Solana Beach CCA on the verge of raising rates to about the same level as SDG&E

One of the big selling points of community choice aggregation energy programs is the prospect of providing customers cleaner sources of power at rates that are often lower than traditional utilities such as San Diego Gas and Electric.

The community energy program in Solana Beach — which opened for business in June 2018 as the first CCA in San Diego County — still touts its green credentials but is on the verge of bumping up its rates to practically the same level as SDG&E in order to shore up its bottom line.

A combination of factors has put a financial burden on the operations of the Solana Energy Alliance, the CCA that purchases energy contracts for the 7,300 customers in Solana Beach it serves.

A report Solana Beach city staff delivered to the city council last month said the alliance’s cash position as of Jan. 31 was $130,000 lower than the $750,000 target that had been previously set.

One reason is connected to steeper exit fees that all CCA customers across the state have to pay.

The fees, called a Power Charge Indifference Adjustment, are assessed monthly to offset the costs the utility in a given region has spent over the years on things like building power plants and developing renewable energy projects — all done with the approval and/or direction of the California Public Utilities Commission. The commission in late 2018 adjusted the exit fees higher, leading to complaints from CCAs.

The report also cited changes the commission made to the required amounts of power resources each “load-serving entity” — including CCAs and utilities — across the state must procure to make sure they can handle peak loads. The change has resulted in higher costs for the Solana Beach CCA.

In addition, the market demand for renewable energy has led to an uptick in costs.

Add it all up, the report said, and the factors “result in a cash projection that goes into the negative for a period of time in 2021” unless changes are made.

“Despite current cash flow challenges, I believe that our outlook is positive during the remaining life of this program,” said Judy Hegenauer, Solana Beach vice mayor and city council member.

What’s being considered

The Solana Energy Alliance currently offers a default plan to customers that is 3 percent cheaper than the rate offered by SDG&E. The default plan is made up of energy sources that are 50 percent renewable and 75 percent carbon-free, which includes sources like hydropower that are not defined by the state as renewable.

To improve the financial figures, the city staff has proposed shaving the discount compared to what SDG&E charges. The bigger the adjustment, the more the bottom line improves.

“From an operational standpoint, we just want to be as conservative as possible to make sure we’re operating in the black,” said Solana Beach City Manager Greg Wade.

For example, adjusting the rate to make it 2 percent less expensive than SDG&E instead of 3 percent improves the numbers somewhat, but would still result in an estimated $118,394 shortfall in the minimum cash target in 2021.

But reducing the discount to the point where the rate is the same as SDG&E’s — a zero percent discount, or parity — results in an estimated $242,921 surplus in the minimum cash target in 2021.

The five members of the city council — who also serve as board members of the CCA — discussed making adjustments to the rate at their Feb. 12 council meeting and will vote March 25 on which direction to take.

Hegenauer, in an email to the Union-Tribune, said adjusting the rate “temporarily” to 2 percent or 1.5 percent “could be an appropriate strategy to retain a funding balance.”

Saying, “Solana Beach is in a strong financial position,” City Council member Kelly Harless said she would likely support decreasing the discount to zero or 1 percent.

“If adjusting the rate allows us to remain fiscally responsible while keeping a default product that is at least 50 percent renewables and 75 percent carbon-free, then that, as far as I’m concerned, is a win.”

But for skeptics of the CCA movement, which has grown rapidly across California in the past decade, the situation in Solana Beach represents one of the warning signs critics have raised before — that moving to energy programs overseen by elected officials is fraught with financial risk.

“There are a lot of people and small businesses that are going to be harmed by the fact that we will have a less efficient method of getting power to them,” said Bill Roper, a member of the Strategic Roundtable, a local group that includes retired business leaders. “This is all done in the name of saving money and greener power when it won’t save money. It’ll cost money.”

What a CCA does — and doesn’t do

Under community choice energy, local governments buy the sources of power for a given jurisdiction — a responsibility that has long been handled by investor-owned utilities such as SDG&E. Traditional power companies do not go away when a CCA is established because utilities still perform their other duties, such as transmission and distribution of energy, as well as customer billing and services.

Since local elected officials do not have experience with large-scale energy issues, many CCAs hire outside groups to perform many of the program’s day-to-day operations. But the final decisions are made by the CCA’s board, made up of elected officials or appointees.

The revenue generated can be used to build up financial reserves to ensure the CCA’s rates are lower than or the same as the incumbent utility. The money can also be used to invest in renewable energy programs and establish clean energy projects, such as building electric vehicle charging stations in the CCA’s territory.

As per state rules, electricity customers are automatically enrolled in a newly created CCA. If customers want to remain with their traditional utility, they can opt out by going through the CCA.

An average Solana Energy Alliance, or SEA, customer using 420 kilowatt-hours saves $1.50 a month, compared to what they would pay if they remained with SDG&E. If the discount rate is changed from 3 percent to zero, that $1.50 a month in savings would disappear. Overall, it’s estimated customers have saved a combined $450,000 in rates since the CCA’s creation in June 2018.

But if there is no difference in rates, will customers stick with the CCA?

“I’m confident that the vast majority of SEA customers will continue to support SEA as enthusiastically as before,” Harless said in an email. “First of all, we’re talking about nominal changes,” pointing to the $1.50 per month savings figure.

Harless said most Solana Beach customers are more concerned about having local control and cleaner power choices than having a steeper discount rate.

“Our customers appreciate the opportunity to go directly to City Hall to provide input, express concerns and get real-time information,” Harless said.

Roper said he was not surprised to hear about the Solana Beach CCA shortfall. “Scale matters and they’re at the bottom end of the scale with 7,300 customers,” he said, adding the CCA model amounts to “financial alchemy” in an energy market looking increasingly at cleaner options.

“For the next 10 years, there won’t be meaningful additional capacity and yet the demand is going to go up dramatically based on the law,” Roper said, referring to California’s aim to derive 60 percent of the state’s electricity from renewables by 2030 and 100 percent from carbon-free sources by 2045. “All of the CCAs want to prove they can obtain more green power but you’ve got more competition trying to buy a scarce commodity so prices are going to go up. The system dynamics on this are just awful.”

CCA supporters say none of the existing 19 community choice programs in California have gone bankrupt. It’s been estimated about 80 percent of the state’s load will be served by jurisdictions that have adopted CCAs by 2030.

Changes coming

The pending rate change comes as the Solana Beach CCA is on the verge of no longer existing as a stand-alone entity. The Solana Energy Alliance will join Del Mar and Carlsbad to create a larger CCA called the Clean Energy Alliance that will serve the three cities. It’s scheduled to come online in 2021.

That’s the same year a much larger CCA in San Diego County opens for business. San Diego Community Power — made up of the cities of San Diego, Chula Vista, Encinitas, La Mesa and Imperial Beach — will serve an estimated 920,000 customers, making it the second largest CCA in the state.

Bill Baber, board member of San Diego Community Power and vice mayor of La Mesa, said the shortfall in Solana Beach does not dampen his support for the five-city CCA.

“We’re a bigger operation than Solana Beach and we’re confident we can manage things,” Baber said.

Carlsbad Mayor Matt Hall said he was aware of the “challenges” Solana Beach was about to face in advance of the decision to join the Clean Energy Alliance but the larger issue in his mind centered on officials from SDG&E recently announcing their intention to get out of the power purchasing business altogether.

“With that as a given, who’s going to fill that role?” Hall said. “I’ve never seen a CCA as a huge profit-making entity. To me, it’s more about how do you provide good clean energy and try to keep it at a competitive price.”

The Solana Beach-Carlsbad-Del Mar CCA that is estimated to have about 58,000 customers is expected to begin operations in May of next year. It plans to offer a rate about 2 percent lower than SDG&E.

San Diego Community Power, surpassed in terms of customer accounts by only the Los Angeles and Ventura counties-based Clean Power Alliance, plans to better SDG&E’s rates by between 2 percent to 4 percent. It expects to phase in all customers by November 2021.

— Rob Nikolewski is a reporter for The San Diego Union-Tribune