California ahead of the clean energy curve...again

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California has long been a renewable energy pioneer, acting as a de facto frontier for advanced grid technologies such as smart meters and solar PV. It extended that tradition earlier this month with further advancement of the Global Warming Solutions Act, a multi-faceted environmental bill passed in 2006.

Formally called Assembly Bill 32, the legislation is the backbone of California's goal to reach 33 percent renewable energy generation by 2020 and return greenhouse gas emissions to 1990s levels. A big part of the bill was the creating of a cap-and-trade policy, which requires the California Air Resources Board to begin auctioning off pollution allowances to companies that need to cut back on emissions.

What's unique is that this is not just some regulation that was forced through the legislature. The cap-and-trade measure enjoyed significant support, with 61 percent of California's voting in 2010 to affirm the provision.

It's a law that has wide-ranging implications for the California energy industry, and likely is a preview what utilities and business can expect in states across the country.

A commitment to clean power

The Environmental Defense Fund praised the new program, which it helped author.

"California's cap-and-trade program is the strongest and boldest move in the U.S. to protect public health and the environment from the clear and present danger of climate change," said Fred Krupp, EDF President, in a statement.

The first quarterly cap-and-trade auction was held on November 14 with an opening bid of $10 per ton. The results of the auction show that all 23,126,110 of available allowances were sold for 2013, with an average of about 3 allowances per submitted bid. The highest submitted bid was $91.13, with an average price per allowance of $13.75. Also sold were 5,576,000 allowances for 2015. The cap-and-trade measure will be formally implemented in January 2013, at which point greenhouse gas emissions will be applied against pollution maximums.

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Pike Research projects that the auctions could generate close to $2 billion in the first year -- not an insignificant amount for a state with a budget deficit pushing $16 million.  ___________________________

The rule affects businesses and utilities across the state emitting more than 25,000 metric tons of carbon dioxide who must have one permit for each metric ton of carbon they emit. But many of the state's utilities already have significant renewable energy generation, which will lessen the impact of the cap-and-trade regulation.

"We continue to add renewables to meet the 33 percent Renewable Portfolio Standard and have added over 130 MW of distributed photovoltaics, more photovoltaics than 42 states," said San Diego Gas & Electric spokesperson Gina Jacobs, in an email with FierceEnergy.

"With this additional power from renewable sources, our GHG emissions have dropped substantially, thereby minimizing the number of allowances we need to purchase," she said.

Other large utilities in the state, including PG&E, Southern California Edison and the Sacramento Municipal Utility District are making great progress in reducing greenhouse gas emissions through encouraging the use of smart meters, net metering, and demand response incentives.

Increased revenue

Along with reducing greenhouse gasses, the cap-and-trade program seeks to bring new revenue into the state. Pike Research projects that the auctions could generate close to $2 billion in the first year -- not an insignificant amount for a state with a budget deficit pushing $16 billion. The San Francisco Chronicle notes that figure could balloon to $5.8 billion by 2015.

While the money from the law is to be allocated to carbon reduction programs, this means different things to different people.

Next 10, a California advocacy group focusing on budget and environmental reform, in May released a series of reports examining various ways to spend the cap-and-trade revenue. It noted that, "…from an economic perspective, funding new energy-efficiency programs produce the greatest economic benefits," and pointed out that these are relatively low-risk ways of furthering the goals of AB32.

But the California Public Utilities Commission and the Air Board have advocated using the money to keep customer electricity rates low. In a decision released November 19, the CPUC proposed allocating 85 percent of investor-owned utility revenue directly to households in the form of rate reductions. This could total anywhere between $5.7 billion and $22.6 billion in savings between 2013 and 2020, according to the CPUC.  A vote on the detailed proposal is scheduled for December 20, 2012.

Wherever the revenue ends up going, the advent of cap-and-trade in California is undoubtedly a milestone in the push for reduced pollution and greener energy. Utilities can mitigate financial impacts through continued customer engagement on programs like dynamic pricing and demand response, as well as the ongoing development of alternative generation such as wind, solar and geothermal.

Utilities should take note, even outside of California. For in many ways -- especially when talking about renewable energy -- California acts as a harbinger for how future regulation and policy will unfold across the rest of the country.