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Renewable Portfolio Standards Drive Market for Alternative Energy

November 20, 2008

Introduction

Renewable Portfolio Standards (“RPS”), which mandate that utilities replace some portion of their hydrocarbon-based electricity with clean power sources, have been embraced by over twenty-five states as part of a broad range of actions to reduce greenhouse gas emissions. A federal RPS, while discussed in the drafting of the energy bills of 2005 and 2007, has never been passed by both houses of Congress. Now, with an upcoming shift in policy under the Obama administration, the prospects for a federal RPS are much greater.

Introduction

Renewable Portfolio Standards (“RPS”), which mandate that utilities replace some portion of their hydrocarbon-based electricity with clean power sources, have been embraced by over twenty-five states as part of a broad range of actions to reduce greenhouse gas emissions. A federal RPS, while discussed in the drafting of the energy bills of 2005 and 2007, has never been passed by both houses of Congress. Now, with an upcoming shift in policy under the Obama administration, the prospects for a federal RPS are much greater. In this article, we examine a sampling of state RPS programs as an illustration of the choices to be made as Congress considers a federal RPS. We also discuss the possibilities and pitfalls of enacting and implementing an RPS on a federal level.

Overview of Renewable Portfolio Standards

An RPS is intended to spur the development of new renewable power sources and technologies. In the process the hope is to reduce greenhouse gas emissions and other pollutants associated with burning hydrocarbons, reduce reliance on foreign sources of oil and gas, and create new jobs through home-grown energy sources.[1] Key issues in designing an RPS include defining qualified renewable energy resources, compliance benchmarks and deadlines, and penalties for noncompliance.[2]

The real action in developing RPS programs has occurred at the state level. Iowa was the first state to enact an RPS in 1991. Since then, more than twenty-five states have developed RPS programs.[3] Many states have also established tradable credits as a way to lower costs and facilitate compliance with their RPSs, although some – such as California – have so far resisted trading in so-called “renewable energy credits” or RECs. Eligible renewable resources under state RPS programs usually include wind, solar, geothermal, biomass, and several forms of water-based power, including hydropower, current, wave, tidal, and ocean-power.[4] However, in some states that already heavily rely on hydropower, this energy source is excluded as an eligible resource.

While a variety of state RPS programs exist, certain trends have emerged. Generally, all state RPS programs require qualifying utilities to gradually increase the amount of renewable energy in their supply of electricity provided to consumers and to set a series of yearly targets that dictate the renewable percentage of the utilities’ electricity mix. In the early RPS programs, the amount of renewables in the mix was relatively low, such as Iowa’s 1991 RPS that set the standard at 2 percent by 2000 (and was attained in 1999), or Wisconsin’s standard of 2.2 percent by 2011. Further, early RPS programs did not differentiate between sources of renewable energy, or favor one particular source over another.

As RPS programs have expanded in number and evolved, states have aimed for increasingly higher levels of renewables; as high as 33 percent by 2020 in California, and 25 percent by 2013 in New York. As for the mix of renewables themselves, states are beginning to mandate that specific renewable energy sources, such as solar, comprise some percentage of the RPS in order to boost those technologies that remain relatively more expensive or are deemed to have the least environmental impact.[5] In addition, RPS programs are integrating other initiatives that complement the RPS, such as funds that encourage investments in renewables or programs that mandate renewable energy sources for government buildings.

Sampling of State Renewable Portfolio Standards

Washington

In 2006, voters in the State of Washington narrowly passed Initiative 937, which requires that by 2020 large public and private utilities must obtain 15 percent of their electricity from renewable resources, and undertake cost-effective energy conservation.[6] The Initiative covers seventeen of the state’s sixty-two utilities that serve over ninety percent of all customers in the state. Affected utilities can meet their renewable energy target by relying on qualified renewable sources or by purchasing renewable energy credits from qualified renewable energy providers with a surplus.[7] The law includes a cost cap on renewable energy sources, which allows a utility to achieve compliance if it has invested at least four percent of its retail revenue in an effort to comply with the renewable energy target. It is expected that I-937 will play a key role in meeting the greenhouse gas emissions reductions needed to reach the targets established by the Washington Climate Change Challenge, Executive Order 07-02.[8]

California

Under California’s current RPS, retail sellers of electricity must increase their sales of eligible renewable energy resources by at least 1 percent of retail sales per year, so that 20 percent of their retail sales are served by these sources by 2010. The law allows flexibility where insufficient transmission infrastructure renders a retail seller unable to access renewable energy sources, or by allowing excess renewable procurement in one year to apply to a deficit in another year.[9]

Earlier this month, California Governor Arnold Schwarzenegger signed Executive Order S-14-08, which streamlines the state’s renewable energy project approval process and increases its RPS to 33% renewable power by 2020.[10] A recent analysis by the state’s Public Utilities Commission (“PUC”), which jointly implements the RPS program with the California Energy Commission, expressed concern that this would cost the state $60 billion between 2012 and 2020.[11] Acknowledging that 33 percent renewable energy is an important part of the state’s energy future, the report found that this would require an increase of 110,000 gigawatt-hours (“Gwh”) of new renewable energy in 2020. The PUC estimated that this will necessitate seven new major transmission lines, “an infrastructure build-out on scale and timeline perhaps unparalleled anywhere in the world.”[12]

Texas

The Texas RPS program, launched in 1999 to address concerns about the long-term supply of electricity in this high power-consumption state, as well as mounting environmental problems, has been deemed a “textbook” model for other state RPS programs.[13] It established an REC program, a transparent market for RECs, and alternatives to compliance that allowed flexibility for electricity suppliers unable to meet the standard (at a cost). The success of the initial standard, under which wind power development has more than quadrupled, along with additional capacity for solar, landfill gas, and micro-hydro, fueled an extension and expansion of the standard in 2005. Senate Bill 20 increased the state’s RPS goal to 5,880 MW by 2015, of which, 500 MW must come from non-wind resources.[14] The legislation also set a goal of 10,000 MW in renewable energy capacity by 2025, although this is not binding.

Despite the success of Texas’ RPS, two significant obstacles stand in the way of reaching the goals set by Senate Bill 20. The first is the inadequate transmission capacity for moving large amounts of wind energy from remote sections of the state to population centers. To address this, Senate Bill 20 includes a transmission plan for remote regions, and requires that competitive renewable energy zones (“CREZ”) be designated and that an electric transmission infrastructure be constructed to move renewable energy from those zones to markets where people use energy. The Electric Reliability Council of Texas (“ERCOT”), the state’s transmission operator, is charged with collecting wind data and nominating a number of CREZs based on transmission cost calculations for each CREZ.[15]

The second obstacle is the lack of financing available for large-scale renewable projects such as Mesa Power, owned by T. Boone Pickens, the former Texas oilman turned wind energy proponent. Frozen credit markets have delayed construction of the project.[16] And while Mr. Pickens has made clear that lack of financing slowed his projects, other renewable energy commentators suggest that falling natural gas prices make renewable energy look more expensive, driving down demand and creating less-attractive investment opportunities. [17]

Ultimately, as the majority of states adopt their own RPS, along with state-level challenges, issues of inter-state collaboration and enforcement have become increasingly complex, raising interest in the possibility of a federal RPS.

Future for Federal RPS

Proposals

Promoting renewable energy on the federal level is nothing new,[18] but a federal standard requiring the generation of a certain amount of electricity from renewable sources by a given date has only been given serious consideration in the last few years.[19] While the Senate included a federal RPS in its version of energy legislation in 2007, as it had previously, the proposal remained too controversial, and ultimately was not included in the Energy Independence and Security Act of 2007.[20] However, because Congress gave it recent serious consideration and because it is part of the President-elect’s New Energy platform,[21] a federal RPS seems more likely to gain traction next year.[22]

The two recent proposals floated in Congress were less aggressive than many state programs.[23] Both would have modified Title VI of the Public Utility Regulatory Policies Act of 1978 to establish an RPS for retail electric utilities that the Department of Energy (“DOE”) would administer. The bill sponsored by Senator Jeff Bingaman, D-NM, would have started with a goal of 3.75 percent in 2010, rising to 7.5 percent in 2013, 11.25 percent in 2017, and then peaking at 15 percent in 2020, with a sunset provision of 2030.[24] Eligible renewable sources under both proposed RPS programs would include wind, solar, geothermal, biomass, landfill gas, ocean, tidal, and incremental hydropower, but excludes existing hydropower and landfill gas facilities.[25] In addition to direct generation, retail suppliers could purchase power from other organizations, purchase tradable credits from suppliers with a surplus, or purchase credits from the government. An excess of tradable credits could be banked up to four years. Power generated on Native American lands would receive double credit. Finally, and an important consideration in any federal proposal, states could impose more stringent RPS requirements without the threat of preemption.

President-elect Obama’s campaign included a proposal for a federal RPS that requires 10 percent of electricity consumed in the United States to come from renewable sources by 2012. In order to make RPS a reality at the federal level, the President-elect has argued for a $150 billion investment over 10 years in research, technology demonstration, and commercial deployment of clean-energy technology; an extension of production tax credits for five years to encourage renewable energy production; and a cap-and-trade system of carbon credits to provide an incentive for businesses to reduce greenhouse has emissions.[26]

Issues remain, however, including debates among lawmakers representing states with vastly different amounts and types of renewable energy sources. In states largely dependent on already existing hydropower, the definition of a qualifying renewable resource will have an enormous impact on whether existing hydropower and incremental hydropower is included in calculating a utility’s base load, and in turn, how much of that utility’s total portfolio will actually fall under the RPS. The structure of the national system of tradable credits will also determine whether retail suppliers in states with less abundant or less-developed renewable resources, such as the South, will end up paying high prices for renewable credits. This contrasts with calls to set rates for renewable energy credits that discourage their use and encourage utilities to generate or purchase electricity from qualifying renewable sources.

Possibilities and Pitfalls

Supporters and critics of a federal RPS have each become increasingly vocal as the impacts of such a mandate become clear. Supporters believe that a federal RPA will promote energy independence, stabilize electricity prices, create green jobs, protect clean air and water, and promote U.S. leadership in clean energy technology. Proponents also point to the need for federal production tax credits for renewable energy, federal assistance in improving transmission capacity, and the development of national renewable energy credit trading, all of which are more likely to occur with a federal RPS than without.

Critics question whether the targets are attainable, and if so, at what cost. As noted earlier, the California PUC estimates that it will cost at least $60 billion between 2012 and 2020 to meet that state’s aggressive goal. And while federal renewable energy tax credits were extended through 2009 for wind and another eight years for all other renewables under the Renewable Energy and Job Creation Act, financing for renewable energy projects, investments in needed research and development, and consumers’ ability to pay for higher energy costs may be stymied by current economic circumstances.

Regulatory concerns also run high, particularly in determining how to site transmission lines required to carry energy from areas rich in renewable resources to population centers. The Federal Energy Regulatory Commission recently stated that creating a transmission grid under its authority would create a coherent regulatory framework.[27] But the National Association of Regulatory Utility Commissioners favors local control and opposes giving FERC siting authority over the existing patchwork of regional policies influenced by local concerns over unsightly power lines, damages to natural resources, and interests in keeping traditionally low electricity prices in-state.[28]

While the timing and structure of a federal RPS remain unclear, there is little doubt that a national standard, not unlike its state counterparts, will present both unique opportunities for renewable energy providers and enormous challenges for those charged with designing, implementing, and enforcing a new plan for domestic energy.

For more information on Renewable Portfolio Standards, please contact any member of Marten Law Group’s Climate Change and Sustainability practice group.

[1] Pew Center Report on States’ RPS at v.

[2] Joel Merkel, Legislative Counsel, Energy and Natural Resources, Office of Senator Maria Cantwell, personal communication.

[3] See Pew Center on Global Climate Change, Renewable Portfolio Standards.

[4] Details about state RPS programs are available at the Database of State Incentives for Renewables & Efficiency.

[5] Barry G. Rabe, Pew Center on Global Climate Change, Race to the Top: The Expanding Role of U.S. State Renewable Portfolio Standards, June 2006 [hereinafter “Pew Center Report on States’ RPS”]

[6] Initiative 937 at Sec. 1.

[7] A renewable energy credit (“REC”) is a tradable certificate that represents one megawatt-hour of renewable energy. The certificate includes all of the non-power attributes associated with the generation of that one megawatt of electricity. RECs allow for production of renewable energy where it is most efficient.

[8] RCW 80.80.020.

[9] Susannah Churchill, Energy Division, California Public Utilities Commission, RPS Annual Procurement Targets, Reporting and Compliance Staff White Paper, February 14, 2006.

[10] Governor Schwarzenegger Advances State’s Renewable Energy Development, Office of the Governor, November 17, 2008.

[11] California Public Utilities Commission, Renewables Portfolio Standard, Quarterly Report, October 2008.

[12] Id.

[13] Pew Center Report on States’ RPS at 11.

[14] Texas Renewable Energy Portfolio Standard, State Energy Conservation Office.

[15] Id.

[16] Kate Galbrath, Live From New York: T. Boone Pickens, The New York Times Green Inc., November 12, 2008.

[17] Keith Johnson, Gas Pains: Another Reason Clean Energy Should Hate the Downturn, Environmental Capital, The Wall Street Journal, November 13, 2008.

[18]The Solar Energy Research, Development, and Demonstration Act of 1974 states that “the mass production and use of equipment utilizing solar energy will help to eliminate the dependence of the United States upon foreign energy sources and promote the national defense.” 42 U.S.C. § 5551(a)(7). The Public Utility Regulatory Policies Act of 1978 (PURPA) encouraged renewable energy by requiring interconnection with small generators.

[19] During the 107th, 108th, and 109th Congresses, the Senate passed an RPS, but it did not survive conference committee action. Fred Sissine, CRS Report for Congress, Energy Independence and Security Act of 2007: A Summary of Major Provisions, December 21, 2007.

[20] Fred Sissine, CRS Report for Congress, Energy Independence and Security Act of 2007: A Summary of Major Provisions, December 21, 2007.

[21] President-elect Obama calls for a federal RPS that requires 10 percent of electricity consumed in the United States to come from renewable sources by 2012

[22] Barack Obama and Joe Biden, New Energy for America.

[23] Senate Amendment 1537 to H.R. 6 and House Amendment 748 to H.R. 3221.

[24] Energy Information Administration, Officer of Integrated Analysis and Forecasting, U.S. DOE, Impacts of a 15-percent Renewable Portfolio Standard.

[25] “Incremental hydropower” is additional electric generation achieved from increased efficiency or additions of capacity at an existing hydropower facility.

[26] Barack Obama and Joe Biden, New Energy for America.

[27] Katherine Ling, E & E Daily, Electricity: Obama’s bold energy agenda spurs push to overhaul grid, Nov. 7, 2008.

[28] Id.

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