3. Discussion

In D.07-12-052 we authorized SDG&E to procure 530 MWs of new resources (including fossil-fuel resources) by 2015 in its local area if its application for the Sunrise Powerlink was denied. This authorization included 130 MWs of local peakers already approved by the Commission. D.07-12-052 also authorized SDG&E to procure the equivalent quantity of local capacity associated with any retirements of local area resources that occur beyond the amount of retirements it forecasts in its Long-Term Procurement Plan. (D.07-12-052, Ordering Paragraph 6.)

The Celerity Agreement provides capacity at a price that is significantly lower than the range of capacity prices that cleared SDG&E's 2008 Peaker RFO. However, the price of capacity alone does not fully reflect the relative value and cost of the BUG units when compared to other units bid into the 2008 Peaker RFO. For example, the limits on operating hours of the Celerity units mean the capacity may be of less value than that of a typical peaker which is available nearly all hours of the year.

Nor do the Celerity units, despite SDG&E's assertion to the contrary, meet all the criteria of SDG&E's RFO. For example, the units are not new facilities, and they only provide limited quick start capability. In addition, SDG&E will provide diesel-fuel costs for units under the Celerity Agreement when dispatched by SDG&E. Heat rates for these units are described by SDG&E as being higher (representing a less efficient unit) than the equivalent natural gas peakers.

SDG&E indicates that the Celerity Agreement is consistent with various Commission plans and policies. In particular, SDG&E asserts that approval of the Celerity Agreement is consistent with the Energy Action Plan and greenhouse gas (GHG) standards because it "constitutes a peaking power project (with an estimated annual capacity factor less than 60%) which is not designed or intended to augment the output or extend the operating life of an existing power plant." (Application at 7, citing D.07-01-039 at 7.) According to SDG&E, the distributed generators operate like a peaking plant for capacity purposes with a capacity factor of under 5%, well below the 60% threshold and thus are not subject to the GHG standards. Further, while the hours of operation of the BUG units may be increased as a result of the contract, there is no augmentation or increase in the generating capacity of the units.

Next we consider SDG&E's claim that the Celerity Agreement improves environmental impacts by reducing particulate emissions because of the fitting of filters on existing Celerity units. The application clearly establishes the efficacy of the upgraded filters. In particular, SDG&E's testimony indicates that "... with the particulate filters, BUGs will emit less carbon monoxide, hydrocarbons and particulate matter running the 199 permitted hours than without filters running at only 50 permitted hours."

However, emission rates for other pollutants, including carbon dioxide, a GHG, are not improved by the filters. The BUG emission rate for carbon dioxide is less than the comparable emission rates for other peaking resources, such as older gas-fired combustion turbines (CTs), 1512 lbs/mwh versus 1755 lbs/mwh, respectively. The BUG emission rate for carbon dioxide is slightly higher than the emission rates for new, efficient CTs. Thus, increasing the operating hours of these units from 50 to approximately 200 per year may result in minor increases or minor decreases in overall carbon emissions. We encourage SDG&E and Celerity to evaluate using biodiesel fuel to reduce net GHG impacts.

SDG&E also claims that, under the Celerity Agreement, the conversion of the BUGs, which currently can only operate for maintenance or in emergencies, to dispatchable units will help avoid the emergencies under which such units would normally be used. SDG&E's assertion is accurate. However, the characterization of capacity as reducing the likelihood of use as emergency generation applies to all capacity generally.

Finally, we are unconvinced by SDG&E's claim that the Celerity Agreement will decrease the likelihood of a reliability must-run (RMR) designation of the South Bay Power Plant. While there is a chance that the California Independent System Operator (CAISO) will not designate the South Bay Power Plant as an RMR facility, the Celerity's units will likely have little impact on that decision due to their relatively small amount of MWs and the uncertainty in their own resource adequacy status.

Overall, the Celerity contract appears to provide SDG&E with additional reliable peaking capacity at an attractive capacity price and without the need for new transmission facilities, by taking existing facilities and better integrating their operation to match the needs to the utility. At the same time, the installation of new filters will significantly improve the BUGs emission rates for some types of air pollutants. These benefits justify approval of the contract. However, these benefits only occur if in fact the capacity can be used by SDG&E to meet its reliability obligations and if the pollution filters are actually installed on the facilities. Therefore, we condition our approval of the contract on the Commission and the CAISO approving the contract capacity as qualifying for resource adequacy purposes and on the installation of emission filters on all BUG units participating in this program.