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United States

The essential renewables portfolio standard

A "Renewables Portfolio Standard" (RPS) is legislation which places an obligation on all sellers of power to the retail market (the level at which all electricity is "caught" during trading) to demonstrate, through ownership of tradable "renewable energy credits," that they have supported the production of a certain amount of electricity from qualifying renewable energy sources.

To comply with the obligation, sellers may either have their own renewable power facilities and generate their own renewable energy credits, or buy renewable power bundled with credits, or buy renewable energy credits alone.

The purpose of an RPS is to ensure the swift penetration of renewable energy into competitive electricity markets through a system which forcefully drives down their cost until a purchase obligation is no longer needed. A renewable energy credit -- known in Europe as a "green label" or "green certificate" -- represents the environmental value of kilowatt hours from renewables. Trade in credits puts a market price on that environmental value.

In the United States, five proposals for federal RPS legislation lie with Congress as part of broader electricity market restructuring legislation, including one from the Clinton Administration. Meantime, six states have adopted partial RPS laws and one, Texas, a complete RPS (main article).

In Europe, the RPS mechanism is being promoted by the European Commission for adoption by all members states, though there is fierce opposition to it from some sections of the renewables lobby -- particularly the German wind lobby. The Netherlands has a partial RPS system and is looking to complete it. Denmark is to kick-off an RPS market in January 2002 and is now struggling with mechanisms for including its large amount of existing wind power. Britain is currently shaping legislation for a "percentage obligation" on suppliers (retailers) of all electricity, tradable through "green certificates" -- though these proposals flout some of the basic principles of the RPS concept and could potentially result in a market which is paralysed from birth.

If any of the critical implementation details are botched, an RPS will be seriously impaired or even rendered ineffective. To ensure effectiveness and minimise costs, the mechanism must contain a number of essential features:

o-----the obligation must apply equally to all market participants (the sellers of electricity) serving a state, a country, or a whole group of countries

o-----it must be a tradable obligation, based on a system of tradable credits, to achieve the renewables goal at least cost

o-----it must ensure that demand outstrips supply by setting the obligation at the level of existing renewables, increasing it from that point; or by excluding existing renewables; or by using separate "tiers" for new and existing renewables

o-----requirements for new renewables should begin at least two years after all regulations are final, to allow time for competition among all potential resources

o-----the obligation must rise gradually and predictably to ensure a stable market

o-----stiff automatic penalties must be imposed on market players that do not comply with the obligation; the penalty must significantly exceed the cost of compliance

o-----the RPS must be long term, continuing until green kWh prices drop to competitive market levels, when the RPS will sunset

o-----qualifying renewables must be limited to those that need market support and meet certain criteria; large hydropower must be excluded

o-----there must be flexibility for meeting the obligation, with a limited period for making up shortfalls, a system of credit banking, and a force majeure provision for temporary exemption in case of extreme events, such as hurricane damage.

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