The Blog - Wind energy market analysis

Posted 21/06/2018

Richard Heap

   

Is community choice a threat to the US grid?

The growth of community choice aggregators in the US is an exciting source of green-minded electricity consumers for wind and solar companies. But there are risks in this business model that should make owners wary, writes Richard Heap

Community Choice Aggregators

 

“Never use a long word where a short one will do.” 

This is the second of George Orwell’s rules for clear writing and, as a journalist, I still refer to them fairly often. How well I implement them is for you to decide.

Even so, I think I do a better job than whoever created the phrase ‘community choice aggregator’ to describe a new type of electricity buyer in North America. It’s a ghastly phrase for a simple concept: CCAs are set up on behalf of people in specific areas to buy electricity directly from power producers, without having to go through a utility. 

But we’ve got the phrase now so let’s stick with it.

The topic of CCAs came up during my interview with Beth Waters, managing director at MUFG, for A Word About Wind’s inaugural North American Power List. Click here for an abridged ebook version of the report. There are now CCAs in seven US states – California, Illinois, Massachusetts, New Jersey, New York, Ohio and Rhode Island – and Waters said there is a “massive movement” to create more.

What is the purpose of CCAs?

In short, CCAs enable people to pool their power needs and sign deals directly with energy generators, including wind farm owners, so they can access cheaper prices and/or greener electricity. We’ve seen a similar approach by corporates, as they’ve signed power purchase agreements directly with wind farm owners.

Waters said these direct deals should worry utilities:

“Corporates, historically, have been buying through their local utility, and I believe they were not happy with how things were going. Maybe pricing wasn’t attractive or competitive enough, or they wanted more renewables and utilities weren’t providing it for them, so they circumvented [regulated utilities] and went direct to these developers,” she said.

CCAs are now doing likewise – and it’s starting to worry electricity regulators.

 

How CCAs work

The first CCA was launched in California in 2010, and we still see most of them in California as the model appeals to the state’s environmentally-minded population. CCAs now serve 12% of the state’s total electricity demand and there are 14 in this state alone, with three more set to become operational in June 2018.

CCAs can be run on an opt-out or opt-in basis, but opt-out is by far the most popular model. With this approach, consumers in the area are automatically enrolled after a local referendum – as in Illinois and Ohio – or by a vote of elected representatives – as in California. Individuals can opt out if they don’t want to be a part of it, but only a small percentage of people in CCA areas have done that so far. From that we can discern that either they’re either happy, lazy, or they haven’t yet formed an opinion.

Opt-out is the preferred method for most CCAs as it enables the group to get greater participation, and thus achieve more economies of scale when signing their PPAs. It also means the region doesn’t need to go down the more expensive route of setting up a municipal public utility, which then has the cost of operating its own assets.

Waters said the trend of corporates and CCAs buying power directly has been a wake-up call for utilities:

“Now the regulated utilities are waking up and saying: ‘Whoa, we’re losing business.’ They’re now scrambling to get back into the game and to play an important role in renewable going forward,” she said.

Not that CCAs are a perfect solution. People can still end up paying more for their electricity after a CCA is formed, even though they are pooling their energy needs; and the groups that run the CCAs are not necessarily used to signing power deals. These are new organisations without an established commercial track record.

In addition, they don’t usually have a strong balance sheet or credit rating, and so may have a tough time offering the credit support that developers need to secure financial backing for their schemes. In its guide to CCAs, law firm Norton Rose Fulbright says it is possible to get around this, by setting up metrics that can kick in when it looks like a project is at risk of defaulting on its deal with the power producer, but it adds extra complexity. You can read Norton Rose Fulbright’s guide here.

 

Regulatory concerns

Another big risk is that so many people will opt out that it makes the CCA unviable. Opt-out levels are currently around 7%, but this covers a relatively short time period since the first was set up in 2010, and so it is likely to rise. 

The risk of people leaving puts pressure on the CCA to sign competitive deals so that they stay, which is how it should be. Professionals in the wind sector can make the case for wind energy as much as they like, but people will only believe it if they see that CCAs reduce their energy bills – or, at very least, don’t push them up.

And this is not just a wake-up call for utilities. California regulators are now looking at the potential impact that CCAs could have on the state’s electricity grid. This month, California’s public utilities commission published a ‘California Customer Choice’ consultation document that warned that the growth of CCAs and other non-utility energy providers could be storing up a crisis.

It said:

“In the late 1990s, California deregulated the electricity industry, allowing customers to choose their power supplier. But in 2000 and 2001, the new electric system collapsed, saddling customers with high costs and rolling outages.”

The document said that something similar could happen again now that customers are moving away from utilities as their primary electricity providers, and were instead getting their power from rooftop solar, private electricity re-sellers and CCAs. It warned:

“Fewer and fewer customers are getting power from the traditional large regional utilities and the central decision making that we use for keeping the grid reliable, safe and affordable is splintering, becoming the task of dozens of decision-makers.”

The regulators have also conceded that they did not have a plan for how to run the grid when consumers had so much choice over where they buy power from; and that they didn’t have a plan in place for what would happen if a CCA was to collapse.

Some have called this unnecessary scaremongering, on the basis that CCAs are underpinned by strong demand. The backers of CCAs argue they should be fine because people want the power they provide; that they can help disadvantaged communities; and that every CCA is governed by local elected officials.

What comes next?

In our view, though, it makes sense for regulators to plan for what would happen if a CCA were to collapse, and we look forward to hearing how this debate about CCAs in California develops. It will give us a good indication of how this model is regarded and how likely other states are to enthusiastically follow the pioneering states.

Undoubtedly, we will see more CCAs. At some point we’ll see one fail, and it’s only when that happens that we’ll get a solid appreciation of how good or bad their effect on the US electricity market really is. In the meantime, we welcome any method that gives people access to power that’s cheaper and greener – and, as long as wind can provide that, then winning the argument will be a great deal easier.

We also spoke to Waters about changes to tax equity, the potential for offshore wind off the US coast, and the prospects for funding in the US wind market after the expiry of the production tax credit in 2020. You can read the whole article in the report here. 

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