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How to Build Clean Energy Portfolios
A Practical Guide to Next-Generation Procurement Practices
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The 2020s are poised to reshape the US power sector in ways rarely seen in any industry.
With vertically integrated utilities poised to invest up to $750 billion through 2030 on new resources, accelerating the shift to competitive, all-source procurement can make sure that money is spent wisely.
Introduction
Supply-side changes, demand-side changes, and climate policy drivers are compounding to prompt an unprecedented realignment of how electricity is generated and delivered to US customers. As the industry prepares to spend between $300 and $750 billion in the next decade on electricity resources, there is a pressing need to use that money wisely. Legacy processes and tools will result in procurement decisions that reflect past conditions, not emerging trends and requirements. Given the scale of likely investment, the industry has an important opportunity to update the processes used for procuring new resources and to ensure that investments are prudent and in the best interests of customers.
This study presents recommendations for updated electricity resource procurement processes that meet the challenge of the coming decade. We begin by laying out three principles that define the leading edge of resource procurement.
The Principles
All-Source
To select for portfolios of optimal utility-scale and distributed energy resources and to capture the value of interaction between resources
Objective-aligned
To enable investments to address diverse, jurisdiction-specific values (e.g., resilience, decarbonization, local economic development) that stakeholders seek
Least-regrets
To limit the risks of greater-than-anticipated costs for meeting system needs by capturing benefits of competition and declining costs of new technologies
Stakeholder-Specific Recommendations
In order to create an environment that unlocks next-generation competitive procurement, legislators can:
- Ensure the state has a participative planning process that links planning outcomes to procurement decisions, and that state policy objectives are included in system planning. For some states, this might mean setting up a planning process. For others it might mean requiring Commission approval of utility plans or requiring consideration of stakeholder participation or comments. Or it might involve revisiting planning and procurement rules and asking whether the current process results in policy-aligned procurement. Regulators may need explicit direction to consider objectives beyond reliability, affordability, and safety.
- Ensure utilities are adequately incentivized to consider distributed energy resources (DERs), including energy efficiency, as resources to meet identified needs. DERs can be valuable in lowering customer costs and providing system flexibility within a resource portfolio. Assess the treatment of DERs in planning and procurement and consider other ways to bring DERs online such as energy efficiency resource standards, performance-based regulation, or creating a third-party implementer to accelerate deployment.
- Ensure the state has rules that encourage or require competitive procurement and a commission that can support them. Legislatures should consider statutes that require utilities to issue all-source solicitations. In states that do not currently have a statute requiring competitive procurement, the legislature could first consider adopting one to reduce costs for ratepayers and encourage clean energy companies to participate in the state's economy. In all cases, it is important that the commission be adequately resourced to effectively monitor procurement processes.
State commissions can play a major role in ensuring that procurement processes and outcomes are in service of the public interest. Specifically, regulators can:
- Ensure that need for new resources is well-defined, transparent, and linked to findings from a well-vetted resource planning process. A need for new resources may arise from emerging electric system reliability requirements, from changing economics of resource options, or from public policy goals that reflect environmental, equity, economic development, and resource priorities. Modeling assumptions and tools should be as transparent as reasonably possible and accessible to all stakeholders, and resource planning scenarios should be specified and evaluated in consultation with a diverse group of stakeholders so that those needs are well understood and validated.
- Ensure that all resource providers have opportunities to offer all capabilities from each of the resource options they bid. Bidding should be open to all resource providers who meet reasonable bidding requirements and bidders should be allowed to submit bids that include all resource types, to enable portfolios that use combinations of supply- and demand-side resources. If the incumbent utility or its affiliate is allowed to bid, codes of conduct should be established to ensure competitive providers are not disadvantaged.
- Ensure that the bidding process is open, transparent, and evaluated fairly. Evaluation criteria used to select bids should be transparent and communicated clearly to bidders prior to bid submission deadlines. A third-party, independent evaluator should be used to supervise utility bid evaluation to ensure that it follows published criteria. Portfolios including the best bids should be brought to the commission for consideration. The commission should consider trade-offs among bids and additional modeling of resource options if one portfolio is not clearly superior to other finalists.
Utilities can lead the way in sourcing and delivering least-cost, least-regrets resource portfolios. In particular, utilities should:
- Proactively bring stakeholders into the analysis of needs and defining the evaluation process for selecting portfolios. Stakeholders can help to verify assumptions early in the procurement process rather than contesting them further down the road.
- Use cost and operational data from competitive bids, not internal estimates, to inform planning and procurement activities. Bids returned in all-source solicitations have continued to surprise utilities and outperform previous estimates. With increased uncertainty and volatility of resource costs, issuing an RFP to seek bids prior to selecting a portfolio for procurement can ensure that decisions are based on accurate pricing.
- Work with bidders prior to, during, and after solicitations to understand what data they need to give their best bids. Supporting bidders to deliver diverse and competitive solutions requires the utility to be available for questions, to document and publish all bidder questions and utility answers, and to be open to modifying the solicitation and proposed contract terms prior to issuance if they can expand the field of competitive solutions.
- Consider whether evaluation criteria for selecting the optimal resource portfolio are aligned with public policy outcomes. Stakeholders are increasingly concerned about alignment between procurement and public policy objectives including resilience, equity, and decarbonization. In addition to covering these priorities in other activities (e.g., integrated resource planning), utilities should carefully evaluate how well their solicitation processes support them in concert with regulators.
Foundational Process Improvements
Three foundational process improvements have been applied by leading utilities to support the achievement of all-source, objective-aligned, least-regrets outcomes.
Increase Transparency
- Bidders obtain the information they need to propose competitive solutions that meet solicitation objectives and reduce the likelihood of bids falling through.
- Stakeholders and regulators can access information they need to validate utility-claimed need and how the need is specified. They can then evaluate alternative solutions to build confidence in outcomes.
Engage Stakeholders
- Stakeholders may propose alternative specifications of the need or portfolio options that the utility did not consider.
- Stakeholders can provide feedback about whether state and local policy objectives are adequately reflected in a solicitation's scope and evaluation criteria and build public support for outcomes.
- Stakeholders and bidders can identify barriers that may limit participation in the solicitation.
- Consistent engagement with bidders can reduce perceived risk, result in more competitive bids from a diverse set of resources, and support market maturation.
Link Planning and Procurement
- Utilities, regulators, and stakeholders can holistically consider all resource options, including DERs and nonprocurement pathways, and assess the need for procurement in the context of longer-term planning objectives and risks.
- Utilities can use actual price and operational capability information from bids to inform planning decisions.
Procurement Activities
There are three main activities within the procurement process that can be designed to enable procurement that is all-source, objective-aligned, and least-regrets:
Define and validate system needs
This type of description can form the basis of a process that generates many diverse and competitive bids. For example, Xcel Energy in Colorado demonstrated through its all-source solicitation in 2017 that a solution-agnostic needs description can elicit many bids and record-low bid prices for renewable energy and hybrid resources.
Questions to assess if a needs description supports all-source, objective-aligned, least-regrets procurement:
Does the statement of needs:
- Describe the binding system needs in terms of energy, capacity, or flexibility?
- Describe where the need is located? Is grid data included that can support bidders to determine if a project can meet the needs?
- Describe when, where, and for how long the system has this need?
- Describe the primary drivers of this need and the associated uncertainty and risks?
A statement of needs may not be written to support all-source, objective-aligned, least-regrets procurement if:
Caution
A description of needs is provided for a specific resource or set of resources, but it does not justify restricting solutions
Red Flag
No description of needs is provided to justify procurement of specific resources
Validating the need with external parties who engage in resource planning can provide assurance that a wide range of options can participate in procurement. For example, in New Mexico, stakeholders demonstrated the value of validating needs using utility data and models by modeling alternatives to the Public Service Company of New Mexico's (PNM's) San Juan replacement portfolio—and presenting the Commission with reliable, lower-carbon options that the Commission ultimately approved for investment.
Questions to assess if needs validation supports all-source, objective-aligned, least-regrets procurement:
Is the statement of needs:
- Accompanied by sufficient data for stakeholder and commission evaluation? Have stakeholders been encouraged and assisted to provide their analysis?
- Validated by stakeholders and the commission through a public record?
- Supported by analysis conducted by an independent planning entity (e.g., state energy office, commission, or regional planning council)?
Needs validation may not be sufficient to support all-source, objective-aligned, least-regrets procurement if:
Caution
- Data is provided only in graphic format and has not been released as machine-readable (e.g., CSV, Excel)
- Needs are defined in an IRP that has not yet been approved
Red Flag
- No data has been released to justify the utility need or proposed solution
- Need is determined by company only
Scope fair and transparent RFP documents and process
DERs can be a critical component in least-cost clean energy portfolios and should be able to participate directly in a solicitation or in concurrent deployment through programs. For example, Glendale Water & Power (GWP) in California demonstrated that procuring a portfolio of local DERs could cost-effectively reduce the size of a large gas repowering project.
Questions to assess if participation of DERs supports all-source, objective-aligned, least-regrets procurement:
If DERs are enabled to participate in the RFP:
- Is the RFP structured such that DERs are eligible to participate contemporaneously with utility-scale supply resources?
- Are the unique values of DERs reflected in the bid evaluation process?
If DERs are not eligible to participate in the RFP:
- Is there evidence that solicitation needs have been structured with parallel plans for deployment of all cost-effective energy efficiency, demand response, and other DERs through customer programs and other pathways?
- Do DER potential studies reflect synergies between different resources (e.g., total lifetime savings and cost-effectiveness improve when weatherproofing and efficient AC units are deployed as a package)?
- Do energy efficiency resource standards or utility performance incentives exist that will result in substantial deployment of energy efficiency?
- Do customer programs or rate structures support substantial adoption of DERs?
DER participation may not be sufficient to support all-source, objective-aligned, least-regrets procurement if:
Caution
Demand-side resources have been analyzed through a potential study within or alongside IRP, but links between this analysis and decisions to pursue procurement are unclear
Red Flag
There is no evidence that demand-side resources and their role in meeting needs have been considered
Limiting size minimums and caps; ensuring solicitation categories are inclusive; providing multiple ownership, timing, and location options; and leaving contract terms open for proposed modification by bidders can reduce barriers to participation from all resources. Bidders may be able to offer additional services or creative business models that decrease the cost or increase project value.
Questions to assess if all-source solicitation provisions might constrain participation:
Does the solicitation:
- Use categories that are inclusive of all resources, including "hybrid" resources and different durations of storage?
- Include multiple ownership options (PPAs, asset purchases)?
- Contain resource size minimums or resource caps that unnecessarily constrain bids?
- Provide enough time for all types of resources to respond effectively?
- Contain provisions that might constrain bidder business models?
Does the description of the evaluation process:
- Include clear codes of conduct for utility affiliate bids or evaluation of utility self-build options?
- Include quantitative and qualitative evaluation criteria that capture the unique attributes and values of all resources?
- Describe the analytic tools and process that will be used to evaluate bids?
- Include a process for communicating with bidders if anything changes about the evaluation process midstream?
Solicitation provisions might constrain resource participation if:
Caution
- Contract terms disclosed in advance are not open for modification
- Solicitation has size caps that are inconsistent with resources available in the market
Red Flag
- Solicitation is open only to utility-owned options
- Contract terms are available only through a nondisclosure agreement and not open for modification
Select the optimal resource portfolio
Utilities can define evaluation criteria beyond cost that align procurement decisions with policy objectives such as decarbonization, resilience, environmental justice, or economic development and select a portfolio that provides the greatest value.
Questions to assess if the portfolio selection process is using a value-based approach to portfolio optimization:
Does the portfolio selection process include comprehensive and accurate portfolio evaluation of grid values, such as:
- Full stacks of portfolio services and values?
- Portfolio diversity that may exceed one-for-one replacement?
- Analysis using capacity expansion modeling to understand interaction with existing resources and interaction across different portfolios of bids?
Does the portfolio selection process include factors for portfolio evaluation beyond grid need that align portfolio evaluation with societal needs and values, such as:
- State and utility goals and priorities?
- Non-cost factors such as resilience, equity, and economic development?
- Risks to the utility and customers?
The portfolio selection process may not support a value-based approach if:
Caution
- Values other than least-cost are used for portfolio evaluation, including alignment with state policy goals, but not all values are considered
- Input on non-cost factors is allowed, but it is not clear how they will be prioritized in comparison to least-cost criteria
Red Flag
- Portfolio selections are based on only short-term costs
- Resource values are limited to one attribute (capacity, energy, RPS compliance, etc.)
Making evaluation criteria transparent to stakeholders prior to the solicitation enables bidders to have confidence that their solutions will be fairly evaluated. After a procurement process is underway or completed, release of nonproprietary or aggregate data regarding solicitation bids can move the market forward. For example, release of aggregate data by utilities such as Xcel and Northern Indiana Public Service Company (NIPSCO) from their solicitation processes has proven the value of all-source procurement for other utilities and allowed them and their customers to reap the benefits.
Questions to assess if the portfolio evaluation and selection process is clear and transparent to bidders and the public:
Does the solicitation process:
- Enable stakeholders and the regulator to review and provide input to evaluation criteria before the RFP is issued?
- Include a pre-bid conference where the data, assumptions, and process for bid evaluation are shared with bidders?
- Have codes of conduct in place to protect against the utility having any embedded competitive advantage in submitting its own bid, if a utility or its affiliate is allowed to bid?
- Use an independent evaluator to develop portfolio options and ensure that they have access to all the data, assumptions, and tools necessary to fully evaluate the submitted bids against the specified evaluation criteria?
- Require aggregated solicitation bids to be made public?
The solicitation evaluation and selection process may not be clear and transparent if:
Caution
- Some important data to be used in evaluating bids is not visible to bidders
- Evaluation criteria to be used in bid evaluation are described vaguely in the solicitation
- A regulator-approved independent evaluator either is not used or is used but receives vague directions on the bid evaluation process and criteria
Red Flag
- The evaluation is conducted with important data that is not visible to stakeholders, bidders, or regulators
- Evaluation criteria are not disclosed to bidders prior to bid submission
- The utility has the sole authority to reject bids without sharing all bid results with the regulator or a regulator-approved independent evaluator
There is an opportunity for at least 420 GW of utility resource procurement over the next 10 years.
The Opportunity for New Procurement Practices
We estimate that within the jurisdiction of vertically integrated utilities (VIUs), there is an opportunity for at least 420 GW of resource procurement by 2030. The greatest drivers for new resource investment exist in the Southeast, Midwest, and Western United States—places with the highest potential for load growth, asset retirement, and renewable energy resource potential.
The 420 GW investment need in VIU territories over the next 10 years represents a once-in-a-generation opportunity. The total capital required for this level of resource deployment is on the order of $420 billion (for relatively low-capital cost technologies including gas turbines and solar photovoltaics) to over $750 billion (for higher-capital cost but lower-levelized cost clean energy portfolios).
After accounting for operation and maintenance costs for the $420—$750 billion in new resources through their lifetimes, and transmission and distribution infrastructure necessary to support them, there are trillions of dollars—and billions of tons of CO2 emissions—at stake in VIUs' procurement decisions of the next decade.
This is a once-in-a-generation opportunity.
Projected opportunity for utility resource procurement, 2020—2030
Total Opportunity: 424 GW
- Southeast 156.3 GW
- Midwest 122.4 GW
- Northeast 51.5 GW
- Southwest 31.9 GW
- Texas 27.4 GW
- West 23.5 GW
- Northcentral 11.2 GW
Click a state on the map to see its procurement details.
Virginia
- 24.4 GW of potential resource procurement by vertically integrated utilities.
- The primary driver of procurement will be: incremental clean capacity to be on track for 90% clean by 2035.
- No formal requirement for competitive solicitations (requirement for limited competitive procurement of renewables) based on review of state statutes and administrative codes.
Sources
Code of Virginia, Title 56, Chapter 23Code of Virginia, 56-598 Contents of Integrated Resource Plans
Code of Virginia, 56-585.5 Generation of Electricity from renewable and zero-carbon sources
Colorado
- 7.3 GW of potential resource procurement by vertically integrated utilities.
- The primary driver of procurement will be: retirement of uneconomic fossil fuel plants.
- Requirement for all-source solicitation based on review of state statutes and administrative codes.
Sources
4 CCR 723-3, Section 3611Washington
- 5 GW of potential resource procurement by vertically integrated utilities.
- The primary driver of procurement will be: incremental clean capacity to be on track for 90% clean by 2035.
- Requirement for all-source solicitation based on review of state statutes and administrative codes.
Sources
WAC 480-100-238 Integrated Resource PlanningTexas
- 27.4 GW of potential resource procurement by vertically integrated utilities.
- The primary driver of procurement will be: retirement of uneconomic fossil fuel plants.
- Procurement primarily driven by market competition based on review of state statutes and administrative codes.
Sources
State is almost or entirely within the footprint of a wholesale market and has a majority of generation owned by non-utility entities as analyzed in EIA-860M
Procurement today is conducted in many different processes driven by diverse requirements. State statutes and administrative codes contain different requirements for competitive procurement by regulated utilities. Despite what is codified in statute and administrative rules, application in practice varies across states.
Leading utilities have begun to demonstrate that emerging best practices in procurement can improve investment outcomes and lead to greater and more cost-effective adoption of clean energy resources. In this section we look at a subset of recent examples of vertically integrated load-serving entities that have conducted:
All-source procurement: solicitations issued to select an optimal portfolio of supply-side, storage, and in some cases, distributed energy resources.
Clean energy procurement: solicitations issued specifically for single or limited sources of renewable energy and hybrid projects, which demonstrate cost-effectiveness of clean energy portfolios compared with fossil fuel-based solutions.
Resource mixes of recent and planned resource procurements by utilities
Click a utility name to view its case study.
- Solar
- Wind
- Storage
- Demand Flexibility
- Efficiency
- New Gas
- Existing Gas
- Renewables (Other)
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