Misplaced utility incentives encourage big capital projects, like SDG&E's Sunrise, and hurt conservation efforts
At odds on scale of power
Some question SDG&E's big-project approach to region's energy future
By Craig D. Rose
San Diego Union-Tribune June 24, 2007
The debates and issues seem too numerous to track.
There's the controversy over building the proposed $1.3 billion Sunrise Powerlink across Anza-Borrego Desert State Park.
Then there are questions about the future of the South Bay Power Plant in Chula Vistaand the big Encina Plant, which sits on valuable coastal property in Carlsbad.
There's also a proposal to build a power plant in Santee and the likelihood that San Diego Gas & Electric will buy El Dorado Energy, a Nevada power plant owned by Sempra Energy, SDG&E's parent company.
On top of all that, there's the state requirement for more renewably generated electricity, as well as rules for reducing greenhouse gas emissions.
By any account, it's a hefty and complex agenda, one that SDG&E says is required to meet the growing electricity demand in this region.
While no one doubts that much needs to be done in coming decades to deal with the burgeoning power demand, some experts say SDG&E's proposals rely excessively on big projects because they generate the most profits.
These experts worry that other approaches - including energy efficiency, rooftop solar-generating systems and other smaller, distributed options for producing power - are being given short shrift. And they say utility customers could be stuck with big, antiquated projects they have to pay for over decades.
SDG&E says its big projects - particularly Sunrise - are just what's needed to usher greater reliability and an era of greener electricity.
All agree that SDG&E needs to satisfy growth in electricity demand, which is estimated at about 100 megawatts per year, or enough to require a new power plant every six years or so. That demand is coming from population growth and increased use of power by existing customers.
To meet that demand, SDG&E is taking what some call the "big iron" approach: large, expensive projects, designed to expand a centralized infrastructure for producing and distributing electricity.
That's the way electricity demand has been met for decades, and that's where SDG&E can make the most money. Under current rules, large capital projects like transmission lines and power plants don't just generate electricity, they produce guaranteed financial returns to the company for decades.
Some energy experts say that's a problem.
They see limits to how many new power lines or plants the community will tolerate. Groups like the Utility Consumers' Action Network also say it's possible that the development of solar electricity, fuel cells and other technologies will reduce the need for big, centralized projects.
Further complicating the discussion is the fact that the region's power demand is increasingly characterized by spikes in usage. The spikes are driven by the development of hotter inland communities and their increased use of air conditioning - the hottest days cause growing numbers of East County residents to crank it up.
So SDG&E is adding more and more so-called peaker units to its portfolio of resources. These are smaller power generators designed to start and stop quickly in response to short-term demand surges. South Bay and Encina have been mentioned as potential sites for conversion to peaking facilities.
SDG&E also hopes that advanced digital power meters, which will be installed soon, will discourage peak demand by charging customers more for power used at those times. That program cost about $570 million but is supported by UCAN as a smart investment because it is expected to lead to conservation, avoiding the need for more generating resources.
But UCAN is among the leaders opposing SDG&E's biggest proposed project: the Sunrise Powerlink. The proposed 150-mile transmission would begin in Imperial County, cross Anza-Borrego Desert State Park and cut through North County communities.
SDG&E says Sunrise will provide a key additional pathway for importing electricity into San Diego, as well as providing access to renewable electric-generation facilities expected in Imperial County, where developers are planning solar and geothermal power projects.
Michael Niggli, SDG&E's chief operating officer, said the California Energy Commission recently increased its 2010 peak electricity demand forecast for the region to 5,150 megawatts, or about 600 megawatts more than this year's expected peak.
"We are at a crossroads," Niggli said. "You can put off building Sunrise for a year or two, but you would get behind on meeting your renewable-energy mandates and on reducing greenhouse gases."
At the same time, however, Niggli anticipates no problem meeting electricity needs this summer or for several years to come. In fact, he said SDG&E's existing resources could be stretched to meet the peak electricity demand expected in three years.
"But you would have to have everything greased up and ready to go," he said. Niggli quickly added, however, that it would be imprudent not to add resources like Sunrise by 2010 for reliability and the access it will provide to renewables.
Niggli said SDG&E would be hard-pressed to economically meet the state renewable mandate without building the Sunrise Powerlink. That mandate requires SDG&E to derive 20 percent of its electricity from renewable sources by 2010.
A recent SDG&E solicitation for renewable-energy proposals drew offers to provide about 5,000 megawatts of generating capacity. A modern fossil-fuel-burning power plant, by comparison, produces about 500 megawatts.
Most of the solar proposals would require new transmission from the east, Niggli said.
But opponents of the project say Sunrise would be an expensive example of overbuilding, one that would provide a remarkable profit stream to SDG&E for decades to come.
UCAN, which conducted its own study of Sunrise, concluded that the line isn't needed for reliability and that renewably generated electricity can be imported from Imperial County for far less than the $1.3 billion cost of Sunrise.
UCAN and SDG&E agree, however, that a host of recent projects undertaken by the utility have left the region's power supply in relatively good shape for at least a few years.
SDG&E's ability to meet power demand is the result of a substantial building and acquisition effort in recent years.
In the past two years, for example, SDG&E completed the purchase of a new power plant in Escondido, bolstered the local electric-distribution system and won approval for the $572 million advanced electric-meter program.
The utility has also contracted for power from the plant under construction on Otay Mesa and signed agreements for the building of two peaker plants.
SDG&E is likely to add another power plant, whether it's the Sempra-owned El Dorado plant or some other facility. As the result of a settlement of market-rigging allegations lodged by the state against Sempra, SDG&E has the option to buy El Dorado at a discount that the utility says will be hard for other project developers to beat.
Henry Abarbanel, a University of California San Diego physics professor who is co-chairman of the Energy Working Group for the San Diego Association of Governments, said the region's power system is adequate.
"Right now, at this minute, we're in very good shape except on the hottest days when air-conditioning demand pushes the limits," Abarbanel said.
He noted that demand from SDG&E customers could soon require up to 5,000 megawatts on days of heaviest demand, or the equivalent of about nine modern power plants.
"I think everyone agrees that in the next six to seven years, we may need another 1,000 megawatts, with the increasing use of air conditioning and people using more appliances like plasma televisions," he said.
"Demand-reduction programs and energy efficiency could push that need out to eight or so years, but it's obligatory for us to be very careful about planning to deliver that."
In planning for the future, Abarbanel said he's troubled by the incentives for utilities administered by the California Public Utilities Commission. The incentives encourage utilities to build or buy big projects, such as power plants and power lines, and not promote conservation or other approaches, Abarbanel said.
"There is something flawed in the process," he said. "We would be seeing very different behavior on the part of SDG&E if we rewarded them not for building transmission lines but for increasing energy efficiency.
"Regulators and the utility should figure out ways for them to make more money by selling less electricity."
That is particularly important because Abarbanel sees an end to allowing unlimited growth in power demand, which is on pace to require a new power plant at least once per decade.
That's a pace he doesn't think can be maintained.
"I think we'll have to come to grips with limits in energy consumption, as well as water and land use," Abarbanel said. "I wish limits were on the table more."
Don Wood, who heads the Pacific Energy Policy Center, an independent public interest think tank, also said that current energy policy overemphasizes construction.
Spending on those capital-intensive projects is rolled into SDG&E's rate base, from which the PUC allows the utility to generate a fixed rate of return, typically anywhere from 10 to 12 percent, Wood said.
"The utilities are like a carpenter who only has a hammer - every problem then becomes a nail," he said. "For SDG&E and the others, the answer to every problem is to build a rate-baseable (project)."
Wood would prefer that the PUC devise a system under which SDG&E and other utilities could derive more profits from energy efficiency and reducing local power demand.
Sean Gallagher, director of the PUC energy division, said the commission long ago moved to decouple electricity sales from utility profits. But he said the PUC is studying additional moves in that direction.
"There are people who argue that the vice president of transmission at a utility is seen as more important than the vice president of energy efficiency," Gallagher said.
"Now the question before the commission is maybe we should provide some incentives to the utility to do things like energy efficiency."
Niggli, SDG&E's chief operating officer, said those incentives already produce some conservation. As an example, he said SDG&E's advanced-meter program will encourage conservation.
"I think the utility incentives are pretty well aligned," Niggli said. "We are in the business of providing infrastructure that is cost-effective for our customers."
Michael Shames, executive director of UCAN, the consumer watchdog, is even more sanguine about regional power supplies.
"Remarkably we are in pretty good shape," Shames said. "When the new power plant on Otay Mesa comes on line (scheduled for 2009), we'll have two new power plants serve as the anchors of the regional supply."
Shames also noted that SDG&E has invested heavily in upgrading the local power grid.
"Increasingly, it is appearing we don't need another major power plant until 2018, and we don't need another power line until at least that year," Shames said. "Holes need to be filled, but the foundation for meeting our electricity needs are there."
The consumer advocate disagrees with SDG&E about the need for Sunrise to tap renewable energy projects that may be expected in Imperial County. Shames said that electricity from any reasonably expected projects in that region could be brought to San Diego with a modest and far less expensive upgrade of the current transmission system.
Shames said it is possible that the further development of photovoltaics - generating electricity from the sun - and other forms of locally generated power, along with efficiencies, could do away with the need for more transmission over the next decade.
Building Sunrise now, said Shames, would shackle the region with a transmission line that won't be needed for years, if it is ever needed. Shames agreed that the utilities have entered an era of overbuilding because of flawed incentives.
Yakout Mansour, chief executive of the California Independent System Operator, which is responsible for the state's electricity grid, said Sunrise is needed to provide the flexibility of another major electricity highway into San Diego.
As California moves to more renewable energy sources, it will be reliant on resources that are less reliable than fossil-fuel-burning plants, Mansour said. That will make the additional pathways even more important.
But renewable energy advocates say blending resources - using wind, solar and biomass - will make renewables as a whole a more predictable source of electricity.