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Mandating Federal Renewables

The importance of getting the REC markets right.

Fortnightly Magazine - January 2010

emission-reduction mandates, the utility industry and independent power producers likely would revert to natural gas as the fuel of choice for new base-load units. While this measure only would be temporary, unless and until new caps are put in place by 2025, it certainly would result in higher supply costs. And it would create just the kind of emissions that an REC standard seeks to help mitigate.

A final effect—and a worthy by-product—of favorable nuclear treatment would be helping to levelize the international playing field for new nuclear—a playing field called “countries vs. companies” by some, and one in which U.S. utilities and investors are competing with sovereign entities for resources. New nuclear, combined with a U.S. REC program, together would drive the United States towards its renewables and GHG targets.

Third, an REC market coordinated at the national level would allow optimization of the renewable generation portfolio and would provide RECs—allocated efficiently and fairly—that could be sold to reduce the cost of new renewable generation projects.

When designing this market, federal policymakers should learn from state experiences to limit the maximum impact of these requirements on electricity rates. Common approaches include alternative compliance payments in lieu of purchasing RECs, direct retail rate caps, renewable energy contract price and funding caps, per-customer electric bill impact limits, and financial penalties that can serve as cost caps in certain circumstances. Furthermore, establishing force majeure mechanisms would mitigate the wholesale price risk. Such mechanisms would allow electricity suppliers to limit their renewable energy purchases if those purchases would unduly raise electricity rates.

Overall, minimizing generation costs by increasing availability reduces the need for subsidies and saves tax-payers money by bringing down the levelized cost of generation. A national REC market then would allow utilities and other load serving entities (LSE) to choose the most economical method of compliance ( e.g., asset ownership vs. contracting vs. purchasing RECs). The bottom line is that a uniform and transparent REC market will be critical for future compliance with aggressive renewable portfolio standards, will facilitate the equitable transfer of value between different regions of the country, and will help minimize the impact on wholesale prices of large capital investments in renewable energy.

Green Market

Meanwhile, Europe is working to create a single energy market and China is committing vast resources to develop low-carbon technologies. While the pressure is increasing every day, the United States can take action by replacing disjointed state policies with a coordinated REC market that is tied to a federal RES mandate. Then, it can treat all low-carbon energy in a similar manner in order to promote investment, not only in wind and solar, but also in nuclear—a low carbon energy source with a long track record of efficient and reliable electricity generation.

A consistent and ubiquitous renewable energy market will allow stakeholders in power markets—like utilities, retailers and other LSEs—to optimize the choice between asset ownership and RECs. While operating in this environment will present challenges and opportunities to these different stakeholders, change is inevitable as new generation assets are needed to replace traditional