ECM TALKS ENERGY

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October 6, 2015

Domestic Renewable Portfolio Standards and Renewable Energy Credits: The Evolution Is On

by Margie Miller

Over the past decade, U.S. political conversations have increasingly turned to discussions about energy sustainability programs and environmentally-friendly energy generation projects. In turn, 30 states have developed individual Renewable Portfolio Standards in their efforts to reach specific renewable energy generation metrics over specific periods of time.

These state standards typically require end-use electricity suppliers to purchase Renewable Energy Credits (RECs) — derivatives whose value represents additional incremental costs incurred over base generation costs for specific forms of green energy production. By quantifying the value of these renewables, green energy producers have an insured mechanism to finance long term development projects independent of fluctuating prices for the underlying electricity commodity.

As a result, suppliers have one of two choices when purchasing RECs from participating states:

  1. purchasing directly from approved generators or approved Brokers through various trading platforms
  2. if they are unable to (or choose not to purchase RECs directly), paying an Alternative Compliance Payment (ACP) to the state — a form of penalty more expensive than the cost of marketplace RECs. These ACPs are then returned to the state to help fund qualifying renewable energy generation projects (solar, wind, biomass and some forms of hydro power).

 

Corporate philosophies have changed too—but these require a definitive strategy to align actual actions with stated missions.

Many organizations now incorporate renewable and sustainable energy goals as part of their mission statements, including “carbon neutral footprints” or commitments to using 100% green energy.

Modern de-regulated transmission systems, however, make it difficult for these organizations to attain 100% green energy for one simple reason: energy cannot be produced and delivered to specific end-use customers. Instead, generators produce and deliver energy to the power grid, where it is then dispatched to utility sub-feed stations for end-use meter delivery.

In other words, while utilities, Third Party Electric Suppliers (ESCOs) and Direct ISO Customers can execute contracts directly with green generators to obtain electricity at fixed prices, these contracts function solely as financial agreements—the commodity itself does not flow directly between the two entities. Therefore, the only way that any supplier can legitimately claim to be purchasing green power is by buying RECs associated with generating that power.

If you function as a self-supplier of your electricity (Direct Customer), we suggest a more efficient and affordable way to accurately claim 100% green energy usage: procure electricity through the wholesale market (the cheapest source) while purchasing marketplace RECs. This strategy allows you to choose the types of power you want to support in addition to managing your required compliance filings. And in geographic areas that don’t have active green generation, you can purchase Green E-RECs to assist you in reaching your 100% green energy goals.

Similarities and differences of four states offering RECs.

With 30 states now implementing Renewable Portfolio Standards, it’s important to realize that both similarities and differences exist from state to state. To help clarify this point, let’s examine four states and some of their Renewable Portfolio Standard details:

New Jersey has been a national leader in solar energy production since adopting energy structuring legislation in 1999. Earlier this year, the state revisited its solar renewable standards to more accurately align demand with excess supply. And not surprisingly, it also has one of the nation’s most aggressive renewable energy electric generation goals: 22.5% of total electricity produced and sold by 2021.

The Garden State is going green like few other states have; in fact, New Jersey offers many financial incentives to residents to participate in solar energy generation—property tax incentives, performance-based incentives and the ability to sell credits in the state’s certificate markets—all of which, in turn, generate solar renewable energy credits (SRECs).

As a participant in the PJM Interconnection Regional Transmission Organization, New Jersey utilizes the Generation Attribute Tracking System (GATS) to track and manage compliance requirements for all market participants. Participants who fail to comply with Energy Year requirements (posted by the Board of Public Utilities as a percentage of usage) are penalized with an ACP. In addition, participants are required to file all necessary documents with the board—failure to do so can result revocation of a supplier’s license, additional financial penalties and/or a prohibition on accepting new customers.

Illinois introduced voluntary standards in 2001. By 2007, the state had added a plan for managing non-voluntary renewable requirement schedules as well through the Illinois Power Agency.

Like New Jersey, the state uses GATS to manage and confirm certificate eligibility. Unlike New Jersey, however, it requires market participants to submit 50% of their yearly requirement at the ACP rate—funds which are then made available to the Illinois Commerce Commission to purchase additional RECs. The state then divides the remaining half of each participant’s yearly requirement into two pieces: 60% in the form of wind credits, and 40% in wind or a mix of other eligible forms of renewable generation. Additionally, 6% of actual metered usage will be required to come from solar beginning in Energy Year 2016.

Massachusetts introduced their standard in 2003, expanding through the years to include five product lines and a variety of generation methods. With an Energy Year corresponding to the calendar year, Massachusetts compliance filings are finalized in May, giving market participants approximately 17 months to acquire the necessary certificates. Massachusetts also allows participants to bank residual purchased certificates for two consecutive compliance periods. And similar to New Jersey, any un-purchased requirements are levied with an ACP penalty.

New resources represent a fraction of the state’s standards, while already existing resources, waste-to-energy elements and solar comprise other components. Massachusetts has been particular about promoting qualifying energy statewide, intentionally setting their ACP rate to be much higher than the market to encourage compliance.

Since 2004, New York has required utilities to supply a percentage of electricity from renewable sources, driven by committees assigning yearly targets for energy usage. For 2015, the state’s goal is to achieve 29% renewable energy usage—equivalent to approximately 9.77 million MWhs.

New York is different from many of the other states in that it operates a centralized procurement model. Individual market participants are not required to purchase independent certificates as a percentage of their usage; rather it’s the responsibility of the utilities to collect funds to purchase renewable energy credits (with NYSERDA allocating those funds for the purchase of actual RECs). According to the U.S. Department of Energy’s website, the prospect of certificate trading is currently under discussion for New York, with the state’s Public Service Commission in favor of adopting a tracking system similar to PJM (GATS) or NEISO (GIS). Under the current program, the state organizes incentive payments for renewable generation; in return these generators transfer their Renewable Portfolio Standards attributes and resulting energy to New York’s power grid.

The renewable energy market continues to grow and evolve. So too will the opportunities to maximize its potential.

It’s clear from just the four state examples we’ve highlighted that there is no single approach to renewable energy production, particularly since standards are not governed by utilities or the federal government. Today’s policies and tomorrow’s legislation will emerge largely from political arenas, continually transformed by new conversations on clean and renewable energy throughout the United States.

 

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