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Commission Watch

California anticipates changes in energy policy under its new governor.
Fortnightly Magazine - March 2004

has not said much about methods to ensure adequate capacity. Thus, questions remain about whether the governor will encourage more central plant projects by utilities along the lines of the recent CPUC-approved Mountain View project, 11 adopt incentives for more independent power generation, renew the state's commitment to qualifying facilities under the Public Utility Regulatory Policies Act, or some combination of the above.

Schwarzenegger is likely to endorse legislation that would increase reserve requirements for utilities, thereby encouraging additional supply. Reserve margins of 12 percent have been shown to be inadequate given the vagaries of weather, out-of-state imports, and the availability of performance of the aging fossil-fuel plants, which provide most of the reserve margin for peak conditions. Expect reserve margin requirements for California IOUs to increase to the high teens, whether by legislative action or as a result of actions by the PUC, as suggested by a recent procurement decision mandating a reserve margin of 15 percent. Various tax incentives also may be employed to encourage more generation, and Schwarzenegger also is likely to sponsor initiatives that ensure both the diversity and adequacy of power supply. With respect to the former, the Energy Policy Statement suggests an undue dependence on natural gas, from which 43 percent of the state's energy supply is derived. At the same time, gas transmission system improvements may reduce the problem by increasing access to sources of natural gas. 12


Schwarzenegger's policy statement expresses his commitment to the California renewables energy portfolio standard, which calls for 20 percent of the state's total power supplies to be generated by renewables by 2017. The governor has advocated accelerating the time deadline by seven years, and it is likely that additional incentives favoring renewables will be forthcoming.

Schwarzenegger has expressed a particular affinity for solar power, with promised additional tax incentives for new solar power installations. The Energy Policy Statement set a goal that 50 percent of all new homes will have solar photovoltaics by 2005, although this goal is probably too ambitious given the costs involved. 13 Similarly, the goal of building a network of stations to implement a "hydrogen highway" by 2010 may be over-ambitious given the cost and the state's fiscal constraints. In addition, we can expect new legislation providing for tax credits for companies that install on-site renewable generation projects. Schwarzenegger has not yet expressed a policy respecting expansion of micro- or mini-turbines, another form of on-site generation, but one that is dependent on fossil fuels. However, given his strong support for on-site generation, distributed generation is likely to be an area of emphasis in the new administration.

Other Initiatives

Schwarzenegger frequently has emphasized the need for increased energy conservation. For example, the details of his conservation plan will include implementation of a real-time pricing program for "the largest customers." 14 Real-time pricing will "not only protect California against shortages," but "also help reduce the cost of doing business for energy-intensive industries such as manufacturing." 15

In addition, the Energy Policy Statement suggests increased emphasis on liquefied natural gas (LNG) as a fuel source. LNG