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Renewable Subsidies in the Age of Deregulation

Fortnightly Magazine - December 1997

techniques should be permissible, such as:

Voluntary "green power" marketing;[fn16]

Portfolio standards for retailers of power;[fn17]

Renewable energy priced to reflect savings in distribution services;[fn18]

Dispatch requirements reflecting renewable resources;[fn19]

A nonprofit quasi-public funding source using independent funding unrelated to retail rates;

Expedited state approval or removal of financial, siting or other barriers for renewable or DSM projects;

Voluntary partnering with federal programs to leverage funds or opportunity;

Efficiency standards for appliances or buildings;

State tax incentives for renewable power generation or DSM provided from general state revenues;[fn20] and

Segmentation of the market into renewable retail requirements. fn21

Renewable Portfolios: A Matter of Degree

Let's focus on this last popular option, requiring renewable energy to satisfy certain segments of the retail market.

Clearly, states may regulate the mix of generating/efficiency resources that regulated utilities must procure, as explained by the FERC in 1995.fn22 However, the FERC has not definitively declared the degree to which the market can be segmented for purposes of resource procurement or supply-side planning.fn23 Nothing in the case law suggests that segmentation of the market into various fuel types is impermissible. In addition, there is nothing to suggest division of the wholesale or retail electricity market into demand-side and supply-side resource portfolios is impermissible. FERC regulations provide that "[s]tate authorities may also favor particular technologies or fuel types through direct subsidies or favorable regulatory or tax treatment."fn24

While a state, then, can segment the market to require renewable energy in the supply mix, it cannot establish separate prices for more-expensive-to-produce, or renewable, resources deemed more desirable.fn25 The FERC has stated, in dicta, that wholesale power transactions may reflect real non-price factors that represent "real costs that would be incurred by utilities."fn26 In other words, externalities may reflect real costs. They cannot be manipulated as an artificial means to rig the market.fn27 By market segmentation, states could require that certain renewable resources be procured and also can value incurred environmental externalities of different technologies in the determination of the total marginal costs of generation and price-setting.

A Political Solution?

Federal legislation could mandate collective preservation of renewable energy and DSM programs. Bills proposed by Rep. Dan Schaefer (R-Colo.), as well as by Sen. Dale Bumpers (D-Ark.), loom on the horizon.

Legislation proposed by Sen. James M. Jeffords (R-Vt.) would require an annual renewable portfolio standard for the generation mix climbing from 2.5 to 20 percent over 20 years. It also proposes a 2 mills/kWh, $6-billion/year stranded benefits subsidy to match state grants to fund these benefits. Absent new federal mandates, some of the current vanguard of state renewables initiatives could be deemed ultra vires to state authority.

The legal question comes down to where and how the state promotes renewable resources. A state could regulate the composition of what types of energy are sold, but not discriminate regarding the situs of renewable resources.

Conversely, it will be politically unappealing for most states to tax their residents' power purchases, only to devote much of those funds for out-of-state renewable energy businesses. There lies the choice between policy goals and constitutional limitations.