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CA Grid Operator Heads to the E.R.—To Borrow the Hospital’s Generator

Key Takeaways

  • A July 30, 2021 State of Emergency Declaration by California Governor Newsom (the “Emergency Declaration”) acknowledges a power reliability crisis which it attributes to drought, heat, fire, a lack of dispatchable generation, and — more broadly — to climate change.
  • Specifically, the Emergency Declaration authorizes payment of up to $2 per kilowatt-hour (kWh) to commercial customers to go off-grid and self-generate during power shortages and waives air quality restrictions to allow use of backup—even portable—generators to meet the shortfall.
  • $2 per kWh is over ten times the average commercial rate of $0.18 (eighteen cents) per kWh in May of 2021.[1]
  • We see this as an act of desperation, punctuated by its late Friday release. As we’ve argued in prior posts, California’s lack of planning and short-sighted retirement of existing large scale gas-fired generation is to blame for a system that is now less reliable and more polluting.
  • The Emergency Declaration is effective through October 31, although we would not be surprised if there were efforts to further extend parts of it. That said, California can’t waive the federal Clean Air Act, and some of these drastic measures may be challenged in court.

Why It Matters

California is in trouble.  Paying customers ten-x the average retail electricity price to switch on their diesel-powered backup generators is not the sort of energy policy you’d expect to encounter in the self-styled “world’s fifth largest economy.”  Among many ironies, the Emergency Declaration calls for the dispatching of highly inefficient and carbon-intensive sources of peaking power (diesel, for instance, emits 38% more carbon per Btu of energy produced than natural gas)[2], ultimately an unintended consequence of the state’s closing 9 gigawatts of seldom-used natural gas generation in the past decade.  This action further questions the wisdom of the planned 2025 closing of Diablo Canyon, the carbon-free nuclear plant that currently supplies just under 10% of the state’s electricity.[3] Governments do make and change laws, but the laws of physics remain beyond their reach.

In our opinion, California is providing a valuable lesson in how not to transition the electric power system to zero carbon and the rest of the country is taking note.  As one knowledgeable person stated to us last week, the energy transition is like rebuilding a plane while it is flying, an apt metaphor for any state governor who doesn’t want his or her career to crash.  The solution?  As we have been arguing, plan for the worst, invest in reliability and resilience (not just zero carbon) and pay attention to costs.  Investing in newer technologies such as carbon capture could help retain natural gas facilities needed to balance intermittency which would, in our opinion, provide reliability and resilience while keeping costs down.

We highlight a few quotes from the emergency declaration:

“WHEREAS under the provisions of Government Code section 8571, I find that strict compliance with various statutes, regulations, and orders specified in this proclamation would prevent, hinder, or delay appropriate actions to prevent and mitigate the effects of the conditions of extreme peril.”

“To provide incentives for large energy users to reduce their electricity demand when an extreme heat event, a sudden and severe reduction in transmission capacity (including reductions due to wildfire), or both, are projected to result in acute energy shortages this summer, the Department of Finance is directed to provide payments to fund electrical demand reduction programs to be established by California utilities…”

“The utility must pay participating customers $2 per kilowatt hour reduced during the period specified.”

“With respect to new emergency and temporary power generators of 10 megawatts or more that the California Energy Commission determines will deliver net peak energy before October 31, 2021, the provisions of Public Resources Code, Division 13…are suspended to the extent that the California Energy Commission determines that such generators should be licensed and that:

a. generation will be located in a previously disturbed site;
b. generation will use natural gas as soon after construction as practicable (emphasis added)
c. there is a secure water supply for the project; and
d. there is an available grid interconnection.”

[1] U.S. Department of Energy, Electric Power Monthly, May 2021

[2]Department of Energy, Energy Information Administration, Energy FAQ, June 2021,


The Information provided in this article is believed to be accurate as of the date above. EIP reserves the right to update, modify or change information without notice. Any statements of opinion are EIP’s opinion and should not be relied upon as a prediction of any future event. The information is based on data obtained from third party publicly available sources that EIP believes to be reliable but EIP has not independently verified and cannot warrant the accuracy of such information. Investors are encouraged to seek their own legal, tax, or other advice before investing.

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