The City of Irvine did something very notable on February 8, 2022. The City Council voted unanimously to have the default choice for the City, businesses, and residents to be 100% renewable electricity from the Orange County Power Authority (OCPA).
Given the urgency in taking action locally to globally on the climate crisis, the 7% increase in rates is a small price to pay to get 100% renewable electricity. As a concerned scientist and member of the City of Irvine’s Green Ribbon Environmental Committee, I am very happy Irvine took this step forward.
At that February 8th City Council meeting, there was an important question posed by Councilmember Larry Agran. Agran asked what the effect on electricity rates would be if more people “opted out” of OCPA — and stayed with SoCal Edison — than what OCPA’s financial model assumed. The CFO Tiffany Law replied that the pricing models from OCPA were based on a 5% opt-out rate for residents, and 10% for businesses. But what happens if the opt-out rate is higher than expected?
CFO Law said, “If it increases [more] than our expectation or our assumption, it won’t have a significant financial impact, because the revenue will match with all the costs of energy.”
After Councilmember Agran sought clarification, Ms. Law continued, “If more people chose to opt-out, more than 10% let’s just say, the costs of energy will decrease as well as our revenue. So, because of the matching principle, there will be no significant financial impact to us.” (See the exchange here.)
As a physicist, I know that taking a claim to its extreme is a good way to test if the claim is true. If CFO Law’s “matching principle” is true, then if only one customer remained in OCPA, then the claim would be that their costs would still match the revenue from that single customer. Of course, this cannot be the case. A single customer certainly could not cover their overhead, which includes the OCPA CEO’s $239,000 annual salary.
So, the question remains unanswered. Somewhere between 100% retention and retention of only one customer is where the CFO’s “matching principle” fails in having OCPA cover their costs for providing electricity. What is that fraction?
Based on how power purchasing works, we also know that costs cannot necessarily always match revenue. Cal-CCA.org has a nice summary of the nature of the power purchasing, which happens under short (0-5 years), medium (6-10 years), and long-term (10+ years) power purchase agreements.
For example, “CleanPowerSF has signed two agreements to purchase power from a new 100-megawatt solar project to be built in Lancaster, California and a new 47-megawatt wind project in Mohave, California. The contract terms are between 10 and 22 years.” Since opt-out is on a month-to-month basis, for a perfect matching principle to work, power purchasing would have to be on a spot market, which is by far the costliest way to purchase electrical energy.
Customer opt-out risk is known to be a primary risk for CCEs (Community Choice Energy). Western Community Energy (WCE), a recently-bankrupt CCE in Riverside County, wrote in its October 2019 Energy Risk Management Policy that “Customer opt-out risk is the primary risk WCE faces and includes any condition or event that creates uncertainty within, or a diminution, of WCE’s customer base, thereby increasing the potential for WCE to not meet its Policy goals.” (OC Power’s Energy Risk Management Report is—for some reason—not properly linked in its key documentation as I write this.)
We also know from the experience of WCE that a revenue and cost mismatch can lead to disastrous outcomes for CCEs (Community Choice Energy), including bankruptcy. Even with a reported opt-out rate of 8.26% in April 2021, unexpected costs and less than anticipated revenue led to WCE’s board to direct an unscheduled rate increase of up to 20% in April 2021. With that still not covering their costs, WCE filed for bankruptcy the next month. Within weeks, WCE stopped entirely as an electricity provider and de-registered, transferring all of its remaining customers back to SCE.
If we want to successfully have 100% renewable electricity for Irvine, let’s hope OCPA does not face the same fate as WCE. With their CFO not clearly identifying their exposure to risks, including customer opt-out rates, it leaves me less confident than I would like to be.
To read other articles published by Dr. Abazajian on Substack, click here.
- Orange County Power Authority CFO Makes Demonstrably Inaccurate Statement on Risk Exposure - March 2, 2022
- Every Disaster Movie Starts with Government Officials Ignoring Scientists: The All American Asphalt Plant is Irvine’s Disaster - December 2, 2021
- Irvine’s Continuing Commitment to Protect the Environment - April 17, 2021