Energy-hungry California is playing out a battle that may be mirrored across many states as the US strives for optimum incentives to advance renewable energy.
RES mechanisms (more commonly known as RPS in California) have been adopted in 29 US states and Washington DC, in various formats.
In Arizona, the renewables standard is aiming for 15% by 2025, in Colorado it is 20% by 2020. Across the US, RES policies account for around 42% of electricity production, so the industry is watching California with interest to see the effect of these changes on the renewable energy market.
While the January ruling lifts a ban on tradeable renewable energy credits, it is effectively imposing tighter restrictions on Californian utilities’ opportunities to use renewable resources out of state for RES compliance.
Investor-owned utilities — providers of most of the power in the state — have for the last year been required to provide 20% of their electricity supply from renewable energy.
In searching for the most cost-effective source, many have looked across the borders, buying wind power from nearby states such as Oregon and Washington.
Using various loopholes in the regulations, many could purchase only the renewable credits without bundling them with the actual renewable power. January’s ruling effectively legitimises this, but slaps a 25% limit on it.
Hot on the heels of this moratorium, the X1-2 Bill upped the requirement for 2020 so that power providers will have to produce not 20%, but 33% of energy from renewable sources by then. Municipal utilities in California, who had until April been free to develop and implement their own renewables policies, are also bound by the new 33% target.
In a matter of months, Californian power providers had opportunities limited and compliance requirements increased — a clear push for more renewable power to flow from within or into California.
When the California Public Utilities Commission (CPUC) authorised the use of the credits in January, commission president Michael Peevey said: "Tradeable renewable energy credits can play an important role in increasing the liquidity of the renewable energy market.
"However, this needs to be balanced with a deliberate approach to ensure that the use of renewable energy credits is not at odds with the intended goals of the RPS [RES] programme."
This balance comes in the form of two restrictions. The ruling on tradeable credits still demands that 75% of renewable energy requirement must come from in-state.
This compromise addresses the concerns of different proponents of renewable energy; while some future wind jobs in California may cross the border, this limit means that most are likely to stay. Emissions reductions and indigenous US low-carbon generation will be unaltered in the state, and electricity prices for users may fall.
The second restriction is a cap on price, allowing a maximum of $50 per credit. Both are temporary, both are set to expire after 2013.
And both are expected to protect the Californian electricity consumer as the rulings are being established — the process is likely to continue evolving, particularly given the demands of the new 33% RES target for 2020.
Some observers believe the trading ruling limits the ability of energy suppliers to use out-of-state renewables for RES compliance.
One key issue that remains unclear is the qualification of out-of-state electricity generation as a bundled transaction.
The definition of a "bundled contract" has been narrowed, but the 25% limit does not apply to previously arranged long-term bundled contracts.
Future electricity procurement contracts in the state will require a CPUC review to confirm that renewable energy generated is delivered and consumed in California, which means that some may not qualify as "bundled".
Suppliers do have other options to classify out-of-state renewable projects as bundled transactions.
Dedicated transmission lines could be constructed to connect out-of-state wind farms with a balancing authority in California.
Also qualifying would be "dynamic scheduling agreements", where the California balancing authority receiving the power treats the generation as if it were located within its area, for some purposes.
For contracts approved pre-March 2010, energy deliveries after that date count towards the 25% limit. However, if they cause a utility to exceed 25%, it can still count all deliveries toward its renewables compliance under those pre-March 2010 contracts, but it cannot enter into new contracts.
To avoid unfairly hindering the utilities’ RES compliance strategies or the expectations of renewable energy generators themselves, the CPUC will consider previously approved power purchase agreements, although it would review the transmission arrangement in connection with that approval to determine whether the transaction was bundled.
So what does all this mean for wind power across the US?
The tradeable credits position in California will bring winners and losers, says Mike Bernier, of consultancy Ernst & Young’s climate change and sustainability services team. ~
"The commission in California is aiming to balance low-cost energy investments and in-state jobs.
"If there was no cap, utilities would build all their new generation, including wind, out of state.
Ultimately it’s about compromise."What is important is that renewable power generators in a region with greater wind resource and cheaper land will now be able to benefit from the California market, he says.
"We are talking about shifting installations as opposed to creating additional installations."
But that’s not the end of the story.
"There are lots of moving parts in the US energy machine," says Bernier.
"Attitudes to nuclear could change because of what’s happened in Japan" he suggests. "And there may be further oil price issues because of what is happening in North Africa and the Middle East." The saga of fiscal incentives for US wind energy is far from over.
TRADING CREDITS HOW THEY WORK
Tradeable renewable energy credits, or RECs, are an incentive mechanism that represents the environmental and renewable attributes of renewable electricity.
A renewable energy credit is issued as proof that 1MWh of renewably-sourced electricity has ben generated.
Tradeable RECs can be purchased by an electricity utility separately from the underlying electricity produced by a renewable generation plant such as a wind farm.
They are then put towards the utility’s renewable energy compliance targets, and the power can be sold elsewhere, without the credit.
The ability to re-sell energy credits separately from the associated electricity increases flexibility and liquidity in the US renewables market, and can level the imbalances in supply across a geographical area, potentially avoiding costly grid connections.
This can reduce "stranded cost risk" and help create revenue for renewable energy generation plants.
Should the separate sale of credits and power improve the value of the two elements, a market for renewable energy credits may facilitate project finance.
Before the Californian commission authorised the use of tradeable credits in January, utilities were required to buy renewable energy and renewable energy credits together, on a "bundled" basis.
Now they can be bought or traded separately, but limited to only 25% of their renewables requirement.
That state requirement has recently been raised from 20% of retail electricity sales from renewables to 33% by 2020.