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California poised for fundamental change -- Vast market for trade of virtual wind power steadily taking shape

This month the California Public Utilities Commission (CPUC) begins evaluating whether utilities mandated to include a rising proportion of green energy in their electricity supply mix can meet the state's renewables portfolio standard (RPS) through the purchase of renewable energy credits (RECs) separately from the power associated with them. The outcome of the CPUC's deliberations could fundamentally change one of the largest renewable energy markets in the United States -- and with nationwide consequences.

With mixed results for REC trading in other areas of the US -- and uncertainty about the validity of trading credits between states for stimulating healthy markets for renewables -- the concept has supporters but also detractors. Some say REC trading could undermine wind projects for developers and dampen its value to California customers.

The CPUC has previously explored the use of RECS "unbundled" from green electricity for compliance with the RPS, but has always postponed implementation of a certificates trading market. A law passed last year gave the CPUC discretion to decide whether such a market should be introduced and what the trading rules should be.

The California RPS requires utilities in the state to source 20% of their power from renewables by 2010. With a shortage of renewable power for purchase, the state's major utilities are expected to miss this target. REC trading is seen as a solution that would allow utilities not able to obtain enough renewable to meet the mandate to buy excess credits available within the state, or to buy them beyond California's borders. In both cases the electricity supporting the credits could be delivered elsewhere.

One of the conditions of the 2006 law authorising REC trading was the establishment of a tracking system for credits in the service territory of the Western Electricity Coordinating Council (WECC), which extends from Canada to Mexico. It includes the provinces of Alberta and British Columbia in Canada, the northern portion of Baja California, Mexico, and all or parts of the 14 western US states in between. This summer, the Western Renewable Energy Generation Information System, a renewable energy registry and tracking system for WECC, went online, opening up the possibility that RECs could be traded across the entire region.

But current law in California only allows utilities to buy actual power from over the border to meet the RPS; RECs purchase is not enough on its own. Utility frustration at this barrier is likely to grow, especially with the REC concept gaining traction across the US. Just last month Xcel Energy, the largest buyer of wind power in the country, announced its own internal REC tracking system for all its bought or owned renewables generation. Xcel's use of RECs to comply with Colorado's RPS started the effort, says the utility's Bryan Friehauf, but the company decided to expand the database to its entire eight state service territory to be prepared for the possibility of REC compliance with other state laws or an eventual federal RPS.

Concerns

One of those arguing against allowing REC trade to play more than a small supporting role in meeting renewable energy mandates is Matt Freedman, with The Utility Reform Network (TURN). He says REC trading has been wrongly sold as a "no lose" proposition. He has serious concerns about the consequences of REC trading potentially undermining the economic value of renewable energy for customers. "If a utility just buys RECs, what is the economic value of renewable power to customers? What if gas prices go to $20 [a gallon] and power prices go haywire -- what did the customer get? For that REC, they got nothing. They got a compliance with a state program and then the utility will be out there buying power for $200 a megawatt hour," Freedman says.

He also worries that short term utility purchases of RECs would undermine the long term power contract structure that wind developers seek. "There are a lot of concerns about loosening the delivery requirements," says Freedman. If California's independently owned utilities meet their green power requirements by buying bulk RECs from Wyoming or New Mexico it represents no more than a transfer of money to those projects, says Freedman. "If that's the dominant form of compliance, then what kind of political support will it have in the long haul?"

Freedman concedes that REC trade still offers overall climate change benefits, but he says California will lose out on a variety of benefits from renewable energy, including long term stable prices for power and economic activity within the state.

Seth Hilton, with law firm Stoel Rives, is more hopeful. Though there are complicated issues to be worked out, he has seen largely unanimous support for REC trading.

Cheaper

"I don't think the use of RECs necessarily means that the utilities would somehow be subject to greater price volatility, or result in higher rates," Hilton says. "It is certainly possible that a well constructed REC market will allow utilities to comply with the RPS requirement and purchase long term power more cheaply than under the current system." Concern about RECs potentially diluting the value of renewables to Californians is an issue the CPUC raised in the past and will be considered thoroughly in coming months, he says.

California already allows allow outof state power to qualify for the RPS even if imported RECs are banned. "Where it's going to get down to the nitty-gritty is exactly how the REC market is going to be structured. That's where people are either going to get a benefit out of it or get potentially injured by the way the market is structured," Hilton says. "But in terms of the general idea of REC trading, there's not a lot of people who oppose it."

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