California Resource Adequacy Regulation: Short-term Solutions with Long-term Implications

A central challenge for California is how to achieve a measured pace of growth of electricity supply so as to avoid shortages similar to what triggered the 2000-01 power crisis. So far, only temporary and short-term resource adequacy rules have been implemented. In CERA's view the solution to long-term resource adequacy lies in defining a capacity compensation mechanism that is stable. In this context, stability of the regulatory solution is more important than finding the "best" or economically optimal solution. Other key findings in this report include

* Short-term rules solve short-term problems. The 2006 and 2007 resource adequacy rules do little, if anything, to stimulate investments in new generating capacity but do provide a few benefits, such as increased revenue certainty for existing generators and reassurance for regulators and the systems operator that existing capacity will be available when needed.
* Interim orders may evolve into the main avenue for new capacity. In 2006 the California Public Utility Commission ordered California investor-owned utilities to enter into long-term contracts for new generating capacity. These contracts are not available for existing generation, creating discrimination between new and existing capacity.
* Long-term contracts and locational value are key to successful investments. Considering the profound uncertainties surrounding transmission developments and the regulatory landscape, long-term contracts will be crucial to the commercial success of investments in California's power markets.

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CERA Reports Online, a wholly owned subsidiary of IHS Energy, is a leading advisor to international energy companies, governments, financial institutions, and technology providers. CERA delivers critical knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA's expertise covers all major energy sectors--oil and refined products, natural gas, and electric power--on a global and regional basis.