DWR seeks Water Code change to allow sale of emergency generators constructed under strategic reserve program

Delphine Ho, deputy director for statewide energy at the California Department of Water Resources, told the Senate Budget Subcommittee that three generators constructed under the Electricity Supply Strategic Reliability Reserve are ultra-low-emission natural‑gas units sited at Modesto Irrigation District, Turlock Irrigation District and the City of Lodi, and that DWR seeks a small change to Water Code language to preserve sale value if the state sells the facilities.

DWR’s proposal: Ho explained trailer‑bill language that would add the phrase "and owned" to Water Code section 80,710 so the statutory operational restriction — which currently limits DWR‑built generators to operate only during extreme events while the state owns them — would not automatically carry over to a purchaser were DWR to transfer ownership. DWR says the change would allow counterparties to operate the generators under their own policies after purchase and preserve residual value.

Cost and structure: Ho told the committee the three‑site program has a committed budget of about $330 million that covers construction, site lease, interconnection and operations agreements; the interconnection availability at the municipal sites was a key value for DWR. Ho said DWR expects a potential sale earliest in 2028 and estimated recoverable proceeds of roughly $40.5 million in aggregate if the sale is completed under the proposed statutory change. Without that change, DWR would either forfeit resale value or face decommissioning costs (DWR estimated up to $20 million across sites to decommission and move assets).

Why DWR built the units: Ho said AB205 (2022) authorized DWR to construct emergency assets to respond to grid stress. DWR used a developer’s technology certified under CARB’s distributed generation program (low emissions) and contracted with municipal utilities to site the units; DWR also cited rapid interconnection at those municipal sites as crucial for emergency readiness.

Questions and concerns from lawmakers - Market participation and revenue: Senators asked why the state would construct assets that are prohibited from participating in day‑to‑day markets. Ho said the statute requires the reserve units to be held for extreme events only and that the restriction limits market revenues that in a private model would offset capital costs. She noted subsequent trailer‑bill language previously opened some rules for battery resources but not thermal units. - Purchase price and value: Lawmakers pressed for a clearer breakdown of the $330 million committed cost, how much directly represents physical equipment versus site/interconnection and lease costs, and why a projected sale price of about $40.5 million appears small compared with the committed cost. DWR staff said the committed amount includes site lease fees, interconnection value and operations costs; the resale value would reflect physical asset depreciation and marketability constraints. - Interconnection and site constraints: DWR staff explained interconnection capacity at the municipal partner sites (Modesto, Turlock, Lodi) was a major reason DWR could quickly site the units, and that moving the generators would require substantial additional interconnection and transformer work that is difficult to secure quickly in many ISO queues. - Reporting: Ho said DWR will release the statutory-required report on the Electricity Supply Strategic Reliability Reserve and related activity and expects the delayed December report to be issued in the coming weeks.

Public policy implications: The exchange highlighted a tension between emergency preparedness and efficient capital deployment. Constructing assets quickly under an emergency program provided immediate grid insurance, DWR representatives argued; critics pointed to the limited ability to monetize the assets under the statute and the potential for state taxpayers to bear losses if resale is limited.

Next steps: DWR asked the Legislature to enact the trailer‑bill language to permit sale without operational restrictions for purchasers so the state can recover value. DWR also said any proceeds from sale would return to the Electricity Supply Fund and that counterparties have expressed interest in purchase options. DWR committed to provide a more detailed cost breakdown to the committee.

Ending note: The subcommittee requested a fuller cost and valuation breakdown and the December report required by statute; DWR said it would provide the requested materials and expects to pursue the statutory change to preserve resale value and give host municipalities optional ownership after the reserve program sunset.