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RPS Race

As green mandates tighten, utilities scramble to comply.

Fortnightly Magazine - September 2008

Balancing Goals and Implementation Strategies . Market structure can be important in this regard, particularly whether the market is regulated with a single electricity provider, or restructured for market competition. “Regulated utilities with a captive customer base and cost-recovery guarantees are better positioned to make investments in new generation or execute long-term power-purchase contracts with renewable energy project developers,” Cory says. In restructured markets, however, electricity generation and distribution responsibilities often are separated. In states with retail competition, and where distribution utilities are precluded from making generation investments, long-term investment planning becomes difficult and risky for suppliers.

“In addition, states’ RPS policies are usually subject to legislative and regulatory changes,” Cory says. “The financial community, which provides the funding for renewable projects, tries to avoid the risks that legislative and regulatory uncertainty can cause.”

• Solar Set-Asides: Wind’s dominance of RPS markets arises from its relatively low cost, compared to other non-hydro renewable energy sources. “Solar, biomass, and distributed generation are not being advanced significantly by RPS laws at this point because of their higher costs and, for biomass, because of air-quality issues,” says CESA’s Sinclair.

To encourage diversity of renewable energy sources, about a dozen states either have designed or revised their RPS laws to require set-asides for solar, or even distributed generation. “Because of the increased costs, it’s unclear how easy it will be for utilities in these states to meet these solar set-asides,” Sinclair says.

RECs or Wrecks?

Most states with RPS mandates allow utilities to meet their requirements by acquiring renewable energy credits or certificates (RECs). An REC is a tradable environmental commodity representing proof that one megawatt-hour of electricity was generated from an eligible renewable energy resource.

RECs can reduce the cost of RPS compliance by reducing T&D costs, while also providing access to a larger quantity of resource options. RECs have become the prominent mechanism for addressing geographical limitations and cost issues, and they likely will become more important as RPS requirements ramp up and developers exploit the most cost-effective project options, no matter where they’re located. Using RECs, however, presents a number of challenges.

“Concerns have been expressed that REC price variability and uncertainty might limit the ability of RPS policies to support renewables investment decisions,” says NREL’s Cory. REC markets are based on short-term purchases, but short-term markets don’t help developers obtain project financing. “The best way to get assurances is through long-term contracts,” she says. Some states are attempting to address this weakness by requiring long-term contracts. Utilities in Colorado, for example, are required to sign minimum 20-year contracts to meet the state’s RPS standard. California, Connecticut, Nevada, and Montana have 10 year minimums, and Maryland requires 15 years for solar contracts. “These requirements help to solidify their value to financiers,” she says.

Another challenge, according to Lawrence Berkeley’s Wiser, is that some states don’t allow RECs to meet RPS requirements. “California, Arizona, and Iowa do not currently allow unbundled RECs to qualify,” he says. (This isn’t an issue in Iowa, though, because that state achieved its standard in 1999.)

The use of