by Dian Grueneich and Theresa Cho, Morrison & Foerster
Reaffirming California’s strong commitment to the development and use of renewable energy sources, Gov. Jerry Brown recently signed Senate Bill X1 2, which requires all California utilities to generate 33 percent of their electricity from renewables by 2020. The new 33 percent renewable portfolio standard (RPS)—the most ambitious RPS in the country—sends a strong message to renewable energy developers that California will continue to support short- and long-term investment in renewable energy sources in the state.
How Does the Law Work?
While SB X1 2 revises details in the existing California RPS statutes, the bulk of its impact for developers will derive from a few key provisions. The bill:
Sets a three-stage compliance period requiring all California utilities—including independently owned utilities (IOUs), energy service providers and community choice aggregators (CCAs)—to generate 33 percent of their electricity from renewables by 2020: 20 percent by Dec. 31, 2013; 25 percent by Dec. 31, 2016; and 33 percent by Dec. 31, 2020.
Requires the RPS to be met increasingly with renewable energy that is supplied to the California grid and is located within or directly proximate to California. SB X1 2 mandates that renewables from this category make up: at least 50 percent for the 2011-2013 compliance period; at least 65 percent for the 2014-2016 compliance period; and at least 75 percent for 2016 and beyond.
Sets rules for the use of renewable energy credits (RECs): establishes a cap of no more than 25 percent unbundled RECs going toward the RPS between 2011 and 2013; 15 percent from 2014 to 2016; and 10 percent thereafter. It does not allow for the grandfathering of Tradable REC contracts executed before 2010 unless the contract was or is approved by the California Public Utilities Commission (CPUC). It allows banking of RECs for three years only. And it allows energy service providers, CCAs and IOUs with 60,000 or fewer customers to use 100 percent RECs to meet the RPS.
It eliminates the market price referent (MPR), which was a benchmark to assess the above-market costs of RPS contracts based on the long-term ownership, operating and fixed-price fuel costs for a new 500-MW natural gas-fired combined-cycle gas turbine. Using the MPR, the CPUC would provide above-market funds to cover contract costs that exceeded the MPR: requires the CPUC to establish a cost limit for each IOU and authorizes IOUs to stop procuring renewable energy beyond the cost limit; and requires the CPUC to adopt a standard tariff for renewable projects up to 3 MW in size with a 750-MW statewide cap on eligibility for the tariff.
New Challenges, Opportunities
The signing of SB X1 2 is good news for renewable energy developers. The previous RPS, which required a 20 percent renewable portfolio by 2010, has proven to be a powerful driver of investment in renewable energy. Since 2003 the RPS has led to the development of 45 new renewable energy projects and 1,702 MW of new capacity. During that time, the CPUC has approved 181 contracts for about 14,000 MW of new and existing eligible renewable energy capacity.
The trend shows no sign of slowing. On the contrary, the past few years have seen a dramatic increase in the participation of larger, more experienced developers who are submitting bids, which has resulted in 100,000 GWh of bids in 2009. The signing of SB X1 2 should provide further momentum to this fast-developing market.
By eliminating the MPR—a cost-control method—and replacing it with a cost cap, SB X1 2 will compel developers to fit their projects within an IOU’s overall fixed budget for implementing the RPS. This might produce a rush by developers to get their projects on the table before there is any danger of the IOUs’ reaching the cap. In addition, the new law requires IOUs to compare the costs of each proposed project against the costs of the others, which will force more competition in the market.
The new 33 percent RPS will interconnect with California’s recent substantial investment in transmission infrastructure, which allows for the efficient conveyance of electricity from renewable energy developments. In the past five years under CPUC leadership, California has streamlined siting transmission lines and has permitted three major new transmission projects, resulting in more than $6 billion of new energy infrastructure to carry renewable power.
These transmission lines will deliver much of the renewable power California needs, but they are insufficient to meet the magnitude of the increase in demand caused by the move to a 33 percent RPS. There is still an opportunity to develop additional interconnection lines that will facilitate the next generation of renewable energy needed to fulfill the mandate of SB X1 2.