Jonathan Abe and Christopher Clark, KEMA-XENERGY Inc.
As independent system operators (ISOs) grapple with the challenges of administering wholesale electricity markets in a manner consistent with reliability and open access, they are also becoming increasingly involved in the development and management of electricity information tracking (EIT) systems. Among other things, EIT systems provide critical support for nascent renewable energy markets and the various policies designed to stimulate their growth.
To varying degrees, renewable energy initiatives, such as renewable portfolio standards (RPS), fuel source disclosure policies, and green power marketing in general, each require a detailed accounting mechanism to help verify and facilitate compliance. For example, an RPS requires electricity suppliers to demonstrate that their supply portfolios include a minimum percentage of renewable energy. Disclosure policies call for retail energy suppliers to disclose information, such as emissions and fuel mix associated with their generation and supply portfolio, to end-use customers. And green power marketers need to be able to demonstrate to their customers that the claims they make about the renewable power content of their electricity are valid and verifiable.
The growing importance of EIT systems can be traced to the increasing prevalence of clean and renewable energy policies across the U.S. Fourteen states, including California, Texas, and New York, have enacted or are in the process of developing an RPS. Electricity information disclosure regulations are equally pervasive. In addition, almost 40 states have a green power marketing program of some kind; about 10 of these states have green products offered in competitive retail markets.
As RPS and green power markets continue to evolve, the development of EIT systems that are automated, flexible, and compatible across different regions will be increasingly important. In many cases, the regional independent system operators (ISOs) will be called upon to develop and oversee EIT systems and related markets.
What is EIT?
At the heart of electricity information tracking is the “electricity attribute.” In contrast to the “electricity commodity,” which refers to the actual MWh of energy produced by an electricity generation facility, the electricity attribute represents the characteristics of those MWh. For instance, 10 MWh of electricity produced by a new wind turbine would result in the creation of 10 MWh of electricity commodity, as well as 10 MWh of wind attributes. An electricity “certificate,” reflective of the attributes produced by a new wind turbine, would have the following characteristics:
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This certificate could be bought, sold, or traded as needed to comply with a renewable portfolio standard or to meet demand associated with a green power product.
The term “electricity information tracking” specifically refers to the tracking of electricity attributes associated with the generation of electricity from the point of generation to the point of retail sale. Depending on the type of EIT system applied in a given market, electricity and its attributes: 1) must be bought, sold, or traded together; 2) can be bought and sold separately; or 3) may or may not be separated, depending upon the situation. These three types of EIT system are further defined below:
“- Contract path—requires that attributes be bought and sold with electricity. Attributes follow the contract path associated with electricity transactions, from the point of generation to the point of retail sale.
“- Certificate—allows for attributes to be “unbundled” and traded separately from energy in a manner that encourages price transparency and liquidity. Under this approach, a generator produces electricity and a corresponding certificate that can be bought and sold separately from the energy.
“- Hybrid—incorporates features of the contract path and certificate approach, depending upon the type of transaction. For example, the contract path approach could apply to all bilateral transactions between suppliers and specific generators, while the certificate approach could be used for spot market, system power, or transactions that occur in specialty power exchanges, such as a renewable energy market.
Consider a wind generator, Acme Wind. When Acme Wind generates 10 units of electricity, it also creates attributes for 10 units of electricity. Under the contract path approach, Acme Wind must sell the electricity and the attributes together to the same buyer, GreenCo. Alternatively, under the certificate approach, Acme Wind could sell 10 units of electricity commodity to Energy Inc., and then sell the corresponding attributes, or certificates, to another buyer, GreenCo. The certificate approach, in effect, creates two markets: one for electricity and one for certificates.
Key trends in EIT
The virtues of the different EIT approaches have been debated for more than half a decade. Traditionally, the contract path method has been used to verify the characteristics of green pricing products that are offered by a regulated utility to its captive customers. The verification of associated transactions is typically a manual process.
However, given the rising complexity of transaction accounting systems—a response to an increased number of market participants, emerging renewable energy policies, and growing green power markets—the past couple years have borne witness to development of the first comprehensive and automated EIT systems, largely based on the certificate approach.
In 2002, both the Electric Reliability Council of Texas (ERCOT) and Independent System Operator New England (ISO-NE) began operation of their respective EIT systems. In both cases, the key driver behind EIT system development was implementation of an RPS, although both systems are also used to support a customer driven green power market. In addition, the New England EIT supports various states’ disclosure standards, and may soon be used to support emissions performance standards.
The EIT systems of ERCOT and ISO-NE both are based on a certificate approach, and were implemented and are overseen by regional ISOs. The certificate approach was adopted largely based on the advantages identified above: ease of administration; high tradability and flexibility; and maximization of market efficiency and liquidity. ISOs are involved because they already have the settlement data that is essential to any EIT system, and relative to any other stakeholders, ISOs have the expertise and infrastructure that makes them qualified to oversee the development and operation of an EIT system.
According to a recent report by the California Energy Commission, in spite of potential questions by consumers about the credibility of certificate-based EIT systems (due to the separation of the electricity commodity and attributes), the certificate approach is accepted as credible and meaningful by most green power stakeholders at the retail and wholesale level. Given similar sentiment echoed by a wide array of industry stakeholders, it appears that a significant shift to certificate-based systems is underway nationwide.
For example, the Center for Resources Solutions, an independent non-profit that certifies green power products, is now also certifying green power certificates. In addition, the U.S. Environmental Protection Agency’s Green Power Partnership, which works with businesses to encourage green power purchases, allows its partners to qualify by purchasing green power certificates.
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The use of renewable energy certificates (RECs) can also be expected to grow at the wholesale level. Last summer the National Association of Regulatory Utility Commissioners (NARUC) passed a resolution to support the inclusion of a certificate-based EIT system as part of ISO responsibilities and in FERC’s Standard Market Design (SMD). The resolution explicitly supports the ability to separate attributes and the energy commodity, as well as encourages: 1) each RTO/ISO to “assume the responsibility of developing tracking databases for all electricity generation, and for issuing, recording transfers, and redeeming or retiring attributes within the tracking database”; and 2) FERC to require this function through its SMD.
Specific evidence of the widening influence of RECs is provided by a number of active wholesale market participants. For instance, not only are all registered renewable transactions in ERCOT and ISO-NE currently using RECs, but in the Mid-Atlantic and Pacific Northwest, where wholesale certificate companies like Community Energy, PacifiCorp Power Marketing, and Bonneville Environmental Foundation have become active traders, a majority of wholesale renewable transactions utilize certificates.
Consistent with the NARUC resolution, most of the developing and existing RPS initiatives currently use or have stated that they will allow for the use of certificates. At least eight states now use, or plan to use the certificate approach for RPS compliance, including: Massachusetts, Connecticut, Maine, Texas, Arizona, Nevada, New Jersey, and Wisconsin. In large part due to the RPS initiative in New Jersey, PJM is in the process of exploring and designing a certificate-based EIT system.
Two other states, California and New York, are leaning toward the use of a certificate-based EIT system administered by a wholesale market entity. Both systems will support their respective state’s RPS initiative. In response to California’s announcement of an RPS initiative, the California Energy Commission (CEC) staff recently recommended development of a certificate-based accounting and verification system to support RPS implementation and the state’s ongoing Power Source Disclosure Program. The staff also supports the certificate program as a tool to facilitate consumer awareness and confidence in the renewable content of electricity purchases. Notably, the CEC is participating in the Western Governors’ Association process to establish a comprehensive Western certificates system within the Western Electricity Coordinating Council.
New York provides another example of a wholesale market that is currently weighing the pros and cons of the various EIT systems. Currently the state employs the hybrid methodology to support its disclosure regulations and emerging, yet small, green power market. The New York ISO’s involvement is presently limited. Its present role is only to provide settlement data to the state agency that is responsible for verifying disclosure and marketing claims.
However, New York is now in the process of developing a statewide RPS, for which regulations are expected to be in place by the end of this year. Based on the limitations of the current hybrid system, especially when RPS administration is considered, New York may move to a certificate-based EIT system. Additionally, its RPS regulatory process will likely result in the New York ISO’s direct involvement in the oversight of a certificate-based EIT system.
First apparent in Texas and New England , the trend toward ISO involvement in certificate-based EIT systems is evident in recent efforts in California and New York as well as other initiatives, such as the NARUC resolution. As EIT systems and renewable portfolio standards continue to evolve across the electricity landscape, a key issue will be the development of EIT systems that are regionally compatible and allow for the formal trading of RECs across regions. In recognition of this issue, the U.S. Environmental Protection Agency is currently funding work to establish protocols for certificate trading between neighboring regions. Success on this level might ultimately pave the way for development of a national RPS, which would represent a key step in the move toward a robust national market for renewable energy.
Focusing on renewable energy and distributed generation, the authors provide market, financial, and policy analysis and planning for KEMA-XENERGY clients. Clark and Abe can be reached at email@example.com and firstname.lastname@example.org.