California’s shifting energy landscape enters a landmark summer

This summer, California will be hard pressed to navigate a volatile energy landscape as the state balances its climate commitment with high temperatures, record demand and supply-chain disruptions.

An earlier - and longer - fire season, drought, a strained grid that needs upgrades, inflation and the war in Ukraine will contribute to a tight energy marketplace. Proposed solutions must satisfy immediate summer energy requirements while attempting to stay the course on the state's goal of carbon neutrality by 2045. That's a tough balancing act with many externalities that are beyond the state's control.

In this dynamic energy marketplace, California has several initiatives to address the risks with opportunities for the state's businesses.

Businesses' Role in Addressing Summer Demand

In 2020, California experienced its first rolling blackouts in two decades due to a heat dome blanketing the West Coast that sent energy demand soaring. Following that summer, the state implemented policies that succeeded in preventing additional rolling blackouts in 2021, but state and grid officials are warning of possible blackouts again this year.

Emergency load reduction programs enabled the grid to handle high demand last year, and power managers have said they plan to expand options that include having large businesses turn off their power during emergencies in exchange for lower rates. These demand reduction programs are essential to prevent blackouts, and additionally reduce fossil fuel consumption helping the state achieve its aggressive climate goals.

In response, new policy changes provide opportunities for businesses to use state resources to protect and advance operations. But leveraging these new programs and policies will require knowledge of what the state has to offer.

Businesses are being actively recruited by the state's largest utilities to participate in the California Public Utilities Commission's (CPUC) five-year pilot program designed to pay electricity consumers for reducing energy consumption or, if they generate, increasing their contribution to the grid during supply emergencies. The program was called on four times in the summer 2021 and proved very effective (and lucrative) for those who signed up.

Another program, Automated Demand Response (ADR), being offered by the utilities provides financial incentives and technical assistance to those who sign on. In times of peak demand, this customized automated system regulates commercial customers' energy consumption allowing businesses to cut energy costs and their environmental impact without upfront investments. This program also offers energy audits, technical guidance on system upgrades and follow-up inspections to verify results.

The key for businesses is staying ahead of the dynamic energy situation and its shifting policies and regulations as the state promotes its ongoing energy transition to a more electrified economy. Many of these programs are either in development or being adjusted to meet evolving scenarios.

Solar Power For All

The solar industry is also facing key decisions by the state. A final decision is expected for the state's controversial amendments to its Net Metering 3.0 policy, which will determine a buyer's rate of return on their solar installation. A draft of the rule created fees to connect solar to the grid charged monthly based on system size, with fees increasing proportional to the size of the system. Solar advocates have said the plan would put solar out of reach for millions of working-class residents.

Governor Newsom has called solar "essential" to California's future, but would not comment on the proposed plan. However, on May 9, the CPUC announced it was "reopening the record" for its net metering proceedings through June 24. Companies investing in solar must take note of news coming from the CPUC - and monitor expert analysis following the comment period - which may provide early indications as to the shape of the final plan and the projected return on investment.

Solar has helped California break records in renewable energy generation with the grid on a single day last month surpassing 100 percent of its demand. Following this milestone, legislators are reviewing Assembly Bill 2316, a bill that would create a statewide Community Renewable Energy Program, allowing utility customers to subscribe to community-based clean energy facilities. The bill is designed to particularly help low-income residents who do not have access to solar infrastructure and increase grid reliability. A vote is expected this summer.

The state's energy/grid decisions are proactively responding to a report from the North American Electric Reliability Corp., which states regions of the country, including Southern California, are facing more energy emergencies due to a combination of climate change and a transition from fossil fuels to renewable power. Neither the governor, the regulatory agencies, or legislators are abandoning their commitment to an energy transition, but their attempts to manage the transition will create uncertainties for businesses in the near and longer term.

Reliable and Electric Ready

The transportation sector is another part of the energy puzzle. Drivers and fleet operators are witnessing the highest gas prices ever seen, partially because California banned Russian imports of oil, which previously amounted to over 11 million barrels of oil per day. The high prices are pushing electric vehicle demand - a positive development in achieving the state's energy goals - but adoption has been constrained in part by available supply.

According to a study by Consumer Reports, operators of electric vehicles could save $2,100 a year on fuel and maintenance with an electric car, $2,600 with an electric SUV, and $3,200 with an electric pickup. The value of an electric vehicle will likely improve if oil continues to climb, as Russia's war in Ukraine grinds on and the EU bans imports of Russian oil ahead of the summer season. Oil prices are projected to remain high in this scenario, but the electric vehicle shortfall is being addressed. Congress is crafting legislation to address chip shortages and help global supply chains recover from the latest wave of COVID outbreaks.

Despite the pain at the pump as California manages its transition from fossil fuels to a mix of renewables, the state remains committed to a more electrified future. Disciplined early movers who can secure supply and resources will see a quicker and broader return on investment. Manufacturers are expected to increase their production of electric vehicles through 2030, including Ford, General Motors and Stellantis, who've announced their "shared aspirations" to achieve sales of 40 to 50 percent electric vehicle sales by 2030. This historic shift to an electrified economy is providing opportunities across all sectors.

Wildfires, Drought and Climate Change

More than 2500 wildfires have already broken out across California this year, well ahead of the average for this time of year. The rise of wildfires in springtime has extended the fire season, which traditionally peaks between July and October, and is one of the largest threats to property and grid reliability. In response, state policymakers and agencies have expanded investments in programs that address the key drivers of catastrophic fires and improve the resilience of increasingly threatened communities.

The state is funding programs that will create a market around forest biomass to encourage forest management. It is providing funds for cost-effective structure hardening and retrofitting to create fire resistant buildings through pilot programs that will expand based on data from this summer. High demand from businesses is expected for these new programs, so timely applications will increase the chances of participation.

California is also in the grip of a three-year drought, which is driving wildfire frequency, according to the U.S. Energy Information Administration. That's having major ramifications for how the state generates electricity now and in future years. Hydropower typically supplies about 15 percent of the state's energy, but hydroelectric generation in 2021 was 48 percent below the 10-year (2011-2020) average in the state. A sustained depletion of California's reservoirs is likely to further handicap clean energy generation, threatening some hydropower plants with eventual shutdowns.

However, while the state's reservoirs approach low levels experienced in 2015, California's energy mix has changed significantly since then. Solar capacity has increased by 8,800 megawatts and the state has broken renewable generation records, and deployed battery storage and microgrid technologies to increase the resilience of these systems.

Companies operating in California can expect the state to roll out more and varied renewable energy solutions and proposed policy updates to address this issue.

The business landscape will be irreversibly impacted by these changing policies as California pushes for a low carbon future. The answer is a mix of energy and fuel choices during the transition that will provide the necessary flexibility for our energy supply to support economic growth and protect the environment. The problems are complex and the transition offers a number of opportunities for stakeholders to participate in, and there will be a scramble for available state resources. Business leaders will need to make sure they stay abreast of the changing legislative actions and repercussions to their businesses and be informed of all available options.