California Lays Welcome Mat for Out-of-state Renewable Energy, Sort Of

by Tom Mounteer, Jeff Allmon and Paul Hastings LLP

A new California law makes it easier to use out-of-state sources of renewable energy to satisfy California’s renewable portfolio standard (RPS).

As readers of Electric Light & Power know, RPSs are state requirements that a certain percentage of electricity consumed in a state come from renewable resources such as solar, wind or biomass.

More than 30 states have some form of RPS. In the absence of a comprehensive federal program to address greenhouse gas emissions, state RPS programs represent the strongest form of U.S. commitment to address climate change.

In the new law, California stepped ahead of its sister states in setting an ambitious goal of having 33 percent of electricity consumed in the state by 2020 come from renewable sources.

That aggressive goal might, in part, explain why California tentatively put out the welcome mat for an increased quantity of out-of-state renewable energy sources.

So how does the new law change the rules with respect to out-of-state renewable energy sources?

Before the new law, California had a statutory delivery requirement. The delivery requirement can be understood in the context of California’s energy debacle during 2000 and 2001. In response to that debacle, California policymakers wanted to assure that, to the extent out-of-state energy sources were going to be used to meet the state’s RPS, the physical electricity generated by those sources was delivered into the state to meet its burgeoning needs.

Those familiar with this area of the law know that most states allow their RPSs to be satisfied by the actual consumption of renewable electricity in the state or by the surrendering of so-called renewable energy credits. These credits represent the environmental benefits—chiefly the greenhouse gas emissions avoided—of renewable energy.

Most states allow these credits to be stripped from the underlying energy that created them, referred to as unbundling. This means an entity that must demonstrate compliance with the RPS can do so by surrendering credits to the regulators as opposed to demonstrating the actual consumption of renewable energy within the state. There are rules that each credit must be counted only once.

The reason for allowing credits to be used to demonstrate compliance goes back to the environmental problem that renewable energy addresses: emission of greenhouse gases. Greenhouse gases do not cause a problem locally; they cause a problem in the upper atmosphere. For that reason, it does not matter where geographically their production is stopped. The benefit remains regardless.

Until the recent changes in the law, California did not allow use of entirely unbundled renewable energy credits from out-of-state renewable energy resources. Under a strict reading of prior law, for California utilities to use wind resources in Oregon, for instance, the electricity from the Oregon wind farm had to be consumed in California to be counted for compliance with the California RPS.

Yet, the California Energy Commission recognized that to meet even the state’s previous 20 percent renewable energy goal, it would have to accommodate more flexibility from out-of-state supplies. So the commission relaxed the statutory delivery requirement. After an initial purchase with the associated energy, the commission allowed the use of renewable energy credits stripped (unbundled) from the associated renewable electricity to satisfy the RPS.

Because of the delivery requirement, those wanting to use the credits originating from out-of-state sources had to match those credits with other electricity (referred to as firming and shaping). Prior law allowed firming and shaping to account for the variability of certain renewable resources. The commission, however, took this limited authorization and turned it into a mechanism allowing unbundled renewable energy credits.

Under the prior law, following the initially bundled purchase of renewable energy credits and underlying electricity from an out-of-state resource, firmed and shaped products—made up of alternatively sourced electricity and renewable energy credits—then subsequently could be delivered into the state.

Even with the allowance for subsequent firming and shaping, the former law significantly burdened transactions. The former law imposed an obligation that the initial acquisition must include the renewable source’s electricity and the associated credits. If the purchaser wanted only the credits, the purchaser subsequently would have to re-sell the energy. This required a resale of energy. In this way, the law made it cumbersome to use out-of-state credits to meet California’s requirements.

The new law eliminates the statutory delivery requirement and with it any need for an initially bundled purchase of credits with their associated electricity.

California has not gone as far as other states in allowing the use of unbundled renewable energy credits to meet its RPS. It still imposes limits other states do not. California allows regulated entities to meet only a portion of their renewable electricity quotas with credits alone and limits how much of their quotas they satisfy with so-called firmed and shaped electricity and credits.

In addition, it remains uncertain precisely how regulators will carry out the new law. The California Energy Commission is expected to rewrite its guidance that had imposed the initially bundled purchase requirement under the former law. Given the new law’s elimination of the delivery requirement, it is hard to imagine how new guidance could impose any sort of bundling requirement at all.

California has put out the welcome mat for out-of-state renewable energy, but it remains not nearly as welcoming as many other states.

Authors

Tom Mounteer and Jeff Allmon, and Paul Hastings LLP are attorneys in the Washington, D.C., office of international law firm Paul Hastings. They help clients sell renewable energy credits into the California market. They are co-authors of the “Climate Change Deskbook” Institute and several other works addressing the development of renewable resources.

 

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