Renewable Energy: Toward A Portfolio Standard?

Fortnightly Magazine - August 1998

DEREGULATION PRESENTS WHAT IS PERHAPS THE BEST opportunity yet for renewables to stake a lasting claim in the electricity market.

Since most energy from renewable sources still isn't priced competitively with fossil-fueled technologies, many restructuring proposals at state and federal levels include various support mechanisms intended to drive down the renewable generation costs. The initial added expense is a necessary trade-off, advocates say, for the resulting reductions in emissions and energy price volatility.

One idea that has gained much credence is the renewable portfolio standard. Largely the brainchild of the American Wind Energy Association, the RPS would establish an across-the-board minimum of electricity that must be generated from renewables. Depending on how it is set up, the RPS would require either electricity generating companies or retailers to prove they've supported a level of renewable energy generation equal to a set percentage of annual kilowatt-hour sales. This target level of renewables would be phased in, then phased out once renewables become price-competitive.

What makes a mandatory RPS palatable to many regulators and utility officials is its market-based approach. Modeled after the federal sulfur-dioxide allowance trading program, the RPS would allow energy companies to buy and sell renewable energy credits to meet the standard in the most cost-effective way. One credit would be issued for every kilowatt-hour of electricity generated by a renewable operation. An energy generator could choose to meet the RPS by investing in a renewable operation and producing its own RECs, buying power from an outside renewable source, or simply purchasing RECs.

"Credits are central to the concept if you are intending to encourage compliance and encourage a market for these technologies through private-sector decision-making," says Randall Swisher, AWEA executive director. "I think almost any company that has been engaged in compliance with the Clean Air Act recognizes the benefits of tradable credits."

However, opinions vary as to what level of renewables is attainable, how long it will take to reach that level, and at what point the cost outweighs the benefits. While the RPS offers marketplace efficiencies, "the downside is you don't know what the cost is going to be," acknowledges Ashok Gupta, a senior energy economist for the Natural Resources Defense Council.

Green marketers, meanwhile, are beginning to wonder if the RPS really is the best way to develop the renewables market. If the RPS isn't structured carefully, "it might actually frustrate the development of renewable markets by making every seller of electricity look green," says Karl Rabago, a vice president at Planergy in Austin, Texas.

What Are States Doing?

So far, five states have adopted the RPS as part of their restructuring plans: Maine, Nevada, Massachusetts, Connecticut and, by regulatory order, Arizona. Massachusetts and Connecticut also have approved a systems benefit charge to directly fund the development and promotion of renewables projects. Elsewhere, states have been slower to embrace the concept, though New Jersey is likely to debate the issue later this year when restructuring legislation is filed.

"It's by no means a standard component of restructuring legislation," says Matthew Brown of the National Conference of State Legislatures. "It's not the top item."

At the federal level, however, the Clinton Administration's draft legislation for deregulation includes a 5.5-percent RPS by 2010. That's slightly more aggressive than the 4-percent share called for in Rep. Dan Schaefer's (R-Colo.) well-publicized restructuring bill (H.R. 655). Several other congressional bills also contain an RPS, including S. 687, introduced by Vermont Sen. James Jeffords (R-Vt.). S. 687 calls for a 10 percent RPS in 2010. That's combined with emissions caps on carbon dioxide, sulfur dioxide and nitrogen oxide. Only one bill, S. 237, introduced by Arkansas Sen. Dale Bumpers (D-Ark.), grants RPS eligibility to large hydropower generators.

Politicians know they have support from a substantial portion of the public on green energy. Why? In a Sustainable Energy Coalition survey last April, 60 percent of more than 1,000 registered voters cited renewables and efficiency as worthy of the highest priority in energy research funding. The National Renewable Energy Laboratory concluded in a review of about 20 years of opinion polls that 56 to 80 percent of Americans are willing to pay more for renewable energy. And a recent study by the Edison Electric Institute concluded that 60 percent of households are willing to pay $6 or more per month for green power. About 40 percent would pay more than $11.

But the Energy Information Administration doesn't foresee widespread renewables development without additional incentive programs like an RPS and "green pricing." According to the EIA's 1998 Annual Energy Outlook, under current conditions, the total renewable share of U.S. generation, including hydropower, will likely drop from 12.5 percent in 1996 to 9.2 percent in 2020. Excluding hydropower, the EIA expects electricity generation from renewable resources to supply just 2.5 percent of the country's grid-connected energy supply in 2020.

In devising a way to boost demand for renewables in a competitive market, AWEA looked to the SO2 allowance trading program for guidance. The program's trading aspect, which allows trading or banking of emissions allowances in order to achieve the lowest cost of compliance, has produced higher cost savings than expected. According to a U.S. Environmental Protection Agency report, since 1990, the projected cost of compliance has declined from $4 billion per year to less than $2 billion per year.

Under the RPS, explains Swisher, "energy companies that aren't interested in or aren't in a good position to build their own renewable generation" could instead purchase credits to meet requirements. In addition to lowering compliance costs, the credits would provide revenue for new renewable facilities.

How Much Will It Cost?

Several studies have tried to calculate the costs associated with a nationwide RPS, as well as the impact on overall energy mix. However, the cost calculations come with caveats.

Researchers at the Tellus Institute of Boston, a nonprofit organization that promotes sustainable resources, studied Rep. Schaefer's proposal and concluded it would raise electricity prices by just 0.03 cents per kWh by 2010 (compared with a system with no RPS). For the average residential customer, that's an additional 15 cents a month.

Researchers also concluded that carbon emissions in 2010 would be reduced by an estimated 2 percent as a result of displaced fossil fuel generation. Wind would account for almost half the new non-hydro renewable generation in 2010, and geothermal power would make up more than a third.

The Tellus researchers cautioned, however, that their method may have overestimated the cost of the RPS. Their model couldn't account for the "multitude of local, high-value applications of clean, small technologies" that could evolve under an RPS, more research and development investments, or the impact of green marketing initiatives.

An EIA analysis of S. 687, conducted at Sen. Jeffords' request, concluded that his inclusion of a CO2 emissions cap of 1,914 million tons, beginning in 2005, would prompt a rise in renewables above the bill's 10-percent requirement by 2010. Average regulated prices would be about 12 percent higher in 2020 if the bill's provisions were implemented. That's about $7 per month on the average residential bill. The report assumed that gas-fired and coal-fired generation would decline, while wind and biomass generation would increase.

But the EIA quickly pointed out that uncertainties couldn't be figured into the cost calculations. One of the biggest is the cost of developing enough renewable resources to meet the RPS level. New biomass plants will need a steady source of fuel from an energy crop industry that doesn't yet exist. And wind plant developers may face considerable difficulties in locating suitable sites. Those factors, the agency noted, could drive up costs beyond estimates.

The Natural Gas Supply Association, a staunch opponent of the RPS, argues it's just not reasonable to assume that a higher rate of renewable generation can be achieved simply by allowing the market to put green power plants where they're most cost-effective. For example, some communities would undoubtedly balk at becoming wind farm centers, says NGSA spokeswoman Charlotte LeGates.

"You can hear these blasted things a mile-and-a-half away," she says. "And because of the resonance problem, the noise can actually be worse inside your house than outside your house."

Moreover, contrary to the EIA's assessment that a nationwide RPS would reduce harmful air emissions, LeGates argues the RPS would "do nothing for the environment." That's because biomass, as the most reliable renewable energy source, would make the greatest immediate gains under an RPS, and biomass, she says, "is essentially uncontrolled burning."

AWEA has rebutted that claim, citing a National Renewable Energy Laboratory study of the environmental effects of California solid-fuel biomass plants. The study concluded that the use of biomass residues as fuel leads to large net reductions in emissions of air pollution compared with gas- or coal-fired generation. The new biomass gasification technologies which might be encouraged under a stronger renewables market would further reduce emissions, according to the report.

A Way to Gain an Edge?

For New Jersey's Public Service Electric and Gas Co., which serves 1.8 million electric and 1.5 million gas customers, support for a statewide RPS has competitive aspects as the state deregulates. In March, PSE&G issued a joint statement with the NRDC declaring common positions on environmental aspects of deregulation. Topping the list is a call for the Environmental Protection Agency to "correct the enormous disparity in emission rates among the nation's electricity generators." Among the other initiatives endorsed, however, is the phase-in of a statewide RPS that relies on marketable credits.

"New Jersey has had extremely tough air standards, and we've had to make a strong investment here," notes Tony Borden, PSE&G vice president. "We don't think it's fair for other utilities to just grind it up a few notches on the output of their plants and send that power here when they don't have to meet the standards we do. People say 'You're afraid of competition,' and we say, 'That's a dumb response.'

"The central-most notion that we share with the NRDC is, if you're going to restructure the energy industry, this is the time to fix the environmental issues as well," Borden adds. "They go hand in hand."

Arizona Public Service Co. also supports renewables development, but has reservations about the solar portfolio standard included in the rules for restructuring adopted by the Arizona Corporation Commission. Though lower than the commission's initial proposal, the goal of 1 percent solar by Jan. 1, 2002, beginning with 0.5 percent in 1999, may still be too much too fast, says Herb Hayden, coordinator of APS's renewable resources program.

"It's going to require 100 megawatts of solar installation for APS," he says. "The total for Arizona will be 250 megawatts of solar. The construction pace required is very rapid. You're talking about magnitudes of solar that are comparable to the global production of solar."

The SPS will cost Arizona consumers an estimated $500 million by 2003, Hayden says, adding, "Our analysis showed that it's cheaper to comply with the penalty than the solar standard." The penalty for noncompliance is 30 cents per kWh of shortfall.

Almost none of Arizona's power is supplied by solar, according to Hayden. But APS has recently built two plants -- one 82-kilowatt plant, and one 250-KW facility -- as part of its Solar Partners Program. Customers sign up to purchase 100-watt units of solar power at a cost of about $3 a month. The program has proven so popular it's scheduled for expansion.

An RPS that demands too much too soon could do more harm than good to green markets, says Karen O'Neill, vice president at Green Mountain Energy Resources.

"If it kicks in immediately in an area where there are very few renewables, it could suck up all the green resources," O'Neill says. "That would make it difficult for those marketing the supply to find the product."

On the other hand, an RPS set at a level close to what the market will achieve on its own will make it easy for every energy provider to look green, notes Rabago, of Planergy. That won't necessarily help the further development of renewables, he says, because companies dedicated to green power will have a much tougher sell.

"Today, the message a green marketer has to get out is, 'To be green, go with us.'" Rabago says. "[A] perfectly simple message. But now, the message will have to be, 'To be greener than the RPS, which is set at X percent of every supplier's electricity generation, go with us.' "

The Renewable Energy Alliance, composed of six green power marketers, was formulating a formal position on the RPS and other restructuring issues at press time. "All of us have a strong interest in renewables development and want to be supportive of that," says O'Neill, whose company is an alliance member. "But at the same time, we want to protect the market for renewables. We don't want the RPS competing or undermining a competitive market."

In Vermont, often perceived as the "greenest" of states, the legislature has yet to adopt an RPS proposal while it wrestles with other restructuring issues. According to Vermont Public Service Board economist Frederick W. Weston, Vermont derives about 15 percent of its electricity supply from renewable sources. An RPS proposal included in a restructuring package approved by the state Senate but put off by the House calls for an increase in "new" renewables to reach 4 percent of sales by 2008. Adoption of the RPS was among the recommendations in the Public Service Board's comprehensive proposal on industry restructuring.

Weston says he didn't like the RPS at first, because he thought it involved too much administration. Now, however, Weston is one of its most vigorous supporters because, he says, he's convinced of the efficiencies inherent in the credit trading system.

"I don't think it solves the problem of how to allocate resources to untried technologies that the market has no interest in," he says. "Markets [aren't good at] getting done most of the things that society needs done. The ultimate hope, however, is that renewable technology will become more competitive."

Lisa Prevost is a freelance writer based in Fairfield, Conn.

Should We Call It Green Power?

The hues and cries.

WHEN it comes to distinguishing "green" power from fossil-fueled energy, the best approach is this: Give consumers enough information to make up their own minds.


That's the conclusion of research initiated by the National Council on Competition and the Electric Industry. Based on the results of extensive consumer research, the council recommended a uniform disclosure label that includes price, fuel mix and emissions data.


"Labels shouldn't say whether power is green,"says David Moskovitz of the Regulatory Assistance Project, a nonprofit organization that provides education assistance to state regulators and which directed the disclosure research.


"Just tell them what it is. The proposed label doesn't even use the word renewables because consumers don't know what renewables are."


In a 1,300-person telephone survey, 82 percent of consumers identified environmental factors as very important in choosing an electricity source. Subsequent tests in consumer focus groups showed that when consumers were given fuel type and emissions information about two electricity products, they relied on environmental factors to choose. For example, when the groups were given only fuel-mix information, they generally selected the product with less coal and more gas and renewables. When they then were shown emission information disclosing that the coal-based product actually had lower emissions, they changed their selection.


At least seven states -- California, Connecticut, Illinois, Maine, Massachusetts, Nevada and Rhode Island -- have adopted legislation requiring disclosure of specific information. According to a recent report by the Center for Clean Air Policy in Washington, D.C., at least another 20 states are studying or designing disclosure requirements. The New England Conference of Public Utility Commissioners designed its model disclosure rule to serve as a starting point for commissions in the region. Eleven western states are doing the same.


The rule recommends that the label appear in all written marketing materials, although Massachusetts has exempted newspaper and magazine advertisements because of the expense.


The importance of regional uniformity is two-fold, says Moskovitz. "It's good for suppliers -- they don't face multiple requirements in what is essentially a single retail market," he explains. "And it also helps consumers. The more consumers see this standard food label-like thing, the more confidence they have in it."


While there are some differences in the disclosure language adopted by various states, Moskovitz says they're likely to all come around to a fairly standard format.


"A lot of the actions that states took were early in the process when a lot of the research information wasn't in yet," he says. "For example, California does not disclose emissions. They were very early in the process legislatively and they had a unique set of politics that went along with that. So they disclosed fuel mix and not emissions, whereas most of the other states have both. I expect that California will ultimately have emissions disclosure as well."


A new "green"certification used in California offers green power marketers an opportunity to make a more blatant appeal to environmentally friendly consumers. In order to the Green-e logo and label under the Green-e Renewable Electricity Program, a marketer must prove at least 50 percent of the electricity supply for its product is generated from sun, water, wind, biomass or geothermal sources. Any non-renewable part of the product must have lower air emissions than traditional electricity mix.


"Almost everyone seeking to market green power in California is trying to meet or has met our standard,"says Marcy Roth of San Francisco's Center for Resource Solutions, which created the certification.


Green-e is developing standards for certification of green products in Pennsylvania, Roth says. The Northwest will likely follow.


A Sampling of State Renewable Energy Activity

Measures Pending and Approved

ARIZONA. (Commission Decision No. 59943, Dec. 26, 1996) Establishes an RPS by 1999. At least 0.5 percent must come from new photovoltaic or solar thermal sources. The requirement will increase to 1 percent by 2002. CALIFORNIA. AB 1890 (September 1996) establishes an SBC to fund EE, LI, RE and RD&D. RE funding totals about $540M for 1998-2001. RD&D funding is about $250 million covering 1998-2001. SB 90 (October 1997) creates a trust fund to support in-state renewable sources from 1998-2002. CONNECTICUT. HB 5005 (April 1998) establishes an RPS. Some 5.5 percent of the state's power must come from solar, wind, sustainable biomass, landfill gas and fuel cells by 2009. An additional 7 percent must come from hydro, other biomass and trash-to-energy by 2009. A charge of 0.5 mills/kWh is imposed to create a SBC fund for R&D and renewable energy resources. ILLINOIS. HB 362 (December 1997) establishes an SBC in the form of an RE Resources Trust Fund, capped at $100M for 1998-2007. Trust funded from gas and electric customers. Some 50 percent of the Trust goes to a Coal Technology Development Assistance Fund. MAINE. The state was holding hearings on an RPS at press time. LD 1804 (May 1997) established an RPS with a minimum of 30 percent of the supply portfolio coming from renewable resources. The PUC planned to set rules to implement the limits by 1999. MASSACHUSETTS. HB 5137 (November 1997) establishes a RE Trust Fund of about $200M over the first five years. The legislation also establishes an RPS calling for 1 percent of electricity sales to come from new renewable generating sources by 2003. This will rise to 4 percent by 2009 and 1 percent thereafter. MONTANA. SB 390 (May 1997) establishes an SBC of 2.4 percent of revenues in 1995 (about $15M) to cover LI, EE and RE from 1999 to 2003. NEVADA. AB 366 (October 1997) establishes an RPS with 0.2 percent of the total amount of electricity consumed annually coming from renewable resources by 2001. The amount will increase biannually to 1 percent by 2009. Fifty percent of the RPS must come from solar resources. NEW HAMPSHIRE. HB 1392 (June 1995) proposed that a SBC may be used from LI, EE and R&D. For RE, utilities should be allowed to charge customers a premium. Governor proposes an SBC of 2.3 mills/kWh for EE and RE. RHODE ISLAND. H 8124B (August 1996) establishes an SBC of 2.3 mills/kWh to fund EE and RE until 2001. This will raise about $76M over five years. VERMONT. The Public Service Board recommends an RPS of 4 percent by 2007. SB 62, which is pending, calls for an RPS that would increase each year beginning in 1998 and ending in 2007 when 4 percent of all retail electricity must be RE. Tradeable credits also are established. WISCONSIN. A December order establishes funds collected from all natural gas and electricity providers, based on the volume of their sales. It calls for RE to be funded at $5M a year, ending in five years.

RPS = Renewable Portfolio Standard

SBC = Systems Benefits Charge

Sources: Energetics Inc., for the U.S. Department of Energy Electric Utility Restructuring Database, May 29, 1998; Public Utilities Fortnightly, Feb. 15, 1998, p. 43.



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