Stanford's Program on Energy and Sustainable Development (PESD) is collaborating with the California Public Utilities Commissions (CPUC) on an Impact Lab that tackles an urgent policy question: How do we make sure the lights stay on as the electricity mix climbs towards state targets of 50% renewable energy in 2026 and 60% in 2030? Wind and solar are essential zero-carbon energy sources, but they are only available when the wind blows and the sun shines. Blackouts in Northern California last August were a warning that system reliability is at risk if the state doesn't act quickly to implement policies that ensure backup generation is available when needed.
The existing regulatory instrument for ensuring long-term resource adequacy, capacity payments, is not well-adapted to a high-renewables future. Capacity payments aim to ensure enough "firm capacity" is always available to keep the lights on, but the firm capacity construct is not applicable to wind and solar, which cannot be turned on and increased at the system operator’s discretion.
The PESD/CPUC Impact Lab has proposed an alternative resource adequacy mechanism that is robust to a world of high and solar generation: auctions of Standardized Fixed-Price Forward Contracts (SFPFCs) that ensure every megawatt-hour of energy consumed in the state is hedged through long-term financial contracts. Unlike capacity payments, the SFPFCs provide a strong financial incentive for generators to meet their commitments to supply reliable energy wherever and whenever it is needed. PESD research suggests this novel policy mechanism can provide enhanced reliability and major cost savings relative to the capacity payment approach.
The CPUC has initiated a stakeholder process to consider possible implementation of this proposal, and PESD is assisting with research, policy outreach, and development of market simulation games that will allow stakeholders to gain hands-on experience with how the SFPFC mechanism would work in a realistic electricity market.