Key Developments in Electricity Generation in California

by Latham & Watkins LLP

Electricity Generation in California: Key Developments and Trends, a webcast hosted by Latham & Watkins partner Michael Carroll and associate Marc Campopiano, focused on the recent developments that are constraining California’s energy supply and the efforts to address these shortages.

In this Q&A interview, Carroll and Campopiano share key takeaways from the presentation and address some of the questions that came up during the live webcast. For more information on electricity generation in California, listen to a recorded version of the full webcast.

What is driving the current need for new power plant projects in Southern California?

Campopiano: There are three key trends that are driving the current urgency for new generation in Southern California. First, and this is somewhat counter intuitive, is the rapid rise and increase in renewable generation in California. What that has done is increased the variability of electrical supply in California, meaning that renewables don’t provide steady electricity because the sun doesn’t shine or the wind doesn’t blow all the time. Fast-response, flexible generation resources — such as new natural gas power plants — can fill the gaps in supply when those renewables aren't available, particularly in areas such as Los Angeles or San Diego where there are already capacity constraints.

Second, there is a recent State Water Resource Control Board regulation that is driving the retirement of a number of aging coastal power plants in California that use a technology called once through cooling, which impacts marine resources. There are about 20 of these plants that are affected by the policy in California, and there is a particular concentration in Los Angeles and San Diego. The retirement of these plants will drive a need for new replacement or retrofit power plants.

Third is the announced retirement of the San Onofre Nuclear Generating Station in southern Orange County. Not only did the San Onofre nuclear plant provide over 2,000 megawatts of base-load generation to both Los Angeles and San Diego, the location was of importance because it could help maintain the reliability of both markets, so eliminating it affected both markets.

What are Emission Reduction Credits (ERCs) and how do they come into play with power plant projects?

Carroll: ERCs are emission offsets that have been certified by the regulatory agencies and are available for new sources to satisfy the omission offset requirements in the Clean Air Act. The emission offset requirements in the Clean Air Act require that any new or modified source completely offset its emission increases so that there is no net increase in emissions in the region, overall. The reason that emission reduction credits are relevant for power plant projects is that power plant projects, like any other major stationary source, are subject to the emission offset requirement and therefore must obtain emission reduction credits before they can be issued a permit to start the project.

Are there limited ERCs in the Los Angeles area? Why?

Carroll: Yes, there are limited ERCs in the Los Angeles area, particularly for certain pollutants including particulate matter (PM10). The reason that there is a limited supply is that, historically, emission reduction credits have been generated from either the shutdown of existing facilities or through the over control of facilities, meaning achieving emission reductions lower than what are otherwise required and generating credits for the delta. As the industrial base in Southern California has shrunk, there aren't very many large facilities that are available to be shutdown to generate credits, and as the air quality regulations have become more stringent over the years, there are limited opportunities for sources to over control their emissions and generate credits. So, as a result the supply of credits going into the market has contracted.

Do you expect similar ERC supply constraints in other parts of California and the country?

Carroll: Yes, we are already starting to see constraints in other areas of California including the San Diego area and Ventura County. We do expect this to be a problem that expands across the country. The emission offset requirements only apply in areas that are out of attainment with federal standards and the current administration has plans to make a number of the air quality standards more stringent. So, with more stringent standards there will be more areas of the country that are not in attainment and will therefore be subject to the emission offset requirement.

Have power plants been constructed in the Los Angeles area given these concerns?

Carroll: Yes, in the last in the last six to seven years there have been three significant power plants that have been constructed. However, in each of those cases unique strategies were pursued to satisfy the emission offset requirement, including in one case the adoption of project-specific legislation by the California State Legislature. So, while it has been possible to site new generation in the area, it has been very difficult to do so and it is becoming increasingly difficult.

What about future power plants or other industrial projects in the Los Angeles area?

Carroll: The current situation, that being the shortage of emission reduction credits, continues to worsen. This means that the prospects for permitting new power plants or any other type of industrial project in Southern California are very limited. That said, we are working closely with stakeholders, including developers and owners of existing plants and the relevant agencies, to try to develop strategies for satisfying the emission offset requirements so that projects can be permitted.

What are the regulatory agencies doing to fix the ERC supply problem?

Carroll: A number of regulatory agencies have acknowledged the problem and have begun to think about solutions to the problem. As I mentioned, some projects have been permitted based on creative solutions that were developed in conjunction with the agencies. Some such efforts have been successful, but other efforts including rulemaking to make certain types of offsets more broadly available have been subject to court challenges and have not been so successful. So, at the moment there is no real clear path forward for resolving the emission offset problem. Most of the agencies do acknowledge that it is a problem and there have been recent calls for the establishment of stakeholder groups to come together and try to develop additional strategies.

Does the re-designation of the South Coast Air Basin for PM10 to “attainment” status mean that PM10 ERCs will not be needed?

Carroll: The EPA recently determined that the South Coast Air Basin, which included the greater Los Angeles area, meets the federal PM10 standards. What that means is that, at least as a matter of federal law, PM10 offsets are no longer required for new projects in the South Coast Air Basin, so that is very helpful.

However, the area continues to be out of attainment with the state standards and there is some question as to the implications of that. One interpretation of the equivalent state law requirements is that they do not apply to PM10, but that interpretation is not shared by all parties. Even if the state law requirements do apply to PM10 it is clear that there is a great deal of flexibility under state law in terms of how the emission offset requirement can be satisfied. In particular, it is clear that it can be satisfied on a region-wide basis as opposed to on a project-by-project basis. So, we are still in the process of evaluating exactly the scope of the flexibility that exists under state law in light of the federal re-designation. It is not exactly clear what the implications are, but they are generally positive.

Are ERCs needed for greenhouse gas emissions?

Campopiano: No, not in the same sense. Greenhouse gas emissions, carbon dioxide emissions primarily, are regulated under the Federal Clean Air Act but, because there are no areas that are out of attainment for greenhouse gases, there is no Clean Air Act requirement to offset greenhouse gas emissions. In California, however, the Global Warming Solutions Act of 2006 directly regulates greenhouse gas emissions from power plants and other large industrial sources.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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