What are some approaches to regulation adopted in recent decades by national governments, and the implications for management making international investment decisions?
Mandating Federal Renewables
The importance of getting the REC markets right.
Renewable energy credits (REC) have been around for more than a decade. The development of state REC markets has been intrinsically linked to increasingly prevalent renewable portfolio standards (RPS) throughout the United States since the late 1990s. In combination with federal tax incentives, such as the production tax credit (PTC) or the investment tax credit (ITC), state RPS requirements have been the driving force behind renewable generation capacity additions (see Figure 1) . To date, the RPS requirements and their associated REC markets have been instituted and operated at the state level. Now, the United States Congress has pending legislation—H.R. 2454 in the House of Representatives and S.1733 in the Senate—which creates, among other things, a federally mandated renewable energy standard (RES). However, since this new federal mandate hasn’t yet been approved and signed into law, RPS requirements and REC markets continue under state jurisdiction.
RPS and REC Patchworks
Currently, state RPS requirements have a common goal of encouraging and increasing the renewable energy supply. However, the design of these RPS requirements varies so dramatically that there’s debate over what exactly constitutes an RPS. This is because despite fostering the installation of renewable generation, the tailoring of RPS designs by states to satisfy particular objectives and political exigencies in some respect creates “laboratories” for RPS policy experimentation.
The lack of standards in RPS mandates also can be observed in the differences among states regarding how RPS compliance is achieved. Three distinct RPS compliance models thus far have emerged:
• States with competitive retail markets : electricity suppliers are given broad latitude to comply with RPS requirements;
• States with regulated monopolies : regulators oversee electric utility procurement and contracting of RPS; and
• States conducting procurement : a state agency or instrumentality has direct responsibility to conduct procurements under the RPS.
These compliance models and different RPS requirements have direct impacts on the development of REC markets. The reason is that states also have adopted different eligibility rules related to geographic location and electric delivery. For example, states that enact an RPS do so with the expectation that the requirement will stimulate new resource development in their state or region. This highlights the practical limitation on the actual location of renewable projects.
These limitations are one of the root causes for the sub-optimal progress being made in developing new renewable generation resources and one of the main reasons the United States should consider some form of a national REC market. A national REC market would be an invaluable tool that could be used to satisfy RPS requirements without any geographic constraint.
National REC Market
The current design of the regional REC market