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Federal Renewable Electricity Standard Takes Shape

June 12, 2009

The Waxman-Markey climate change bill, passed out of the House Energy Committee last month, awaiting action in several House committees, and possibly slated for consideration by the full House later this summer, would create a federal “Combined Efficiency and Renewable Electricity Standard.” Renewable Electricity Standards (“RES”), already established in many states, mandate that utilities replace some portion of their hydrocarbon-based electricity with renewable energy sources.

The Waxman-Markey climate change bill, passed out of the House Energy Committee last month, awaiting action in several House committees, and possibly slated for consideration by the full House later this summer, would create a federal “Combined Efficiency and Renewable Electricity Standard.” Renewable Electricity Standards (“RES”), already established in many states, mandate that utilities replace some portion of their hydrocarbon-based electricity with renewable energy sources.[1]

The RES proposed by the current House climate change bill would require utilities to obtain 15 percent of their load capacity from renewables by 2020, but would allow states to drop down to 12 percent as long as utilities make corresponding increases through energy efficiency.[2] The Senate draft is slightly less aggressive, requiring a mix of 15 percent renewables one year later, in 2021, but allowing a fourth of the requirement to be met by energy efficiency. In contrast, existing state programs are as high as 33 percent by 2020 in California, and 25 percent by 2013 in New York.

Key components of an RES design include setting compliance benchmarks and deadlines, designating and defining eligible renewable sources, and setting up a tradable credits mechanism. This article examines each component of the RES bill pending currently in the House, and concludes with a brief comparison to developments in the Senate Energy and Natural Resources Committee draft.

Compliance Benchmarks and Deadlines

The House’s RES applies to “retail electric suppliers,” which are utilities that have sold more than 4 million megawatt hours in the year preceding the enactment of the bill.[3] To set baselines, retail electric suppliers’ base amounts will be measured by the total amount sold to electric customers (for purposes other than resale) during the relevant calendar year. This excludes non-qualified hydropower, nuclear power from a facility constructed after enactment of the bill, and the proportion of GHGs produced by fossil fuel electrical generation that are captured and geologically sequestered.[4]

The bill’s required annual percentage of renewable electricity begins at 6 percent in 2012, and increases to 9.5 percent in 2014, 13 percent in 2016, 16.5 percent in 2018, and 20 percent from 2021 through 2039.[5] Each retail electric supplier must, beginning in 2012, demonstrate to FERC that it has met these compliance benchmarks.[6] They can accomplish this either through submission of renewable electricity credits earned for their proportion of electricity based on renewable sources, demonstrated energy efficiency, or alternative compliance payments.

Eligible Renewable Sources

The House’s RES includes a variety of eligible renewable sources, including solar, wind, wave and tidal energy, landfill gas, and waste-to-energy facilities that incinerate solid waste and construction debris to generate electricity. Some of the more controversial eligible renewable resources are certain hydropower and renewable biomass projects where the biomass is from federal lands.

In states with existing hydropower sources (such as Washington state), the definition of a qualifying renewable resource has 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 RES. In the House bill, hydropower built after 1992 is defined as an eligible renewable resource.[7] This is more generous than an earlier draft, which only included hydropower in the renewables mix if it was built after 2001.

Debate has also centered on the definition of biomass materials obtained from federal lands. Despite an attempt by Rep. Greg Walden (R-OR) to amend the bill to include a broader range of biomass materials from federal lands, the final version settles on a narrower definition which includes “materials, pre-commercial thinnings, or removed invasive species from that National Forest System lands and public lands … that are removed as part of a federally recognized timber sale … to reduce hazardous fuels … to contain disease or insect infestation, or to restore ecosystem health.”[8] Biomass would not qualify for the RES if it is collected from designated wilderness or roadless areas, old growth stands, National Monuments or Conservation areas, primitive areas, or Wild and Scenic river corridors. [9]

Electricity sources that are not eligible under the RES include nuclear and fossil fuel-generated electricity, even if it uses carbon capture and sequestration. Finally, hydropower constructed before 1992 does not qualify under the RES.

Tradable Credits

Renewable electricity credits may be traded with other retail electric suppliers, and are to be submitted to FERC to show compliance with the RES benchmarks. One federal renewable energy credit is to be issued for each megawatt hour of renewable electricity generated after December 31, 2011.[10] Retail electricity suppliers already receiving renewable credits under a state RES would receive federal credits in proportion to the state credits they are already earning.[11] Distributed renewable generation facilities, defined as those that are near their electricity consumers and have less than two megawatts of capacity will receive three credits per megawatt hour generated, in an effort to support smaller-scale renewable electricity generation.[12] Qualified hydropower would receive credits based on efficiency improvements or capacity additions.[13] Facilities with mixed renewable and non-renewable sources will receive credits in proportion to the amount attributable to renewable energy.[14]

The bill also contains “alternative compliance payments” at a rate of $25 for each credit or megawatt hour of energy efficiency that would otherwise have been accomplished under the RES. Failure to comply or pay results in fines at twice this rate plus the overall quantity of credits, compliance payments, or efficiency savings required under the bill.

Retail suppliers in states with less abundant or less-developed renewable resources, such as the South, may have to pay high prices for renewable credits, at least at the outset. However, the credits are likely to be less expensive than attempting to build enough renewable generation to meet the RES standard in those areas. The House bill’s proposal for tradable emission credits would be more flexible than some existing state programs, like California’s, which do not allow the renewable attributes to be severed and traded separately from the associated electric power. In the absence of unbundled, tradable renewable credits, the cost of meeting the RES standard in some regions probably would be substantially higher. However, trading in unbundled credits introduces additional complications to regulation of the credit trading market.

Draft Senate RES

Members of the Senate Energy and Natural Resources Committee made their way through more than 20 amendments to the RES provision in their draft energy bill during the first week of June. Of the 20 proposed amendments, those that survived include a provision that excludes new nuclear reactors and capacity from the baseline electricity sales, though amendments to exclude all nuclear from the baseline were rejected. Additional approved amendments would exclude electricity from coal-fired power plants equipped with carbon capture and sequestration technology from qualifying as renewable energy and allow biomass plants that increased efficiency through the elimination of heat loss to accrue more credits.[15] Finally, an amendment by Sen. Maria Cantwell (D-Wash.), would create a low-interest loan program to refinance renewable-energy projects.[16]

As it now stands, the Senate RES requires a covered utility to use renewable energy to produce 15 percent of its electricity by 2021, one year later than the House bill, but roughly a fourth of the requirement may be met through energy efficiency measures. If utilities are not able to meet the standard by directly producing the electricity, they may buy renewable energy credits from other entities producing renewable energy electricity or pay a 2.1 cent per-kilowatt-hour “alternative compliance payment,” under the measure.[17] The Senate RES also has an “off ramp” that would allow utilities to ask DOE for a one year waiver if the standard would increase consumers’ electricity prices by more then four percent in a given year. It also includes a “phase in,” by requiring utilities to include three percent renewable energy beginning in 2011 that accelerates to 6 percent by 2014, 9 percent by 2017, 12 percent by 2019, and eventually, 15 percent by 2021. Finally, in addition to these and other flexibility provisions, it provides a waiver for reasons “outside the reasonable control of the utility.”

Conclusion

While it is too early to predict exactly what a federal RES will look like, it appears likely that some type of federal program will emerge if an energy bill passes out of Congress this year.

For more information, contact any member of Marten Law Group’s Climate Change practice group.

[1] See “Renewable Portfolio Standards Drive Market for Alternative Energy,” Marten Law Group Environmental Newsletter, November 20, 2008.

[2] Title 1 Clean Energy, Subtitle A – Combined Efficiency and Renewable Electricity Standard [hereinafter “Draft Federal RES”].

[3] Draft Federal RES at Sec. 610(a)(19).

[4] Draft Federal RES at Sec. 610(a)(20).

[5] Draft Federal RES at Sec. 610(d)(2).

[6] Draft Federal RES at Sec. 610(b).

[7] Draft Federal RES at Sec. 610(a)(13).

[8] Draft Federal RES at Sec. 610(a)(16)(I).

[9] Draft Federal RES at Sec. 610(a)(16).

[10] Draft Federal RES at Sec. 610(e).

[11] Id.

[12] Draft Federal RES at Sec 610(a)(4)(A).

[13] Draft Federal RES at Sec. 610(e)(5).

[14] Draft Federal RES at Sec. 610(e)(6).

[15] Katherine Ling, Senate panel’s RES markup previews floor showdown, Greenwire, June 4, 2009 (subscription required).

[16] Ben Geman and Katherine Ling, Wind industry pushes Reid, Pelosi for tougher RES, E & E News PM, June 4, 2009 (subscription required).

[17] Ben Geman, Senate markup may herald return of offshore drilling debate, E & E Daily, June 8, 2009 (subscription required).

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