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