Designing an RPS Program

To promote – not inhibit – renewable energy resources

by Steven F. Greenwald

State regulatory agencies and legislatures are increasingly promoting the accelerated development of alternative or renewable energy resources through a series of policy initiatives, most predominantly the imposition of some variant of a Renewable Portfolio Standard. More than half the states have adopted some form of RPS, obligating load-serving utilities to procure increasing amounts of power from qualifying “renewable” resources.

These initial RPS initiatives have served their purpose: jump-starting the desired rejuvenation, and promoting the accelerated development, of alternative energy projects. However, imposition of RPS standards by themselves will not achieve the desired transition away from our fossil fuel- dominated generation facilities. In fact, exclusive resort to increasingly more exacting RPS standards, along with a series of other regulatory and utility practices, could actually inhibit the development of renewable resources, deprive consumers of their benefits and, ironically, preserve thermal dominance.

The speed of the development of alternative energy is limited by the laws of physics and economics. Regardless of their good intentions, legislators cannot circumvent these engineering and market realities by simply ordering the purchase of specified percentages of RPS-qualifying energy on a politically developed schedule.


Exclusive resort to increasingly more exacting RPS standards, along with a series of other regulatory and utility practices, could actually inhibit the development of renewable resources.
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Instead, regulators, legislators and utilities interested in rescuing electric consumers from our nation’s addiction to fossil-fuels could consider the following concepts when designing an RPS program. State programs that consider and ideally supplement existing RPS programs with these policy objectives will be better off, too. They authorize policies and practices to better advance the development of renewable power and maximize the benefits that electric consumers and the nation can realize through renewable power.

Scientific, consistent and objective criteria

The fact that most hydroelectric resources are excluded from RPS-eligible status reveals an unfortunate political reality: RPS status often reflects local political and competitive situations, rather than objective scientific criteria. The California statute that generically denies RPS eligibility to all combustion municipal solid waste generators, but for one “located in Stanislaus County and … operational prior to September 26, 1996,” epitomizes the partisan influences permeating RPS programs. Similar political influences may explain the incessant changes in RPS standards. In 2006, California revised the state’s RPS program for the fifth time in as many years.

Focus on megawatt hours

Many states impose an RPS requirement based on the number of megawatt hours of RPS generation. While this facilitates RPS accounting, these megawatt hour benchmarks, without regard to the time or reliability of the generation, are not likely to achieve the desired result of replacement of fossil resources. For instance, an intermittent resource that produces its megawatt hours mostly in off-peak periods dictates that the utility must continue to rely on fossil units during peak periods. One possible additional and unintended fallout of using megawatt hours as the goal of RPS standards is that utilities that previously curtailed higher price renewable power during off-peak periods would have an “incentive” to dispatch these renewable units even when lower cost hydro and nuclear power are abundant.

Excessive credit requirements

One lasting vestige of the Enron debacle and the California energy crisis is the insistence by utilities that generators post large amounts of credit to provide the utility security in anticipation of the generator’s default. While reasonable requirements are appropriate, the credit demands imposed by the utilities are uniformly excessive. They far exceed the risk and have no correlation to performance. Increasing security has no positive influence on limiting forced outages; if anything, diverting funds that can be more effectively used for maintenance may cause reliability to suffer.

Yet, regulators routinely approve any utility credit proposals based on two false assumptions. The first is that utilities can be trusted to self-police credit, theoretically imposing only the minimal amount required. This is naive. No utility credit manager will exercise “discretion” to request any credit less than the maximum allowed. The amount of credit the utility requires is tautological; the maximum authorized necessarily equals the minimum amount the utility will require.

The second is that the magnitude of credit demanded has no cost consequences on the price of renewable power and should be exempt from regulatory scrutiny for cost-effectiveness. These assumptions are at odds with basic economics and the best interests of electric consumers.

Regulatory risks

The California Public Utilities Commission has authorized utilities to demand that RPS generators agree to indemnify the utility against any penalty the agency may assess for the utility’s failure to comply with the state’s RPS standard, “to the extent caused by the Seller’s failure to deliver the Product.” This indemnification liability is on top of the direct and large financial penalties that the power purchase agreement already subjects the generator to for failing to satisfy its delivery obligations.

This transfer of regulatory risk benefits no one and serves only to increase costs and frustrate the development of renewable power. Our regulatory system is designed for the regulated utility to assume all regulatory risk and in turn be directly compensated for taking on this responsibility.

If a utility fails to achieve its RPS targets, and it can establish that its failure was totally caused by a defaulting generator, the sound policy result should be obvious: no regulatory penalty should be assessed against the utility. Obligating the generator to indemnify the regulated utility against an RPS shortfall benefits neither party. The generator should have its financial rewards and penalties assessed by the satisfaction of the performance requirements set forth in its power sales agreement. It should not have to bear the additional costs and burdens associated with being directly responsible for the utility’s compliance with RPS standards.

Extended terms

Many utilities refuse to offer renewable producers contract terms for 20 or more years, reasoning that shorter terms protect against over-market prices, but resistance to long-term contracts does impose costs and increase prices. Longer terms enable the renewable producer greater access to financial markets and the ability to amortize its debt for a greater period, allowing these cost savings to be passed on to electric consumers. The development of third-party hydroelectric generation was built on 50-year contracts; many PURPA qualifying facility projects were financed and constructed with the benefit of 30-year terms. The desired next generation of renewable power should not be limited to terms of 20 years or less.

Author

Steven F. Greenwald leads Davis Wright Tremaine’s energy practice group. He can be reached at (415) 276-6528 or stevegreenwald@dwt.com.

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