{"id":9869,"date":"2016-11-03T22:55:11","date_gmt":"2016-11-04T02:55:11","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/generating-change-a-california-utility-copes-with-state-regulation\/"},"modified":"2016-11-03T22:55:11","modified_gmt":"2016-11-04T02:55:11","slug":"generating-change-a-california-utility-copes-with-state-regulation","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/generating-change-a-california-utility-copes-with-state-regulation\/","title":{"rendered":"Generating change: A California utility copes with state regulation"},"content":{"rendered":"

Climate change is one of the most pressing issues facing global business in the 21st<\/sup> century. While this phenomenon will create threats and opportunities to many industries, some of the most near-term and pressing changes will come to the Energy and Utilities space. Fully 25% of all greenhouse gas emissions coming from electricity and heat production which has led many governments to target it heavily for major reductions2<\/sup>. One company in this space is Pacific Gas and Electric Company (PG&E).<\/p>\n

PG&E was founded in 1905 in San Francisco. \u00a0Like most traditional utilities, PG&E took advantage of economies of scale in generation, distribution and transmission of electricity to grow throughout the state, resulting in a large capital intensive business. Today PG&E is the second largest utility in California that delivers electricity and gas to both residential and commercial customers throughout the state1<\/sup>.<\/p>\n

Key Challenges<\/strong><\/h2>\n

The most immediate challenge to PG&E\u2019s business model comes from a series of Senate bills passed in California which sets a plan for meeting minimum thresholds for renewable shares of electricity generation in the state. According to the California Energy Commission,<\/p>\n

\u201cThe new Renewable Portfolio Standard [applies] to all electricity retailers in the state including publicly owned utilities (POUs), investor-owned utilities, electricity service providers, and community choice aggregators. All of these entities had to adopt the new RPS goals of 20 percent of retails sales from renewables by the end of 2013, 25 percent by the end of 2016, and 33 percent requirement being met by the end of 2020\u201d3<\/sup>.<\/p>\n

In October 2015, Gov. Jerry Brown extended this legislation to require utilities to procure 50 percent of electricity from renewables by 2030. To meet these ambitious goals PG&E has embarked on a plan to dramatically increase investment in energy efficiency, renewables and storage. Ironically, these plans coincide with its plans to retire its two nuclear reactors at Diablo Canyon which currently represent over 20% of its current electricity production. See Exhibit 1 for a breakdown of PG&E\u2019s current electricity generation portfolio:<\/p>\n

Exhibit 1: PG&E electric power mix as of 20154<\/sup><\/strong><\/p>\n

\"exhibit-1\"<\/a><\/p>\n

Despite providing the state with GHG-free energy, the plant has been deemed incompatible with future energy models. According to the company,<\/p>\n

\u201cthere are several contributing factors, including\u2026the challenge of managing overgeneration and intermittency conditions under a resource portfolio increasingly influenced by solar and wind production, the growth rate of distributed energy resources, and the potential increases in the departure of PG&E\u2019s retail load customers to Community Choice Aggregation.\u201d5<\/sup><\/p>\n

To make up this gap in energy production, the company is investing in utility scale solar production as well as supporting residential and commercial customers who purchase their own solar panels to integrate them into the grid. Finally, PG&E is investing in utility scale energy storage projects to complement its renewables portfolio6<\/sup>.<\/p>\n

Opportunities<\/h2>\n

Although the new targets set by the state of California create strains on PG&E \u2013 largely in the form of necessary capital investment \u2013 there are also many opportunities for PG&E to offer new products and services to its customers. Particularly, PG&E is incentivized by the California Public Utilities Commission (CPUC) to engage its customers in energy efficiency programs, a practice that dates to the early 2000s. Some examples of new products and services that it has introduced include:<\/p>\n