Could Test Curtailment Risk Allocation Provisions in Renewable PPAs
At the most recent meeting of the Board of Directors of the California Independent System Operator (CAISO) held on February 16, 2017, the President and Chief Executive Officer of the CAISO reported that because of the “bountiful hydro conditions expected this year and significant additional solar installations both in the form of central station and on rooftops” in California, the CAISO “expects to see significant excess energy production this coming spring.” As a result, the CAISO is forecasting that it may “need to curtail from 6,000 MW to 8,000 MW.”
Based on the CAISO’s Monthly Market Performance Reports, it doesn’t appear that there were any significant curtailments prior to a few isolated days in the Spring of 2015, the Spring and Fall of 2016, and this Winter. This stands in marked contrast to the scale of curtailments that appear to be expected for this Spring. Moreover, in 2014 the CAISO reported that by 2024 it expects maximum hourly curtailments of over 13,000 MW in California under a scenario where the Renewables Portfolio Standard (RPS) targets 40 percent of retail sales by 2024. (This RPS requirement was enacted in October 2015.)
Click here to view graph.
The CAISO relies, at least initially, on market-based solutions to address over-generation and resulting curtailments. That is, as an initial matter, the CAISO curtails generation resources, including renewable generation resources, based on their economic bids used to schedule their delivery through the energy markets administered by the CAISO. During 2015 and 2016, curtailments of renewable generation resources were largely economic in nature. However, to the extent that such generation resource-specific economic curtailments are not sufficient to address over-generation, the CAISO will manually curtail generation resources in a more generalized, systematic and non-economic manner. The CAISO warns that such non-economic curtailments could become much more likely in the future, especially during mid-day periods in the Spring and Fall, with increasing levels of output from renewable generation resources.
Click here to view graph.
Most, if not almost all, renewable generation resources in California that are under long-term power purchase agreements (PPAs) and that have their energy deliveries scheduled through the energy markets administered by the CAISO have specific provisions in their PPAs addressing the allocation of risk as between the seller and buyer under the PPA with regard to economic and non-economic curtailments. Curtailment-related risk allocation provisions in renewable generation resource PPAs have been an issue of some contention in California Public Utility Commission proceedings regarding proposed renewable energy procurement offerings (and associated proposed pro forma PPAs) by California’s investor-owned utilities. Increasing levels of curtailments could test these risk allocation provisions in already existing PPAs and result in an increased focus on these types of provisions in future PPAs. Moreover, as the CAISO reported in 2014, CAISO market participants may need to consider a number of options to address increasing curtailment risks, including “modify[ing] provisions in [PPAs] that deal with curtailments limits to reconcile with renewable portfolio standards priorities.” (Lexology, 3/12/2017)