What is Central Procurement and Why Is It Being Used for Offshore Wind in California?

Typically, utilities like Pacific Gas and Electric Company (PG&E) and community choice aggregators (CCA) like Redwood Coast Energy Authority (RCEA) execute a purchase power agreement directly with a project developer. A power purchase agreement is a contract wherein the buyer agrees to purchase a certain amount of energy and capacity from the power generator for a specified period of time. The buyer has shown credit worthiness and a strong track record of paying on time, so after the contract is signed, the power generating company can then use that power purchase agreement as collateral to finance the construction of new generation facilities, like a solar power plant, by taking it to a bank and showing them that someone has promised to purchase their electricity. This process is referred to in the electricity business as “procurement.” In California, this type of procurement conducted by private entities like investor owned utilities and community choice aggregators are regulated by the California Public Utilities Commission (3) (CPUC) in an attempt to keep electricity affordable, clean and  reliable. 

 

This process works well for traditional renewable development, where there are clear milestones and deliverables built into the power purchase agreement. However, the individual buyer executing a PPA does not necessarily work for offshore wind and other long lead time resources. For one, the lengthy development timeline means that there are not the same easy to predict milestones, which makes projects look more risky and therefore harder to get a loan. Secondly, because offshore wind projects require large economies of scale to be efficient, they need to be built big - bigger than any one buyer could need. A developer could execute a lot of separate side agreements with multiple buyers, but that only increases transaction costs and makes the project more expensive overall. So as envisioned in the legislation, the state designated its Department of Water Resources (DWR) to act as a central buyer and then allocate the costs to the various smaller entities. There is a critical reason why the state established a new process to buy these long lead time resources, like offshore wind. The state determined them to be essential components of decarbonizing the electricity grid and fighting climate change. California wanted to buy down the risk of the more expensive projects, and determined that the state providing a centralized solution would help bring down prices and keep the projects affordable. This is why this process is called “Central Procurement”. 

 

AB 1373 established a centralized procurement framework and authorized the State of California, through the CPUC and the Department of Water Resources (DWR), to directly purchase electricity from long lead time resources. That way, the State can purchase offshore wind and other long lead time clean energy resources directly from the project developer and in advance rather than waiting for the private market to choose to do it. This provides developers and lenders assurance that generated power will be sold in the market. After the State purchases the electricity, they will allocate the electricity and the associated costs to the load serving entities such as the utilities and CCAs across the State. AB 1373 also laid out a process to protect ratepayers and other interests. So how will the process work?

 

First, the CPUC made a determination that there was a “need” for these long lead time resources, including offshore wind, in order to achieve net zero emissions and maintain a stable grid. The CPUC considered cost, how helpful the resource would be for decarbonizing the grid, and how likely it was for private utilities like PG&E to decide to purchase the power on their own among other factors when conducting their investigation. On August 22, 2024, the CPUC issued its Decision (4) in which it determined that the State needed to purchase up to 7.6 gigawatts (GW) of offshore wind energy. In this Decision, CPUC laid out a timeline to procure offshore wind energy through three rounds of bid solicitation, meaning they will request bids from developers for OSW projects towards the 7.6 GW goal. The solicitation for these bids is projected to occur in 2027, 2029, and 2030.

 

The CPUC also instructed the Department of Water Resources (DWR) to handle the process and to organize an advisory Procurement Review Group (PRG) made up of non-market participants, which could include Tribal Nations, community groups, other state agencies, as well as utilities and CCAs. DWR will issue solicitations for electricity and then power generators, in this case offshore wind companies, will respond with bids. The PRG will review those bids and advise DWR on whether or not to purchase the electricity. Importantly, because the need determination was up to 7.6 GW of OSW the DWR can decide to purchase less offshore wind electricity based on the quality, cost, and risk of the bids received. Bids are not limited to simple price tags and can also include other criteria such as environmental protections, community benefits, project labor agreements, etc. For example, the State of New York (5) which has undertaken a similar process, required bids to include environmental monitoring, stakeholder engagement, and project labor agreements.  After DWR select a short list of bids, advised by the PRG, the final power purchase agreements will be reviewed by the CPUC before they can be recovered in rates. This way, ratepayers are protected both by the DWR procurement review group and by the CPUC’s cost-benefit analysis.

 

On February 24, 2025 President Reynolds of the CPUC sent this letter (6) to Deputy Director Hou of the DWR initiating this process. DWR is currently in the process of selecting a procurement review group in advance of the first round of solicitations and bids. This page will continue to update as the process develops.