 1). Statute directs the CPUC to establish the RPS for retail sellers and ensure they progress in achieving it, levying penalties for failure. The governing board of each POU establishes its own RPS. The CEC may issue a notice of violation against a POU for failure the adequately progress in meeting RPS targets and refer the POU to the ARB, which may assess penalties against it. The state’s electric utilities report they are on track to meet, or exceed, the RPS goals. The following table shows the progress to date of the state’s largest electric utilities: SB 350 (De León) Page 6 of 14

Progress of Major Electric Utilities Towards Meetings RPS Goals

RPS Procurement Percentages for Percentage of RPS the 2011-13 Procurement Period Procurement Currently Under Contract for 2020

Pacific Gas and Electric 23.8% 31.3%

Southern California Edison 21.6% 23.5%

San Diego Gas and Electric 23.6% 38.8%

Sacramento Municipal Utilities District 20.1% --

Los Angeles Department of Water and Power 20.0% --

IOU RPS procurement is as reported by the CPUC. See http://www.cpuc.ca.gov/PUC/energy/Renewables/index.htm.

The POUs report their own progress on the RPS to the CEC. See http://www.energy.ca.gov/portfolio/pou_rulemaking/2013-RPS- 01/POU_Reported_2011-2013_RPS_Percentage_Table.pdf.

Regarding transportation, the state regulates vehicle emissions and encourages the development of less carbon-intensive alternative fuels. For example, the ARB regulates the greenhouse gas tailpipe emissions of new passenger vehicles, as well as smog-forming emissions. Acting under the authority provided by AB 32, the ARB regulates the carbon content of transportation fuels, via the Low Carbon Fuel Standard. In addition, ARB provides rebates for the purchase of alternative-fueled vehicles and funds the retirement of older, higher-polluting vehicles, as well as funding alternative fuel research, demonstration and workforce training. In a related effort, the CEC provides nearly $100 million annually to fund measures to develop and deploy innovative technologies that transform California fuel and vehicle types to help attain the state’s climate change policies.

Other state programs directly address energy efficiency. The state’s loading order, established by the energy agencies in 2003, calls for meeting new electricity needs first with efficiency and demand response, followed by renewable energy and distributed generation, and then with fossil generation.2 Under statute guidelines, the CPUC authorizes IOU spending for all available energy efficiency that is cost

2 2003 Energy Action Plan (http://www.energy.ca.gov/energy_action_plan/2003-05-08_ACTION_PLAN.PDF). SB 350 (De León) Page 7 of 14 effective, reliable and feasible. In recent years the CPUC has authorized close to $1 billion per year in energy efficiency spending to meet this mandate based on feasibility studies and the record developed in CPUC’s energy efficiency proceedings. Since 1977, the CEC, acting under the broad authority provided to it under the Warren-Alquist Act, has set energy efficiency standards for appliances and new buildings; many credit these standards, in part, with keeping California’s per-capita electricity consumption flat over the past three decades.3 Further, CEC, acting according to statutory mandate, recently released a draft plan to achieve cost-effective energy savings in California’s existing residential and nonresidential buildings, which, generally, are not subject to CEC’s building efficiency standards.4

Building Upon Existing Structure to Create New “Golden Standards”. In his 2015 State-of-the-State speech, Governor Brown announced three ambitious new energy goals that would take state clean energy policy beyond 2020: (1) 50 percent of California’s electricity to come from renewable energy sources; (2) reducing by 50 percent the amount of petroleum used in cars and trucks; and (3) doubling the energy efficiency of existing buildings, all by 2030. The author has described this bill as an effort to execute on the Governor’s “bold vision.”

To a large extent, the bill builds upon existing state programs, which the author describes as already making significant progress to the three goals. In its current form, the bill prescribes little for the achievement of the petroleum reduction goal or the energy efficiency goal. Rather, the bill directs the ARB and the CEC, respectively, to expand upon existing authorities to achieve each goal.

Similarly, the bill builds upon existing statutory authority to achieve the expanded RPS goal. As existing statute makes extensive, specific requirements of the RPS program, so too does the bill. Notably, the bill removes the prescriptive cost- containment provisions of the RPS statute meant to ensure the renewables mandate does not cost too much. Just as notable, however, is that the cost-containment provisions have never been used as the cost of compliance with the RPS statute has not been too burdensome.5 This bill, instead, directs the CPUC to establish a limitation for each IOU, at a level that prevents disproportionate rate impacts. It will be important for the Legislature to maintain oversight of the CPUC’s implementation of these looser cost-containment provisions. The author and committee may wish to consider requiring the CPUC and the Office of Ratepayer 3 See, for example, http://switchboard.nrdc.org/blogs/mwaltner/energy_savings_on_the_way_for.html. 4 Existing Buildings Energy Efficiency Action Plan - Draft (http://www.energy.ca.gov/ab758/). 5 The CPUC’s Energy Division estimates that the RPS has increased electricity rates by four to five percent, a range well within that contemplated by the Legislature during its deliberation of SB 2 X1. See, for example, the Assembly Appropriations Committee analysis of SB 2 X1, which referenced a CPUC estimate that the 33 percent RPS might raise rates as much as 7.7 percent. SB 350 (De León) Page 8 of 14

Advocate, as part of their annual reports to the Legislature, to update the Legislature on the cost-containment requirements the CPUC has made of each IOU.

What the Duck Is This? The bill also adds language to the RPS statute that directs the CEC and CPUC to:

 Value distributed generation and the benefits it provides, particularly in disadvantaged communities, and to promote its use.  Allow for the costs of grid integration.  Adopt rules that, where feasible, minimize system power and fossil fuel purchases, increase the use of energy storage, demand response, and other low-emission and zero-emission technologies to protect system reliability.  Ensure incentive programs are aligned with state policy and benefit disadvantaged communities.  Give priority to opportunities to create jobs and increase investment in the state.

Integration of renewables is a real challenge. Many renewable resources, including solar and wind, are intermittent resources, meaning they are available only as conditions allow them to be, such as, when the sun is shining or the wind is blowing. This intermittency complicates reliable management of the electrical grid a challenge and has the potential to lead to situations in which the state produces more power than it needs. Such a scenario is depicted in the California Independent Service Operator’s now-infamous “duck” chart. Thus far, the state’s electrical system has responded to the challenge of intermittency by, primarily, relying on natural-gas fired power plants that can quickly ramp up and down in their generation of power.

However, other solutions exist or may be developed. For example, energy may be stored in batteries, pumped hydro, or compressed air. So called demand response can be called upon to better match electricity demand to electricity supply. Distributed generation can be placed where it most benefits the grid overall. Balancing markets can allow use of resources across regions, so that local supply need less coincide with local demand. And the state has programs and policies to encourage these programs. For example, the CPUC requires the IOUs to procure set amounts of storage capacity. And the IOUs operate demand response programs, though, as the CEC notes, growth in demand response in California is flat and lags other parts of the country.6 The author may want to consider, as the bill moves forward, language that better ensures that the CPUC, CEC and the

6 See 2013 IEPR, Chapter 2: Demand Response. SB 350 (De León) Page 9 of 14 retail sellers of electricity appropriately value these zero-emission, grid-enabling opportunities. Similarly, the author may want to consider language that ensures regulators, retail sellers and POUs recognize the value of local benefits that certain projects may provide.

Balancing the Balanced Portfolio. This bill leaves unchanged the statutory requirement that retail sellers procure a “balanced portfolio” of renewable energy resources. This bill, and the existing RPS statute, define eligible renewable energy sources as biomass, solar thermal, photovoltaic (PV), wind, geothermal, fuel cells using renewable fuels, small hydroelectric generation, digester gas, municipal solid waste conversion, landfill gas, ocean wave, ocean thermal, or tidal current. An examination of the IOU’s RPS portfolios, however, shows an increasing and predominant reliance on solar PV renewable energy resources. This increasing reliance makes sense, in that the cost of solar PV has decreased dramatically in recent years, making electricity generated from solar PV nearly cost competitive with electricity generated from natural gas, based on the direct cost of generation. Yet, in calling for a “balanced portfolio” of renewable resources, the Legislature recognized that procurement of electricity from a variety of renewable resources may have value not recognized by the price of electricity generation.

This bill reaffirms and strengthens this recognition. The bill newly requires each IOU to include in its RPS procurement plan a strategy for procuring a diverse portfolio of resources that provide specific, nonmonetary benefits: reliable electric supply, including renewable energy integration needs, using zero-carbon emitting resources to the maximum extent possible. The Legislature should expect this requirement to lead IOUs to procure a more-diverse portfolio of renewable resources and to rely less on natural gas-fired electricity generation to balance the electrical system.

Not This Henhouse. The bill authorizes CEC to levy fines for noncompliance with the RPS against POUs and directs monies from any such fines to the EPIC Fund, as it does monies resulting from fines levied by the CPUC against retail sellers. Existing statute charges the CEC with administering monies in the EPIC Fund and defines eligible projects as research, development, and demonstration programs that benefit IOU electricity ratepayers. In addition, the CPUC must approve CEC planned expenditures from the fund. These requirements – CPUC approval and benefits to IOU ratepayers – are appropriate for monies that come from IOU electricity ratepayers. It seems inappropriate to apply these requirements to monies from fines paid by the ratepayers of the state’s POUs. The author and committee may wish to establish a fund, distinct from the EPIC Fund, to receive SB 350 (De León) Page 10 of 14

RPS penalties from POUs, that funds similar projects as the main EPIC Fund, but without the IOU-specific constraints statute places on monies in the EPIC Fund.

Do As I Say (And Do). The existing RPS does not apply to the Department of Water Resources (DWR), though DWR is a major purchaser of electric power. The Governor effectively described the driving imperative of achieving our clean energy goals. If the state is committed to meeting those clean energy goals – and committed to obliging retail sellers and POUs and their ratepayers as well, then it should apply those clean energy goals to all energy users. The author and committee might want to consider amending this bill to subject DWR to the RPS requirements, though pursuant to a modified schedule that acknowledges DWR’s current fossil fuel-dependent energy portfolio.

Decarbonizing the Electricity Sector: Another Way Forward? As described above, the bill expands upon the existing RPS framework, largely as a strategy to reduce greenhouse gas emissions. This makes sense: the strategy has worked. California is on track to meet its renewable energy targets. As the bill’s author notes, renewable resources provide a number of benefits beyond the production of electricity: minimizing local air pollution effects, insulating ratepayers from fossil fuel market volatility, and encouraging technology innovation and a decline in costs.

Some industry representatives, while expressing general support for the state’s clean energy goals, have suggested a “clean energy standard” (CES) instead of an RPS. As described, under a CES, the electricity generating sector would agree to a sector-wide greenhouse gas emission cap. The particulars of how the actors in the sector would achieve such a cap would be left up to those actors, who, presumably, would choose the least-costly greenhouse gas reduction measures needed to meet the cap. Such measures might not include renewable energy project or might not include the number and scale of renewable energy projects that would be realized under the higher RPS. The CES approach would have the advantage of being, potentially, lower cost; however, it would also provide less benefit, especially since it seems unlikely the lowest cost projects would be those that would force innovation.

Double Referral. Should this bill be approved by the committee, it will be re- referred to the Senate Committee on Environmental Quality for its consideration.

Prior/Related Legislation SB 350 (De León) Page 11 of 14

AB 758 (Skinner, Chapter 470, Statutes of 2009) requires the CEC to develop and implement a comprehensive program to achieve greater energy savings in California’s existing residential and nonresidential building stock.

SB 2 x1 (Simitian, Chapter 1, Statutes of 2011) requires retail sellers of electricity and POUs to procure at least 33 percent of their electricity from renewable resources by 2020.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

ARGUMENTS IN SUPPORT: Supporters note the need to build upon the success of the state’s existing clean energy policies and note many co- benefits, such as cleaner air, innovation forcing, and energy supply diversity, provided by RPS.

ARGUMENTS IN OPPOSITION: The Western States Petroleum Association (WSPA), in explaining its opposition to the bill’s petroleum reduction goal, decries this approach, expressing concern over how ARB would implement such a broad mandate. WSPA recommends the bill, instead, spell out the regulatory mechanisms ARB is to use to achieve the petroleum reduction goal. Other opponents protest what they see as the excessive cost of complying with the bill and the lack of flexibility.

SUPPORT:

American Lung Association – California American Academy of Pediatrics – California Asthma Coalition of Los Angeles County Azul Baz Allergy, Asthma and Sinus Center Berkshire Hathaway Energy Blattner Energy Bonnie J. Adario Lung Cancer Foundation Breathe California BYD Motors, Inc. California Black Health Network California Conference of Directors of Environmental Health California Energy Efficiency Industry Council California League of Conservation Voters California Pan Ethnic Health Network SB 350 (De León) Page 12 of 14

California Public Health Association – North California Thoracic Society Californians Against Waste Center for Climate Change and Health; Public Health Institute Central California Asthma Collaborative Circulate San Diego Clean Water Action Clean Power Campaign Cleveland National Forest Foundation Coastal Environmental Rights Foundation Doctors for Climate Health (8 Doctors) Endangered Habitats League Environment California Environmental Defense Fund EtaGen First Solar Friends of the River Health Care Without Harm Large-Scale Solar Association League of Women Voters of California McCarthy Building Companies, Inc. Medical Advocates for Healthy Air Moms Clean Air Force National Parks Conservation Association Natural Resource Defense Council NextGen Climate NextTracker, Inc. Office of Ratepayer Advocates Physicians for Social Responsibility – Los Angeles Physicians for Social Responsibility – San Francisco Bay Area Chapter Public Health Institute Recurrent Energy Regional Asthma Management and Prevention Sequoia Riverlands Trust Sierra Club California Signal Energy, LLC Southwest Wetlands Interpretive Association SunEdison The Utility Reform Network TransForm Trust for Public Lands SB 350 (De León) Page 13 of 14

Union of Concerned Scientists Wireless Advanced Vehicle Electrification

CONCERNS:

California Municipal Utilities Association County of Los Angeles Public Health

OPPOSITION:

Association Builders and Contractors of California BizFed (Los Angeles County Business Federation) California Construction Trucking Association California Independent Oil Marketers Association California Independent Petroleum Association California Manufacturers & Technology Association California Small Business Alliance California Small Business Association Coalition of Energy Users Fullerton Association of Concerned Taxpayers Howard Jarvis Taxpayers Association Independent Oil Producers Agency International Warehouse Logistics Association Kern Citizens of Energy Kern Citizens for Sustainable Government Kern County Taxpayers Association Long Beach Area Chamber of Commerce National Association of Royalty Owners – California National Federation of Independent Business/California Placer County Taxpayers Association Regional Hispanic Chamber of Commerce San Diego Tax Fighters Santa Barbara County Taxpayers Association Santa Barbara Technology and Industry Association Small Business Action Committee South Bay Association of Chamber of Commerce Torrance Area Chamber of Commerce Valley Industry & Commerce Association Western States Petroleum Association Wilmington Chamber of Commerce SB 350 (De León) Page 14 of 14

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