- Are there prepaid electric bond issuance opportunities?
- Community Choice Aggregation (CCAs)
Transcription:
Rudy Salo (00:10):
All right. Welcome everybody. As people are still walking in, I'm going to get things kind of started with a couple of questions here. First question is, how many people knew that there's actual strain on the electric grid? Okay, a couple of hands. Sorry. That might be why you guys are here. How many people here knows what a CCA is? Okay, good. That was a good Howard. That was a good one. How many people here know why your electricity bills are rising? Yeah, I don't know why either, but these are all these types of questions that we're going to be answering today during addressing the strain on the electric grid as opposed to another type of grid. We're going to talk about the electric grid. I was right about to make a tron joke there, but I think there's probably not enough old people and nerds in here, so we'll put aside the tron jokes. Come on in, please. We're going to get going. The jokes are going to stop. We're going to get serious here. This is a very serious topic. I am Rudy Salo. I am a Partner in Nixon Peabody's Public and Project Finance Group based out of our Los Angeles office. I'm joined here by a number of my colleagues and I will be moderating this panel today.
(01:25):
My focus in the electric utility world is kind of broad and wide ranging in that I have worked on a number of transportation electrification projects. I've one of my clients, Caltrain helping the train get electrified. I've also worked with Howard Chang here of Ava Community Energy on a number of interesting projects. I've done some other types of deals and I'm very passionate about electricity because I believe that's the future of transportation no matter who is going to be in the office in a couple of weeks. I know that's all in the back of our minds. I truly believe that the cat is out of the bag, especially in places like California. So why are we talking about the strain on the electric grid and who do we have on our panel that's going to speak to it in even better fashion than me? Starting all the way down at the end of the row?
(02:21):
We have Alexandra Rozgonyi from S&P from the Public Power Team. I probably butchered her last name. Sorry about that. Alexandra. Next to her we have Chris Jumper from Assured Guaranty. Next to him we have Michael Fleishman from Goldman Sachs, and to my immediate left, we have Howard Chang, the CEO of Ava Community Energy. What are we talking about here? The US not-for-profit power sector is currently grappling with multiple competing goals, including decarbonization targets and mandates, managing power, intermittency, demand growth, and the phasing out of fossil fuel generation. Accomplishing these goals, it depends on building out and upgrading of transmission lines while replacing aging generating units, but a costly and time consuming backlog of interconnection applications from new renewables based projects are slowing things down. The new stuff is causing problems. It's slowing things down. Why we're going to get into that. These delays could ultimately affect credit quality of the not-for-profit related utilities within this sector if management teams struggle to achieve regulatory compliance with decarbonization requirements. I read that that was a mouthful, and we're going to explain what I actually said. That was taken in part from a excellent s and p report. If you haven't read it, Alexandra shared it with our group and I do think it summarizes the issues that we're facing today and we're going to be discussing on this panel. Question number one. Okay, we're here. We're talking about strain on the electric grid. We're talking about a backlog. Alexandra, how did this backlog come about? What were the factors that have led us here?
Alexandra Rozgonyi (04:16):
Yes, and can everybody hear me okay? Okay, how about now? Okay, great. So prior to 2020 and over the past decade, electric demand and consumption has been fairly flat, and this is due to economic factors and energy efficiencies. New generation projects entering the interconnection queue came by a first come first serve basis, which worked well at the time and project withdrawals from the interconnection queue. All they did happen, they happened earlier in the process and they didn't impact reliability to the current extent. Now, more recently, we're seeing an increase in demand, and this is due to beneficial electrification, AI and data centers all at the same time that we're dealing with energy transition. So we're seeing an increase in renewables in addition to, as mentioned before, a rapid retirement of fossil fuel generating facilities. So all of this has led to a significant increase in the number of new projects coming into the interconnection queue, both solar and wind. However, these projects, they do take up more landmass and they're also more distant from load. So what you have there is you need more transmission lines to serve those projects, increasing the overall time it takes a project to get from the interconnection queue to commercial operations. At the same time, because of all these delays, developers were submitting to the interconnection queue prior to having site control, site control, state or local approval. So all of this drove us to the backlog that we have today.
Rudy Salo (05:59):
Thank you, Alexandra. Alright, question number two, the Infrastructure Act and the Inflation Reduction Act both provided incentives for electric vehicles and charging stations. How much of a factor are these electric vehicles coming online and everywhere around us here in California, how do they play into the current strain on the electric grid? How about AI data centers? We heard Alexandra talk a little bit about that. How about crypto mining? Are we simply at the very beginning of a problem that will worsen Howard Chris?
Howard Chang (06:33):
I go first. I'll go first and hand it over to you. Two points that you highlighted there. One is inflation reduction act and some of the new incentive structures in place that will allow for hopefully more cost effective financings than such to enter the market and sort of the clean infrastructure space and the other, of course around load growth. On the first point, I'll just say as a tax exempt load serving entity, really exciting to see new avenues to think about project ownership, project deployment, and I think obviously any new incentive structure, especially at a federal level, takes time to ripple through and implement clarifications, tax guidelines, load serving entities like ourselves, evaluating project ownership where we've historically been balance sheet light and really valuing the risks of owning that infrastructure, whether it be small scale electric vehicle chargers or large scale solar wind clean battery projects.
(07:25):
So I think we're still at the front end of figuring out how we'll own projects, but I think it is of serious interest where we've historically looked at third party PPAs and such. It opens up a new avenue for that project deployment and I think that's one source of potential increases in the step of infrastructure deployment. The other of course, is driven by transportation, electrification, EV adoption, things like AI data centers, and I think one thing you didn't mention clean hydrogen, so a lot of new sources of load growth where over the last couple of decades as already noted, we've been pretty flat. So I think we're really at the front end of that curve. I think there's a lot of forecasts out there that you see where there's going to be material growth on load throughout the US and certainly in California driven by these various sectors, and it's hard to say how quickly it will grow.
(08:20):
Will it be linear growth? Will it be exponential growth? Will it take a little bit more time to ramp up? I think there's no question it's going to grow. We're already starting to see that adoption and the direction of that trend. I think one of the really interesting things to highlight, particularly as a load serving entity is how electricity and supply is really an enabling factor for that growth, right? It's not just the technology advancements of EVs making it easier for customers to go buy electric vehicles. It's not just about innovation and AI and how it processes and how we as consumers adopt that, but electricity and how cost effective it is and how reliable it is will enable that or it will hinder that. And so a lot of topics we'll touch on today in terms of strain on the grid are really critical because some of these newest technology advancements really depend on the supply side really being efficient for developing green resources that can support that growth.
Chris Jumper (09:22):
So again, I agree with everything you said and just to maybe fill in a couple of points, EVs, again, big growth year over year, they increased about 58% from 2022, but still they only account for about 2% of registered vehicles. So they're actually more of an issue for state governments that are dependent upon like fuel taxes and motor taxes. Really the growth that has been experienced has come from the data centers. In particular, it's been AI, generative AI, things like what Chat GPT where a regular Google search uses like 0.3 watt hours per search. Generative AI uses about 2.9, so that's the difference, and you multiply that by say what 9 billion searches a year? You're talking real amounts of power. The both public and investor owned utilities kind of got caught flatfooted. They were all anticipating, Howard and Alexandra mentioned 1%, 2% growth because of for the past 20 years, there's been a lot of energy efficiency projects and programs which have slowed the amount of electric demand usage because you had more efficient refrigerators and air conditioners and whatnot. Well, now you have these AI data centers that are about a third of, there's 8,000 worldwide. About a third of them are located in the United States and they're projecting like 30% growth by 2026. I've heard Goldman Sachs actually said it was like 160% by 2030. It's very meaningful and you have that as a result, a lot of their projections have been revised. They went from one in 2% growth. Now they're talking about five and 6% growth annually, which is going to require some additional generating capacity.
Rudy Salo (11:42):
I'm doing my part by actually writing these questions myself and not using AI. So I'm trying to tamp things down a little bit there. I guess I go old school, I use my brain, so okay, some issues. Sounds like we probably need to go out and get some gas power generators for a little while because I don't think things are going to get better that quickly. Just kidding. That was a dirty energy joke. Anybody pick up on that? No, didn't. Okay, I'll stop. Question number three. What are the credit implications of this backlog? Alexandra and Michael?
Alexandra Rozgonyi (12:14):
Yeah, I can start this one off. The delays in the backlog can cause an increase in escalating capital improvement costs for utilities. In addition, if these projects don't come online when expected utilities might have to purchase on the more volatile spot market or through more expensive purchase power agreements to meet demand, all of this can increase costs for the utilities purchase power costs. It also could impact their ability to meet their decarbonization goals in a timely manner. So at the end of the day, all of these higher costs flow down to their ability to recover costs, rate, raising flexibility, and ultimately their financial metrics, which could overall impact ratings.
Rudy Salo (12:58):
That's good. There was a good pause there about the impact ratings. I like that the silence in the room.
(13:03):
Rating agency speaks. Hi Karen. Yeah, Michael?
Michael Fleishman (13:07):
Yeah, just a few follow-ups on the projected cost of energy here mean, so everyone hears some eye-popping numbers about this queue projects to join the grid in California. I think it's up to like a thousand projects right now, which is kind of hard to imagine. In 2023, the amount of applications was 10 times what it was in 2020. So this has popped up pretty quickly here, but it's not the queue itself that is kind of creating a potential credit concern down the line. It is, as Alexandra said, the pressure on prices. So due to that queue, there's a limited supply of long-term renewable projects and that seems to be the product to simplify things a little bit. That's the product that everyone in California wants. So there's a limited supply and then there's also been a lot of challenges of ones that are under construction coming online due to supply chain issues.
(13:59):
So it is really a seller's market and if you look at actual PPA prices, they've risen dramatically. I think just on kind of isolated anecdotes, we've seen for say your common solar plus storage project in California, the PPA prices have doubled in the span of a couple years and we're kind of at this inflection point now of there's some consultants out there that track PPA prices. I think there's like a level 10 or a send analytics report in the last month or so that says these high costs are going to be around for a while, see through 2030 when this first RPS milestone is. On the flip side, you have Kai O. It's taking a lot of measures this year to improve the process with new models to clear projects out of that queue, and CCAs are kind of right in the center of that with a lot of the power being handed back to the LSEs.
(14:54):
So that's the fundamental question of where energy prices go if they remain on this upward trajectory through 2030, I think we could have credit considerations around the usual stuff, financial metrics, pressure on rates, reserves at the end of the day that all these entities hold. But it's worth noting that big utilities in California have remained with pretty constant credit profiles since these new RPS goals were last established in the last six years, 2018 credit profiles have been relatively constant, so the big entities are used to dealing with this and there is more powder there to work with rates and other tools at their disposal. Last point, I think just another thing that's coming into focus is that in this marketplace for procuring new green energy, I think people do need to focus more on the size market presence and even the age of the utilities that are going out there trying to procure new green energy. There's an advantage to diversity, getting your energy from any different renewable sources in addition to traditional, and then in addition, this power being given to kind prioritize new projects that's dependent on load. So there is some benefit to the larger entities that entered into contracts back when prices were cheaper, and you have to watch the alternatives of smaller entities banding together and say in JPA with new financial structures like CC power.
Howard Chang (16:23):
Can I make a point there, Rudy?
Michael Fleishman (16:24):
Please do.
Howard Chang (16:25):
I want to add on obviously as an entity that's having my credit evaluated and bond issuances rated. Something I would really want to highlight is the increase in procurements for renewable energy generation, clean batteries, things of that nature. While some of the prices are increasing due to interconnection backlogs, just higher costs of development, supply chain issues, things like that. It's being driven both by mandatory compliance obligations, but a lot of it's driven from a voluntary basis, right? So load serving entities like CCAs are procuring above those compliance mandates. A lot of corporates throughout the country are procuring without any mandate whatsoever. They're doing it out of a necessity, out of a climate crisis, need to address that. And they're doing it because they're actually in many cases cost-effective hedges and ways to stabilize costs and in some cases more cost-effective. When you think about California, it is a very regulatorily driven market, even though I just noted we're doing a lot of voluntary procurements above that.
(17:27):
When you look at a state like Texas, not regulatorily driven, and yet they're one of the largest procurers and developers of renewable energy. So really interesting to compare different markets in some different drivers. And so I guess I pose that to sort of push on the credit risks and the implications of that because I think the market as a whole is really moving in that direction and maybe California is amongst the leaders of course in driving that adoption, but it seems that is really the state of the market, not just in the US but really globally.
Rudy Salo (17:57):
Alright, that's a perfect segue into the next question. You are the CEO of one of the largest and most well-known CCAs. Can you explain a bit to the audience about CCAs and their goals? Can you also speak to whether the long-term trend of retirement of fossil fuel generation plants which have led to significant losses of dispatch power onto the grid should be slowed?
Howard Chang (18:22):
Yeah, it's funny, I usually go to energy specific conferences and this being a Bond Buyer conference exciting to be maybe in the niche portion of the audience and on this topic of electricity and grid strain. But the quick introduction to CCAs is we're a community choice aggregator. Ava Community Energy specifically serves Alameda County and parts of San Joaquin County, so we are one of the largest power buyers in the state of California and a fairly sizable size relative to your municipal utilities countrywide. We serve a population about 2 million people as I noted. We have some pretty big priorities. One is to accelerate decarbonization and we have two main energy products that we serve our customers with. One is called renewable 100 as it's named. It is a hundred percent renewable energy, and then our baseline product is called Bright Choice and it's about 50% renewable energy and 30% large hydra.
(19:20):
So it is largely carbon free as well. I think your latter question on what's the strain on the grid and how do we think about dispatchable resources retiring and how do you balance that? I think what I'd say is it is really important to be pragmatic with how we continue to adopt renewable energy. There's greater the issues. You have to think about how do you provide that carbon-free energy overnight, and as we continue to increase solar penetration and other renewable resources, it's going to get more challenging and we're already seeing that we have a goal of being a hundred percent clean energy by 2030, a very ambitious goal. We're able to achieve that. I hope we'll be able to achieve that because we're looking at that on a net annual basis, but as the grid in California as a whole becomes more and more green, that's going to become more and more challenging.
(20:12):
So we do need to be very pragmatic about how we retire fossil gen resources like natural gas where it is available and it's dispatchable. I think the good news is we've seen a huge amount of success with the deployment of clean batteries, so lithium ion batteries and other chemistries that are available in the market that are bankable, and that's actually, they've proven to be really reliable resources. In fact, in some ways they have quicker dispatch rates than some of the traditional fossil gen and gas units. That's really addressing that evening ramp, which is the immediate concern as the sun sets in California, how do we support the power needs? And we're finding that four hour duration batteries and as we lengthen that beyond that, it supports those needs in the evening hours. I think as we go into the overnight hours, that's where we'll see that there will continue to be some challenges and we don't have the immediate solution on the horizon.
(21:06):
Will it be offshore wind? Will it be geothermal? Will it be some type of flow chemistry battery that is more cost effective for long duration? So we need to figure out, the solutions are not necessarily on the table today, at least at a cost effective level, but I'm optimistic, right? When you look 10, 15 years ago, solar was five times more expensive than it's today as well. And so with scale of deployments from a manufacturing perspective, from a development perspective, we've seen that we've been able to get that very cost effective. So if we apply that to other newer technologies on the horizon, very optimistic, we'll do that as well. But we do need to be pragmatic and we do need to think about how do we phase out those retirements and really plan ahead for it because I don't think over the last 10 years we've done the best jobs throughout California to plan for those types of retirements and make sure we have visibility into when those new resources will come online.
Rudy Salo (21:58):
Thanks for that, Howard, and I don't mean to keep you on the hot seat, but don't worry, there'll be some other people there to help you. While this may be a room filled with bond buyers and bond sellers or bond council or bond, whatever, we all pay electric bills. And I'll tell you right now, my bill has been rising, and I'm going to say this, I think everyone's electric bills are increasing. What are the reasons why Howard, Alexandra, Chris, please come to Howard's rescue, but he's going to explain this as we all stare at him.
Howard Chang (22:28):
Take it off at least with a,
Rudy Salo (22:29):
More anger, more daggers
Howard Chang (22:30):
Perspective and you may have others to add to it, but most of the cost increases that Californians are experiencing, and unfortunately, California has some of the highest energy prices in the country, though I think the trends across the country are similar, but for California it's largely driven by wildfires. Most of your electricity charges are in transmission distribution, and most of those increases are in wildfire hardening. So when you go, we obviously are, if you're California, if you're Californian, you're familiar with the wildfire risks that we've experienced over the last five years unfortunately, and right now we are trying to transition the system to be more hardened and resilient in these sort of climate stress conditions, which for me only accentuates the need for green resources. And it's not that renewable energy itself is necessarily a source of those cost increases, but rather the wildfire hardening that's necessary to underground lines and such. With that said, of course, adoption of renewables with new technologies in a transition of a system does also have cost implications. So there are transmission distribution upgrades necessary to support these more distributed energy resources throughout the state of California. That is a natural part of the investment in the grid to support different types of energy generation.
Chris Jumper (23:55):
Yeah, I guess again, I agree with the rising cost of transmission unlike coal or natural gas, where those are usually or historically have been centrally located nuclear power plants centrally located close to population centers. Now you have with the renewables, they're much farther away. You have to reconfigure the transmission system and you have to get new substations and whatnot, so it was very expensive. The other thing that you touched on is the distribution system was built 50, 60 years ago, and it wasn't meant to handle bidirectional trades. It was meant to just one way, maybe used eight, 10 hours a day. Now all of a sudden it's being used 12 hours a day, 14 hours a day, 24 hours a day in some cases where you're buying and selling back and forth. So all that needs to be upgraded in order to fit into the new paradigm that we're in.
(24:54):
Howard mentioned climate change and wildfires, extended heat waves extended the need for wildfire hardening, vegetation management, underground trenching, all very, very expensive. The other thing, the last point is one of the proposals I know Cal ISO is talking about is the offshore floating wind turbines, which again is going to require reconfiguration of the transmission grid. You're going to have marine lines out there. We saw it in the northeast where a lot of the offshore wind projects ended up getting canceled or postponed because of rising costs of labor, rising costs of material. So those are really your reasons.
Alexandra Rozgonyi (25:45):
And I will just say that both and everything that you guys have said is what we're seeing why rates are rising across the country. And I'll just end it with, although general inflation has improved over the past couple of years, electricity CPI has continued to outpace general inflation. So I think that just drives home that no matter where you are in the country or what's driving your rate, increase rates are going up.
Rudy Salo (26:09):
Great segue into this next question, which is one of the controversial ones because they'll need a little controversy in our lives. So should we be focusing more on affordability with inflation rising or clean energy, Michael, Howard, Chris?
Michael Fleishman (26:26):
Well, I don't know if it's an OR question. I think in California, both of those are the goal, and over time it's the question is where's the needle on the spectrum there? And I get the sense that maybe when in prior years when, say CCAs were just starting RPS, it was just getting started, renewables were a little cheaper and entities could just suck up green at any cost. And within the last couple years, affordability has come much more back into focus. And one kind of really interesting case study that's come up just within the last couple months, I think all CCA boards had to evaluate whether to take an allocation of green attributes from the Diablo Canyon Nuclear project. It was either do that or is one CCA laid out. The alternative cost to that would be a hundred million dollars over six years of additional cost if you don't do that. So you kind of had a collision of these two themes, customer bills at the end of the day and opinions pro and con on nuclear in California and the amount of public comment, which Howard can attest to was super interesting. No doubt long board meetings across the state, but it just shows the passion behind the issues and how current it is right now.
Howard Chang (27:42):
Yeah, I would totally agree. It's not an either or issue. The affordability and addressing the climate crisis are both critical priorities, and I know for our CCA who's governed by elected officials throughout territory, these are the two biggest issues that we address day to day and how do we balance these things and make sure that long-term we have good visibility to cost controls, but also accelerating our clean energy deployment so that we can ensure that not just greening our wholesale power, but we think about what are those program services that we can do to support increased electrification? Because if the wholesale power and the electricity that we sell is not cost effective, it's going to hinder those types of electrification goals and priorities that we have as well. And so we need to do that effectively, and I think we're at a very interesting phase of this transition in California where we are seeing the cost increases just over the last several years, as Michael noted, we were in a very favorable renewable energy for pricing environment and we're seeing that change. We have to make sure we're very conscious of how we plan forward, both from a grid perspective as well as the independent individual generation resources that we're talking about, sort of balance those needs.
Chris Jumper (29:03):
I mean, again, affordability to me is I think becoming more and more a little more in the forefront. Clean energy, very important obviously, but there has been a lot of support from the federal and the state through subsidies, production tax credits, investment tax credits. My concern is that we're seeing you're going to start seeing haves and have nots once power costs get to a certain level, less wealthy, lower socioeconomic groups are going to be experiencing. Do I keep the lights on? Do I try to avoid certain times of day? And again, that's time of use. I guess it's intended. As a rule of thumb, we kind of target, we take the annual electric bill and then we compare it to meeting household income, and when it starts getting around 4%, 5% of meeting household income, annual media, household income, that's where we start getting concerned and start seeing customers starting to take some actions. So again, it's a tough situation.
Rudy Salo (30:15):
You've been on the theme of difficult questions that might be controversial. Is it time for the United States and one particular group of United States citizens environmentalists to rethink our nuclear approach, especially in light of advancements for smaller scale nuclear projects? I'll just throw in another question there. How about hydrogen? And so Chris and Michael, who would like to jump in here, first step on this landmine.
Chris Jumper (30:43):
Yeah, so we not to step on this landmine. Yeah. I had a quote from a person that said something to the effect of, if you're anti, well, it's Robert Bryce from the Manhattan Institute. I'm sure I'm going to catch a lot of booze or hisses from this one. Basically he said that if you're anti carbon dioxide and anti-nuclear, then you're pro blackout. So I don't know if that's fully the case, but again, the transitioning from the traditional fossil fuels to renewable fuels, it's complicated. It requires a lot of changes. We are seeing several projects, one in Michigan, the Palisades nuclear plant that has just got a grant from the federal government to restart a 1.5 billion grant to restart them. They were shut down I think in 2019, and then they're going to retrofit and restart in 2028. There's another one, you might've read this in the paper, about three Mile Island, that Constellation Energy that owns Three Mile Island.
(31:57):
I'm looking around a lot of young people here, so maybe you don't realize that three Mile Island was the site of a large radioactive leak, made the papers, movies about it, stuff like that. That was unit two. This is unit one. Unit one was retired because of environmental, economic economic reasons. Really it was just not cost effective when Whole Tech, the owner purchased it in 2022, they were planning on just decommissioning it, and when the federal grants became available, suddenly they're like, well, wait a minute. Oh no, I'm sorry. That three mile was Microsoft decided that they wanted a 20 year long-term contract with the Three Mile Island Unit one. And so they've signed up because it was recently decommissioned in 2022. They expect to have that started up by maybe the end of 2025, somewhere around there. Again, these are two examples. These are also examples of small nuclear reactors and the opportunities that they present.
(33:10):
There has been some movement. The NRC has approved some of the designs that were proposed, and both Haltech in Michigan and Three Mile Island Constellation are planning on building several five or six small nuclear reactors, small nuclear reactors, around 300 megawatts. Again, the conversation that the NRC is considering or exploring is going, and this is nationwide replacing old coal plants with a small nuclear reactor that would meet their needs and revitalizing that because there's value to a utility site. You've got the interconnection, you've got the water and fuel sources. So I think you're going to see more of it. I think it's just kind of a necessary, again, not talking just about California, but I think nationwide it's an alternative in order to meet the growing demand.
Michael Fleishman (34:18):
Yeah, I'd agree that capital seems to be available nationwide for projects like this, either for startups in this space or for recommissioning old projects. But turning to California, I think the issues are a little different. And number one, you have, as I mentioned before, Ville Canyon, it's about 9% of our electric supply right now, and in late 2023 as most of its service, life was extended out to 2030. So the question is where is a state? Is everyone going to go? No crystal ball here. But I think the only thing we do know is we shouldn't lose sight of how much the grid has really changed just in the last two years and just mentioned batteries. Not that it's the one answer in replacement of nuclear, but just as an example that's ramped up. It's doubled like in the span of the last two years, the installed capacity to 11 gigawatts, and it's that extension of the hours in the day before and after renewables are available that have started to solve a lot of problems that base load like nuclear was meeting and just as an example this last summer, I think some of the press about how the grid performed has been to the net positive in the first week of September.
(35:35):
There was this event here, I think probably most of you remember, that temperatures were, I think in the triple digits in much of the state. There was a fire out in San Bernardino County that affected transmission at the time, and a lot of people are pointing to this rapid increase in battery availability as something that got the state through that situation relatively unscathed in terms of loss of service in blackouts. I'm not an expert on the complete balancing of the grid, but my understanding is those issues were on par with problems that occurred in prior years that led to blackouts or brownouts, and this year they didn't happen. So a number of years to unfold before we get to 2030, but I think there is some optimism about how quickly things have changed here in California, and we'll see you what the situation is in six years.
Rudy Salo (36:31):
Thank you, Michael. In late 2023, FERC issued order number 2023 in an effort to deter low feasibility projects from entering the queues. What are our thoughts on this order and its ultimate impact, Alexandra?
Alexandra Rozgonyi (36:45):
Yeah, so overall, we think that FERC order 2023 should improve the backlog over time. If you remember from earlier in the presentation I talked about first come first serve with FERC order 2023. It's first ready, first serve. So once developers are actually ready, they can enter the queue and through FERC order 2023 developers can only enter the queue within a cluster window. The projects are looked at collectively through their feasibility studies, and also developers have to show 90% site control prior to entering the interconnection queue, so showing commitment there. And then lastly, there's greater financial penalties at these developers withdraw prior to having the feasibility studies done. So they're not wasting time of the ISOs and RTOs working through those feasibility studies if they're going to ultimately withdraw. So overall, we think that FERC order 2023 should really improve, maybe not all at once, but over time it should improve the backlog.
Rudy Salo (37:47):
That's great news.
Howard Chang (37:48):
Just add something there please. Interestingly, in many ways, as California sort of leads the way on certain things, this is another area where Kaiso had already been studying projects on a cluster basis prior to this order and had required a certain level of site control for assessing deliverability for projects. So determining if a project gets the right to generate resource adequacy or provide resource adequacy. So some of those things were already in place in California. With that said, there's a lot of interconnection reform that's happening right now as well within California and there there's things to work through where load serving entities are given certain number of points that we can allocate towards projects to determine how Kaiso will necessarily favor certain projects because they have a buyer ready to go for those projects. So that is a very, very new element that's being introduced and very active process to kind of work out the kinks of this type of reform process.
Rudy Salo (38:46):
Thank you, Howard. And final question before we get to the group questions, and this is probably one that most people are here to listen to since this is the Bond Buyer conference. Okay. What are some of the most interesting deals that we have been seeing in the markets prepays others to address building out the grid further and otherwise? Michael, Chris, Howard, take it away.
Michael Fleishman (39:11):
Yeah, happy to start with prepay and first of all, why, and going back to our earlier discussion when there is cost pressure on utilities around the state, opportunities to generate savings and benefit from tax exemption become even more important. And so I think we just have to start by kind of acknowledging that the JPA that the CCA has set up to do Prepays C-C-C-F-A or California Community Choice Financing Authority has rapidly just in the last three years since its first transaction, become the second largest issuer in the state of California after the state itself and also the seventh largest in the us. So that's a pretty incredible pace relative to some of the other entities that are up there on that list. In terms of the outlook for Prepays going forward, just in terms of available load, there continue to be opportunities that we touched on CCAs, but I think we're just kind of scratching the surface of other types of public utilities like California cities, Anaheim being an example this year that have taken advantage.
(40:20):
And we're just talking about California here. I mean there are electric utilities around the country with very similar types of prepayable load that have not quite leveraged it to the extent that the CCAs have so far. One more note there is the issue of diversity of credits in the pre-pay space. Just one aside, each transaction can have its own rating and its own financial party that takes in the funding. There've been nine new entrants to that space since 2022, so it's nine brand new credits in the municipal market, and this has gone to address a lot of the tax exempt investors concerns about some historical concentration, and the bottom line is that's delivering better savings results for the end users, the municipal utilities around the country. Last question I get a lot is, okay, so people can kind of see prepay volume has paralleled interest rates, and what if rates go down notwithstanding the last month where the bias seems actually to be to much higher rates. Let's say the Fed continues with this plan of taking rates down. I do think there's a lot of headroom before we get back to this. Low volume is true in 2020 when rates were close to their absolute lows that prepay math dries up and doesn't provide as much savings to the end users. But there's a lot of space between the 10 year treasury at 425 today and zero and volume existed in that interim period. So I think most people see the coming years continuing to set potentially record volumes like the last two years.
Chris Jumper (42:00):
Yeah, just on a little bit of a different note, what I've seen in some of the more interesting or public utilities buying into large transmission projects, and the reason they're doing that is because these costs are going up, they're only going one way, especially with the build out for renewables and whatnot. So it's a way for them to hedge their costs and by being a part owner in particular L-C-R-A-T-S-C, we did a few deals with them this past year. They're bidding on projects for the Ercot Texas transmission projects to remove capacity constraints and upgrade reliability and redundancy, improve transmission operations. So those are some of the more interesting deals, and again, they're doing it because it'll help hedge their costs going forward.
Howard Chang (43:01):
Yeah, I'll just add that as we touched on the affordability issue, we talk a lot within the California spectrum on what are ways to reduce costs, can you cut programs, things of that nature. What we're talking about here I think are really great tools as a tax exempt entity, finding ways to reduce costs without actually changing necessarily the products that we're using or the infrastructure deployments that we're aiming to put out there. And on behalf of Eva Community Energy, I sit on that bond issuance entity, California Community Choice Financing Authority. It's a very new entity and it's really exciting to think about what we've done through that JPA on behalf of CCAs, it's really there to issue prepay energy bonds on behalf of the tax exempt load serving entities in California, these CCAs. And for Ava Community Energy, we've issued three roughly $1 billion energy prepaid transactions just in the last few years.
(43:59):
So one in 2021, 22, and 23, and we're seeing the adoption by other CCAs picking up quite a bit. So really excited by the direction of that because we are otherwise just lowering the costs of the green energy that we're already procuring. And this is a structure as I think this room well knows has been applied in the gas markets for many decades. And so to think about how to apply that same exact structure to reduce costs for customers in California is really, really meaningful and exciting to see the direction of the growth of that market. The other thing I'll say in a slightly different topic is what are the other tools to optimize financing costs in California? It's not just energy prepay bonds, but what we talked about before, a lot of the costs are driven by wildfire hardening. So what can we do on that front to potentially lower costs?
(44:49):
And I know there are discussions from a legislative perspective to think about are there ways to securitize some of those costs, maybe take them off of the energy bill or perhaps leave them on there, but centrally procure that through some type of securitization, whether that's tax exempt or not. Not sure. There's a lot of discussion and I think proposals that may come forward in the coming year or so, but that is an area given that the biggest source of energy cost increases is wildfire hardening. So how can we potentially address that need through more effective and efficient financing mechanisms?
Rudy Salo (45:23):
Wow, you guys just made the whole room salivate. You're talking about billions of dollars of brand new credits and securitizations of wildfire hardening. I'm sure the crowd cannot wait to just run up to that microphone and ask their first question. So who's it going to be? Yes, you. I can barely see you because the light, so I apologize. I might know you. I have no idea.
Audience Member Jeb Spengler (45:46):
Jeb Spengler with Prague. This question's for Howard. If you had a crystal ball, what did the three states IOUs look like in about 20 years?
Howard Chang (45:57):
That's a great question. I mean, just over the last 5, 10 years has changed dramatically. The IOUs obviously are playing less of a role from a generation perspective. Obviously they continue to be the primary transmission distribution provider. So if we're looking at the current trend, I think we will continue to see CCAs expand services, potentially new CCAs form. Right now we have close to 25 CCAs throughout the state of California and all three IOU territories. So I do expect that to continue to increase and more and more load throughout the state of California to be served by CCAs. And I think we will continue and we'll need to increase our partnership and collaboration with IOUs to really think about some of these solutions to address affordability issues.
Rudy Salo (46:47):
Thank you. Howard. Next question.
Audience Member 2 (46:50):
Yes, I had a question about nuclear power. Considering that Diablo Canyon provides 9% of the power in the state and that nobody actually was injured or died at three Mile Island, which I think I just used 0.6 kilowatt hours to discover that, making two Google searches.
Rudy Salo (47:10):
Oh, dare you.
Audience Member 2 (47:13):
Is there any talk of creating or building 1, 2, 3, even 4 larger scale nuclear plants in California, thereby having 50% of the power provided by safe nuclear power with technology that must've improved over the last 40 years?
Rudy Salo (47:32):
Who's going to take that grenade.
Chris Jumper (47:35):
Again, I haven't heard anything in California to that effect. Again, it is pick your poison. Good news is it doesn't generate greenhouse gas. Bad news is you've left with stuff that lasts 2.4 billion years. So it's a challenge I could possibly see. And again, there's some talk at the NRC of extending the Diablo Canyon license. At least right now it's just talk. I don't know. I think they've gone to great strides to already close their plants. If the trend continues with demand continuing to grow at such record paces, they're going to have to find something. But again, I could more likely see it being built in Wyoming or somewhere in some of the surrounding states before it's built in the state itself.
Howard Chang (48:37):
I'll just add on, you may or may not be aware, but in addition to Diablo Canyon, part of Palo Verde and nuclear plant outside of California actually serves
Chris Jumper (48:45):
Arizona.
Howard Chang (48:46):
Kaiso as well. So Diablo Canyon is not the only nuclear resources that serves some of the energy needs for Kaiso and to be direct, there is no discussion politically to increase the amount of nuclear in California. Diablo County was slated to shut down its two one megawatt units, half in 2024, half in 2025. It was extended as Michael noted in 2023 from a legislative perspective due to energy, reliability and decarbonization goals. And so that's been extended 2029 and 2030, and there's no discussion on the horizon for continuing to extend that, but obviously the decision to extend it in 2023, which was driven by need. So with adequate planning going forward and thinking about the resources that can come online, the expectation is that will not be further extended, but time will tell. And I think part of what we'll need to develop is what other technology and resources will come online and substitute for nuclear, and that's where there's a lot of investments being poured into offshore wind amongst some other areas.
Audience Member 2 (49:53):
Thank you. One follow up. Is there any discussion about cold nuclear fusion? I mean, I know that's a long way off, but I know they've had some successful experiments, which would solve a lot of problems.
Chris Jumper (50:07):
You have any cold, I mean, again, wonderful. If you can attain it, that would be great. Even if they did it tomorrow to redo the infrastructure would take 20 years, 30 years. So it's I think way in the future. That's my impression of it. Mike, do you have any?
Alexandra Rozgonyi (50:28):
And I'll just say I think what we're hearing from utility managers is they're looking into a lot of different things, but with nuclear, even small modular reactors, they haven't been implemented to scale to large scale. So we hear a lot that utility managers might not want to be early adopters. So we hear a lot about hydrogen and nuclear and they're absolutely looking into it, but I think we'll need a little push before we actually see it come to utilities.
Chris Jumper (50:58):
Thank you. That's been the concern with the small nuclear is the fact that no one wants to be the first mover. It is going to be very costly, the first person that does it. There's some talk about some utilities trying to team up to handle it because once they get it in the ground, once it's operating commercially operational, I think you're going to see the costs come down quite a bit.
Rudy Salo (51:23):
As our time today. Thank you very much for attending. I hope you enjoyed it and learned something.