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California Realities and Federal Plans

A tale of two energy worlds.

Fortnightly Magazine - August 2009

With the largest population and economic output of any state, California occupies an important but unusual place in the U.S. energy market. In such areas as renewable energy and energy-efficiency policy, it’s a trend-setter on initiatives among the states and the federal government. This is particularly true given the ambitious program the Obama Administration unveiled to simultaneously move toward a comprehensive greenhouse-gas (GHG)-reduction effort, while dramatically expanding investment in the nationwide energy grid with special emphasis on wholesale power demand-response (DR) programs. These goals reflect policies that California already began: A landmark climate change law (AB 32) passed in 2006 that calls for substantial GHG reductions and for a cap-and-trade program to limit emissions from the largest GHG emitters; an ambitious renewable portfolio standard (RPS) requiring retail power providers to supply 20 percent of their power from renewable resources by 2010; and aggressive energy-efficiency goals with supporting DR programs.

However, in terms of the wholesale energy market design that governs the dispatch of generation and transmission of power, California only now is catching up to the other centralized energy markets in the country. On April 1, 2009, California implemented its Market Redesign and Technology Upgrade (MRTU) initiative to improve the current wholesale electricity market system through new market features and advanced computer software technology. First proposed nearly 10 years ago as Market Design 2002, MRTU means that California now joins the centralized markets in the Northeast, Mid-Atlantic, and Midwest in establishing a truly integrated wholesale power and transmission market design.

An analysis of this dichotomy between California’s advanced energy regulation in certain areas and its lagging energy market structure is especially timely, given the federal government’s push for GHG regulation, increased renewable energy output and a “smart” electric power grid. Comparison between state and federal initiatives demonstrates those areas in which California should be regarded as a leader, and those in which it still is playing catch-up.

California Reality

The U.S. House of Representatives in June passed legislation—HR 2454, the American Clean Energy and Security Act (ACES)—that would impose limits on GHG emissions and also establish a national RPS. The regulatory process this legislation would create on a national basis already is well under way in California. In June 2008, the California Air Resources Board (CARB) unveiled a wide-ranging draft plan that will guide how GHG-emissions reductions are achieved in accord with AB 32. Among other mandates, AB 32 requires California GHG emissions to be reduced to 1990 levels by 2020, which translates into a reduction of some 170 million metric tons of carbon-dioxide equivalent (CO 2e) in 2020, compared to current emissions trends.

A large proportion of emissions in California come from the electricity, transportation fuels, natural gas, and large industrial sectors. For these sectors, emissions reductions would be achieved through a cap-and-trade program as part of traditional regulatory efforts. To